Reader Profile: BG

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 BG. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am a 27 year old male from the South Central US. My wife of 3.5 years is 26 years old. We both graduated from a state school about an hour's drive from the city in which we now reside. We both grow up in the same hometown which is in the opposite corner of the state that we still live in. We met in high school and dated for about 6 years (all through college) prior to getting married. I graduated college one year ahead of my wife, and we got married about a month after she graduated from college.
 
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

Presently, my wife and I both work full time jobs. I am a commercial lending officer for a locally owned bank and my wife is a team supervisor for the local housing authority (section 8 housing). Our average monthly take home pay is about $7,000 per month. This does not include bonus income, which can vary from a few thousand to tens of thousands of dollars per year (bonus income is from my job).

Take home pay is after we contribute 10% of my gross pay (my employer matches 3%, so total for my 401k is 13%) and my wife contributes 6% of her gross pay (with an 8% match, 14% total). We also contribute a full $10k per year to ROTH IRA's.

Monthly living expenses are about $4,500 per month (not including ROTH contributions or cash savings/investments). Total monthly budget looks like this:

$7,000 - take home pay

• $1,300 - mortgage payment (PITI)
• $300 - utilities
• $400 - food/groceries
• $85 - cell phones
• $115 - cable
• $500 - auto expenses (fuel/maintenance)
• $580 - auto loan payments (most funds used for investments)
• $250 - giving
• $40 - gym membership for me
• $500 - golf club membership (includes golf & dining)
• $400 discretionary spending
• $832 - ROTH IRA Contributions
• $1,700 cash savings/various investments

A few notes on my monthly expenses:

• I am a golf nut and pay a premium to belong to a very nice local club. As a banker, this is a tool I use frequently to help grow my career by entertaining clients.
• We have to 2 auto loans of which most of the funds were used for various investment opportunities. The rates on each of these are 3.49%. You can see below that we could fully pay these off if we wanted to, but decide not to since investments earn much more than 3.49%.

Our household net worth is approximately $210,000. This includes the following (this is all net of debts):

• $60,000 in cash
• $50,000 real estate partnerships equity
• $50,000 retirement assets
• $30,000 stock/options in the bank I work for
• $20,000 - other private investments, home equity, vehicle equity, etc.

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

The main financial goals that we have right now are growing our overall investment portfolio, focusing more on investments outside of retirement assets. We put a good chunk of money into retirement accounts each month, but I don't think too much about these accounts. I do spend a good deal of time each month focusing on our other investments, which are focused in real estate investments and a few other private company investments (insurance company, etc.).

Working as a banker, I have the opportunity to see all different types of businesses and work with the most wealthy and successful business people in my city. This allows me insight on and access to investments that many people would not.

I own 7 rental properties (some personally and some with a partner). These are all condos so they are fairly easy to manage, and me and my partner handle all management ourselves.

I also just recently had the opportunity to buy a chunk of stock in the bank I work for. I've worked here for about 1.5 years and have moved up quickly, which is beginning to open up solid equity opportunities (both in buying shares and getting options).

I am not too concerned about paying off debts at this point, as they are all at low rates. Debts consist of the following:

•  $190,000 home mortgage @ 4.50%
•  $30,000 in auto loans @ 3.49% (all but about $10k used for investing purposes)
•  credit card balances usually are around $1,000 and are paid in full monthly

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

My wife and I plan to have children in the next 2-3 years at which point we plan for her to become a stay at home mom. She is not as career focused as I am, and we both believe it will be worth the sacrifice for her to be able to stay home. Her take home pay represents about $2,000 of our total $7,000 monthly income. I believe that my income growth from my job over the next 3 years combined with growth in investment income should come pretty close to covering this gap by the time my wife quite her job. Thankfully, we spend much less than we currently earn so this should be easily doable.

