Reader Profile: JM

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

Please tell us a bit about yourself.

My wife and I are both 27 years old and have been married about year and a half.  We both work at the same company in the Southeast, a large engineering and construction firm where I am a mechanical engineer, and she is in procurement.  The industries we work in are very cyclical, so that has made our job situation feel very unstable at times during the recent down economy.  Fortunately, we have both been able to weather the storm so far, and it has probably been beneficial as it helped us stay prepared for a rainy day and strengthened our saving habits.
 
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

We are both very fortunate to be in the situation we are in at a fairly young age.  First and foremost, both of us graduated college 4-5 years ago with no debt thanks to very generous parents which helped put us both ahead of the game.  After school we both got what I would consider good paying jobs at the same company we currently work for and immediately started putting away money.  Our base gross salary is about 134k a year, and we earn a little overtime that amounts to about 3-5k extra on average.  We manage to put away just about 50% of our gross income split over our retirement accounts and regular savings and investment accounts.

Our monthly expenses are about as follows:

• Mortgage - $750
• Gas - $300
• Cell Phones - $140
• Food - $600 (a bit expensive for two people but it's something we splurge a bit on)
• Insurance - $120
• Utilities - $160
• Medical Stuff - $200
• Other - $350-$1350 (ranges greatly, usually on the higher end if we have to buy gifts, take a small trip, do a house project, etc.)

As you can see, our total expenses are in the $2,600-$3,700 ballpark.  We don't really maintain a strict budget, just make sure we check our balances every couple days to see where we are for the month.

Our household balance sheet is as follows:

• 401(k)s - $146,000 (we each contribute the maximum amount plus a 5% company match)
• Roth IRAs - $49,000 (maximum contribution every year)
• Taxable Investment Accounts - $11,000
• Cash - $100,000
• Home Equity - $30,000 ($125,000 home value, $95,000 mortgage)
• Rental Property Equity - $30,000 ($100,000 home value, $70,000 mortgage)
• Other Assets - $35,000 (HSAs, cars, present pension value)

When all is said and done our net worth is about $400,000, which is much better than we thought we would be doing at our age.

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

Overall, I think we are definitely on the right track.  The biggest issue now is staying the course and investing our excess take home pay wisely. Our cash balance is fairly healthy, and I'm sure some may be quick to point out that we could pay down our mortgages quite a bit.  This is something we are beginning to do with our excess take home pay rather than adding to our cash balance, however for the time being it is very comforting to know that we have the cash available for an opportunity that may present itself while our mortgage payments and interest rates our very low.  That said, we do not want to carry debt for our whole life, so paying down the relatively modest and safe debt we do have while maintaining a "war chest" to go after some opportunities is very important to us for peace of mind.

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

Other than saving as much as we can to have as many options as possible, we don't have any concrete long term goals.  We both like our jobs (most days) and can imagine being there for the foreseeable future.  Having a healthy level of savings will give us the option of continuing working, starting a small business, or investing in a franchise or more property in the future.  I don't see myself wanting to fully retire too early, but I can definitely see leaving the corporate world at some point to pursue some entrepreneurial interests, and having this option sooner rather than later is important.
 
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?

"All that glitters is not gold." I believe this is misquoted or derived from Shakespeare but I think it is a great philosophy to live by in today's world of consuming beyond your means, as it reminds you that appearances are not always what they seem. I also particularly like one quote by Warren Buffet, "You only find out who is swimming naked when the tide goes out."  This is a great reminder to be conservative, be educated, and be prepared for whatever life may throw at you as you want to be the one with the bathing suit on.

Even simpler than those though, my own little philosphy is that it's not what you make, it's what you keep.  There are countless examples of people with huge incomes that don't have a clue what to do with it.  The best tip is to make the gap between your income and expenses as big as possible and invest the difference wisely and steadily.

Comments

[JM]

I think this is the 3rd JM doing a Reader Profile. ;) I believe I was the first.

You're doing fabulously IMO, especially for your age. Keep it up!

[Crystal]

Wow, nice! I love checking out everyone's list of assets and investments to make sure I haven't missed out on any great ideas (I didn't know what a Roth IRA was in 2007...never want that to happen again). This one is very thorough. :-) Congrats JM!

[Jon Smith]

Definitely doing pretty well...

And Warren Buffet is a great idol to have! Contrarian investing can be very profitable indeed. Well, duh, Buffet has already shown that quite satisfactorily.

[Kurt @ Money Counselor]

You are light years ahead of the game (compared to most), congratulations. You correctly anticipated the only question/suggestion I had, which is use some of that cash to pay down debt. But if you prefer to keep it available for opportunities, that's a personal preference and I respect that. Given your results, criticizing your strategy would seem unfounded in any case. Given your reserves, that both of you working for the same company in an 'unstable' industry doesn't strike me as an issue.

[Old Limey]

You are doing fantastic for your age. Of course being a retired engineer myself that doesn't surprise me since you have been well trained to make excellent logical decisions and to not get swayed by the crowd. It's nice that your wife works in procurement. We have a couple of friends considerably older than you that hold similar positions in the company I worked for, and are still there. With a home and a rental property you are somewhat trapped in your present location. Just keep going the extra mile on every assignment that you get and keep your boss happy. In my case I definitely needed an MS degree to pursue the kind of work I wanted to do and my company made that possible for me with an "Early Bird" program at a nearby university where I took classes from 7am to 10am three times/week and made up the time of course.

When you say you have $100K in cash I hope you are getting a better return on it than a bank savings account. You might want to check out a municipal bond mutual fund that only holds muni bonds issued by your state, that way the interest is state and federal tax free and you can always sell shares when needed. Fidelity has such funds for NY, MN, MD, CT, CA, AZ, MI, PA, OH, MA and NJ.

