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July 28, 2014

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Hi CM,

Great to hear your update. Our daughter (only child as well) turns 13 months at the end of this month, however I am 9 years older than you.

If we didn't have a kid, I would be lecturing you about controlling your escalating costs. Now, however, I find that we are in the same boat- bought a place 2.5 times the size of the older place, which was great as my parents came to visit us twice for a total of 7 weeks during the last 8 months, to visit their first grandchild. Our expenses have gone up from $3k a month to $5k a month, and that is quite painful. It is good that you got your income to increase, I am looking at a cut in income and an end of this job in the coming months ahead.

Try and keep costs contained and see what you can do to add more value to your work output out of your small group- that can provide a basis to increase your compensation in the future.

-Mike

Mike --

I had to smile at your comments. Welcome to parenthood! :)

CM, sounds like you're against the nanny on a financial basis - there's a couple of considerations that can make it more of an "investment".

1) Depending on how good your nanny is, your child will develop better and faster with 1-1 attention rather than 5-1 attention. This will carry through to an advantage in early schooling, which carries through to later academic achievement. You can decide for yourself how much value this would have.

2) Kids get sick more often in daycare. There is some body of research saying healthier kids 0-5 have better achievement later in life (which makes intuitive sense, as instead of fighting infections their bodies are spending energy on developing). Again, worth a consideration of whether you buy into this and how much of a value you might place on it.

Overall, is that worth an $8k / year premium? One of those difficult judgements parents have to make.

I am struck by the differences between CM's world and that of my generation. There's no comparison.

We bought our first home (4Br, 2Ba) in a brand new housing tract in 1963 for $27K in what is now Silicon Valley. Those homes today sell for over $1M. After getting married in 1956 and moving to California in 1960 our 3rd. child arrived in 1963. Back then every wife in the tract was a stay at home mother which was pretty typical back then. We only used a baby sitter when we wanted a night out by ourselves, and there were plenty of teenage girls available nearby in the neighborhood for 50c/hour.

My wife didn't go back to work until the last of our children was old enough to be left at a daycare center. She then worked as a daycare teacher for the school district and worked there until retiring with a nice pension. She saved most of her earnings every month in a separate account that I never touched. It wasn't until many years later when we had our will and living trust drawn up that we combined our assets.

When my wife finally started work we bought our second used car.

Now I am 79 and my wife is 81, we have 5 grandchildren and live a very quiet life indeed. Our frugality and a lifetime of strong savings habits have made us very secure financially and we vacationed worldwide many times after the children had all left home.

@CM,

If you want to get into real estate and for retirement I recommend you move sooner rather than later. After the real estate scare 5 years ago people stayed away but the buyers and investors are coming back and more keep coming. The longer it feels safe the more will come. The window on affordable rental housing will keep closing so time is not on your side if you wait.

As to your condo did you really type that correctly? You are making net $1080 per month after all mortgage and expenses? If that is the case why do you want to dump it? That would be a gold mine.

Apex --

Are you still buying places? Are there affordable options in your market?

In my old, Michigan town, opportunities to buy at a "discount" were drying up a year or so ago. I suspect they are gone now.

FMF,

I am still looking and just closed on one a month ago, but the deals are very hard to find. The inventory is down to 1/3 of what it was and the prices are up a vast amount. In some cases 50% increase in price or even more. So the options to get high quality properties at good prices are mostly gone.

I have been shifting gears a little bit and looking at other options such as group housing and senior housing. Trying to dip my toe into those waters a bit as I have made some contacts that let me explore that.

Some markets are likely better than others and my market here in Minnesota has definitely gotten far less profitable for buying investment properties. On the plus side the ones I had bought previously have probably appreciated close to 50%. I knew that time would eventually come because the prices were just too good but I was hoping the depressed market would last longer. When the window starts closing it can close very quickly which is why I gave the advice to CM to move now and not wait. If his market still has good deals it will likely have less each year he waits.

Investors are also willing to do more remote investing the healthier the cycle gets so out of town investors will move in and squeeze out the profit eventually if they haven't already. There is no time to wait.

Carpe Rentals.

Apex --

That's exactly my experience as well. I'm pretty good with my three properties/14 units, but if I was buying, it would be tough.

@Apex,
Used homes in nice areas are selling like hotcakes in Silicon Valley. They usually end up with a bidding war between prospective buyers. Apple is building a new campus on former HP property that will house 12,000 workers and have underground parking for 2,000 cars. This campus is really adding to the boom in existing homes. There are also huge 4 and 5 story condo developments going up in several commercial areas. I second your advice - in many areas the longer you wait to buy a home the more it is going to cost. It's a seller's market, with few sellers and multiple buyers for every seller. It's rare these days to see nice individual homes being built, primarily because of the unavailability of land for single family homes at a price that would make sense. All the orchards were starting to disappear about the time we arrived in 1960.

