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 MR. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
My wife and I are both around 30 years old and live in a mid-sized low cost of living city in the midwest (median household income in this city is ~$41k, typical home price for 3-4 bedroom is $140-$200k). We are expecting our first child later this year. My wife is a veterinarian and works for a good-sized practice with 5 other doctors. I have a background in computer software (BS degree in Computer Science), and now manage a development team for a Fortune 500 company. We live in a house that we built 3 years ago. We love to travel and in the past couple years have been to several places around the world.
I have read FMF for years, and always found the reader profiles fascinating, so I decided I should contribute. I've learned so much from seeing how others have handled their financial situations.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
My wife and I both work full time at the moment, although she already has a slightly unusual schedule (Tues-Friday, with some Saturday mornings) that will alter further after the arrival of our child (same days, but she plans to drop to about 75% time and leave around 3 or 4pm every day). We have been extremely fortunate to find well-paying jobs and to substantially increase our income -- I began working after graduating from college in 2007, and started with a fairly typical salary for my field but was able to increase my income by 150% over the course of 5 years. My wife's income jumps have been less dramatic than some of mine, but steady and significant. All told, we have a base income over $210k/year with another ~$20k or so of annual bonuses distributed via cash or directly into 401(k) accounts.
I manage all finances in our house. I don't keep a really strict budget, because we have wild fluctuations depending on what our priorities are -- some months we'll buy something big we've been holding out for (like a room full of furniture), some months I'll just throw extra money at investment accounts or debts. However, I'll outline the things that are relatively consistent:
- Mortgage: ~$2100/mo (20 year fixed @ 3.375%) + $200-$400 extra principle every month
- Utilities (power, water, sewer, natural gas): $300
- Communication (phones, cable, internet): $220
- Groceries: $300
- Eating out/other entertainment: $150-$250
- Gas: $500 (I drive 46 miles each day for work, my wife drives 66 miles each day)
- Car insurance: $80
- Charitable contributions: $400
- Medical insurance premiums: ~$300
- Misc (lawn care, web hosting, gym, etc): $200
- Home improvement projects/hobbies: $300 (very much an average; high some months, low others)
- Personal 401(k) contributions (total for both my wife and I): ~$2100/mo. This is basically as much as we can legally put in. (NOTE: I am limited to contributing around $8500/year, not the federal maximum of $17,500/year; because I am considered a Highly Compensated Employee and apparently the rest of the company's employees save too little, my contribution rate gets docked. I just got hit with this recently; I'm not sure I fully understand it yet but you can read more about it here)
- Company match 401(k) contributions: ~$750
- Traditional IRA: $416/mo (so we can max at $5k/year)
- Self-directed investment account (mutual funds, stocks, bonds): $1500
- Savings account slush fund (emergency fund, trips, furniture, cars, etc): $750
- Mortgage: $285k (house appraised at $385k during refi last October)
- Student loans: ~$18k @ ~2.2% (mine; we managed to pay for most of my wife's schooling out of grandparent/parent college savings and then scraped the last couple years out of my starting salary once I entered the workforce)
- House $385k
- 401(k)s: ~$150k
- IRAs: $8k
- Non-retirement investment accounts: ~$40k
- Cash accounts (checking, savings, emergency fund): $28k
- Cars (two 2011 vehicles, both purchased new and paid off): ~$42k
We have several credit cards but always pay them off in full every month. I put everything possible on the cards to maximize rewards. We primarily use a cash back card that nets us roughly $600-$800 a year in rewards, plus another card that gets us a couple hundred a year toward Amazon purchases (which we certainly use -- I'm probably one of Amazon's best customers). Finally, we have a third card that we use when travelling internationally because it has no foreign transaction fees.
What are the current financial issues you're facing (saving, paying off debt, etc.)?
We recently got the one car we had financed paid off, and right about the same time my 401(k) contributions were forcibly cut -- two events that freed up a fair amount of cashflow. So I just recently started putting more into my self-directed investment accounts, and will probably siphon some of the additional extra cash into getting rid of my student loans. The relatively low interest rate on those hasn't set a fire under me to pay them off, because I've gotten a higher return on my investment activities, but it would be nice to have them off the books. I also want to direct more into charitable giving, and am trying to determine the best place to give.
