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.
Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.
Next in the series is FMF reader CA. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
I am a long-time reader (and silent observer) of Free Money Finance. I first became obsessed with personal finance in middle school, when I played a stock market game in my social studies class and came to understand the value of compounding money over time. I’ve had ups and downs (mostly related to short-term investments in stocks that went south), but overall feel like my family is in a good position.
I am 33 and live with my wife and one-year old in a large US city. We live in a very expensive part of the city and own our 2-bedroom condo. We own a very old SUV that we drive a few times per week, cook most of our meals at home (very delicious meals though!), prioritize our health and time with family, and strive to travel several times per year (though it’s been a while since we’ve done an international trip). We expect to have 1 or 2 more kids and will likely move in the next 1-3 years to a lower cost area, closer to friends and family.
My family is in the midst of a crossroad for our life journey, so I thought it’d be helpful to get some feedback from commenters on our current decisions. This is a pretty long profile, and I appreciate insights for some or all of my questions. Thanks!
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
I work full-time in middle management of a mid-size company. My wife is a full-time grad student and finishes her degree this summer. She receives a modest stipend through her university, but 90%+ of our income is from my salary. I’ve broken down our income and expenses on a monthly basis below.
$13,314/month - this is through August, when my wife’s stipend goes to – our income will go up after this assuming she gets a job
- Housing (mortgage, taxes, condo fee, insurance) - $2,372
- Income Taxes - $2452
- Retirement (max 401k + Rothx2) - $2,292
- Childcare - $1,076
- Groceries (including baby supplies, household items, etc) - $675
- Travel - $277
- Tuition - $262
- Personal allowances - $250
- Entertainment allowance - $225
- Healthcare (co-pays, gym memberships) - $187
- Utilities (gas, power, internet, netflix, cell phone) - $158
- Transportation - $150
- Gifts and charity - $146
- Student loans - $121
- Upkeep (Dry cleaning, haircuts, manicures) - $103
- Cleaner - $100
- College savings - $20
My wife and I are both savers, but also really like nice things and enjoy food and travel. In 2012, we eclipsed $300K in net worth and my goal is to have $1M by 2020. Here are our assets and liabilities.
- Condo - $405K (+/- $35K)
- Roth accounts - $119K
- 401k accounts - $80k
- Liquid - $25K (half is in index fund, half in cash, which I know this group would not consider a safe emergency fund)
- Mortgage $302K remaining (2.5 yrs into a 5-year ARM @ 3.5%)
- Student loans $15K (@ ~3%)
- Current credit card debt - $5K (this is paid on-time at end of each month, but is accurate as of today)
Net worth: $305K
What are the current financial issues you're facing (saving, paying off debt, etc.)?
As I mentioned, my wife is about to finish her grad program and she’s in the midst of a job search. This has afforded us the opportunity to think about where we want to live in the short-term and long-term. We initially thought that we’d move to a lower cost city when she graduated, but we like living in a big city and also like the idea of having our second child here (because we know the hospital, doctor, etc.). We’ve also built a strong social network here, so want our next move to be our last (or at least one in which we settle down for a bit for our kids to go to primary and secondary school). All of that said, we definitely want to be in a more affordable city within the next five years, so that we can get a house with a small yard and have an overall nicer quality of life. We’re in a lucky position right now in that my employer has said that I can telecommute if my wife gets a job in another market. My wife has job leads in our current city (and could no doubt find a job here) and also in lower cost markets that we would love to settle down in.
With that context, here are some of the issues that we’re facing:
1. Current budget surplus – We’ve kept our expenses pretty flat over the past few years and for the first time have a monthly surplus (due to a nice raise for me and increased stipend for my wife). What should we do with that surplus? The options that we’re considering are: spending some (on a new car for example), paying off student loans, paying down mortgage, putting in cash, putting into a kitchen renovation (which would increase condo value, as well as make us more likely to stay in the condo for another 18 mos), and putting in equities (index fund). I lean towards the latter option.
2. Moving – Should we move now, or stay in the big city for a few more years? I realize this is a very personal decision, but still thought I would throw this out there, as it’s a major issue that we’re thinking through. If we stayed in the big city, then we’d want to move to a bigger place in our neighborhood (unless we renovate our condo a bit - which might keep us in our place longer). We’d likely rent, and would expect our monthly housing costs to go up about $1K. Moving is very related to my career (see below).
