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 SF. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
I am 29 (about to turn 30) and live in Southern California. I have a bachelors and masters degree in accounting and currently work as a forensic accountant. I have my CPA license in California and I am also a Certified Fraud Examiner. I got married about a year ago, my wife (age 30) has a bachelors in music and a masters in elementary education. My line of work is very stable, though my wife's isn't as stable because of the teacher troubles in the state of California. We currently have no children, but are planning on starting a family within the next couple of years.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
As stated above, both of us are working. My salary is in the upper 60K range with bonus possibilities depending on productivity and other factors, accruing every quarter and payable in February. My wife is an assistant teacher at a private school and currently brings in around 20K, which is low for her education level, but the private school job should allow her to jump to a full-time position either there or at another school next fall with a corresponding pay increase.
Expenses wise, the biggest item is rent, coming in at 1125/month. Yes, this is high, but it also allows both of us to live very close to our jobs, cutting down on commute time and expenses and in our view, worth the extra money to get this location. I have about 11K in student loans remaining from my masters degree (bachelors was a full-ride scholarship, thank goodness) at 140/month, 6.8% fixed interest which I am paying 200/month on for now because after 4 years of on-time payments, it drops to 4.8% interest (and prepayments count towards running the clock faster). I also have a car loan from a new car I bought in mid-2009 at around 12.5K, paying 450/month for another 2 1/2 years. This loan is at 0% interest and the car is above water now, so prepayments to this loan aren't the highest priority. In hindsight, I probably got too much car, but I was single at the time and living with roommates, so I had more free cash flow. I plan on driving it until it falls apart, so once it's paid there won't be any new car for a while. My wife's car is paid off, but is old (1999, 140k miles) so we're saving up to replace that car, at around 6k right now. We plan on riding that car until either it falls apart (at which point we pay cash for the best used car we can find) or until we have enough saved to pay cash for a new car. She also has student loans (about 4k in undergrad, 41k for her masters, undergrad is at around 3%, masters at 7.25%, unable to consolidate the two because the undergrad is Canadian student loans).
We're practicing living on just my income for when we start the family. Right now, all of my wife's earnings go toward her student loans 1st (payments about 400/month for 25 years from a consolidation, we're paying 500/month which should let us pay it off in around 10-12 years, though I'd like to pay that off even sooner) and her replacement car fund 2nd. Once we have her replacement car, all her earnings will go to repaying her loans. We also tithe to our church 10% and I contribute 6% of my salary to my 401k which has a 100% match up to 1st 5% of contributions. Additionally, I put between 250-300/month into a Roth IRA. Currently the 401k + rollover IRA from previous job is around 45k, the Roth is around 4k. Emergency fund is around 2.5k (this is separate from the car fund) which I'm trying to increase by about 100/month.
What are the current financial issues you're facing (saving, paying off debt, etc.)?
The main issue we're currently facing is the replacement car for my wife. It could give out tomorrow, it could last another couple of years, but we're saving up to take care of that 1st. 2nd is reducing my wife's student loans. 3rd (maybe 2b) is boosting the emergency fund. I'm toying with the idea of either reducing or eliminating the Roth IRA contribution and rerouting it to the emergency fund buildup until I have at least 3 months of expenses saved up. I feel this is an acceptable move since with my 401k contribution/match, I'm effectively at a contribution of 11% of salary. Thoughts?
The other issue which will come up soon is when we start having children. We want my wife to be able to stay at home, but right now with all our expenses I can't cover her student loans on my salary alone, not until I finish paying off my car. She can do piano lessons and tutoring from home while taking care of the kids, but this income can be unpredictable. Not currently an issue, but one to look at down the road and keep in mind.
What are your plans for the future. (retire early, build your career, etc.)?
Currently for me it's building my career. My work is fairly specialized, so we will most likely be staying near the big cities to allow me to continue it, though we may reevaluate this down the road. My long-term goal currently is to be able to start my own business along those lines (it would be similar to the partner track of a law or accounting firm) or to become a partner in my current firm.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
My general philosophy on personal finances is you are the one who should be most concerned about them. It is extremely unlikely that a "white knight" will come in and swoop you away from whatever financial trouble you may be in. Your friends and family care about your well-being, but you (and your spouse/partner, if applicable) are the only ones who can truly do something about your own situation.
Additionally, I'm a firm believer in knowing where you stand financially, even if it isn't good. If you have credit card debt, open up those scary credit card bills. They won't disappear just because the envelope isn't open. If you're investing, know what you're buying, even if that means you stick with index funds. Keep track of your expenses and you can plug those leaks in your budget that always seem to appear while they're small.
Finally, try to anticipate future situations and plan for them. For me, this is my car payment. My family situation has changed significantly since making that purchase and it's reduced our financial flexibility accordingly. I realize you can't anticipate or plan for every possible contingency, but keep an eye down the road for the obstacles you can see.
Have you shopped insurance recently? Looked for areas to cut back a bit? It seems like your debt is the biggest barrier right now. You are making some extra payments which is a good start, but any extra you can squeeze from the budget will help get you out of debt sooner.
