Reader Profile: JD

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

Please tell us a bit about yourself.

I am married with no children. My wife and I are both 27. We currently live in New York City and plan to start a family in three to four years. We both attended graduate school in NYC, I received a J.D. and my wife a M.S. in Public Policy.

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

I currently work as a legal contractor for a large corporation. My wife is currently working for a non-profit organization and hopes to remain in that world until we start a family.  Our combined income is around $121,000 and our monthly take home after taxes is around $6600.

Monthly Expenses

• Rent ($2,500)
• Groceries ($400)
• Transit ($200)
• Medical ($180)
• Pharmacy ($50.00)
• Cell ($160.00)
• Laundry/Dry Cleaning ($150)(The woes of living in a NYC apartment without W/D!)
• Insurance ($140) (Car, Apartment, Personal Property)
• Restaurants/Wine ($200)
• Cable ($90.00)
• Church ($60.00)
• Electric ($50.00)
• Tolls ($35.00)
• Netflix ($8.70)

Total Expenses: $4223.70 (We would like to reduce our expenditures a bit but have already drilled down pretty hard, perhaps with some room for decreasing cell phone expenditures. Any savings in rent would be lost in longer commutes and increased transit costs).

Debts

• None

Assets

• 2008 4-dr sedan with mid-30’s mileage
• Monthly Joint Checking balance range $4,500-$5,500

Savings/Investments

• We transfer $2,000 a month into a Joint Savings account. This account has roughly $14,000 and we consider it an emergency cash fund.
• I began a Roth IRA after college (I worked for a few years in between college and law school). I did not fund it during law school as my earnings from summer clerkships mainly went towards our living expenses and wedding. The current value of my Roth is around $5500. I was not able to contribute towards it in 2012.
• My wife’s employer offer’s a 401K plan which she invests at 2% a month which they match. The current value is $1,200.
• I have a separate savings account from before our marriage which has a balance of around $3,000.
• I have a trading account with around $175.00 in penny stocks.

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

Personally we are looking to start a family in 3-4 years and hopefully having 2-3 children.

Professionally I am hoping to find an in-house counsel opportunity with a smaller company in my industry that leaves me time for community service or pro-bono work.  My wife would like the opportunity to stay-home with our children while they are young, but hopes to find an arrangement which allows her to work part-time or reengage after the children begin school.

Short Term Financial Goals

First, we would like to increase/improve our credit history. Though we have no adverse accounts or record of delinquency, I did not have a credit card until marrying my wife two years ago (my anti-credit sentimentality). We currently have a USAA Platinum Master Card and I frankly don’t have much knowledge about the virtues of certain credit cards or how many one should carry. I can say we travel at least on a quarterly basis for pleasure and to visit family (I am originally from the Midwest) and have often thought that a card aligned with a certain airline carrier would be useful. I have also thought about a card attached to a certain hotel chain for similar purposes.

Second, we would like to purchase a home in the next 5-6 years in the NYC/DC metro areas putting down 20% with a 15 year term mortgage. I would guess our price range will be $500,000-$650,000. My question is how we should go about investing the $2,000 a month we set aside in savings prudently (how much risk should be taken) to achieve this short-term goal and also considering the tax consequences of any investment realizing we will be selling the investments to finance the down payment and avoid PMI.

Mid-Term Financial Goals

First, we would like to begin to thinking about retirement planning though the above two goals are more important to us immediately. In terms of an overall investing/savings strategy I want to devote 25-30% towards retirement and 70% towards the home purchase goal. The retirement goal is affected by two factors, I don’t plan to retire in the traditional sense and the possibility of family wealth transfers. The first factor speaks for itself and on the second a little explanation.

On my end we can expect a fixed share (I have two siblings) of the estate assuming no financially destabilizing event occurs to my parents. On my wife’s end we can expect a 2/3 to full share of her family’s estate (my wife has no siblings) assuming no destabilizing financial events occur. My wife’s family has already initiated several estate planning vehicles including a Personal Residence Trust for a secondary property which will be transferred into my wife’s ownership when the term expires in the 2020’s. (I would also like to start planning for the maintenance of this property long-term which likely runs $15-25K a year).  I don’t want to rely on our inheritances or assume their existences for purposes of retirement, but I think it would be imprudent to ignore the likely realities in terms of how we approach our appetite for risk in developing a retirement strategy.

Second, we would like to begin educational savings for our future children which would allow us to the option to send them to parochial elementary schools if we so choose and eventually college. We don’t want to take risks in this category.

Long-Term Financial Goals

First, we would like the ability to give more philanthropically as well as be able to provide loans to our family members when they are in need for educational or medical purposes. I have read some columns that advise spending towards career development (networking, entertaining…etc.) in lieu of philanthropic giving when one is in their early career.

