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.
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 GP. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
I am a 29 year old financial analyst and work in an expensive metropolitan area. I married an amazing woman a year ago, and we are expecting a baby soon. I enjoy Texas Hold ’em and blackjack as a hobby.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
My wife used to work full time at a very small company but was laid off the day she informed her boss (who is the president of the company) about her pregnancy. We were extremely frustrated and I was looking for an attorney to file a suit against the company, but ultimately decided not to. She currently stays home taking care of herself. She is planning to find a job several months after the baby is born.
My take home pay is $5,150 per month after tax.
Our monthly cash flow:
- Rent - $1,300
- Roth IRAs - $900
- Roth 401k - $355
- Travel fund - $300
- Car insurance/maintenance/gas/toll - $275
- Health insurance - $270
- 529 Plan - $250
- Dining out - $250
- Bus/subway - $225
- Cell phone bills (incl. wife’s grandmother’s) - $200
- Groceries - $200
- Lunch at work - $175
- Donations/Gifts - $150
- Personal care/Entertainment - $150
- Shopping - $100
- Cable/Internet - $90
- Electricity - $15
- Heat/water - Free
- Total - $5,205
- Retirements (401k / IRAs) - $157,000
- Fund to pay down payment on a house - $55,100
- Fund to pay closing costs - $8,000
- Fund to pay off wife’s student loans - $16,000
- Emergency fund - $12,000
- Taxable equity investments - $7,400
- Health Savings Account - $4,400
- Fund to pay baby’s medical expenses - $1,900
- 529 Plan (started 3 months ago) - $800
- Wife’s student loans - $16,000 (@6.8% APR)
- Baby’s medical expenses - $6,300
What are the current financial issues you're facing (saving, paying off debt, etc.)?
Currently, our most important priority is our baby who will soon be able to see the outside world.
Unfortunately, our company provides a horrific health insurance plan with an extremely high deductible and out-of-pocket maximum. I calculated my out-of-pocket expenses for childbirth costs to be around $6,300. I had been putting some money into an HSA prior to getting married. I will be using this account in its entirety and $2,000 extra to pay off the impending medical bills for my wife and child.
I used to save about half of my income (after tax) before getting married, which is the primary reason I have an above average asset base compared to my age group. I used to contribute the maximum amount into my Roth 401K and Roth IRA (I still try to max out our IRAs, but substantially reduced my 401K contributions after getting married). Moreover, thanks to my benevolent parents and grandfather, I was able to graduate from college with no student loans.
The equity funds in my 401K and IRA outperformed the benchmarks as well. By pure luck, I avoided the stock market crash by timing the market and pulling out of equity funds in 2008 and going back in in 2009, which helped me save a large sum of money.
However, I wasn’t so lucky with my taxable accounts. I basically went against the market in 2008 and executed a lot of bearish trades (i.e. buying leveraged bear ETFs and short selling individual stocks). The large success I got from these trades in late 2008 and early 2009 eventually led to my financial demise. I became attached to being a bear, and continued to trade actively for two additional years. I believed that whatever recovery the market had during 2009 and 2010 would soon reverse its way back to a new low. Even when the market kept going up and up, Boy was I wrong big. I quickly lost triple the amount I had made. My long “hedge” with my 401K and IRA is what saved me. In retrospect, I am thankful that I had to go through this experience when I was young and single. I now focus more on mutual funds and ETFs and try not to time the market.
Our cash flow statement above shows that we have a negative cash flow of $55 a month. This gets offset by credit card and checking/savings account rewards and bonuses (a little over $1,000 per year so far), but obviously these bonuses shouldn’t be included in the cash in-flows because of their unreliability as a stable income source. Our travel fund is sizeable since we like to travel outside the U.S. We also dine out two to three times a week. Once we have the baby, however, we will have to reduce our travel, dining, and personal care expenses and possibly our IRA contributions in order to keep a positive cash flow. Our extremely low utilities expense is golden for us. Hopefully, when my wife gets a job we won’t have to worry about what amount to put in our retirement contributions.
My wife has a student loan of around $16,000. Since the interest rate on this loan is quite high at 6.8% and I can’t seem to find any stable investment option that can beat this rate, I plan to pay this off in a week or so.
What are your plans for the future (retire early, build your career, etc.)?
We plan to purchase a house in the near future, but we haven’t researched anything yet. We still have to decide whether to get a house or condo, and choose a broker that can help us. Money is obviously an issue here since a mere $55K down payment limits us from buying a decent house (as you could already tell, we live in a high cost of living area). Any suggestions would be really helpful.
My wife and I are looking forward to meeting our soon-to-be-born child, and we plan to put our maximum efforts into raising him. We also plan to have a second child in three years or so.
At the rate we’re going, I don’t foresee an early retirement unless my wife lands a decent paying job to ramp up our retirement savings, and unless I accelerate my climb up the corporate ladder. I am currently working on a CFA charter (passed Level 2) that my company pays for. However, my employer doesn’t pay for a part-time MBA. I want to be able to complete both of these down the road to further enhance my own personal branding.
We currently commit around four hours a week of our time volunteering at our church. Hopefully we’ll be able to do more volunteer work both at church and other places once we become more financially stable and in retirement.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
I learned that one does not have to keep up with the Joneses in order to become a better and happier person. I probably live in one of the most expensive areas in the United States and still manage to find ways to spend only half the amount of what my neighboring friends are spending. That doesn’t mean I don’t have my own share of fun. Don’t focus on how you are viewed by others. Focus on what you believe you should be and you’ll become a happier person overall.
Dollar-cost averaging does not work for most people. If one of your investments is going south, there is a reason for it – usually the reason is that you made the wrong investment decision. Being emotionally attached to your financial decision and hoping to make up your losses by putting more of your money down at lower prices will eventually lead to your financial demise. I learned it the hard way.
It’s never too late to build your career. ‘Having too little time’ is almost always a lazy person’s excuse to avoid hard work and effort.
I also have questions to the readers about my financial situation:
1. Currently, I have my retirement savings in mostly Roth accounts because my guess is that tax rates will go up in thirty years and I like the certainty of how much taxes I’m paying up front. However, I’m starting to wonder if I should diversify by putting some in traditional accounts. Any thoughts?
2. Any information on buying a house vs. condo vs. co-op would be extremely helpful.
3. Is there another way to tackle the childbirth expenses in my situation? The $6,300 out-of-pocket expenses seem pretty ridiculous to me.
4. What are your average childcare expenses (from infant, toddler, to kindergarten)?
5. What other financial advice do you have?