Reader Profile: Soners

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.

Next in the series is FMF reader "Soners". She answered my questions (in red below) as well as asked for some advice (in bold black below) as follows:

Please tell us a bit about yourself.

My husband and I are in our late 20s, childless and live in a big city.  As some of my previous comments have indicated, I'm a professional fundraiser.  I never meant to become one but would recommend it to people who want to work in non-profits but still want to focus on numbers and the bottom line--it's a nice combination of helping people and still being business oriented.  Plus, it's usually the most well paid position in a non-profit.  (FMF, you should think about it for your encore career--especially if you're in sales as the skill sets would transfer easily).  Although I like my current job, both of us dream of different careers in the future--me owning some sort of business and him doing something soccer related.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.)

We both work and net about $6k/month after taxes, tithe, 401ks, etc.  Of that, we save about $2500/month--$800 of that goes to our Roths leaving about $1700 in cash savings per month.  I've never been disciplined enough to track my budget too closely.  I honestly am not totally sure where that $3500/month goes (well $1500 goes to rent, so that's a big chunk) but I've always spent far less than I've made so I don't see a big problem with that.  The only thing that I do track is our net worth and net cash at the end of every month.

What are the current financial issues you're facing (saving, paying off debt, etc.)?

It seems like we have a lot: a big move, having children and buying a house all in the next 18 months or so.  We're planning on moving closer to family within the next year--the added bonus is that it will be a much lower cost of living.  I have already worked out the ability to continue to do my job remotely and my husband is applying for new jobs out there but also exploring the remote work option.  The biggest benefits of this would be stability during our move, higher wages than we'd make in the place we're moving to (the cost of living difference would make our current salaries feel 30% bigger--hello awesome raise), and getting to work from home together (we love spending time together).  The negatives I can see are: While it's more secure in the short term, over the long term it seems to expose us to more risk if we both work from afar.  I've never worked remotely but it seems like it'd be easier for the rug to be pulled out from under you (layoffs, firing, whatever) since you are less a part of the team than everyone else.  Additionally my husband is pretty social and I think he'd thrive more in an office environment.  What other negatives and positives do you all see?

Along with that, we're planning on having a child in the next year or two (God willing).  For now I plan to keep working remotely after maternity leave and rely on family to help with childcare.  But I do worry that working remotely and then going on maternity leave will put me in a negative position with my job.  My plan to counter that is to go absolutely above and beyond in the time between moving and having the baby to show that this job can be done well remotely and to make myself indispensable to the company.

What are your plans for the future. (retire early, build your career, etc.)?

Our biggest goal for the future is to have the financial freedom to change to careers that are less stressful and engage more of our passions.  To do that, I'd like to get in a great cash flow position by 1. having a fully paid for house and 2. building up a large cash pile that's invested in bonds and dividend paying stocks.  Our current hurdles in getting to that point right now are timing a house purchase and deciding how to prioritize traditional retirement savings vehicles (specifically the 401k).

With the house, I am not the type of person who thinks you have to buy a house before having children, or that this is a necessary step in life.  That said, after living in a rented basement for 3 years, there are several huge advantages I can identify in having our own space (ability to garden, decorate, be noisy if we want, have pets, etc.) so we are considering it.  If we do buy, we'll plan to stay in that house for 20+ years as our kids go through school and I'll follow the typical millionaire next door guidelines: well built house, good neighborhood (but not the wealthiest), wait for a deal.  The biggest question for me is how to finance it.  If we stay in our current jobs and keep saving at our current clip, I estimate that we'll be able to buy the home outright with cash in 3 years.  It sounds so nice to not have to go through the financing process but on the other hand, I'm feeling a little impatient and I'm feeling like 3.5% is a ridiculously low rate for a mortgage and it wouldn't be the worst thing to have that for a few years--we would put about 50% down, finance the rest and work to quickly pay it off.  What do you all think, better to wait and buy with cash or finance?

Which brings me to our other biggest issue--in order to save that boatload of cash we want, we're not maxing out our 401ks right now.  Between the two of us we contribute about 10k a year which is 23k less than we could be putting in.  Part of me feels like I should take every tax advantaged opportunity we have, but the other part of me feels like retirement is a goal for our 60s, we already have twice as much in our retirement accounts than we do in cash, and I'd like to pursue our other goal of paying off the house and building a monthly cash flow.  I feel personal finance guilt about not maxing out my 401k but on the other hand, I've been saving for retirement since I was 16 and I'd like to start investing in other goals too.  Thoughts?

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?

Avoid debt.  I was able to graduate college without student loans (lots of scholarships, some help from family and I graduated in 3 years) and that's made all the difference.  I was free to move to the big scary city and look for a job because I had some savings and could live cheaply without the debt cloud hanging over me.  When my first job got terrible, I was able to quit and pursue another opportunity because I didn't have debt.  I was able to have the wedding I wanted because I didn't have to ask anyone to pay for it.  Avoid debt.