@Old Limey,

Every market is different and southern CA is certainly a market that stands on its own. The resurgence of the high tech boom and the associated companies, especially in the San Fran to San Jose corridor which includes Cupertino where Apple is building their new campus, makes that area a market where demand vastly outstrips supply. I can't possibly pretend to have any insight into how that market will or should function. But I do think what is happening there is indicative of what is happening most places in the country right now. We are coming off of multi-decade lows and that is leading to one thing being true in most places. Namely, that prices will be higher next month, next year, next decade.

First, how much do each of you make? If one of you makes a lot more than the other, there is a good chance you are paying a marriage penalty, and it makes more financial sense for the lower-income spouse to leave his/her current position. This is a very good breakdown on the marriage penalty: http://www.financialsamurai.com/at-what-income-level-does-the-marriage-penalty-tax-kick-in/

Second, if you decide it makes sense for both of you to continue working, I think you should try to find a full-time nanny (rather than a nanny share). It would actually cost you more money now but it would also improve your quality of life drastically. I have a live-in nanny for my 3-year old and he also attends half-day Montessori school. She works on his education during the day, and because of all she does for me around the house, I have the time and energy to spend 1-2 hours per night reading and doing flashcards with him. He could identify all his letters, numbers and colors when he was 2 and is reading at 3. My nanny also does both of our laundry, cooking and all the housekeeping and errand-running. Before I sound like an over-entitled brat, I do this on an income slightly less than your combined income, and as a single mom. Although my ex owes me a significant amount of child support, including in arrears, he has never paid anything, so I’m doing this on my own and on a lower income than your combined income. I pay her $500 per week and she lives with us. I also have a more expensive house payment than you. I don’t have a car payment. I still max out of my 401k, HSA and save enough for him to attend college when the time comes. I’m just telling you this so you see that you can absolutely make a full-time nanny work with your budget, but it probably means not eating out often (but your nanny should do some of the cooking), not buying new cloths and not taking expensive vacations. You probably don’t want a live-in nanny, but in my case it is the best. I believe what we do every day is more important than what we do once in a while, and with this situation, my daily life works for me. I can still pursue activities that are good for me, like yoga or biking one or two evenings a week and skiing or hiking on the weekends, since I have a little help at home. And I get a lot of quality time with my little one, since I outsource all the housework. I do have to manage micro-manage my nanny and create lots of checklists, but I still come out ahead.

@Old Limey - the other difference that you're missing here is the income that CM and his wife are making, which probably pretty much offsets or more the rise in real estate costs. A lot of the expenses/choices here would and could be made differently with less income. That's not to say there's anything wrong with them - there's not - but I don't read this as saying that one child is costing $2500/mo - from what I see, the child is costing ~$250/mo, housing choices and not having a parent stay at home are costing ~$2250/mo (again, these are valid choices that were probably made in everyone's best interests, but they're not inevitable, they're just choices that have different positives and negatives associated with them).

Just as an example, between the larger house, the nanny, the second car, and eating out, if CM's wife stayed home with the kid (she being the lower income earner of the couple at this point), they actually wouldn't be all that much further 'behind' financially from what I can see. I speak from experience, having made similar choices - yes, our living quarters are smaller and older than a lot of our friends (but in a great neighborhood and the kids - plural - really don't care if it's tight when grandparents come to visit), we only have one vehicle, and we hardly eat out, but for us, it's worth it! Hopefully this doesn't come across too judgmental - just trying to present a bit of an alternate viewpoint!

@r_meister
If you plan on staying put in an area that you really like I believe that buying a home is the only way to go from a financial point of view. However if your job security is questionable it's probably a bad idea. In the 32 years that I spent with my employer some layoffs did occur. My manager however had an annual meeting with each of his employees that discussed salary, raises, promotions, job performance, and even more important in my opinion, your position in the department stacking list for layoffs. Thus even though occasional layoffs took place I always knew that I wouldn't be affected. My particular manager also told me that he gave preference to married men over single men, even though this was never stated in any printed material.

For most of my career our engineering division only had male employees. This changed a few years before I retired when we started hiring exceptional women engineers from a few of the top rated engineering universities such as MIT. That's when we also had to attend mandatory lectures on interacting with any minorities in the workforce.

As a fellow parent I understand the impulse to want to put money in the 529. But I would put more into retirement for now- as Clark Howard would say, there are college scholarships, but no retirement scholarships.

I believe a certain portion of ROTH IRA funds can be withdrawn for a child's college expenses, so maybe putting money that you would put into a 529 into a ROTH until you build up a bigger nest egg might be worthwhile. Great job on the e-fund.

Don't forget about Backdoor Roth Ira. Even when your income gets high, you can contribute. I would be maxing out retirement funds before 529 plans. You can get loans for college but you can't get loans for retirement.

As Ktmoney mentioned I would do a non deductible roth ira for yourself - max out your HSA (with a child you will need it) and instead of contributing more to your wife's 401k plan which has a high expense ratio, contribute to her employers match and plug the rest into a roth IRA for her.

good luck

High earning dual income couples may be paying a "marriage penalty" in taxes, but a stay at home spouse pays a life penalty in eroded job skills and lost career development opportunities. There are a lot of other reasons why one spouse might choose to stay at home, but tax-savings should never be more than a minor factor in this decision. A high skilled dual earning couple will give up a lot more money than the tax-differential associated with the "marriage penalty" if one spouse decides to quit.

