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FI in 7 years; what is it going to take?
InsideOut:
Life Situation: Married; Both 37 years old. My wife is self-employed. Three children; 7,5,10 months. Live in New England suburb.
Gross Salary/Wages: 2017 $162,064 ($93904 Me, $ 68,151 Wife)
Individual amounts of each Pre-tax deductions:
My 401k about 8k 2017. On pace to max out at 18k this year. Family Health and Dental Insurance $6,890 annually ($265 bi monthly paycheck)
Other Ordinary Income: N/A
Qualified Dividends & Long Term Capital Gains: None
Rental Income, Actual Expenses, and Depreciation: Have a rental property where mortgage payment and escrow is $1548/mnth. Rent is $1380/mnth. So since we are not cash flow positive here I thought I would just note it in this column.
Adjusted Gross Income: $157,230 ($162,064-$4,815) (deductible self-employment tax.)
Income; $13,102/month
Current expenses:
Mortgage Primary Residence; $2,262 ($536 Principle, $1169 Int, $953 Escrow)
Rental Property; $2004 (Pay weekly with extra towards principle; Min payment $1,548 ($397 principle, $639 int, $513 Escrow)
Child Care; $2000
Groceries; $1500 (I know this is gross and it might be more. Currently trying to first nail down and track with WNAB. Between different stores, cards, farmers markets, tracking is weak here. Food quality/health is a high value to our family but I know that we can do much better than this and most of this is straight sloppiness.
Eating out; $600 (Again, Face Punch!) Date night out about 3x per month and my wife buys lunch 2-3 days per week.
Wife Student Loans; $276 (2.25% int)
Car (GMC Acadia); $262 (2.6%)
Gas; $300
Electricity; $160
Heating (Gas); $200
Phone; $152
Car Insurance; $136
Clothing; $100 (Mostly Kids)
Personal Care; $100
Continuing Education; $130(One big conference per year and books, certs, ect)
Travel/Vacation; $350
College Funds; $135
Personal Care (Wifes Hair mostly); $100
Child Programs/Sports; $50
Roth IRA’s; $912 (Max out both)
Furniture; $125 (0% int)
Charity; $25
Life Insurance ; $45
Total Expenses; $11,924/month
Assets:
Primary Residence; worth about $375k, outstanding mortgage of $330k, so about $45k in home equity
Rental Property; worth about $190, outstanding mortgage of $145, so about $45k in home equity
My Roth Ira; 12k
Wife’s Roth Ira; 13k
Work 401k; 20.5k
College Funds; 5k
Cars/Misc; 15k
Savings Account; 5k
Assets; $160.5k (Equity in houses included)
Liabilities:
Mortgage - previously mentioned, balance of $330,000, interest rate 4.25%, 27 years left, minimum payment $2,661 ($536 Principle, $1169 Int, $953 Escrow)
Mortgage rental property – balance of $145,000 interest rate 5.25% 19 years left min payment $1,548 ($397 principle, $639 int, $513 Escrow)
GMC Acadia Car Loan – Balance $12,000, interest rate 2.6%, minimum payment $263, 48 months remain
Wife’s Student Loan #1 – Balance $6050 interest rate 3.03% (variable) minimum payment $276
IRS Payment Plan- $3300 .5% monthly (Last years taxes) underpaid throughout year and had larger bill than expected due to poor planning.
Liabilities; $21,350 (House and rental not included because equity factored in to asset side of equation
Net Worth; $139,150
Specific Question(s):
1) What would it take to become financially independent in 7 years? I am not asking if it is possible, or realistic. I am asking in the manner in that if someone told me that I would be shot dead seven years from today if we were not financially independent. What changes would need to take place in order to live in this situation. What would we need to get our expenses down to and what type of income would we need to earn? In other words “what price are we going to have to pay to make this happen”?
2) What are the first steps that we should take to gain control over our situation that will give us the most bang for our buck?
Please bear with me here as I know that I might not appear serious to many of the readers of this post. I promise that I am, and that I will prove this to anyone that puts time in to read and respond to my post.
LDoon:
Without any changes, you're basically spending $7100/month. I took out the rental mortgage (see below), child care will go away, and Roth contribution would disappear. Comes out to about $7100/month = $85,200/yr = need $2,130,000 in assets.
Short answer for getting from $140k to $2.13M in 7 years? Save and invest $18k per month.
Clearly the expenses need to come down. Couple suggestions to get started:
Dump the rental house. Rental properties that are not cash flow positive are a waste of time. Plus there will be repair expenses coming that will end up being out of pocket. Sell it now and simplify. Use the equity to boost your investments.
As you know, the food costs drastically need to be reduced. Track it and then nail the easy parts. Set a goal (e.g., $900 for all food costs) and then work towards it. Then set another goal, etc. Spending $2100/month is too much if want to retire in 7 years. Current spending levels would take at least $630,000 ($2100 x 12 x 25) in assets to cover (just for food alone). Keep that in mind if/when it seems hard to spend less.
You didn't include internet/TV, and that can sometimes be an easy one to reduce. Same for hair care. Appointments every 6-8 weeks instead of every month, etc.
