Reader Profile: JT

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

Please tell us a bit about yourself.

I am a 30 year-old banker living in Houston, TX.  I have been happily married for 6.5 years.  She worked until we had our first child 2.5 years ago.  She is now a stay at home mom, and we have another little one on the way, due in April.  We both have Bachelor's Degrees from large state schools.  I've been in banking since graduating in 2003.

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

At this time I am the sole income-earner, but fortunately my income has increased significantly over the last 3 years.  In 2008 we brought home a combined $150k ($105k me, $45k her).  Today my base salary is $140k, and my annual bonus potential ranges between 50% and 100% of my salary.  If 2012 is a great year, I might approach $300k.  Our benefits are decent - my company provides a 4% match on 401k, and we can also participate in an ESPP.

Historically we have always contributed into my 401k up to the match, then we fully-fund both of our Roth IRA's, then we go back to the 401k.  Depending on a certain pending bonus, we may not be able to contribute to our Roth IRA's this year (although we've already contributed $2,500 each).  We will max out my 401k contribution at $16.5k in 2011.  We also currently put $5k per year into a 529 for my son, and will do the same when Baby #2 is born.  We will likely increase our annual contributions by some amount.  We utilize a high-deductible health plan, and save the max into an HSA each year. 

Aside from this, we set aside excess funds in a high-yield savings account (if you can call 1.1% high-yield!).  We also do targeted saving when we have a big purchase coming up.  We will purchase cars brand new and drive them until it's time to move on.  Our two previous cars lasted 9 and 10 years.  We now have two new 2012 models, both of which we paid for in cash.

We have no debt outside of a mortgage.  We recently refinanced for a second time.  In 2009, we took our 80/15 at 6.0% blended to a 15-year at 4.375%.  In October 2011, we converted that loan to a 10-year at 3.25%.  We currently owe $134k, and our home would probably sell for around $190k if marketed today (2,000 s.f).

My increased bonus potential of 50-100% of salary really starts in 2012.  In 2011, our gross income will be $175k and our take-home income (after 401k, HDHP premiums, and HSA contributions) will be around $120k.  In 2011 we will save approximately $25k into retirement accounts, $5k into 529, $6k into HSA, and another $20k into general cash savings.

Our net worth today is $310k, comprised primarily of $55k of home equity, $75k in cash savings, $20k in 529 savings, $130k in retirement accounts. $30k in automobiles.

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

We'd like to buy a new home approximately 1-year after our new baby is born (i.e. spring, summer of 2013).  We live in a suburb of Houston, so it's not out of the realm of possibility to buy a 3,500 s.f. home for $350,000.  In mid-2013, assuming our home can still sell for $190k, we would have around $65k in home equity to apply to a new home.  In April 2013 I will also receive my 2012 bonus, which I anticipate will be between $70k and $150k. It could make sense to put some of this towards a house as well. 

I am also talking with several agents about permanent life insurance.  I currently have a $1,000,000 term policy, and my wife has a $250,000 term policy.  At minimum, I will soon be upping my term to $1,500,000, and hers to $500,000.  The tax benefits of whole life insurance are intriguing, especially when we will lose the ability to continue funding a Roth IRA most likely in 2012.  Yes, a whole life policy (with NW Mutual for example) may only earn 6% over the long-run, but the tax benefits and the low risk profile are attractive to me, given that we already have a lot of market risk in our 401k, Roth IRA's, and small brokerage account.  I'm curious to know other places people place excess cash once they exceed the Roth IRA limits.   

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

I recently moved to another bank, one which affords me more opportunities both professionally and monetarily.  I am excited about this move and hope it works out for the long-term.  I have never really sat down and thought significantly about retirement, but I admire both my father and my father-in-law, who each worked for one Company for 35+ years before retiring.  I could see the same for me at this new bank. 

We have always said we want to be able to pay for our children's college, wherever they decide to go.  One agent says a 4-year degree at a large in-state institution will cost $250k all-in for our first child, and $300k for our second.  And if one or both decide to attend mom's out-of-state alma mater, you can double that number!  Yikes!  We will continue to save via 529s, but I anticipate that some portion of our income in those years will be diverted accordingly (i.e. we may not save enough in 529s but will have enough income to cover any shortfall).

10-15 years down the road I could see us purchasing a second home in upstate New York, perhaps splitting it with my wife's siblings.  The area is special to our family, and we vacation there for several weeks in August.  It is a beautiful area, and fortunately not as costly as you might think.  But that is a long way off.     

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

Don't worry about the Joneses.  It took a few years for my wife to grasp this concept.  We are very fortunate to have a high income, but we are not spend-thrifts by any means.  We don't purchase fancy clothes and when we do spend money, like buying a car, we will buy new, mid-priced dependable cars with cash and drive them forever.  Also, it's important to save for retirement before saving for college.  You can always take out a student loan, but you can't take out a loan for retirement!  In 2006 we made a concerted effort to track our spending and our net worth.  I find that tracking Net Worth on a monthly basis is very beneficial, and sort of becomes a one-stop shop where you can go to assess your financial situation over the long and short-term.  For example, if I see that our liquidity falls month-to-month, I can focus my attention on identifying why that happened (was it a large one-time purchase, did we eat out more this month, etc.).  We then adapt our spending the next month in an effort to regain any lost liquidity. 

Comments

[Carol]

Don't be quick to buy a new home. Make sure that you have a good emergency fund; wife has a fully=funded Roth (after all, she's staying home to make a home for you and to raise the kids). I'd be very conservative when it comes to housing. A larger home can break you financially,especially if something happens to your job. No one is so secure in their job these days, and that ain't changing anytime soon.

[JM]

This reader profile enforces the stereotype that the symbol of success in Texas is to have a giant house that is entirely too big for your family just because you can. Why in the world would your family of 4 need a 3,500 square foot house for any other reason?

[JimL]

I don't have a problem with him buying a larger home. I am thinking he could save
Ike crazy over the next four years and then pay cash for the larger home.

[Luis]

350K is less than 300% of his AGI, of course he can afford the home! He just wants to know where to put excess money outside of Roths and hence he likely has plenty of emergency funds too.

[SR]

I really didn't know that bankers made that much. Good job!

[JT]

Thanks for the comments, and I look forward to hearing additional thoughts.

Regarding the home purchase - we plan to put a sizeable chunk down, but it will largely depend on the April 2013 bonus. I'm not sure yet how much creedence a mortgage lender will give the bonus, but it is a sizable (hopefully) portion of our income that cant be ignored. We don't want to have a mortgage of more than 2x our gross pay, but at the same time we're not going to buy a $600,000 house if I get a $150,000 bonus on top of a $150,000 salary.

Given that I'm at a new job, we will definitely not be making any major financial decisions without gaining some comfort. At the end of the day, we are fiscally conservative, but if we feel like we can afford a nice home and feel like its a good decision, we're going to do it.

[[email protected]]

What is your profession? I work in the finace industry and don't make even close to what you do. I think its time I switched jobs :-)

[JT]

I work for a large regional commercial bank in energy finance.

[Becky]

I looked at my income combined with my future husband's income when I graduated college and realized that the second we got married we would no longer be qualified for ROTHs. (both engineers, I'm in sales) I took a very similar approach to yours by using a whole life policy as my taxed now (ROTH IRA) retirement savings. In addition to the tax benefits and the lower risk, I like that the cash value can never go down. I treat the money in the life insurance as my bonds and allocate my 401k accordingly.