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 AA. He answered my questions (in black italics below) as follows:
Please tell us a bit about yourself
I am 38, married to a woman of similar age and we have 2 new teenagers. I met my wife in high school and fell in love. We got married right after college although we were acting as a married couple throughout college including living together, sharing finances and planning for our future together.
We're frugal by nature since we both grew up in situations that made us appreciate the value of a dollar. My wife spent time sharing mobile homes and even barns with family to have a roof over her head and trying to make a block of cheese last a week for two people when she was a teenager. I was more fortunate and had a middle class family, but with a frugal father who exposed me to what life was like for people who had nothing and couldn't provide for themselves of for those they loved.
I was exposed to experiences that really instilled in me my major financial stress: I never want to be in a circumstance where money is the limiting factor to my loved ones' needs. I never want my wife or kids to not have something they need, especially medical care but also food, clothing, and private shelter. I believe that this was the driver for my work ethic as a young man...fear that the people I love might need something that money could buy.
I was a lazy, class skipping, get Cs student in high school. Once I met my to-be wife, I was highly motivated to be a success in order to have resources to enjoy with her and to take care of her. She changed my life in more ways than one.
In my senior year, I got As and got accepted somehow to a decent college. I went on to get a 3.5 average in college while working full-time. I had a few stress breakdowns during that time and will never forget that feeling and when I feel it coming on as an adult, I know I need to chill out. I did 15-17 credit hours a semester and worked 40-50 hours a week in a challenging job (I would literally schedule sleep). I got an entry level position during the summer after my freshman year, which turned into an entry level position with another company during the school year, which turned into a career.
When I graduated college, I was competing with all my peers for jobs, but I had the advantage. I not only had a degree with good grades, but I also had three years of experience within my career field. I also had shown responsibility and a work ethic that is rare in college kids. As an employer, wouldn't you be willing to hire a kid that could do 16 credit hours and work 45 hrs/week at the same time?
My ideal family life was to provide financially for the family while my wife would be able to raise our kids the way we wanted to raise them (we're kind of weird). We didn't want to rely on daycare of any sorts so that meant that we'd have to rely on my income alone. My college degree is in Computer Science and we lived near a large government contracting population. This meant that I was in high demand and was lucky enough to make good money for my age and circumstance.
Changing jobs was the best way to increase income as a government contractor. For government contracting, the company cannot justify increasing their rate 50% for a junior employee to retain that person, but a company can justify a high rate for a new employee. So I jumped companies every year and each time got between a 25% and 50% pay increase. In May 1997 when I graduated, I got a job making $40K, which was the highest I had heard of amongst all my peers with a B.S. degree and being 22 years old.
Two and a half years later, in December 1999 at only 24 years old, I accepted a job making $100K, but with no benefits so after I paid all my costs, it was about $90K. At this point, I kind of hit a ceiling. Rates for government contractors are competitive so there is only so much a company can charge and still win work. So unless you have a real reason to make more, like a doctorate degree or have expertise that nobody else has, you're going to make good money, but that money will be basically constant with little upside for a long time (decades).
This is when I realized that being an employee is not a way to continue to grow my income. I knew I had to become an entrepreneur of sorts. I created my own company as a government contractor and grew that company up to six people. I was still in my mid twenties and was very naive about how to run a company, much less a government contracting company.
When contracting to the government, there is a tremendous amount of rules, regulations, red tape and politics you have to deal with. After a few years, it was really weighing on me and I was becoming overwhelmed. A competitor out maneuvered me and outplayed me and ended up putting us out of business. My inability to think at a higher level due to several factors (lack of experience and spending the majority of my time on minutia) was my downfall. My company was gone and I had to get a job again making a lot less money. I think it was a good thing in the long run because I was having stress anxiety attacks and not spending any quality time with my wife and new son.
