Reader Profile: FT

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.

Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.

Next in the series is FMF reader FT. She answered my questions (in red below) as follows:

Please tell us a bit about yourself.

My husband and I are in our early 30's, have been married for 10 years, and have 4 young children. We live in New England - not too close to a major city, but in commuting distance. We married relatively young and started our family pretty quickly.

My husband is the sole breadwinner, working in a new sales job. I stopped working 7 years ago when we had our second child. I stay home and home educate our children.

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

We both had zero financial education growing up.  None of our parents talked much about money, but they did value education and hard work.

We spent the first few years of our marriage learning finances the hard way. While we naturally shunned debt, we still incurred a few car loans here and there and seemed to also shun savings (unfortunately!) and didn't always think we had "enough" to invest.  We also made some unwise financial moves.  We finally got on the same page, addressed our shortcomings and (lack-of) financial education with each other, and started tracking everything and reading financial books and discussing them. 

Thankfully, we both received full-ride scholarships, including a full-ride for my husband's masters degree, so we have no education debt.

Over the last few years, our income has steadily increased from 80k to 100k+.  When closer to 80k, living here was a challenge, especially with the losses on our investment property (see below), and we were only able to pay the bills, avoid consumer debt, and then thankfully were able to buy the home we currently live in after a couple years of renting (read: we made it through but did little to "get ahead").

We have a forced investment property in another state due to a major career change 5 years ago. We also had $10,000 in medical bills over the last 2 years, which we've mostly finished paying. When our old van got too old, we bought a nice new van with 100% financing (deciding at the last minute not to put anything down, which worked out "well" so we could put it on the house we bought. We sort of regretted this later!). We also bought our current home, using a chunk of savings for downpayment and closing costs.

We're very thankful to be surrounded by friends that are frugal and who also home educate. This keeps costs down on everything - kid's clothing, tutoring, classes, home ed supplies, etc, and there is little eating out or entertaining in our circle of friends.  We also are able to use our large lot to raise animals, which allows us to eat the best food at regular grocery store prices. 

Income

In my husband's job, we can expect 95k-100k, but 110k is the true number he'll bring in if he meets all of his numbers. The base pay gives us about $4,000/month after taxes, health insurance, 3% 401k deduction, payment for company car, etc. The bonus check can be expected to be anywhere from $2,800-$3,500 and has about 30% removed for taxes, so we can expect over $5,000 (upwards of $10,000) back in tax return every February, based on our current withholdings and tax credits and deductions.

Assets

• 15,000 401k
• 5,000 Roth IRA
• 10,000 Emergency Fund
• 3,000 Stocks
• 30,000 Equity in investment property
• 30,000 Equity in current home
• 11,000 Savings/"Commission Cushion" Account

Current Debts

• $16,000  Equity Loan on investment property - rate is 8%
• $18,000  Minivan - 3 years remaining, at 2%
• $ 2,000 Medical
• 2 homes - Investment property is $195k (30 yr, 4.2 %), and Residence is $340k (30 yr, 3.7 %); both were recently refinanced

Expenses (Monthly)

• 2230     Mortgage/taxes/insurance   
• 540  Minivan    
• 170  Car insurance, gas, registration & tolls
• 160   Cell phones
• 70  Life insurance (we carry about $1.5million on my husband's two term policies)
• 360  Electric & Heating oil (soon to be reduced with wood fireplace)
• 100  Eating out
• 600  Groceries
• 150  Home education
• 300  Giving
• 130  Clothing, haircuts, personal care
• 110  Kid's work/chores pay
• 120  Animals (dog, chickens, goats). The animal feed offsets our groceries.
• 100  Yard and Garden
• 450  Recreation, vacation, holidays, gifts (this is broken out very specifically in our home budget
• 150  Home maintenance *Estimate only *Money is set aside

Total Monthly Expenses: About $5700

We currently need to use $1700 a month from the commission check, so we can expect to have $1000-2000 extra each month (an average of 18,000/year). We plan to use this extra to pay off the Equity Loan as quickly as possible,  and use our tax return to improve our home, which is still in need of some necessary improvements plus some cosmetic updates. We will also give a portion of the tax return to church or missions and to pay down the medical bills.