>eliminating the Roth IRA contribution and rerouting it to the emergency fund buildup
I would not do that because the Roth could be used as an emergency fund. If you have no emergency you don't miss out on contributing, if you do have an emergency you can liquidate some of the Roth and take out the contributions without any penalties.
Since your wife may be out of the workforce soon, you should see what you could do to improve your salary. Is there any additional training, certifications or other training you could take to set you apart from you coworkers?
-Rick Francis
Posted by: Rick Francis | February 13, 2012 at 11:06 AM
I think you wife really needs to be looking a lot harder for a new job or a least a part time job. 20k with a master's seems extremely low to me.
I also think you need to try to re-fi your student loans, interest rates are very low right now and I would think you should be able to improve on that 7.25%
Posted by: Ron | February 13, 2012 at 11:58 AM
Although you are working on paying down some debts, I think you are still in a good positioon with the upside that you have with your career and the education that both you and your wife have. BTW, what is the total debt on your wifes education loans? Payments at $400 a month for 25 years seems like a huge amount to me for a degree related to music... I think you may expect double digit pay increases each year with a CPA under your belt. Paying down debts should be managable if you are disciplined with the extra increase in pay each year.
I would disagree with Rick on Roth IRA contributions and would priortize emergency fund build up. There are specific criteria that must be met in order to withdraw Roth IRA contributions penalty fee. Although I used the Roth IRA to save up for a down payment on a home, I relied on professionalC CPA help to make sure that I met the criteria to withdraw penalty fee. It was a real pain in the butt and I didn't think it was worth all the extra work to get the money back out.
Posted by: Tato | February 13, 2012 at 12:10 PM
Cars don't "fall apart" or "give out". They need repairs. So, her car is very unlikely to "give out" anytime soon, but it may need to go into the shop for a repair. As cars age, repairs become more frequent and expensive. I never understood my in-laws that think they need to sell their car as soon as it needs its first repair. They don't even bother to see how much the repair costs! They just think the car is done for and move onto the next one (via trade in at a dealership, of course).
You don't say what your wife drives, but decent cars will go well over 200k miles without needing extensive repairs. My parents always bought Toyotas and never drove them less than 300k miles. DH and I have had the same car for the last 10 years, driving it up to 260k. It wasn't even dying yet, but we moved to the country recently and bought a hybrid to save on gas. I fully expect to push this one to 300k as well.
People don't typically replace their cars because it is actually financially beneficial (the VAST majority of the time it is cheaper to repair than replace). Usually, people want a newer car either because they are bored of theirs, or their needs have changed (a la kids, etc.), or they don't want the hassle of taking a car to the shop once a year.
Posted by: Des | February 13, 2012 at 12:26 PM
Along the lines of your final conclusion to anticipate future situations, my guess is that family is going to become an increasingly urgent matter within a few years. In order to enable yourselves to have the greatest number of options available when the time comes, I would get some lazer focus on increasing cashflow and decreasing debts. The biggest suggestion I have along those lines would be for your wife to get serious about starting with piano lessons and tutoring now--and to do her best to identify and target a specific audience that might pay more.
Can you consolidate all the student loans? At the very least, her graduate loans need to be re-financed, 7.25% is way too high. It might be good to get yours down too but that's the one I would focus repayments on the most if I were you. Looks like you could knock that out and your car payment right around the same time which would free up some major cash and allow some flexibility.
Posted by: soners | February 13, 2012 at 12:36 PM
Tato,
I haven't ever had to take out any Roth contributions, but my understanding is that with drawing contributions are always non taxable and penalty free. However, taking out contributions isn’t classified as a qualified distribution.
I found the following article that supports that reasoning and references the IRS publications:
http://www.mymoneyblog.com/can-i-really-withdraw-my-roth-ira-contributions-at-any-time-without-tax-or-penalty.html
Was your CPA trying to ensure you had qualified distributions? I believe that there are some exemptions (i.e. education or a 1st home purchase) where you can take qualified distributions before 59.5 but if you don't need to withdraw earnings it shouldn't matter.
-Rick Francis
Posted by: Rick Francis | February 13, 2012 at 12:38 PM
I see comments suggesting refinancing the student loan debt. I currently have student debt from 3 different lenders. One of the lenders has me at around 7.5%. The other two average out to around 6%. How can I go about refinancing?
Posted by: Gunners | February 13, 2012 at 01:38 PM
I would reduce your 401k contribution to 5%. That would free up about $50 a month for you. Next, I'd keep the Roth IRA and keep that as an emergency back up fund. You may want the fund within the Roth to be in safe investments, TIPS for example to prevent losses as it will be needed in an emergency.
You said that you pay $450/month on your car? Sounds way too much for a 3 (2009) + 2.5 year loan. I have two 60-month loans 12k at $208 3.25% and 17K at $298 2.99%. How is that you are paying hundreds more on a zero loan?
I would brush up on FMF's articles on asking for a raise. Make yourself an indispensible hard working employee and you should be getting high pay increases year after year. If that doesn't happen, I'd start looking elsewhere.
Do you have family or friends who you wouldn't mind sharing your apartment until you do have children?