Secondly, grow your career.  My best financial move of all time was asking for a RIDICULOUS raise at one point.  I hated the company and was ready to walk (and could because I didn't have any debt) but thought I'd see what they could do.  They gave me that raise which DOUBLED what I was making from them when I started just 20 months prior.  Getting that big raise so early in my career has made a huge difference in my financial situation.  I was able to save a ton because I was young and living in a group house and eating beans and rice.  And every future job has to account for my salary level.  Brilliant.

The final would be that the Roth IRA is magic.  I don't think our tax environment will stay this way much longer (no matter who is elected) so max that out every year.  I started mine when I was 16 (thanks to some help and prodding by family) and it is the cornerstone of my net worth.

Comments

[Noah]

" For now I plan to keep working remotely after maternity leave and rely on family to help with childcare."

Will you be paying your relatives to watch your child? If so, that should be something that should be factored in. I'm guessing $500-1000/month depending on how many hours your are occupied with working. It also sounds like you are very career-driven (which isn't a bad thing at all) but I'd be careful about making too many plans before having a child/children. They are a huge responsibility and as much as some women think they can handle it, one or the other ends up suffering in the end.

[Jonathan]

I think you've identified potential problems with working remotely pretty well on your own - I agree that those should be concerns.

Regarding the house, I'd definitely finance it. Consider that right now there is a historic combination of low property prices and low interest rates; while rising interest rates could depress property values even further, there's no way of knowing for certain what the future will bring. On the other hand, if you can get a good deal that you're comfortable with now, go for it and don't worry about what the market does (As an aside, this morning I sold something on Craigslist. I had a hard time deciding how to price it, and I ended up listing at a price higher than what I thought I could get since I was in no rush to get it sold. I ended up selling it in less than 12 hours and the guy who bought it seemed to think he got a great price. So it was a win-win for us, even if I maybe could have gotten a higher price.)

Personally I'd not worry about the 401k. You can't use that money until you're 60 (as you point out) and you'll be taxed on it at that point anyway; As long as you're contributing enough to get your employer match if you have one, invest the rest in something that could contribute to cash flow or equity sooner.

[Dee]

"I honestly am not totally sure where that $3500/month goes (well $1500 goes to rent, so that's a big chunk) but I've always spent far less than I've made so I don't see a big problem with that."

In general this isn't a problem, but since you have so many big, risky goals for the next few years I think you should get a better understanding of where your money is going. Otherwise, you could end up getting that big raise (through reduced living costs) but not actually having anything to show for it.

I also agree with Noah that you should factor in paying relatives to help with childcare, especially since you could afford to pay someone else to do it. They may refuse or not charge you a lot, but I wouldn't expect them to do it for free.

[Luis]

The big question I heard from you on this post was concerning your first home. I would not pay for a house in cash at all. You should look foward paying down the standard 20% and avoiding the PMI. Look at it this way, having the home loan is a HUGE hedge against inflation! Be patient And pay the home off with time. There has never been a better time to buy a home and should be even better in 2012. Good luck

[08graduate]

Another big plus to work-from-home is that there's no commute! Since management okayed your move, I'm guessing that you're a top performer already. Keep it up, and that in itself should keep you safe.

Are your co-workers comfortable with Skype? I find that it's much easier to be a full participant in meetings by videoconference than with audio only. Also, you might want to visit the office a few times a year. It'll help people continue to think of you as part of team.

As a longer-term consideration when house hunting, I'd suggest looking for a place with extra bedrooms that you and your husband can use as offices. It will keep you out of each others' workspaces, and keep the kids out as well when they become mobile. There are few things more annoying than a coworker's 8-year-old interrupting a meeting.

[Mike Hunt]

Hi Soners,

Sounds like you are asking the right questions.

I would advise paying 20% or higher on the house and taking out a 10 or 15 year mortgage, the payments will be low enough and you should still take advantage of the cash you have saved up.

-Mike

[soners]

Hi all, thanks for the feedback.

We'll definitely build money into the budget for potential childcare costs--everyone we'd want to watch our (hypothetical) children could use the extra income and we'd feel great about helping them out in that way.

As to the mortgage, I understand that financing might be the better financial decision in the long term when you crunch the actual numbers. That said, I think there's a big psychological advantage to paying off the mortgage and that's what we intend to do--it's really just a matter of timing. I hear what ya'll are saying though--financing for a few years isn't bad if I make the right purchase and get a low rate. Agreed.

Thanks for the advice on working from home--I'm definitely trying to work out a Skype solution, create a separate area of the house just for work and the like. Anyone know good books or blogs on how to work from home and keep your sanity?

