Reader Profile: MB

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

Please tell us a bit about yourself.
 
I’m 40 years old, married 18 years with 3 sons living in one of the largest metro areas in the US.  The wife and I grew up in stable, supportive, blue collar families. I’m the grandson of Ukrainian immigrants.  We all lived on the same street with our aunts, uncles and cousins.  My grandparents lived with us in a small modest home until they died.  Although we didn’t know it, we would have been considered poor by today’s standards. My parents strong work ethic were a big part of my upbringing.  The wife’s story is similar but they were Irish coal miners.
 
One big source of pride for our parents is that we were the first ones in our families to ever go to college. Both of us have Bachelor and Master degrees – mine in engineering and hers in education.  She is an elementary school teacher and I’m a regional engineering manager with a very large, very stable corporation.  I’ve been working for 18 years while she took 10 years off to raise the kids.  She now teaches where the kids go to school.
 
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
 
From a debt and income perspective I believe we are on the right path.  From a saving and spending perspective I’m very worried we are behind.  We were good savers in the past but costs for the kids have gone through the roof since they hit the teen years.  We also bought a new house last year and have spent a lot getting it fixed and furnished.  Time has also been tight for us as my side biz went off the charts and I got promoted in my day job.  This has resulted in me going from a dictator on spending to having no time to budget.  It’s evident as our spending increased and saving shrunk.
 
Here is a summary of our financials:
 
Assets
--------

• House - $450,000
• Rental - $160,000
• 401ks - $150,000
• Pension #1 - $50,000
• Pension #2 - $60,000
• Savings - $10,000

Liabilities
-----------

• House (15 yr 3.0%) - $300,000
• Rental (30 yr 5.25%) - $105,000

Income (Monthly)
--------------------

• Me - $11,000
• Her - $3,000
• Rental - $900
• Side Biz - $2,000

I don’t count the side biz in budgeting as it’s very unpredictable since it’s related to construction & engineering in the oil industry.  Last year it made about $200k profiting $75k but this year profits will be about $12k.  The side business cash flow is not included in my financial breakdown.
 
Expenses (Monthly)
------------------------

• Mortgage P&I - $2,200
• Rental Mortgage P&I - $750
• Taxes: House Property - $800
• Taxes: Rental Property - $250
• Taxes: Fed, SSI, Med - $2000 (I still pay another $10k+ year end)
• Insurance: Medical - $250
• Insurance: Dental - $150
• Insurance: Life/LTD - $125 ($2MM for me, $100K for her, both term)
• Insurance: House - $100
• Insurance: Rental - $35
• Insurance: Auto - $100
• Health Savings - $333
• Auto: Tolls - $100
• Auto: Gas - $500
• Food: Groceries - $1000
• Food: Dining - $300
• Utilities: Mobiles/DSL - $300 (5 mobiles plus house WiFi)
• Utilities: Water - $125
• Utilities: Gas - $100
• Utilities: Electric - $250
• Utilities: Satellite - $110
• Utilities: Security - $40
• Housekeeper - $200
• Misc Monster - $500+
• 401ks - $1200
• Health Club - $20
• Charity - $2,000
• Tuition - $1,400

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

Saving and cutting costs are the biggest challenges.  The kids expenses are going through the roof as they are all active in school, scouts, sports and music.  It seems all I do in life is drive people places and pay.  We used to have about $50k saved for a rainy day but that was spent on our new house and buying a vehicle.  I don’t mind though as my job is very safe and I’ll be able to catch back up soon. The kids will all be gone in 10 years.  My main goal this year is to get spending reined back in as well as saving on track.
 
One item of concern is the rate of return on my 401k.  It’s awful and seems to only grow based on contributions.  Our company doesn’t match since we get a traditional pension.  I wish Old Limey was my dad so he could take over and grow our 401ks! FMF should hold an investing seminar with Old Limey as the teacher so we could all learn how to do this using his methods.  That is a serious request. :)

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

I’d like to retire around 60 (or a few years earlier) which is in 20 years.  Until then I’ll stick with my current firm as the pension is fantastic.  It should be worth at least $1MM when I retire, or on an annuity basis it will be about $60k to $80k per year.  I’m also optimistic on opportunity as there should be a lot of executives retire in the next 5 to 10 years.  This is where good performance pays off… hopefully I can get one of those spots.  That would open up things significantly on base, bonus, and stock options/grants.  Meanwhile, I’ll continue with the side business.  If it ever gets big enough to go on my own I’ll do it. 