3. My career – my employer really wants me to stay in my current job for another 1-2 years, but senior executives at my company in other cities (a few of the lower cost ones that we would consider) are pursuing me for promotions. I imagine the actual pay would be similar (due to cost of living adjustments), but I’d likely have much more purchasing power. I’d also have a promotion on my resume. That said, my boss really wants me to stay and as I’ve said, my wife and I would like to stay in the big city for a few more years. With that in mind, it seems like I have a fair amount of leverage with my boss – so I’m thinking through the things that would make me absolutely pumped up to stay in my current job. It basically comes down to three things. First, I’d like to see a significant pay increase. In my 4 years, I’ve received raises of 22% (promoted), 18% (promoted), and 9%. All very good – so how much should I push for? I was thinking 20% and accepting 15%. Second, I’d like to be positioned in 2 years to be able to get the same jobs that I could get if I took the promotions in other departments. I think that can happen if I receive further education (I have an MBA, but there is a specialty certification in my field that I could get). So the ask would be for my employer to help me get into a program and then pay for it (while I’m still in the job). Finally, if we’re going to stay, I think my employer can help my wife find a job upon graduation. Any other thoughts on things I should negotiate, or how much I should push in each of the areas above? I should note that I have a wonderful relationship with my boss.
4. Real estate – whether we stay in the big city or move to a lower cost city, we’ll very likely be moving out of our condo this summer. (The only scenario in which we’d stay is if we thought we’d only be in the big city for another year, in which case we’d stay in our 2-bedroom and have baby #2 sleep in our room for 3-6 mos.) Right now, we could likely rent our place out for $2,800 – allowing a small profit. I’m pretty sure we could get what we paid for our unit, but once you factor in closing costs, I imagine we’d lose $10-20K of our investment. My current thinking is to test out the market in the spring, and if we can get $410K+ then sell. If not, I’m very open to renting the unit out (especially if we’re still in the big city).
5. Big income jolt – once my wife is back to work, I expect our monthly income to go up about $5K (after taxes). That would put us at nearly $7K in surplus income per month (against our current budget). Right now, we’re thinking that we’d put about $1K+ of that into more house, $1K in to quality of life increases (entertainment, travel, a new car, etc.), $1.5K of that into 401k for my wife, and the rest in savings. Considering where we are, I think it’s safe to increase our quality of life – we’ve earned it and expect our income to continue to rise pretty rapidly (or at least moderately). That said, I’m nervous about lifestyle creep. Another idea that I’ve had is to save all the surplus money (for the next 2-3 years) towards an aggressive cash goal, which we could put into a dream house when we moved to a lower cost market (I’m talking a super fancy house – not massive – that we could stay in forever). We spend a lot of time at home, so this seems like an option that would increase our happiness. Any thoughts on balancing this? I don’t really want to hear the same story of save it all and retire at 40. That’s not what I aspire for – my wife and I both expect to work for at least 15 more years (and probably more like 25-35) so want to be sure to enjoy our income now too.
What are your plans for the future (retire early, build your career, etc.)?
My thoughts above share our medium term plans. In the longer term, we’d like to be in a position to semi-retire around 50. I imagine at that point we’ll both be in senior positions in our field, and I could see us both wanting to continue working for another 10-15 years. That said, we’d like to be in a position to have a semi-retirement at that point – where we could pursue passions, interests, hobbies but still generate income – i.e., teach at the local university, renovate old homes, work in the cheese department at Whole Foods, etc. My guess is we’ll probably both do a bit of each.
Our other goal is to somehow find a way to have summers off once our children are school age. We love traveling abroad, and really like the idea of going to a new destination every summer to expose them to a new culture. I imagine we could make this a pretty cost neutral endeavor – it’d be more about having time away from work and also figuring out a way for this to not hold us back in our career trajectory.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
I agree with most of the knowledge on this blog. My biggest difference is that I’m a lot riskier than most of the commenters and the blogger – I hold much of my emergency fund in index funds and am willing to hedge a lot in real estate (e.g., I previously owned a condo and house at the same time – more than $1M in investments – and flipped the house successfully). But again, overall I live by the advice here. My two biggest pieces of advice:
1) Start a budget early – i.e., at 22 after college – and pay yourself first in that budget (max 401k and max Roth)
2) Manage your career aggressively – there are great posts on this blog about this topic, so I won’t rehash it. I’ll just say that I’m another example of someone that has tried to overperform and have proactively asked for promotions and pay raises. To date, my income has grown by an average of 9% annually. If I keep that up for the next 10 years (which of course will be tough!) then I’ll easily be able to retire before 50 (assuming I save a good portion of those raises).