Keep up the advice!

[Carol]

You're doing a great job--I'd max out my 401K's and Roth IRA's now that you're making good bucks. Buy a house that suits your needs (don't listen to real estate agents--they want you to spend as much as possible to get a large commission) in a decent neighborhood and plan to stay there for a long time, and take a 15-year mortgage. Do not buy a large, more expensive house then you need. Many people have come up short in the long run because of housing expenses. The same goes for cars; buy good used, drive them until they die, pay cash. Your incomes may not grow as much as you think. If you have children, you'll not only have to think about child care, but educating the children as well. Make sure that you have a good cash cushion. Don't live above your means--always live below your means.Other than that, good luck and God speed!

[Rick Francis]

Overall it sounds like you are doing a great job on savings. I don’t bother to track all the expenses- in the end all that matters is two categories: % you save/invest % you spend. If you know those and they are reasonable then you will do OK. The only reason to track spending more is if you want to fine tune the %es.
You should also review life and disability insurance coverage- you are both young and unlikely to have problems, but it doesn’t hurt to be prepared. Especially, once you have a child or a mortgage which would not be affordable with only one of your incomes. Once you have a child be sure to make a will- at the very least you need to designate guardians.
>What do you all think, better to wait and buy with cash or finance?
Right now rates are so low I would NOT wait. Find a neighborhood you like, with good schools, etc. which you could be happy in long term. Even if you have the cash I would still finance 80% (i.e. to avoid PMI) and keep the cash.
> , I think there's a big psychological advantage to paying off the mortgage and that's what we intend to do
Yes, I’m sure it will feel good, but is it the right choice? I could have paid off my mortgage by liquidating investments but I didn’t because:
#1 A paid off mortgage is not very liquid- you have to take a HELOC or sell to get equity out of your home.
#2 Rates are so low you lose money by NOT financing.
Would you pay off your mortgage early even if someone was paying you to keep it? Well, effectively the banks are doing that right now. If you get a 3.5% interest rate, that is the long term average for inflation which means you are getting a 0% real interest rate on your mortgage. Think about that even if your home only appreciates according to the rate of inflation your home value should cover the interest for your mortgage.
If you invest the money you would have paid off the mortgage with what are the chances that you will earn more than 3.5% over the term of your mortgage? Even with very conservative investments? It wasn’t that long ago that CDs were earning 4%, so even if you kept that money as a big emergency fund you would still be likely to earn more by keeping a mortgage. The bank is offering you free money, why don’t you want to take it? Rates may not go up for a while but they really can’t go down any more.
Instead keep most of that cash in more liquid investments like a CD ladder that you could access more readily. You have a lot of life changes ahead and some of them may require a fair amount of cash. Invest some of it for growth- recently the stock market is down
If you really have enough to pay off the house you probably don’t need to save much more in taxable accounts. You could put more toward retirement and take advantage of the tax break.

-Rick Francis

[Bad_Brad]

I'm curious about one thing.

You say you are confident in 3 years you will be able to buy a house with cash. You are putting aside (by your own estimate) $1700 in cash per month. That's $61,200. Doesn't sound like enough to buy a house outright with cash, unless you are going to a really low cost of living area. Do you have a pile of cash already that you are sitting on?

To give you better advice, I would need to know your current personal "balance sheet" position - assets and liabilites.

[soners]

Ok, I'm hearing convincing arguments for financing--I think I am leaning that way for the initial purchase (instead of cash only) and considering (but by no means am convinced) everyone's advice on slowing down the repayment to 10-15 years.

Yes, we have a decent amount already saved for the purchase. Plus, I except our monthly costs to decrease significantly when we move (around $1k) but then if we have a baby, they'll go up. 3 years might be aggressive but 5 years is completely doable

[KMI]

My husband works from home close to full-time, while I do it occasionally. You definitely need to consider having separate offices, preferably far away from wherever your child will be while you are working. As a remote worker you will spend a lot of time on the phone or on Skype, so you need to minimize the distraction of background noises (and if on Skype, visual interruptions too). You don't want to be the person who always has crying kids on the background of the call! While people may understand, it still creates an impression that you don't want people to have of you.

Will you be staying in the same time zone as your current office? If not, bear that in mind as you schedule your days. If you are living on the east coast, but your main office is on the west coast, you will need to work until at least 8 PM east coast time and your lunch will usually be booked for meetings as well since it is only 9 AM there. That can make childcare coverage trickier.

Consider making sure you are involved in an activity that will get you out of the house and interacting with people as soon as you start working from home. It doesn't sound like a big deal, but when you've lost the personal interaction during the workday, you can start to get a little isolated. Having kids can isolate you further just because you end up having even less time to maintain those networks. It takes a conscious, planned effort to keep up with people in that scenario.