Vehicles are another area to examine. You have a larger vehicle with a loan, which costs you extra each month in loan payments and gas. If that's something of value to you because of kids, that's understandable but means have to look hard at other areas to compensate (phone, vacations, etc.)
I think you are missing some items in your budget. Start tracking every penny for next 60 days. YNAB or Mint are helpful, or just use Excel. In the meantime, start looking at reducing food costs and getting rid of the rental. Then report back with an update and move to next round of reducing expenses.
KungfuRabbit:
What is the back story on a rental that loses money?? Why own it?? Sell it
You can get high quality food cheaper than that. Look around here for recipes.
Trade in your car for a used mini van. Lower payments, lower gas, lower insurance.
There are cheaper cell phone options than that.
You need to cut drastically if you want any hope of retiring early.
Then the next thing is make more money. Ask for a raise, find a higher paying job, etc. or look at side gigs, no matter how minor.
mustachian816:
Starting with no assets you have to save 75% of your post tax income to retire in 7 years, given that you already have a net worth of $139k you'll have to shoot for 65-70% to get there in 7.
House:
Try to refinance to 15 year fixed or 7/1 arm and pay off in 7 years. You should be able to get a rate in the low 3's or possibly better. If you extinguish this $1700/month liability for principal+ interest, you'll need to save $512k fewer based on 4% rule. Also shop around for home owners insurance and raise your deductible. If you have cash in the bank, a unlikely $5000 deductible won't ruin you.
Groceries:
Your grocery spending is astronomical! Healthy food is not expensive, vegetables are the cheapest items in the grocery store! Take a look at budgetbytes they have tons of cheap, easy, healthy meals, some as low as $1-1.50 per person/meal. Instead of whole foods, check out aldi they have a great selection of healthy and organic foods now.
Healthcare:
I also don't see a HSA in your budget, I suggest you max that out for current and post retirement healthcare needs.
Eating Out:
By my calculations you are spending about $150/date night, you can cut this down by not buying drinks or at least cut out the alcoholic ones and not over ordering so you are stuffed/have left overs. Try just getting 2 entrees or splitting 1 app +1 entrée +1 desert. Check out trying the hole in the wall but highly rated ethnic restaurants in your area. Typically these are cheaper than high end American restaurants and give you more of an adventurous experience.
Life Insurance:
When you are financially independent life insurance isn't really needed.
Car:
Either trade in your Acadia for something more economical such as a $15k van or at least keep it to at least 200k miles. Not having a car payment in retirement reduces the amount of passive income you need. You don't mention a second car, if you do have one you can probably cut it out when you are ready to retire to reduce gas/maintenance/insurance/etc expenses.
Furniture:
After you pay off your furniture loan, only buy furniture with cash going forward. 0% furniture loans are tempting, but you end up spending way more than you would with cash. A $125/month furniture loan requires you to save up an extra $37k to fund that based on 4% rule.
Phone:
Look to get this down to $30/line or less. Join a friend or family members plan, adding a line is much cheaper than having your own account or check out Google Fi. Avoid phone leases/payment plans, they almost always trick you into thinking your paying less for a phone buy showing you the monthly payment than if you bought it outright and kept 3+ years.
InsideOut:
LDoon,
Thank you for the thoughtful reply. A couple of interesting notes;
On the rental; I have a very interesting tenant who pays the rent late every month with on average $150-$200 dollars in late fees. This has gone on consistently for the past year. On average this brings me very close to break even. Big surprise in that I haven't tracked it. I will back log track and then track moving forward from here. I would image it would still be a clear sell even with this info?
Also, my tenant asked if we would consider selling and I threw out a price that I would be thrilled with probably slightly above market value. I figured if I could sell to him with no real estate transactions it would be a huge win. He said he would consider in the future and seemed somewhat interested.
On tracking; Purchased WNAB last month and am tracking everything through it. I ran the free trial back at the beginning of the year. To be honest with you I was overwhelmed, not by WNAB but just through the process of tracking everything. I understand that that is the only way though and purchased the software. I plan on just trying to diligently track now for 2-3 months and getting all of my numbers more accurate as now they are sloppy. I played with Mint a while back and had an account. Would just WNAB do or would it help to run Mint as well?
On missing expenses; My mother lives with us in our finished basement. She moved it and handles the cable/internet and netflix. We def have other missing expenses I am sure but that accounts for those obvious ones.
On cars; With the three kids I felt a larger SUV/minivan type was necessary. We had a Kia Sorento that was relatively new (5 years old purchased with 2k miles on it). Moved to higher/rural/more snowy area and car was terrible in the snow do traded it in. Probably could have done better than a few year old GMC Acadia, but couldn't sell the wife on the minivan. I was driving an old volvo that died at 200+. Just picked up older Saab for 3.5k in cash.
On groceries or food in general; This category is completely out of control. I plan on working on one change at a time each month. Food will be first and I will post plan and progress with more detail. We recently joined Costco which should really help. In the eating out category my wife purchase lunch at the restaurants below her business 2-3x per week. She realizes this is a problem and I am going to start packing her lunches everyday to help cut back on this.
Thanks again.
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