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
 
The best teacher for me was Dave Ramsey when I read his first book “Financial Peace” in the mid-nineties.  He taught me a lot about budgeting and debt plus he makes money management interesting yet practical in his sessions.  Buying a home on a 15 year note is a good piece of advice we’ve used.  Also, I’d recommend rental properties.  On a cash flow basis they are neutral but from a tax perspective they’re great since you get the mortgage interest and depreciation as tax deductions. 
 
I also liked Michael Masterson’s “Automatic Wealth”.  That motivated me to get into real estate as well as start my side business.  His concept of MSI (multiple sources of income) really opens your eyes.  Getting more than one source of income from your day job can blow the doors off maximizing earnings.  All it takes is the courage to "just do it"... you'd be shocked at the outcome.
 
Finally, FMF and it’s readers have been an inspiration.  Thank you!

If anyone has advice on improving my situation I’m all ears.

Comments

[Luis]

Actually rental real estate is not that great for high income earners. Your tax benefits are choked off. The liabilities and insurance offset deductions. The main benefit is positive cash flow and appreciation at the time you sell. If you are not cash flowing I would sell immediately.

[RichUncle EL]

First thing I would do is increase the wife's life insurance to at least 300K term life. Also you income including side business leaves you with 1500 dollars, that can easily be saved and bulk up the savings and investing categories. With a high income as yours Im surprised you do not have individual dividend stocks, which if done right can provide you with more cash flow in the future.

[Daniel]

I highly recommend you get rid of the monster under the kids bed, especially if his miscellaneous expenses are costing 500+ per month.

:)

[retirebyforty]

It sounds like you're on track to a nice retirement and just need to get your current spending under control. Maybe reduce the number of sports and activities a bit? My kid is still young so I don't understand the need to do a bunch of sports and activities. Kids are way too busy these days.

[Old Limey]

MB
My wife and I have roots somewhat like yours. Mine are English, my wife's are Welsh and I was the first ever in my family to obtain a degree and hold a professional job. There's no better way to learn the value of money than by being poor when you were growing up as a child. Growing up during WWII was another experience that taught us both the value of money and how to be very economical in everything. I raised my children the same way - if they wanted money they had to get jobs and earn it, and all three of them had several. If they made phone calls that incurred message units, they got a bill from me at the end of each month. While they were living at home, if they wanted a used car I gave them an interest free loan and a payment book. Nothing breeds success more than good family values and discipline.

The financial software package that I wrote back in the 90's, ran on MS-DOS, is no longer available, came with a 300 page manual, was menu driven, easy to use, had 70 different analytical tools, and helped to make many people wealthy while the good times were rolling in the stockmarket. I made presentations on it at seminars held by my database provider in many major cities. Now I'm afraid the times of making easy money have been over for a while and my crystal ball is very cloudy indeed. We never used to have national debt and budget deficits of this magnitude but what we did have was a congress that managed to get things done regardless of who was in the White House. It's not just the USA whose economy is slowing down again, it's worldwide I'm afraid, even China. Maybe it's because the demand for energy by the developing countries with their fast growing populations has done away with cheap energy.

My 48 year old son's 401K is currently 100% in PTTDX, Pimco's Total Return Bond fund. He asked me to manage it on 11/26/1999 when it was $7,103.45. As of 7/5/12 it has grown to $278,219.24.

[Earlyfreedom]

I loved the wording "Misc Monster". I usually use Misc for our budget databases but would consider adding the Monster :)

What I noticed is that your 401k contributions are $1200/mo but Charity is $2,000/mo. Was that a typo?

[Old Limey]

I also missed the "Charity" budget item.
I'm one of the seemingly few that believe that Charity begins at Home - but to each his own.
CNN's "Keeping them honest" segment has been exposing many fraudulent charities recently.

[FMF]

Old Limey --

I believe that charity begins at home too. I just don't believe it ends there...

[Rick Francis]

MB,

You’ve build up a large income at over $200K/year that is really strong and should let you reach your financial goals. Given your high income, minimizing taxing is quite important. I wouldn't be surprised if you could more than pay for the cost of a CPA reviewing your taxes with tax savings next year.