My goal is to be "retired" from having an 8-5 job by the time I am 45 years old. I plan to focus very heavily on investing over the next 15-20 years. My investments to this point have been heavily focused on real estate. My goal for 2012 is to make a sizable direct investment into the oil and gas industry by either acquiring some royalties or some working interests in various wells. I am heavily involved in lending to the oil and gas industry and have developed a good working knowledge of the industry. My mother is also employed in a small oil and gas firm and will help to provide me access to some investment opportunities.

I've been heavily focused on my non-retirement investments for about 2 years now, and I've built an income stream of about $600 per month (net of associated debt service - not included in take home pay described above). I realistically believe I can build this to about $15,000 per month by the time I am 45 years old. I typically amortize any debt on investments very rapidly, so once debts are paid off, my income stream will increase quite a bit. Still, I'll have to acquire a lot more assets in order to eventually reach my investment income goals.

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

My general philosophy on personal finances is generally one of being aggressive (focus more on offense than defense). I work very hard to grow my income and to create new income streams. I also don't shy away from debt when it provides me the ability to own an asset that will increase my wealth and income over time.

Keeping spending under control is important, however, to me its not fun to spend your whole life preventing yourself from spending money on things you want to spend money on (see country club membership above). Money is only a tool that can be used to acquire things, or to invest to earn more money.

I'm not shy about wanting big things out of life, but I also try to be smart about creating a plan and working extremely hard to execute in order to reach my goals.

My main piece of financial advice (more like "life advice") - don't let anyone tell you that you can't do something you want to do, or have something that you want to have. People achieve big things every day, and the people that achieve big things are the ones that believe in themselves. Some people think having money or nice things is evil, which is fine. But I don't believe that, and I am not afraid to strive hard for success.

Comments

[Luis]

I somehow believe you can reach your audacious goal of extremely early retirement. Nothing wrong with having an aggressive risk profile as long as your wife is on board. Who says having nice things is evil? Cheers.

[Mike Hunt]

BG,

It sounds like you are doing quite well. Good on you for taking the knowledge you are learning in your job and applying it to your investment strategy.

-Mike

[jim]

BG, you are doing quite well. Nice work.

I'm curious how the rental investments are structured. 7 properties with $50k equity sounds like they're pretty heavily leveraged yet you listed no rental related mortgages. Are you in an LLC with your partner?

How are you for insurance? I don't see any line expense for insurance.

[Jonathan]

BG what happened to your blog??? You disappeared off the face of the earth (the web anyway). You and I are in about the same life position and have about the same exact goals and expectations for ourselves. As a commercial banker you will have a lot more professional networking opportunities than me, so perhaps your plan will be accelerated. Anyway, sounds like things are going well for you. Congrats!

[Old Limey]

The first thing that impressed me was the way you went about making what appears to be a very solid marriage. This is getting rarer and rarer these days and many people completely underestimate its importance. My wife and I also dated for 6 years, came from the same town in the UK and have so much in common. I was 22 and she was 23 when we got married in 1956.

I am also very impressed that at age 27 you have a well thought out "Financial plan" and a very well thought out "Life plan". You made no mention of your parents but I would hazard a guess that they were good role models and gave you some good advice and lots of encouragement. They must be extremely proud of your accomplishments.

You show maturity way beyond your age and my prediction is that you will go far and have a long, happy, and productive life together. It's very heartening to come across a 27 year old that really has his head screwed on right.

Like yourself I took up golf when I was a young man, played 27 holes/week for a while but found it very frustrating and finally gave it up when it became obvious that I wasn't improving. Instead I did a lot of trekking, backpacking, and mountaineering, visited lots of exotic places and gained self confidence and satisfaction by getting to the top of some well known mountains in the USA and Nepal.

It's very heartening these days to read a very successful profile, it makes a welcome change from reading about people's failed marriages and financial screwups. I wish you a long marriage and all the success in the world!

[Bogey]

jim -

All 7 properties are in an LLC. I just list the net equity on my personal balance sheet. We've bought the properties for about $40M each, which is well under market value. Total debt on the properties is about $200k. The $50k in equity that I show here is based upon a very conservative market value for the properties, less debt, less transaction costs. (my share is 50% of that net number).