Obviously with our first kid on the way, our finances could look quite different in a year -- although it looks like we're going to be fortunate to not have to pay typical childcare costs, as we have family members that are insisting they can watch the baby while my wife's at work. One very tactical financial issue we'll continue to face is the length of our commutes and the resulting gas bill -- moving isn't an option, as we go in opposite directions. We're already optimally placed. Our vehicles are near the top of their class in fuel efficiency. Spending that much on gas just really bugs me. It's like burning money. By the time we need to replace one of our current cars, I hope Teslas are more affordable :)
Short term significant financial expenses, aside from the baby, include a number of home improvement projects -- we've been in the house for 3 years and have probably averaged $7k-$8k/year in such projects, but have increased the value of the house by a rate of over $16000/year in the same time period, by making smart choices and by doing some of the work ourselves. We purposely built the house with these future projects in mind, anticipating we could increase the value this way over time.
My biggest goal is to be able to enjoy our lives now while still socking away quite a bit for retirement -- I think we're doing decently well there, especially considering I've only been in the workforce for 5 years and my wife for 3 (and for my first 2 years, we couldn't save a thing). I am continually afraid of having to worry about money rather than enjoying life when we reach our retirement years, so maxing out our retirement savings was one of the first things I did as soon as I felt we could afford it. In the last 18 months, I've had to face the (admittedly good) problem of what to do once you've exhausted the usual tax shelters for retirement -- something that's complicated by our high income. As I noted in the outline above, I can't put as much as I'd like into my 401(k), and my IRA contributions aren't deductible because of our income level. I think I'm at the point where I may need to hire a financial advisor to make sure I'm making the most of the options that are out there.
Additionally, I face a constant internal battle because I tend to have expensive tastes and hobbies -- do I indulge a bit to reward myself for success, or do I try to hold back and save even more? I do try to defer gratification as long as possible, but it's difficult. My wife helps me rein some of this in because she's extremely frugal by nature.
What are your plans for the future (retire early, build your career, etc.)?
I would love to retire early and do something low stress where I don't care how much I get paid (who wouldn't, right?). As for my current career, I'm sure I'll move jobs again at some point -- I'm in my third since leaving college 5.5 years ago. However, I would like to find something a bit longer term and slower paced by the time I'm in my 40s. Whether that's really "retiring" and doing something completely different, or just a significant adjustment in workload and responsibility, I'm not sure yet. We'll see. I expect I'll step out of the workforce gradually.
My wife, being a veterinarian, has wanted to be a vet her whole life and will probably continue to be a vet for as long as she can. We may have an opportunity to buy the practice she works at -- another thing that could change our finances significantly. That's going to be a major event, and purchasing a business is something I've been trying to educate myself about. What happens on this front will likely dictate a great deal of our financial future.
Our two huge "fun" goals for later in life are to get few acres of land and build a custom home (designing homes is a hobby of mine and I've been working on our dream home in my head for years), and to travel -- a lot. We have an enormous list of places we want to go. We'll never stop traveling in the meantime, but the list is so long I know we'll never get to it while we're working all the time (and raising kids). The non-retirement investment accounts are intended to fund these goals.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
I sometimes don't feel that I'm very qualified to offer financial advice, because I only have a few years of experience and because we've been fortunate to have such a high income relative to our expenses. I feel in some ways I've just been lucky. However, there are a few things that I can call out:
- Try to maximize your salary as early in your career as possible. This may be a "duh" moment, but it's worth saying -- your future salary level is determined by your current salary level, and a % increase on a high number is greater than a % increase on a low number. I supposed paired with this is to know what you're worth -- I am able to push for a higher salary when the time comes because I've demonstrated my capabilities and know that I'm valuable.
- FMF says this all the time, but...live in a low cost of living area if you can. Our financial position wouldn't be as strong if we were living on the coasts. And we have plenty of money to travel wherever we want, partly thanks to living where we do.
- Spend less than you earn! (shocker, right?) My corollary to this is: have a crash plan. We could live on just one income if we had to, without losing the house. Our savings rates would drop dramatically until we paid off the mortgage, but it could be done. Never back yourself into a corner such that one life event could completely ruin your way of life. If one of us suddenly lost our jobs (extremely unlikely given our high performance), I know exactly what would be cut out of our budget so we could keep going without dipping into savings.
- Finally, consider marrying someone who will challenge you! OK, maybe you can't plan this one quite as much, but it has helped me. My wife and I are very different, in many ways. Financially, she's actually the frugal one. No one's ever accused me of being cheap or frugal -- she, on the other hand, was excessively cheap (cheap in that way where you sometimes buy cheap things only to have to replace them because they were so bad), so we've found a great middle ground. She reins in some of my more indulgent ideas, and I help her realize we can enjoy life but still save.