In your profile I didn’t see a lot of info on savings I only saw $14,400/year going into 401K. You don’t mention how much goes into pensions/year or other savings. You may want to calculate as a % of your salary how much you are saving, and set a savings goal.

While $270K in pensions, 401K and savings would is a lot of money for most people- it is only 1.35X your yearly income. That suggests you might need to decrease your spending in retirement. I also didn’t see any mention of college savings for the kids; if they are teens then you don’t have a huge amount of time left either.

> We were good savers in the past but costs for the kids have gone through the roof since they hit the teen years.

Now that the kids are teens I bet they could help out paying for at least some of their activities, and it would be a good education for them to try holding down a job, or starting their own business, or working for your side business.

At the very least you could keep the kids’ spending in check by giving them a fixed amount to spend each week and having them budget it. If they run out of money before the week is out let them find no cost activities- like reading library books, practicing skills for their sports, etc.
Your side business can also be thought of as an investment- if you can eventually sell it to someone else. One way to make a business more sellable is to define all of the positions so that other people can take over them. The book The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It by Michael Gerber talks about this and if you do it successfully you should be able to grow the business by hiring new people to fill positions. Eventually the day to day operations will be filled by other people and you could sell the company or get passive income from it.

You might want to reinvest that $2000/month in income back into the business to help it grow. You could potentially have your sons work part time and earn that salary. Alternately, you could see about using a SEP IRA to tax shelter and invest that $2000/month from the side business.

-Rick Francis

[brooklyn money]

No advice, but I'm in a similar boat in terms of the 401K. It doesn't grow at all. Just by contributions. Very frustrating and I too don't know what to do about it.

[Noah]

The more I read about 401Ks, the more I'm convinced that you should minimize contributions and never go over what a company would match. Between fees and poor selections, they simply are not the best investment. Move more money into a Roth IRA.

[Adam Hathaway]

Pretty good job with your finances. I am not a financial advisor but I think that you may want to look into purchasing another rental property. That way you have assets for retirement that can be passive. Purchase a couple more then hire a management company. That way it becomes mostly passive income that you can carry with you into retirement. This might also allow you to go full time with your side job.

[Melissa@LittleHouseInTheValley]

I have three kids of my own, and I know how expensive they can be. :) Even though it is difficult, we have limited each kid to just one activity we have to pay for. For instance, my son can join Cub Scouts (paid activity) and choir and art club at school because those are free. That helps limit our expenses a bit.

[Manette @ Barbara Friedberg Personal Finance]

Generally, you are on the right track. But I think you have to cut down on Misc Monsters and other unnecessary costs to put more savings for your retirement and kids' college education.

[mb]

Thank you to everyone for the feedback. Here is some follow up to the comments/questions:

@Luis – My CPA indicated the rentals are in fact a great deduction for my income bracket. He has suggested I buy more. Depreciation + Mortgage Interest for both my primary and rental + 401k + charity + property taxes + biz expenses + other misc deductions like repairs on the rental = significant drop in taxable income. The biggest challenge is time to manage all this stuff. The tax code encourages this.

@RichUncle – Unfortunately my wife has a permanent medical illness which prevents her from ever getting life insurance. We bought the 100k term prior to the diagnosis.

@Daniel, retirebyforty – I agree! :) Kids are killing us. I do think much of it is justified though. One boy is very good at a certain sport such that he competes at the highest level and travels around the country. He is a member of an elite program where 100% of the boys get athletic college scholarships. Some even get professional contracts. This is very expensive for us but it is building a strong work ethic for him and will hopefully pay for most if not all of college. One of the other boys costs us dearly as he is trying to get into one of the US military colleges to fly jets. He is doing all sorts of other things to build his resume like flying lessons and leadership training organizations (scouts, SGA, etc.) which is the name of the game. If he doesn’t get in I think he’ll still be on track for a good scholarship to another school.

@OldLimey – you have a knack for managing 401ks. Maybe you should do some guest posts or a blog on techniques for folks. I bet many of us would love some sort of step by step help for us “dummies”. :)

@earlyfreedom – Misc monster is a term I shamelessly steal from Dave Ramsey. True, isn’t it? Regarding charity, no that is not a typo. Like FMF, I share the belief in the biblical principal of tithing. My church has a lot of ministries in the community which we support with our time and money including feeding the poor and building homes for poor families.