Posted by: Luis | February 13, 2012 at 01:51 PM
I have to agree with Des regarding the car. The car may require repairs, but I wouldn't go out and buy another car at this point. Use the 6k to fund any future repairs. You guys say you live close to work, so she may not put that many miles on the car. you could potentially have it for another 5 years (up to 200k miles).
Keep funding your retirement..you're doing great there.
Look to consolidate or reduce the interest rates on the student loans..that's a big leak in your budget.
Glad to hear you're living on 1 salary. Once your wife gets a higher paying job in the fall, funnel all that to pay off her student loans. After they're paid off, you can then begin some family planning.
I'm not a financial advisor, but a millionaire (in terms of net worth) at 34.
Posted by: I Am 1 Percent | February 13, 2012 at 02:00 PM
Appreciate the feedback. The common thread I’m seeing is my wife’s student loans, which is what I figured it would be. They are currently consolidated, so that’s not an option. The consolidation is through the federal government. Regarding refinancing, what I’ve been able to find is that there aren’t lenders willing to do this because student loans are practically impossible to discharge in bankruptcy, so there’s no incentive for a lender to refinance. If anyone can provide a link to reputable lenders willing to refinance (NOT consolidate, that’s already been done) I would appreciate it.
@Rick: Recently shopped car insurance, it's about as low as it'll go without reducing coverage or increasing deductible past further than I'd like to go. Certifications/training, I am currently working on a specialized one in my field (2 parts complete, 3rd part scheduled for June) and there will be another one I'll be eligible for early next year, need more work experience 1st.
@Ron: The hire period for teachers is right around now and she's currently doing interviews. As far as refinancing her loans, all I can find info on is consolidation, which we've already done. If you have any specific info on how to refinance I would appreciate it.
@Tato: Total student loan debt is 45k; 4k from music undergrad, 41k from education masters. Looking at my Roth account, I would be able to withdraw most (if not all) penalty free if necessary. Sounds like there's a split of opinion here and I may end up splitting the contributions (part to emergency, part to Roth) to cover both.
@Des: We replaced the starter motor a couple of months ago. As we're saving up, if a repair comes up, we'll look at using the car fund to do the repair vs using the car fund to replace, depending on what the issue is. We'll want the replacement car to be able to handle kids in the future since it'll be the only replacement car for a while. My concern about her car is that it has a salvage title from before my wife owned it (she bought it cheap from an immediate family member) and this might be a safety issue. This is a good reminder for me to investigate what caused the salvage title.
@soners: Good idea on the starting tutoring now. We've already consolidated; if you have any info on refinancing student loans I'd appreciate it.
@Luis: I reread what I wrote, I didn't write it clearly. The current balance on the loan is 12k, that wasn't the original balance. Regarding the raise, since the time of writing I did receive a raise and we're putting all of that toward my wife's loans.
@1%: See my response to Des about the car.
Posted by: SF | February 13, 2012 at 02:53 PM
I'm with Rick on the Roth issue. You can always withdraw your Roth IRA contributions without any penalty. It's the earnings you have to worry about. When you withdraw from a Roth IRA, there's a very simple form you fill out with your tax return to show how much you have contributed and how much of the withdrawal is coming from your contributions. Don't let worries about that keep you from using the Roth as an emergency fund location. Just make sure the emergency portion of your Roth is invested properly - short-term fixed income, Treasuries, etc.
Posted by: Paul Williams | February 13, 2012 at 03:04 PM
If you have a minimum emergency fund ($1000, separate from car fund), then I would be fine with counting the Roth IRA as a secondary emergency fund. I am working towards having six months of expenses in savings as a "lose my job" emergency fund, in addition to other cash savings, and will consider my Roth IRA, to which I have contributed more than that amount, as a backup emergency fund, so I could go a year without any salary if absolutely necessary.
As far as the rest, I think you need to prioritize increasing your income for the next few years so you can pay off debt before you have a family. That includes possibly asking for a raise for you (and/or doing side work doing people's taxes?), and your wife looking at additional part time jobs, especially if she doesn't get the full time offer you say she might. Even a part time retail job that brought in an extra $300 per month would help significantly in this area.
Best of luck to you both.
Posted by: SA | February 13, 2012 at 04:59 PM
SF - With a CPA and CFE, in CA no less (high cost of living), I have got to think you are underpaid for your job. How many years of experience do you have? Are you working for a Big 4 firm or some specialty firm? Big 4 is a lifestyle choice, as in you will work a lot and probably travel since you are specialized, but just a couple years there can lift your earning significantly, especially when you leverage it into your next job.
Posted by: fka CPA Abroad | February 13, 2012 at 06:18 PM
Rick - Thanks for the link on Roth IRA withdrawls. I was not aware that contributions could be withdrawn tax and penalty free. When I had withdrew from a Roth IRA previously it was for a 1st time home purchase which met the definition for a tax free withdrawl and I did have earnings which came out as I liquidated the account to make the home purchase. I now need to consider moving my emergency fund to a Roth IRA.
Posted by: Tato | February 13, 2012 at 09:18 PM