@Pauline - Tax savings can be the difference maker that allows one spouse to stay at home, though - I know lots of people who say that one of them would love to stay at home - if they could only afford it ... another way to look at it is that a working spouse pays a life penalty in eroded parenting skills and lost child bonding opportunities ... and from the "older" people I've talked to, I think I know which I would choose to miss if I could.

@Old_Limey - I hear you on home ownership and stability. I have no idea what kind of market/area CM is in, but where I live, lots of people think you need to spend minimum $350,000 to have a house that's worth living in. I live in a starter home in a different area (not far away from friends/family, either) that I bought for $200,000 that serves our needs very well (although I'm occasionally tempted to stretch for that extra square footage, attached garage, etc, I will admit).

@r_meister - Like I said, tax savings should only be a minor factor in the decision to stay at home. Of course, life and family considerations should be a much more important driver of the decision. People frequently talk up the benefits of the tax savings while downplaying the impact on the stay at home spouse's career, which is why I brought it up.

From a financial standpoint, if there's one super-skilled spouse and one relatively unskilled spouse, the balance may tip more in favor of the un-skilled spouse staying home, and indeed, the tax code was written to favor that behavior. But in contemporary society, it's much more common for marriages to be between people with relatively equal career paths.

CM may make more than his spouse, but she's still pulling in a very healthy post-tax salary, which suggests that she probably invested in her own skills and education as well. It would be a big cost to give that up to stay at home. You never know when one of the three Ds might happen (death, disability or divorce), which is why it's good to consider the importance of keeping a foot in the workplace when you're making the decision to stay at home.

@Pauline - thank you for clarifying, I agree that tax savings is not a reason to stay home, only a small enabler. I would also like to point out that "skilled" and "un-skilled" don't always play a role in the size of compensation. My wife is very skilled at her career, and it's a very important job, it just doesn't pay as well as mine.

As far as the three D's ... death and disability can be offset by insurance and having a community (be that family or church or whatever) behind you as well, and I like to think we collectively have a little bit of control over (responsibility for?) divorce. Maybe I'm naive, but I even like to think that one of the factors that can make divorce less likely is having one parent stay at home and really focus on making the child-raising portion of the marriage (ie, the marriage) a little more peaceful ... I do realize that's a bit old-fashioned (both not divorcing and having one spouse stay at home :), and of course if it makes the financial portion more stressful or adds resentment into the picture, then that offsets the advantage, but it definitely helps simplify our lives not to be carting the kids to and from daycare or having a nanny to worry about.

Anyways, far off topic here, sorry CM (and FMF)!

I'm surprised nobody has expressed concern about taking on more real estate right now.

By the update, it doesn't look like you cut any of your expenses this year:
1) $700 car payments and associated fees
2) $400/mo restaurant meals
3) the condo's mortgage losing $100 (at least) monthly
4) all new furniture and a grill for your rental

Getting more involved with real estate right now (even another personal mortgage) seems extremely risky for new parents having trouble controlling expenses. I don't mean to come across as harsh but I think there may be a lot of expenses besides daycare that are killing the bottom line and you may be underestimating the true costs of the Savannah condo. If you get into real estate right now (your own or rental properties) you open yourselves up to far more liability and expenses (taxes, repairs, general administrative costs and headaches) so I would caution you to proceed slowly with that plan until you have the current expenses better under control.

Thanks for comments.

I realized that I made a typo on my condo... I gross $1050 before mortgage, POA fees, and management fees. I net negative $115 a month. After tax it comes out positive though.

Regarding my wife's employment, she actually works as a coordinator on the heart transplant team at one of the biggest transplant hospitals in the country. This means that her training and her profession are highly technical and her education/ training is ongoing. What is frustrating is that the avg pay for her position in the country is $90k. She definitely doesnt make that here due to the fact that her hospital (and their one competitor) basically have a monopoly on the region and pay well below national standards. She is in a very good spot though and could make the jump to the device manufacturer side if she wanted (significant earnings potential with those companies).

@Jenny - I have actually paid off a vehicle since my first post. Car payment is now $320/ month (not $700). As for restaurants, not sure what the exact figures are as I now track all food/ groceries together in one line item, but I know we eat out much less than we did without baby.

Also, since this update a spot in normal daycare has finally opened up, so our monthly daycare expense will decrease from $1730 to $1100 a month. Should be a big help.

My biggest take away here is that we need to be focusing more on retirement rather than college. This makes sense and i have read plenty of comentary that agrees with this point of view. This, combined with the fact that our savings rates should increase again now that we have all our big expenses settled now (moving, furniture, new car, etc).

Thanks for feedback.

CM-

Best of luck- it sounds like you guys have made lots of progress in many areas this past year. Thanks for the clarification!

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