I have $1MM in life insurance and we have $500k on my wife. I feel good about that for now. I have a decent disability policy through work, but have been considering buying a policy to beef that up. Its on the list to review in 2012.

Jonathan -

It has been a banner year for my bank, and also for me personally. The downside is that I have not had any time for blogging. I am contemplating picking it back up in the new year and focusing solely on real estate investing related articles. I think if I could develop that niche, it might better hold my interest. You know from reading my site that normal day to day finance items really did not interest me.

[Jonathan]

Bogey, that's great your year has been so good. If you do get back into blogging, drop me a line to let me know. Especially if it becomes a real estate blog!

One thought, going through the data you offered - consider increasing your giving. My wife and I are always torn between whether we want to give more now or invest more now with the expectation of being able to give much more in the future. We basically have realized that giving blesses us at least as much as it blesses the people who benefit directly from it, and also that the longer we put off being generous with what we've been given, the harder it would be to open our fists later.

[Rick Francis]

BG,

At 27 your net worth is already $210K that is fantastic- it also means that you don't have to take as much risk- you've started early and saved a lot already.

Are you being too aggressive in your investments? Starting with $210K if you invest an additional $20K/year and get a 7% CAGR for 18 years you would have $1.4M, not enough to retire at 45 but not far from it. Investing in individual properties or individual oil wells isn't well diversified- it could be a large gain or a large loss. Are you earning enough additional returns to compensate you for the additional risk? Is your wife as aggressive as you are and will she be able to sleep easily at night with a highly risky portfolio?

I'm not saying that you shouldn't have some risky investments- but do you both have realistic understanding of the risks you are taking? Have you decided on what percentage of your portfolio should be in these riskier investments?

-Rick Francis

[Bogey]

Old Limey -

Thank you. I couldn't get a better compliment than that. Especially coming from you.

Jonathan -

You must have read my mind. I recently gave away a large chunk of my year-end bonus and we'll at least double the amount we're giving away each month beginning in January of 2012. Our income grew a lot during 2011 and I just was not diligent in increasing my giving, but I will be in 2012. All of our giving goes to our church, except for a very small amount which goes to United Way each year.

[jim]

Bogey, OK that % leverage is not bad and the insurance sounds good too. I had assumed the condos would be more expensive individually.

[Bogey]

Rick Francis -

Which is more risky:

1. Investing in stocks and bonds of companies who are managed by people who do not know me nor care about me, people who get paid to manipulate the company's stock price in the short run, and also get paid huge sums of money when they get fired for doing a poor job (corporate America).

or

2. Investing in physical assets (real estate) which I select, manage and care for with my own interests in mind. I also like the fact that housing will always be needed, so I'll get some level of income no matter what.

Don't get me wrong, I invest a large amount in the markets via retirement accounts each month (15% to 20% of our gross salaries). But, I also don't have much faith in these investments given that the people controlling these companies really don't have my best interests in mind, no matter what the folks on Wall Street want to tell me.

If my retirement accounts grow to a huge amount, then great, but the rest of my free cash flow will be used to build an income generating portfolio of hard assets.

Perhaps I am overly pessimistic when it comes to the markets?

[Bogey]

Rick, I also meant to address your questions about return. My rental portfolio is averaging in the neighborhood of 20% annual cash on cash return, and an overall return of 33% when taking principal reductions on loans into account.

[Rick Francis]

Bogey,

There are still a lot of factors you can't control- demand for rental properties, condo prices, how your renters behave- so you are exposed to those risks.

20% is a huge rate of return, as long as you keep a sufficient emergency fund so that you don't run into cash flow problems (repairs, vacancies, etc.) you should do very well. You may not be able to scale these results in the future- if it is easy to get 20% returns every other investor in your area should be grabbing those condos driving prices up and reducing the profit margins.

>Perhaps I am overly pessimistic when it comes to the markets?

It sounds like it- I'm sure some CEOs are squeezing their companies for every cent with no regard to long term success. However, I'm sure others are more interested in making successful companies than short term results.

-Rick Francis