Second, while we would like the opportunity to travel domestically with an intermittent international trip a bit more frequently once our net worth is a bit higher.

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

I was advised from an early age to save early and save often. I have attempted to do that but have been a bit lackluster during my college and graduate school years (i.e. not funding the ROTH every year). Additionally, I think a combination of family values and learning a bit of personal financial management from my years in the Boy Scouts set me on a sustainable financial path. I would consider myself conservative when thinking about investment opportunities and drawn towards dividend stocks in the consumer products, pharmaceutical –medical device, and energy industries.

Comments

[Param]

It is always amusing to see a "2008 4-dr sedan with mid-30’s mileage" being listed under "Assets" :)

[Param]

another one i find amusing is:
"be able to provide loans to our family members when they are in need"
family members need (or expect or desire or deserve or demand...) gifts, not loans. if they wanted a loan, they would go to a bank.

[Jane Savers @ The Money Puzzle]

Rent is so expensive but I guess that is the norm in a very large city. I can't imagine how much buying a house would cost.

Would it be possible to move to a smaller city and still find work? I love my 5 minute commute and I value my time and I want to be the only person who wastes that time. Perhaps you and your wife love the big city and I am way off base here.

[Paul]

Hi JD,

Congratulations on having your financial house in order at such a young age. It's clear you have a good understanding of budgeting and have developed a pattern of savings. Kudos!

One thing I might caution you on is your plan for a home purchase. Looking at your savings pattern, current income and timeframe for a home purchase, it appears likely you could afford payments a $500,000 home and put 20% down without issue 5-6 years down the road. However, you also indicate plans to start a family within that period, which might hamper your ability to save for a down payment and/or your cashflow. Cashflow may be impacted as you might be reduced to a single income for some time and/or you may need to pay for day care expenses. Further, a down payment of $100,000 or more would seriously deplete your cash on hand. That might not be a major issue if your and your wife were living life as you are now (good cashflow, limited expenses), but with a young child, I would consider depleting cash to purchase a large home a risk.

I guess what I'm saying is, don't set expectations for yourself that seem reasonable now, but may not be in the future should circumstances change. Best of luck to you!

[Kay]

A) Don't count on "family wealth transfers." Far more likely is one of your parents falls into a health issue and has their savings depleted significantly late in life. I've seen/heard it happen so many times to so many people who worked hard and saved hard their whole lives, that I feel like I need to mention it here.

B) You don't plan to retire "in the traditional sense" and yet you want to continue living in NYC, and have a family, AND have your wife work part time or less. These are a lot of strains on your life, my friend. I hope you have a really good life insurance policy (or get one as soon as you have kids!) You need to start saving for retirement NOW, at least 50/50 with your savings for a down payment... remember that wherever you buy a home, you need to really stay in it for at least 5 years or so just to not lose money on all the purchase/fix ups you'll have to do.

C) Your emergency fund is only about 2-3 months of your living expenses. 2K/month in additional savings will mean it will take your 2-3 months to save for each month of expenses should you lose your income. If you can, I'd cut some costs... It's good that your car is paid off, but do you still really need cable when you have Netflix? And is there a way to cut down on your medical/pharmacy costs by looking at generics?

You have a high income which is great, but you probably can't have everything... so make sure you adjust your expectations of yourself/your finances accordingly!

[Chadnudj]

Couple thoughts:

1. Transit: It doesn't say, but make sure you're paying for your transit cards using pre-tax dollars through your employers. In Chicago, I do that, and it's not an insignificant savings over the course of the year.

2. Cell phones: do you and/or your wife use your phones for work purposes? Do you receive emails for your jobs on them? If so, it's probably a good idea to see if your employer would be willing to pick up the cost of your plan, in part or in whole. I did this with my employer, and got them to pay for the data part of my phone.

3. Emergency fund: between your personal savings account and the joint savings account, it looks like you're set for 4 months of expenses in an emergency. I'd say it might be time to increase you and/or your wife's retirement contributions. Get full advantage of any match by either company (free money!), then look at Roths for both of you, then go farther in your 401ks. Honestly, retirement seems to be the only area you're pretty far behind on....but next to getting rid of debt (and you are rid of debt) it's the most important thing to save towards. I'd really start ramping up that retirement savings as soon as possible.

[Steve]

I think you have to treat the wealth transfer as a windfall. You want to be able to celebrate your mother-in-law's 100th birthday, not curse it...

[getagrip]

You are currently in good shape, particularly with no debt so kudo's to you two for that. I'm pretty much with Paul's comments above in that it sounds like you are demanding more goals than your income and expenses will allow.

There is a saying I'll paraphrase: You can afford anything you want, you just can't afford everything you want. You have to focus.