Being a CEO of a growing company was exciting and I thought the future was bright and limitless so I did not pull a lot of money out of the company. I reinvested most of it in growing the company and making the employees happy. So when the company was gone, I didn't have much to show for it. That fact combined with a new job where I had to build somebody else's company making an average salary was quite depressing. I slugged along for a couple years trying to take advantage of all the extra time on my hands now that I didn't have to spend all my nights and weekends working on my own company. I love my family and enjoyed that very much but wanted more professionally.
Fast forward to now and I've started another company (about 5 years ago) contracting to the government because I couldn't stand working for somebody else. You realize after awhile though that you are always working for somebody else. It is just which decisions you get to make. I work for my government customer and when they make decisions I don't like, I still have to march to that path. I just get to make the decision of which health insurance I want to have, what overhead costs I'm willing to incur, etc. Those decisions can become burdens when you have employees and you have to do all the work to get things in place for them.
So now, not only do I work for the government customer that I don't really respect, but I also work for my employees as the chief everything - setting up insurance, going through audits (and there are many when you deal with the government) and setting up all the red tape regulations within your company. I do take more out of the company now to take care of my family so I don't have a repeat of the last company where I reinvested it all and lost out on a lot of money.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.)
Both my wife and I work in our company. I'm the CEO and she is the business administrator. Together, we make about $200K, but this is temporary. The government is cutting budgets and thereby cutting into what we provide for the government. Our current contract expires in 2014 and I don't expect them to pay us anymore after that. Our future is very uncertain.
We contribute 10% to our 401K and receive an additional 15% from the company via our profit sharing plan so 25% of our income is going to a retirement account. That is a nice benefit to owning a company and deciding on how the retirement plan will be setup.
Our expenses include:
- We tithe 10% of our gross
- Our tax rate is high given our income
- Mortgage payment of $2500 on a loan that will be paid off in 2028 and has a 3.125 APR.
- Utilities, food, youth sports, entertainment, gas, clothes, etc of about $3K/month
- We're losing about $200/month on a rental property. (We had a high mortgage payment on our home because we bought near the top of the real estate bubble and when we moved, we decided to rent it out for as much as we could get and keep the house until the real estate market recovered and then sell it. This means that we lose a little bit each month, but we're making more equity with each month that they pay the majority of our mortgage payment and the real estate market climbs. The house is in a highly populated and high demand area so it'll be easy to sell and will continue to climb in value for the foreseeable future). The value of the home has increased $150K in 5 years since we started renting it out so in theory, we've made $2500/month in equity while paying down the mortgage and then subtract $200/month so not a bad thing.
Our assets include:
- Current residence: We have about $50K in equity.
- Rental home: We have about $450K in equity. We'll probably sell this in the next three years and then put that equity into our investment account.
- Retirement accounts: $820K
- Investment accounts (after tax savings accounts with the majority of money in ETFs and some in cash reserves as an emergency fund): $380K
What are the current financial issues you're facing (saving, paying off debt, etc.)?
I don't want to work anymore :)
We don't have any debt except for our two mortgages. No credit card debt and no car payments. We're able to save quite a bit each month.
The issues we're having is that we're very very busy and struggle to make time for the important stuff like family time so when we have spare cycles, we purposely decide to do family activities rather than do some smart financial actions such as figure out how to save a few bucks on insurance, utilities, cell phone plans, car maintenance, etc. We end up overpaying for a lot I think but I'm not really sure because I don't want to make the time to figure it out. I prioritize my time towards family fun and trying to increase our income.
The biggest issue we have is that our employment is not secure beyond the next six months. There will likely be a big drop off and I'll probably have to get a job with a 50% pay cut and my wife will not get a job. Our income will most likely drop by over 50% in the next six months...unless I'm successful in finding new work which is what I'm spending a lot of my time on.
What are your plans for the future (retire early, build your career, etc.)?
