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 RH. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
My wife and I are 24 and have been married almost two years. We don’t have children yet but we look forward to raising several in the future. We bought a house in the Midwest and live in the country just outside of a major metro (well, at least major to me as I grew up in a town of 100 people). I am a police officer and my wife is a school nurse (RN). I am the one interested in finances in our relationship, but luckily my wife is naturally frugal.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
Let’s see. I graduated college with about $10,000 of student loans and had them paid off in about a year. My wife lost both of her parents to cancer and she inherited a decent sum of money. She paid for nursing school out of her inheritance. Shortly after getting married, we bought our dream house. It is way too large for us, but we plan on having several children so it will fill up soon enough. We used most of my wife’s inheritance that was in the taxable account for a 50% down payment. This left us with a $105,000 15-year mortgage at 3.25%.
We have been aggressively paying down the mortgage and in the first 15 months have paid the balance down to $72,000. This past year (2012) my wife made about $50,000 gross and I made $62,000. My base pay is $45,000 but I was able to pick up 500 hours of overtime in 2012. I am budgeting for an income of $115,000 for 2013. The following is a rough budget for 2013. As you can see, I’ve decided to start saving more aggressively for retirement (maxing out my 457B and both Roth IRA’s) which will slow down the rate at which we have been paying off the mortgage. The mortgage payment is $737/month and we plan on putting any extra money at the end of the month towards the principle.
Gross Income (Yearly)
- Husband: $65,000
- Wife: $50,000
- Total: $115,000
- Social Security: $6,756
- Medicare: $1,580
- Pension: $4,550
- 457B Pre-Tax: $17,500
- Health Ins.: $420
- Dental Ins.: $162
- H.S.A.: $5,450
- Fed Taxes: $9,145
- State Taxes: $4,236
- Car Registration: $600
- Vacation: $2,100
- Roth IRAS: $11,000
- Property Tax: $3,200
- Life Ins.: $700
- Home Ins.: $652
- Car Ins.: $840
- Propane: $1,000
- Car Fund: $3,000
- House Fund: $2,000
- Church Donation: $1,000
- Other Donation: $1,000
- Gas: $6,000
- Clothes: $500
- Food/Misc.: $6,000
- Phone: $660
- Electric: $1,800
- Water: $400
- Trash: $228
- Spending Money: $2,400
- Mortgage: $20,121
- Total: $115,000
- Fed AGI: $86,918
- Fed Taxable: $66,918
- State AGI: $91,468
- State Taxable: $80,968
The following is our current net worth statement:
- House: $205,000
- Local Bank: $3781
- ING Savings: $25,046
- Heath Savings Account: $10,412
- 457b & 401a: $8,505
- Roth IRA’s: $9,091
- Inherited IRA: $73,975
- EE Bonds: $4,000
- Total $339,810
- Mortgage: $72,000
Net Worth: $267,810
We currently have all of our retirement accounts in the Vanguard 2035 Target Retirement Fund. I know that doesn’t fit our age but it fits our risk level. This is essentially the three fund portfolio (Total Stock Market, Total International, and Total Bond). I might invest in those three funds separately when my portfolio is larger to get a lower average expense ratio. I like being in the Target Fund for now because I have never been through a stock market crash and I would like to see how I would react. I don’t know if I would have the guts to rebalance so I like that it is automatically done for me.
What are the current financial issues you’re facing (saving, paying off debt, etc.)?
My wife is getting another inheritance of about $20,000 in the next several months. We plan on paying down the mortgage principal with that money. At that time, the mortgage balance will be under $50,000. I will apply for a HEL of $50,000 from PenFed and payoff the balance on the mortgage. The advantage of this is PenFed is currently offering HEL’s at 1.99%. This will save us $50 in interest per month.
We currently own a car, a SUV, and a pickup. We are planning on selling the pickup in a few months, it has gotten horrible MPG and we don’t need three vehicles. My car is 13 years old and I will try to make it last a few more years. I like the idea of driving a car until it dies, but the reality of having to find a new car in a hurry doesn’t sound very appealing to me. When the time comes, I am undecided if I should buy a used car or an inexpensive new car like a Kia Rio or a Nissan Versa.
In the next year I would like to create a will and buy life and umbrella insurance. I plan on losing weight so I can be rated as “Preferred Plus” by the life insurance companies. My wife and I are 24, so the umbrella insurance should be cheaper after we turn 25. Gieco is currently quoting $371 for $1M and $612 for $2M.
What are your plans for the future (retire early, build your career, etc.)?
Sometimes I feel like all I do is plan for the future and don’t enjoy the present. “Life is what happens to you while you’re busy making other plans.” John Lennon I plan on paying off the mortgage in the next 4-5 years. At that time we will hopefully start having children. We originally wanted 6, but now we say 4-6. We will have to just see when the time comes. I want to keep our expenses low so my wife can be a SAHM if she wants to be. The great thing about her being a nurse is she can work one or two days a week and still make some decent money. She has expressed interest in working 1 day a week.
The plan is to max out my 457B and both of our Roth IRA’s for the rest of my career. The maximum amounts are adjusted to inflation so this would be a good way to make sure we keep our contributions up. If my wife does decide to stay at home when we have children, this goal will be difficult to obtain. I can either work a lot of overtime or be satisfied with not filling one or both of the IRA’s.
As a police officer, I have a good pension to which I contribute 7% of each paycheck. I can retire at 47 and start getting paid from my pension at age 50. The pension will pay about $55,000 per year with a 100% survivor’s benefit. The pension will not be inflation adjusted once it begins. The 457B and Roth IRA’s should be worth about $1M in today’s dollars if they get a 4% real return. I am blessed to be able to contribute to a 457B because it does not have penalties for withdrawals before age 59.5. We will live off of our retirement money from ages 47-50, and supplement my pension with it after that.
If we wait 5 years to have our first child, he/she will be entering college just after I retire. I am currently not planning on saving separately for college. I am still undecided on this and would like to hear your thoughts. My line of thinking is that we will be retired when they enter college and our income will be very low. We will have all of our retirement money in tax advantaged accounts so they might be able to get more grants. It sounds/feels sort of unethical but I view it kind of like I do taxes, I want to lower them as much as legally possible. I also have a feeling that by the time we get there, FASFA might also factor in net worth, instead of just income. We will still be able to pay for college out of the 457B and the contributions to our Roth IRA’s. We would have to put less in our retirement accounts if we wanted to put money in 529’s.
After the kids are through college, we will use my pension supported by our retirement accounts for our expenses. We will probably wait until 70 to take Social Security (or whatever the longest you can wait at that time is) depending on how badly we need it. I roughly figured that we should receive about $25,000 per year, as long as it’s not means tested by that time.
And then we get old together and gently pass away in our sleep at the same time. :)
I know this sounds very planned out, but I realize a million things can happen between now and then and we’ll have to be flexible. My pension is currently underfunded so I can’t depend on the current payout amounts. I’m sure SS will change between now and then as well. I just figured it’s best to make a plan with what I have and update the plan whenever new information is available.
What’s your best piece(s) of financial advice and/or your general philosophy on personal finances?
I don’t have anything other than the standard LBYM and plan for the future. Nobody cares more about your money than you do. Index! Simplify! Stay the Course!
I would appreciate any comments or criticisms of things I could be doing better or differently. Thanks for letting me share my story.