[RichUncle EL]

This is a great example of someone that is considered young for our society but has the right mind frame with money matters. Good job, I do not see how you could improve your finances any better.

[Rick Francis]

JM
For 27 you have accumulated a huge amount- if you just keep doing what you are doing you will do fantastically. I would try to guard against misfortune.
You didn't mention anything about insurance- Ideally term life and disability insurance, as the loss of one of your incomes would be a big financial blow. You may also want an umbrella insurance policy to guard against a law suit especially since there could be additional liabilities as a land lord.
I would seek legal counsel in your state to find out how you could best protect yourself. For example I've heard many landlords have an LLC own the rental property to protect their personal assets.

-Rick Francis

[jim]

JM, you and your wife are doing extremely well. Congratulations.

I like Rick's advice about making sure your protected well with insurance. Higher liability / umbrella, landlord insurance, disability insurance, and beefy term life insurance policies would all be good ideas for you right now. You've accumulated a lot so its smart to protect it.

[JM]

JM from the post, just want to comment on the asset protection topic. The rental property is in an LLC, and my wife and I both have moderate term life plans (5x salary as we have no children). Very near term plans (within the next month) include thoroughly reviewing our insurance and making sure our coverage is all in place properly (this most likely includes adding an umbrella policy). The rental property is a relatively recent addition and I have been adding the proper protections as fast as I can.

[Mert]

Fantastic. With that amount of surplus, I would definitely introduce plans to see the rest of the World.

[minimalist]

Wow, your net worth is incredible for your age!

[SR]

Congrats on your domination. I'm not sure what is included in your "Insurance" category but only $120 seems unrealistic for car insurance and two life insurance policies.

[RichGuy]

If children are a possibility in the future, then paying off the house would certainly allow one of you the option of staying at home. Having no house or debt payments provides a very secure outlook.

[Holly]

I, too, believe that $120 seems low for your insurance budget. What does that insurance number include -- auto, life, home?

Great job!!! You two are definitely in an enviable position and are to be commended. Your parents deserve a lot of credit, too, for giving you a leg up (college education)...did they also help you in terms of your 'financial education'? Just curious!

[JM]

JM from the post again here,

$120 is only car insurance, clearly I should have noted that. Tack on another $575 yearly for our personal residence home insurance and $25 a month for life insurance deducted from our paychecks.

[Gran Torino]

JM- excellent job. You may have mentioned it but I highly suggest long term disability insurance for both of you all. Be sure to purchase it privately with your out of pocket funds, since if you take it from your employer, you will owe taxes on it (even while disabled). Also make sure it covers for inability to do your own occupation, not any occupation. Conversely, consider short term disability insurance via your employer. Your lifetime actuarial risk of being disabled is much greater than dying, and it poses a greater risk to your nest egg.

[Rick Francis]

>Very near term plans (within the next month) include thoroughly reviewing our insurance

Sounds like you have it covered :-), I did think of one other thing: Wills- you have enough assets that you really should have them.

> $25 a month for life insurance deducted from our paychecks.

Until you have kids it probably isn’t a problem to just have life insurance through your company. I take full advantage of my employer's insurance but I also have my own policy. If you switched jobs you could end up with insufficient coverage, and depending on your health at the time you could have trouble qualifying for an additional policy.

-Rick Francis

[RichGuy]

The peace of mind you gain from owning your home is priceless. With the lower monthly cash outlay requirement, the prospect of unemployment or underemployment is no longer so daunting.

[SR]

Charity?

[Mike Hunt]

Hi JM,

You and your wife are doing very well for your age, keep it up.

Keep focusing on career growth and accumulating income producing assets and you will be compounding your net worth very quickly.

I agree on the comments about having adequate insurance.

-Mike

[Mark]

Part of the reson they are doing so well, obviously, is gifts & inheritances. No way on those incomes they could accrue so much in such a small amount of time, especially the rental house, etc. Not to make light of your progress, but there is a big difference between earning it and receiving it gratis.

[JM]

Mark, please don't jump to conclusions, there were no gifts or inheritances. We both worked out of town assignments for work for over a year where we had very few personal expenses and were able to log a lot of overtime, and received modest bonuses one year that we did well at our company. I personally would chalk that up to hard work, but I would say it didn't make more than a 10-12% difference in our position.

Also, the rental property was purchased as a foreclosure so a lot of that is sweat equity, and we rehabbed and sold another foreclosure a year or two ago that gave us another little boost.

Our education was certainly "gratis", but I would not say any of the rest has been. In fact my wife voluntarily made extra payments on her student loans her father took out for her as a token of appreciation back to him on several occasions.

[Kelly@All-FinancialNews]

With America being the land of consumers and consumption being accepted as the "American Way" I think what were once seen as "luxuries" are quickly and steadily becoming necessities in today's technological age. People are beginning to see expensive amenities as things that they need to consume, right now which is leading not only to major credit card debt, but also (like you said) a much smaller gap between income and savings.

[Leigh]

Mark, you could also argue that a lot of my net worth right now is from gifts and inheritances. But I am now two and a half years out of college and I would strongly argue that the biggest factor in my net worth is my effort and hard work. It is *me* who is making six figures in my early twenties and growing my career, not my parents. Sure, they have given me some gifts that made life easier, but I do not doubt for a moment that if I had had to take out student loans, I would have paid them back as quickly as possible and I even did some math that my student loan indebted self wouldn't be that far behind my real self at this point because my income and savings is so high. So even if some of JM's money was from gifts and inheritances, it is an insult to suggest that his net worth is where it is because of that. So many people just spend gifts and inheritances away.

My income is comparable to theirs and I can definitely see myself having a comparable net worth at their age.

JM, thank you for sharing your story. I love hearing stories of other people in their twenties who are saving and being financially strong, building wealth :)