The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.
If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.
Next in the series is FMF reader PD. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
I am 27 and have been married almost 4 years to my wife (26). We have a 6 month old daughter and 2 dogs. We live in a suburb of a major metropolitan city in the Midwest with an average cost of living.
I have a B.S. in engineering and my wife has a B.A. in English Literature. I am an engineer for a Fortune 500 company in a high tech industry that is very stable and expected to grow with the aging population (I bet you can guess the industry!). My wife works as a writer/editor/project manager/director for a small company which makes it inherently less stable. Our family takes care of our daughter during the day as we both work full-time.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
As I described, we both work full-time and our family takes care of our daughter. Our household income is in the low 6 figures. We both have gotten regular yearly raises and I now earn the majority of our income. All of our benefits are through my work as well. We are currently contributing 3% of my gross income to a 401(k) to earn the max company match of 3%. In the 401(k) and other retirement accounts, we have saved ~$50K. We also have a small amount of company stock. We have 8 months of minimum expenses saved for our emergency fund where if we had to use it, we’d cut everything out of our budget except necessities.
We currently have a mortgage at 5.25% fixed for our house for a payment of $1550/mo including insurance, taxes, and PMI. We have no credit card debt. In the last couple years, we bought 2 newer used cars because our old cars broke down. One is paid for, the other we owe ~$10K @ 2%. We also have 4 student loans totaling ~$25K ranging from 3.8% to 5.5%--about half is on one loan at the highest rate of 5.5%. Our other expenses are normal for food, utilities, telecom + mobile phones, insurance, etc. We also pay our family for watching our daughter, but we still save over what daycare would cost. We’ve been conscious of making good decisions, but not beating ourselves over the head to save every last penny. We live a relatively normal life, but well within our means.
What are the current financial issues you're facing (saving, paying off debt, etc.)?
What’s most difficult for us right now is deciding what our highest priority is. When the little one came, we reduced the 401(k) contribution to receive the match, but wanted to make sure we could cover unforeseen expenses without going into savings or using credit cards (banish the thought!). (Aside: we do use credit cards to get rewards, but they are paid in full every month). I want to wait to see what our 2011 tax return will look like as last year we had to pay (better than getting a check back, I guess). After that, we need to prioritize: 1) moving to a new house, 2) saving more for retirement in the 401(k) or Roth 401(k) option I have at work, 3) saving for our daughter in a 529 plan, or 4) paying off our student loans.
We are considering moving because our house is very old and small. It was very charming when we bought it in 2008 and it has been great for us as a couple, but we’ve found that 1 tiny bathroom and an old small house is not ideal for a growing family, especially since we want more kids starting in a few years, hopefully ending up with 3 or 4. The other reason we are considering it is that rates will probably never be this low again in our lives and home prices are nearing lows (so it seems), so we would get good value for a home we’d be in for a long time. The downside to this is that if we pursued the type of home we would want to stay in for a long time, we would not have very much extra income left over for the other 3 priorities. If we decide to stay in our current house, we’d refinance our mortgage and save 1-1.25% on the interest rate.
After making the decision to move or not, I am leaning towards the debt repayment starting with the student loans as the car loan is such a low rate. Tackling debt is the next priority because we are debt averse and we’re already getting the 401(k) match. I’d appreciate any input readers might have!
What are your plans for the future (retire early, build your career, etc.)?
Once we take care of our most pressing issues I described, we’d like to be able to have my wife stay at home and take care of the family. If I can continue on my path and get a couple promotions, I think this is possible in 5-7 years. This is contingent on being able to continue saving a large portion of my income for investments/retirement and hopefully retire or semi-retire in ~25 years.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
Be realistic about your financial situation. Without an accurate starting picture, you can’t possibly determine priorities. We have friends who live way beyond their means, but aren’t realistic about what they can afford and save nothing (“We have plenty of time”), yet they talk about getting new cars and other luxuries. We try to steer them in the right direction, but they don’t want to listen. It’s painful to watch.
We’ve worked hard and are fortunate to be in a situation where we have some flexibility in our finances and now have some more nuanced choices to make where subjective factors come into play. We’ve also made the decision to live a normal, yet comfortable life instead of worrying about every last cent. The important part is that we first took an objective look at our situation, and made decisions based on that information.
If you’ve read FMF for any length of time, you know the best way to grow your wealth is to maximize earnings and minimize expenses, thus maximizing the difference and taking that into investment. BUT, if I had to choose between earning more and spending less, I choose earning more. There is a floor to how much you can cut from your budget, but there is no ceiling to how much you can earn. And for me personally, I’d rather not budget how many squares of toilet paper we are allowed to use. ;-)
Overall, what this means to us is that finance is the means to an end, not the end in itself.