I'm growing tired of my current professional circumstance and would love to change gears. The government's bureaucracy and contracting requirements really are very burdensome and drive top-notch talent out of government contracting and into the commercial sector. The problem is that this causes quite the stress for me. I have a job that I don't enjoy and on some days, just flat out hate. It pays more than I could have imagined though so I end up having a choice to make. Continue with a job I don't like and which makes me irritable and unhappy when I get home (which my family sees and has to deal with) and that will provide for my family's needs with plenty of extra for a happier retirement...or...move on to something else that would make me happy but making a lot less money that would force my family to give up some things that they've become used to having. I feel stuck. I want my family to have everything they want, but I'm pretty miserable providing that lifestyle.
Honestly, I've spent quite a few hours trying to figure out a way to retire and work on what I want to work on (entrepreneurial efforts that don't focus on the government). My current hope is to retire in 2024 when my youngest graduates college at which point I'll be 49 years old and according to my amateur savings spreadsheet calculations, I'll have a net worth of $2.6MM but more importantly, $1.0MM of savings to live off of until I reach 60 when I can use the retirement account funds without penalty. Ideally, I could find a way to retire earlier and still pay for the kids' college tuition, health insurance and a home to live in plus live a nice comfortable life that includes some vacations and not worrying about buying good alcohol (I do have my vices). I even spend a few hours every month playing with my spreadsheet and looking online to try to find a magic way I could retire on what I currently have. Man, I wish there was a way (I'd love for a reader to tell me about that way in the comments). Most of our net worth is tied up in retirement accounts where withdrawals will cost us penalties and I'm not interested in that. So to retire early, it seems that growing our non-retirement funds is required. If we sold the rental and added that to our current savings, it would be $830K and applying the 4% rule, we'd have to live on $33K/year. Our mortgage alone is $30K/year. Oh well. Gotta keep plugging away for another 11 years. I realize this is a good problem to have, but that doesn't mean I will stop trying to find a way.
In my dream world, I'd retire but I wouldn't stop working in 'retirement' but I would do fun (or at least my idea of fun) things like develop a software as a service company that helps small businesses get beyond the red tape and concentrate on their innovation/ideas. I love the entrepreneur spirit and want to help people who strive to be one.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
I learned about compounding interest when I was young. Fortunately, I saved a lot of money in my retirement account because I knew about it. I think this is the number one financial lesson any young person should focus on. I wish I had saved more in a non-retirement account to take advantage of compounding now. I expect to make more money in interest this year than I made in a year of employment when I graduated college just 16 years ago all because I saved early in life. If you're young, open a spreadsheet and run some numbers. Hopefully you'll be amazed at the power of compound interest and be highly motivated to save every dollar you can.
I also believe that you should always be looking for new ways to grow your income either through promotion, entrepreneurial side projects or improving yourself so that you'll be ready for opportunity when it presents itself. I spent a lot of time reading and applying new programming languages on my own, developing technically complex side projects to learn from and thought a lot about technology and how it could help my customers. All this meant that I grew faster and became more valuable than my peers. When they were partying, I was studying. My brother thinks that I missed out on life experiences because of that, but I think my reward is much greater...the confidence that I can pay for a medical procedure if my son or daughter needed one. I can also create more life experiences now than I could have if I didn't have any money. I've taken the family on a couple fun vacations every year and my wife has taken lots of pictures along the way. We also fund the kids' sports which allows them to be on a travel team which travels around the southeast portion of the country where they have adventures with their friends in hotel pools and messing around between games. We have memories...just not memories of getting drunk and passing out on the frat house floor.
I teach my kids that every time they receive money, they need to set aside 10% for tithing, 10% for saving and then taxes at about 30%. So that leaves them with half of the incoming money to spend on necessities and then fun stuff. If they could increase the 10% savings, they'll be better off. Every birthday card with money gets the treatment...10% to savings, 10% to God and they can have the rest but they know that if they were older and this was a paycheck that another 30% would come out for taxes.
Some other things I believe:
- Figure out a way to provide real value to people with resources
- Do something today that makes tomorrow better (i.e save money)
- Think about your long term vision often, especially before you make a decision that will negatively impact your financial future (like buying jewelry that you don't need)
- Keep it simple.
- Money is not everything, but it does provide freedom (eventually)