Investment Property

We purchased our "forever" home 1,000 miles away in 2007 with 10% down payment and 10% on an Equity Loan - not a great time to buy, on hindsight! It was shortly thereafter that we took a huge risk to make a career change and rent out the home, and moved to New England. We were still "young" and decided at the time it was more important for my husband to be in a job he liked.  In that respects, it was worth it.

Although it was financially painful for several years, we now have $135/month "profit" due to raising the rent and refinancing. Thankfully, the home is all updated, down to its bones, except for 2 bathroom floors. We've had no problem with finding excellent tenants since it is close to a large military base.

1615 Rental Income
-------------
280  Taxes
960  Mortgage - 30 years at 4.2%
60  Insurance
190 Equity Loan payment
50 Repairs *varies
---------
$135 surplus, and then $325 as soon as the Equity Loan is paid off (Oct 2013).

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

Our Goals

Our first priority is paying off the 3 debts we have - the Equity Loan, the van, and the medical bills. Assuming we will have approximately an extra $18,000/year outside our normal budget, and assuming we can use our tax returns to finance home improvements (for the next few years), we are planning the following:

• 2013 goals: Pay off Equity Loan and medical bills.
• 2014: Pay off minivan, and then start setting aside $250/mo for a replacement vehicle, and use the remaining extra for kid's music and recreation lessons and to increase our giving.
• 2015-2018: Build up Emergency Fund to 30k, Commission Cushion Account to 20k, max our Roth IRAs yearly, get our HSA to 10k, and by then the 401k will be at 6% (with 4% match).
• 5-10 year goals: Sell Investment Property and use funds to buy smaller, less expensive real estate locally. Have 1-3 other income streams, which we're currently working on.

Beyond that, I hope to also pay off our mortgage by age 45 or as soon as is reasonable. We also need to be thinking more about our children's higher education.

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

We have no desire to retire early. My husband will always want to work, and I will stay very active, too. Depending on how our next 5 years go, we may consider adopting a child or providing foster care, meaning any future income generated by me may be greatly reduced.  If I do work, it'll be part time, most likely. We both plan to continue our education and work on our networks. We would like to build a few side businesses with our children, as well.  And finally, we would like to build an accessory dwelling on our land to either rent out or to live in when we are older, if one of our children wants to buy our home.

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

• Track everything! Use online software such as Mint and bank websites and apps. 
• Remember that a tiny leak can sick a large ship.
• Build friendships with like-minded people.
• Plan expenses for every category at the beginning of the year, along with your children, if applicable. Keep wish-lists and always re-prioritize them.
• Never spend to impress people, whether for gifts or your clothes, or your home or car.

Comments

[Strick]

"My husband will always want to work" - #1 asset. Someone who actually loves commuting into a big city sales job everyday should have an enjoyable life.

[Bill]

I applaud you for making the decision to stay home. Having a parent full time in the home is grossly undervalued by American society. Marginal income from a second working parent is usually extremely overestimated. Even more than that the beneficial effects for your children and family will be well worth the financial "sacrifice". It's refreshing to see someone who realizes that a 100k gross income is more than sufficient to provide for a good sized family in a higher cost of living area like the Northeast

My practical advice would be to lower your tax withholding, there is no reason to be overwithholding your taxes to get a refund each spring especially with an 8% second lien still around. The government doesn't deserve your generosity.

Everything in your profile seemed to be planned well. The one question I had was the continual use of a large 5-10k tax return for home improvement. While I don't know what your house is like I think that could become a potential pitfall. The $5k expense on a leaky roof this year can turn into $5k on fancy window treatments in 5 years if it becomes to automatic. I don't think there is necessarily anything wrong with your current plan, I would just make sure that you make sure it is a reasoned and intentional expenditure each year.

[Aaron]

You are not currently saving anything for your children's college costs. Do you have any intent on doing this?