@Rick Francis – Thanks for the lengthy input. I agree on the CPA thing, we use one but I don’t think we are leveraging his expertise enough. I save the 16.5k straight into an account with fidelity via our company which goes to mutual funds. The choices are poor so I’m strongly considering going to a SEP to broaden the options. The two pensions listed in the assets are from previous jobs. I don’t know the value of the current one, just the annuity value Fidelity provides.

Also, we haven’t saved for the kid’s college at all. Maybe I’m old fashioned but my wife and I paid for our own by working jobs and scholarships (she got academic and I had an athletic). We expect the boys to do the same although we will likely help somewhat. Also, those are good points on jobs for them. One already has a small neighborhood landscaping biz. We are also having that very discussion on fixed allowance to cap the costs. The oldest is already talking about offsetting that with a real job.

@brooklyn money, Noah – I agree, it seems 401ks are a sham (except the tax deduction). If I were smart enough, that money would better be working in another investment – more real estate, gold, guns, something but 401k…. just kidding on gold and guns.

@Adam Hathaway – One of my cousins has built a $1MM portfolio of houses/small apartments. Not much but his intent is an income source when paid off. The only challenge is time – he has a lot and I don’t.

[Devil's Advocate]

I believe the tax code does not allow deducting rental expenses on your earned income for couples making over 150,000/yr and it phases out over 100,000.

Of course you can deduct those on the capital gains on the back end.

DA

[Old Limey]

@MB
It's not that I have any great secret to have done well managing money, first in the stockmarket, and then in the bond market.

Anyone that is computer literate and has reasonable math skills could have done what I did. However you have to have something like the comprehensive database that I subscribe to and also a fairly comprehensive set of analytic tools, and unfortunately that does cost money. The Funds/ETFs database is $462/year, the Funds/ETFs/Stocks database is $808/year. The database also comes with the extensive graphics and analysis tools. The oldest data in the database starts on 9/1/1988 for items that were available at that time. The biggest stumbling block is the time it takes to learn how to use everything. Personally I feel that it isn't practical unless you are retired and have lots and lots of time to devote to it. I certainly didn't have that time when I was working and especially when I was raising my children.

[Apex]

@DA,

You didn't state that quite correctly. You can always deduct expenses for all your rental properties against all rental property income and any other passive income. What you cannot do if your income is above $150,000 is deduct expenses that exceed your income (i.e. passive losses) against your other income (active income).

That may be what you were trying to say but saying you cannot deduct expenses makes it sound like you cannot deduct any expenses when in fact you are almost always able to deduct all expenses but may not be able to deduct all of your depreciation if it causes your passive income to be negative.

In a different time this was important for a lot of people but I was never interested in being in a business to "lose" money so I could deduct it on my taxes. I understand it's not really losing money when part of it is depreciation but there were plenty of people who were actually losing real money every month on rental properties hoping to make it up on appreciation. I was never even interested in being cash flow break even to make it up on appreciation or even to get the extra depreciation tax break against active income.

In today's environment there is really no excuse for having a passive loss on a recently acquired property. Maybe if you had to rehab it you might have a loss for a little while but not for long. I am considerably both cash flow positive and passive income positive on my rental properties. I pay considerable additional income taxes because of the fact that I have rental properties. They make that much extra money that even after depreciation there is considerable taxable income left. There is simply no way to make that money not taxable unless I do something stupid like buy a 50K Suburban that I do not need in order to deduct it on my taxes.

People should stop worrying about trying to get out of taxes and focus on making money. It's far more profitable than spending dollars on things you don't need to save quarters in taxes.

That also goes for trying to tie everything up in tax deferred vehicles too.

[Old Limey]

@MB
Your comment "Kids are killing us" struck a chord with me and emphasized a pattern that has developed that is so different from that of my generation. The July 2nd. copy of Time magazine had an interesting article entitled "The History of the American Dream - Is it still real?" The July 9th. copy had the following reader comment:

"By its very nature the American Dream is self limiting and ultimately, self destructive. The American Dream has been achieved to such an extent that most of our children have been raised in relative comfort and luxury. A generation has emerged that has lost sight of the relationship between hard work and achieving a "more comfortable present". Because of the success of previous generations in achieving it, the American Dream has been redefined as a life of luxury and ease. It is not unreasonable to suspect that this redefinition was at the heart of the home-mortgage fiasco that led to our debilitating economic situation."