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 KR. He answered my questions (in bold italics below) as follows:
Please tell us a bit about yourself.
I am a single 30 year old male. I was born in Eastern Europe and spent my childhood moving back and forth between the US and my birth country as my parents worked in academia and had several visiting research positions in the US. I ended up going to college at a small liberal arts college in the Northeast, followed by grad school in a larger city where I got an MS in computer science.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
I started working right out of grad school as a software engineer, which I've been doing for just under five years now. I've seen steady increases in income since I started and have tried to keep my lifestyle and expenses about the same as they were when I was a student. I was lucky to have fairly low student loan debt from college (about $18k, all paid off now) and none from grad school as I had an assistantship.
My initial knowledge of investing came from a very handy booklet I got as part of my college graduation package that succinctly explained things like bonds, index funds, tax-advantaged accounts, and so forth. After reading up a bit I started perusing some personal finance web sites, including FMF. A year or two ago I started reading the blogs by from Jacob at Early Retirement Extreme and Pete at Mr. Money Mustache and thought they were quite good at articulating and improving my approach to personal finance.
I used to have a budget to develop reasonable spending habits but I haven't felt the need to follow a specific plan in the last few years. My monthly expenses are roughly as follows:
- Rent and utilities: $550
- Food: $600
- Transportation (subway pass, car insurance, gas): $200
- Entertainment (event tickets, drugs, media): $200
- Travel (transit, lodging, meals): $150
- Gifts & charity: $200
- Health insurance (employer plan): $150
- Miscellaneous (furnishings, personal care): $200
This comes out to about $25,000 in spending per year. My gross income was $100,000 at its highest but my current job is with a small startup and includes a substantial equity component as well, so I'm 'only' making $80,000. I have also recently started working part-time for my previous company at $110/hour for 5-10 hours a week, which would provide another $2,000 to $4,000 gross monthly income, but it's unclear how long this contract will go, so I consider it a bonus to be donated/added to my savings. My full-time monthly take home is just over $4,000 (no 401k) of which $2,000 is automatically transferred into savings.
My current net worth is about $120,000 and is spread across a traditional IRA ($40k), Roth IRA ($20k) and a regular brokerage account ($60k). I have no debts and no significant assets outside of these accounts, especially since my hot tub broke last year (a sad day for a lover of warm climes living in New England!) I own a car that could probably fetch about $2,000 if I suddenly needed more cash.
What are the current financial issues you're facing (saving, paying off debt, etc.)?
I feel pretty good about my finances although the cheapskate in me is always looking for ways to cut expenses. The most obvious place to do this is in the food budget - I don't know anyone else who spends more on food than on rent! I'm a 6'6 guy with a lightning fast metabolism and consume 3,000-4,000 calories a day, so part of it just comes down to quantity, but I'm also pretty lazy about cooking and eat prepared meals a fair amount.
The other thing I need to figure out is properly investing my savings. My target allocation would be about 40/40/20 into broad-based US, international, and bond index funds at Vanguard (VTSAX, VTIAX, VBMFX) while keeping $10-$15k as an emergency fund.
Due to my equity index funds being sold when I left my last job and rolled everything over into my IRA, most of my assets ended up in cash and instead of buying back in right away, I figured I'd wait a bit to 'buy a dip.' This was in the fall of 2012 so I've been waiting ever since. I have now started dollar-cost averaging back into index funds, and chalking up missing out on the 20% gains of the past 12 months to learning the lesson of not trying to time the market. Hopefully I won't make a mistake like that again and will be disciplined enough to stick to the plan.
What are your plans for the future (retire early, build your career, etc.)?
My job is pretty fun, but I wouldn't want to rely on it for survival for decades, so my long-term financial goal is to accumulate enough net worth to transition as quickly as possible to relying predominantly on investment income for my living expenses. I doubt that would mean I'd stop working entirely but it would definitely put my mind at ease and allow me to pursue interests without worrying about the financial aspects too much.
It's hard to estimate how long that will take, but my back of the envelope calculation goes as follows: assuming a 4% safe withdrawal rate and assuming inflation is a wash (affects income and expenses equally) my current lifestyle of $25k/year in expenses requires $625k in capital to sustain indefinitely, i.e. I need to save $500k more. If part-time work and/or future raises cover my living expenses (as they currently do) and I can save the full $4k from my current salary each month, this would take about 8 years assuming a conservative 4% growth rate.
I'm hoping both to grow my income and reduce my expenses to shorten this time a little more, but obviously lots of unforeseen events could lengthen it as well. The biggest risks I see are (1) increase in health care expenses as I currently pay almost nothing other than my fairly cheap premium; (2) increase in housing costs as my current rent was below market when I moved in and hasn't been raised in five years; (3) stock market stagnation leading to low investment returns; (4) wanting to help out my parents (both early 60's and in pretty good financial shape). I am especially interested in hearing readers' counterarguments to my logic above; if I'm obviously wrong you could save me a lot of trouble!
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
Strategy: time is the most valuable thing money can buy, and the good news is that the exchange rate isn't too shabby. If you internalize the idea that spending more won't produce a significant happiness gain (hot tubs might be an exception), you can avoid many compromises you might otherwise make out of a perceived need to earn more. If you're lucky, you might even get out of needing to earn at all.
Tactics: Advertising works, and you need to stay away from it. Be wary of things that make paying more convenient. Take smart risks - avoid most types of insurance. Be grateful, every day.