[Ivy]

Why not have life insurance for you as well? (you mention 2 term policies for your husband only). You may not be bringing income, but if something happens to you, there will be definitely costs involved, especially with 4 home schooled children.

And your emergency fund is only 2 months of expenses, rather low for family with kids. I wouldn't put that goal as far as 3 years out.

[Paul]

You're doing pretty well, back some back of the envelope math says your savings rate is fairly low. With just 1 income, you're pretty maxed out. There's always the unexpected - a layoff or other issue that interrupts your husband's income would be very difficult for you to withstand for very long.

Although in your early 30's you're still young, healthy, and full of energy, your husband may not continue to want to work forever. Those retirement savings are low as well.

[Joe]

As mentioned earlier - you need a much larger emergency fund - 6 to 8 months and both of you need more life insurance.
Lastly, your husband needs to get short term disability insurance now! If he gets hurt and can't work you are in big trouble.

[Matt @ My Coin Blog]

Emergency fund is key. My wife and I had to dip into ours pretty heavily last year because of a work situation and it's the only way we made it.

[FT]

Thank you all. Yes, we do need to beef up our emergency fund and have struggled to get it higher with having babies, new jobs, moving, new house. We are trying to balance using our excess income wisely, figuring out how much to pay down debt and how much to put in e-fund, and in what order.
Also, we do have disability insurance, but I need to check how much. Thanks for that reminder. Also on my life insurance! I know it's there but with new job, I'm not sure how much.
Can someone advise on the tax withholding? Our number already seems high, to the point where the base pay has almost no taxes taken out. The commission pay has ~30% removed and I don't want to have $5-10k tax refund. Is it possible for me to raise our number? Isn't commission pay always 30%, with no option to adjust?
We won't use $5-10k on home improvements beyond the next 2 years. We are going to fix the infrastructure that's necessary and then wait on cosmetics. We are doing all the work ourselves which we've discovered saves us half or more.

[Sarah]

Given your dependence on your husband's income, disability insurance (short and long-term: SSDI won't replace an income as high as his) are essential. Also, you should have a term life policy on yourself. It may not feel like the work you're doing counts as work, but, believe me, it would cost plenty to replace in the marketplace.

With the relatively low rate on the car loan, emphasize building up your emergency fund instead.

[Mark]

Your husband may want to work forever, but realistically he probably won't be able to...especially not earning 100K per year. A lot of people lose those good paying jobs in their 50s. I have seen it happen first hand to several (well educated) folks I know. I know it's tough to prioritize, but I would at least contribute enough to the 401k to get the full match.

Otherwise, it seems like you're doing well, all things considered.

[Luis]

It hasn't been said enough that you need a larger emergency fund. I would not be comfortable in your shoes financially speaking because of the following reasons. You have 6 family members to take care of, only one income earner, a sales career can be very volatile, not much you can strip from your expenses in an emergency, your expenses are $1700 higher per month than base pay, your investment property can turn into a huge liability if things go south.

You didn't say whether this "forced investment property" was something you and your husband enjoy doing or if it is solely for side income. I would suggest selling the property ASAP after your current contract expires and add the entire 30k equity to your e-fund. If you really like the idea of having rentals then I suggest you purchase close to your residence and insure them with proper rental insurance!

In whose name is the $5000 Roth IRA asset under? I would suggest that once your goals turn to investing in the Roth that the first $5500 go in your name and then if there is enough funds to invest the second $5500 to then go in your husband's name. Seems only fair since that would be a nice way to balance the fact that your husband has a 401k and you do not. I would not worry about funding college for your children. I would do it only after you and your husband's retirement is fully funded for each given year.

You and your husband are way behind in retirement assets for your age. Understandable after starting a family and buying a home but also know that you will have to make this a number one priority and accelerate your savings rate once you have an adequate emergency fund in place.

I agree with your goal of paying off the equity loan and the medical bills. I do not however think you should accelerate payments for your vehicle. Generally it is best to prioritize your e-fund building over paying extra on your debts, especially this debt which is sitting only at 2%!