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 PD. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
I am 33, my wife will soon be 33. We have been married a little over four years and met in college. We do not currently have children, but plan on having them ASAP. I am a VP of Finance at a large bank, and my wife manages the Project Management Office at a top tier consulting firm.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
We bought a house a little over a year ago in a relatively expensive market in the northeast. We have a 30-year fixed rate @ 4.1%. We did only manage to put 10% down, so $285 of our monthly payment of $3100 goes towards PMI. We are undecided if we are going to pay extra to pay down PMI (would appreciate feedback on this) or pay off other debts we have first.
We have done well these last few years to increase our salaries dramatically. I currently make $110K gross, my wife $100K gross. We both have varying bonus opportunities but we do not factor our annual plans around them in case they never materialize.
Paying Ourselves First: We both contribute 15% to our company 401K (10% Roth 401K, 5% traditional) and both receive competitive matches, pushing contributions over 20%. We also contribute roughly 10% take home each to targeted savings funds (Emergency Fund, Home Improvement Fund, Travel Fund, Gift Fund, New Car Fund). We also have $250 each per paycheck that goes towards spending money. This can be used without questions being asked, and if we go out to eat or order takeout we only pay cash, drawing from this fund. We never see this money. It is direct deposited into accounts.
$7200 - Monthly Net Take home for bills. Split amongst the following:
- $3100 – Mortgage
- $900 – Student Loans ($650 me, $250 wife)
- $700 – Food. This varies but we are usually around $100-$150 per visit to local stores. Buy a mix of organic and non-organic food.
- $400 – Average monthly home improvement items. We expect this number to decrease as we become more settled in our home, but we went from a small 1 BR apartment to our current home, so we had nothing to start with.
- $300 – After tax monthly amount for commuter rail passes for wife and I.
- $300 – Clothing (on average, some months more, some months MUCH less)
- $300 – CVS/Target/etc. trips
- $250 – Monthly cable/phone/internet/tablet data/my cell phone. Wife’s cell phone covered by work.
- $250 – Gas/Electric
- $200 – Gas/tolls/general repairs on our one car (2002 Honda Civic)
- $180 – Cleaning lady 2x monthly
- $100 – Car Insurance
- $67 - Gym Membership
- $50 – Wife haircut
- $20 - Monthly Subscriptions – Spotify (Me) and Birchbox (wife)
- $266K – Combined 401K assets.
- $15K – Targeted Savings accounts (Ally Bank)
- $450K mortgage @ 4.1%
- $32K student loan debt ($30K my undergrad and $2500 wife grad)
What are the current financial issues you're facing (saving, paying off debt, etc.)?
I think overall we have done a lot over the past few years to have a firmer financial standing. My salary has nearly doubled while my wife has increased roughly 30%. The biggest issues I see are the following:
1. Student Loan Debt – I have been paying this off for over 10 years now, and by my count I still have 7 years to go off of an original loan balance of $70K. I pay extra each month, and the payments are so engrained in me at this point that it is second nature to hand over $650 a month. My wife has a small balance remaining, and we hope to have that paid off by year’s end. We plan on diverting her payment ($250 monthly) to my loans once it is paid off. I would LOVE to just pay mine off, but being in a new house with new projects that crop up, I really do not want to spread ourselves too thin. From a blended weight perspective my loans are at about 3.75%. Would welcome reader feedback on this topic as to how best to prioritize.
2. Targeted Savings – We approach our E-Fund a little differently in that seeing that we both make a good salary. Our ultimate goal is to have 6-8 months worth of mortgages built in ($18-$20K), with maybe a little buffer to about $25K. We feel that the odds of us both being out of work are slim, so $25K seems like a good number to us. We only have about $10K now, but the hope is to fully fund our E-Fund with bonuses. Although our 2002 Honda Civic (a.k.a Honda Power) is still holding strong and has a relatively modest 112K miles on it, it is starting to show its age. We will likely divert a decent chunk here at some point so that we have a hefty down payment on the car. We are looking at modest cross overs in the $25-$30K range. Hope to hold off another 18-24 months before purchasing with roughly 50% down. We would also LOVE to renovate the third floor of our house, but not really sure how to prioritize that given our college loans and eventual car needs.
3. Starting a Family – We know this can be expensive, and as such we are looking for guidance from your readers as to how we might be able to afford the $1500 per month in expected childcare expenses without altering our lifestyle too much. We currently save a lot each month, but looking for ideas as to how we might be able to carve that out without lessening our targeted savings or reducing our 401K contributions substantially. We both intend on continuing to work after maternity leave is over.
4. Was interested in getting reader thoughts on anticipated tax rates in the future. We currently only contribute 5% pre-tax to 401K, with 10% going post-tax via Roth 401K. So we are currently losing some tax benefits now for perceived tax benefits down the road. Do people think tax rates will raise or are we wasting money now?
What are your plans for the future (retire early, build your career, etc.)?
Our plans for the immediate future are to start a family. We both would like to still work while raising our children, and we are both in roles and industries where there is work/life flexibility but also the potential to increase our income further. Although it is a moving target, we would like to retire by 60 and travel extensively in the early years of retirement. If we are able to continue saving at our current rates, we should be able to retire comfortably and leave a substantial inheritance to our children.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
I have two pieces of advice. The first is no surprise to those who read FMF or any other well written financial blogs out there, is to PAY YOURSELF FIRST. We fell victim to lifestyle inflation when our income increased substantially, and after “having fun” for a few months we set up targeted savings accounts and made real goals for ourselves. Now if we want to go on a trip we look at our travel fund and budget around what is in there. It really teaches discipline and allows for us to physically see us working towards a goal. If you never see the money you get used to not spending it.
My second piece of advice is to enjoy life before retirement. We sacrifice much of what we want materially each month, but we also enjoy splurging on the occasional trip or a new TV or new pair of running shoes as budgets permit. As long as you work towards achieving financial independence regardless of your income level, sweating the small stuff just is not worth it.