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 BW. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
I'm a 26 year old male, married 2.5 years to a 26 year old female and we live in a Midwest city. I am a CPA and recently passed the CFP exam. I currently work for a RIA firm, while previously working in the tax department of a public accounting firm. My wife works in the office for a mid-sized corporation. We have no children yet, but plan to have one in 2014. We will probably have a total of 2 or 3 children, each about 1.5 to 2 years apart.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.)
Gross income combined: $87,000 ($55,000 me, $32,000 wife)
2013 Expenses and Savings:
- Combined 401(k)'s including match (match 50% on 6% contribution): $650/month ($7,800/year)
- HSA: $250/month ($3,000/year)
- Mortgage (and escrow): $1,100/month (160k remaining on 30 year @ 3.625%)
- General Living Expenses: $2,000 / month (food, entertainment, cell phone, TV, electricity, gas, water, internet, gifts, etc.)
- Sinking Funds: $600 month (car maintenance, insurance, home maintenance, vacation - whatever is not spent in a given month is saved)
- Other Savings: $1,000/month (All $1,000 was going to purchase a car. Since that is finished, we are saving $5,000 for a new deck. After that, $500 for Roth IRA, $300 for new car fund, $200 to boost Sinking Funds more – Air Conditioner will need to be replaced sometime soon)
- Emergency Fund: $16,000
- Sinking Funds: $15,000
- Checking: $2,000
- Wife IRA: $5,700 (Vanguard Total Stock Market)
- My 401(k): $2,000 (S&P 500 Index)
- Wife 401(k): $1,000 (S&P 500 Index)
- HSA: $1,000
- 2 Honda cars: $25,000 (Total for both)
- House: $185,000
- Mortgage: $(160,000)
- Total: $90,000
- Car: 100/300/100 liability and collision coverage on cars
- Disability: Both are covered at 60% through work
- Life: $1,000,000 30 year term for me and $300,000 30 year term for wife
- Health: Covered at 70% of cost at my work
- No umbrella as of yet, but something to think about in the future
What are the current financial issues you're facing (saving, paying off debt, etc.)?
Big Picture: We saved a bunch of cash to pay off some student loans, save cash for house down payment and purchase a new (used) vehicle. We are now starting to get retirement more under way and put things on auto pilot. We could (should?) be more disciplined with are budgeting. We could cut back on the general living expenses and save a few hundred dollars more a month pretty easily, I think. With having a child in the near future, we will need to decide if wife will keep working or not. I think at this point, the answer is yes, but the cost of child care will be a large factor and deciding if we will want to make the additional budgetary sacrifices (also depends on my wages over the next 12 to 18 months). Anyone experience this and have any general suggestions, besides increasing emergency fund and try living on my salary alone to see how the adjustment goes?
Short Term: After the deck is finished (by July 1st), I am thinking about putting more money towards the house to get out of PMI. We pay $45 per month to it and will need to get below $148,000 on mortgage to get there. I am more inclined to start the Roth IRA. Thoughts? Also, we might start allocating a portion of sinking funds (maybe emergency fund) to Wellesley Income Fund or Wellington (Vanguard). Does anyone have thoughts/suggestions on how they handle sinking fund accounts balances that they do not use every month? We are savings enough that it is just a big savings account that I allocate to different cells in excel every month. We have enough (generally speaking) to cover any expenses that come up every month out of the cash flow that is allocated to the sinking funds every month.
Medium Term: If we have extra money remaining in the budget after child is born, does anyone think it would be best to start on the mortgage, rather than saving for college? As of now, I am thinking about trying to save $200 to $250/month/child for college. I think at this low level, it is probably best to save in 529 plans (I receive state tax deduction) or taxable accounts. Anyone have experience with paying off house before kids go to college and using old house payment (and maybe even slowing or stopping retirement) to fund college? What about 529 plan vs. taxable accounts?
Long Term: In the next 7 years or so, we will have to decide if we want to send children to private, catholic school. Cost for K-8 is about $4,500 per child, per year and increasing. High School is $12,000 per child, per year. We live in a school district with great schools, so we always have that to fall back on. The cost/benefit in my mind does not work out, but wife is really pushing for it. Thoughts?
Any other thoughts/ideas/suggestions for us?
What are your plans for the future (retire early, build your career, etc.)?
- I want to build the career more to be able to afford wife staying at home to raise children. I think this is possible, but it is hard to predict.
- Be mortgage free by age 50. This is in 24 years or so. This will largely depend on if we decide to ever upgrade house or not.
- Net Worth of $10 Million. This will depend on inflation numbers, market performance, etc. It is just a big, round number goal to shoot for.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
- No debt, except for home debt. This must be paid off by retirement (but hopefully earlier) and only purchase home 2 to 3 times gross pay (no more than 25% take home pay).
- Save 15% of gross pay (including company match) for retirement, starting by at least mid/late 20's.
- 3 to 6 months’ worth of emergency savings.
- Once you have house at (or under) 25% of take home pay and are saving 15% for retirement, you can live a little bit, but not too much. Try to always be anticipating what expenses are coming. If you do that, it really cuts back on having to use the emergency fund, because nearly all expenses can be thought about a head of time.
- Get on same page financially with your spouse.
- Invest in index funds. We are 100% US stocks now, but will be moving towards 50% US and 50% International. I am just fine with the risk, but at some point in our 30s we will start allocating more money towards bonds.