I feel you are ignoring your retirement when the realtively small amount of money you put in now will have the greatest potential return on it in the future. I recommend putting 10% of your gross toward it (if you want to include the wife's matching fine). This should align with your stated goal of 25-30% of your current savings (e.g. $600 plus the percentage your wife is putting in at work probably gets you close).

I'd wait for saving for the kids school until you have kids. At that point you will likely have a better idea of salary, costs, etc. and can determine an amount to put towards the educational goal.

So that leaves the house. I assume you are using bonus money for travel and gifts and "other" expenses since that wasn't mentioned. So as an estimate you've got the remaining $1400 a month * 12 = $16,800 a year. I'd put that in a money market, high interest saving vehicle. Five years, and possible salary increases later should get you to or near the $100K range.

I do not suggest putting that money at risk via investments that claim to offer high returns. Seems many people crow about their winners, but rarely brag about their losers that more often than not trashed their winnings. You are gambling if you do so, and while a small minority of individuals win on occasion, the house never loses.

I also wouldn't worry about "building credit". Paying your bills and using but keeping no balance on your credit card should do that for you.

Best of luck.

[Apex]

@param,

What is amusing about that? Of course it's an asset.

It has real actual cash value of multiple thousands of dollars and is easily liquid. The fact that they don't intend to liquidate it does not change the fact that it is an asset that could be turned into cash if needed.

[Jane]

You have a lot of plans for the future, which is appropriate for a young couple, good for you! And you do have a good-sized income. I do think that you should prioritize those future plans, though. For instance, is your wife staying at home with children (or working part time for a while) more important than buying a home, or less? Standing where I am, at just double your age and with my children all grown and last (hopefully) home bought, I can look back and see that while we got what was MOST important to us along the way, we didn't get to everything we planned to. Life sometimes works that way!

Others have expressed that you might think of those inheritances with less certainty (and in my opinion, I think you'd be best off to pretend they won't happen at all). A little story: a dear friend of mine, (now 54 like myself) was married for nearly 30 years and was recently widowed. She and her husband both always worked but lived very well and never saved any money at all for retirement, not a penny. His parents were well-to-do and had only two children, and I remember him saying "when my parents die we will never have to worry about money again" (I won't speak ill of the dead by saying what that statement made me think of him). Well, he died BEFORE his parents. My friend definitely had an "in-law" relationship with them, and they are not inclined to worry about HER future. Any inheritance that she and her husband might have received will skip a generation and go to the husband's sons from a previous marriage. 'Nuff said.

[Bill]

I think you're off to a great start. I would caution you to discount the overly conservative although well intentioned advice you are receiving. My major complaint about the personal finance community online is that it is far too cautious in its accepted "conventional wisdom". The majority of personal finance literature is targeted toward the average American, a person with poor financial literacy, in debt, with average income. What would be good lessons for a person in that situation are mistakenly applied to people, like you, in far different situations.

You are spending $4200 a month for two adults in NYC, that is very low from my experience. I would not worry about lowering expenses instead I would focus on not letting your expenses grow unintentionally.

You are a 27 year old lawyer with no student loan debt, that gives you a one up on most of your peers.

You are making a combined $121k a year, that is an absolute pittance for a lawyer in New York. I don't mean that in any insulting way, I know that when you first start out your pay will be low. But you can expect this to increase significantly in a relatively short time frame if you are any good.

You absolutely SHOULD be planning for what to do with your respective inheritances when they come. To assume they won't exist and treat them as a windfall when they come is BAD financial planning. I would never recommend a finance strategy that absolutely depends on receiving these but you should not ignore them either. Reading between the lines these estates are going to be of considerable size and will provide a large increase in your net worth.

The only pieces of real advice I'd give are keep your expenses low, don't let the white collar culture you work in seduce you into spending more than you want to. That alone in your career field will make you financially stable. Second is to remain flexible in the timing of your financial strategy. As some have pointed out you have a lot of plans. There is no reason you can't accomplish them all but play it by ear. You might not have enough money saved in 3 years to buy a house and have a kid at the same time, in that case put off the home purchase. Never move ahead with the next step just because it's expected, wait until it's a wise move for you personally. Don't sacrifice your values in the future, having your wife stay home is a noble goal. You will be tempted when the time comes to waffle on that, I know I was, but it is worth the financial sacrifice. Don't be too conservative, if you plan your financial life to withstand every possible negative event in real life you are going to end up having worked too hard for too long with too much money. You can't take it with you.

[jim]

I think JD and his wife are doing well.

THey live in NYC and save $2k a month. They are just 27 and have a JD and a MS and ZERO DEBTS. Their income is >$100k. Thats a great start.

The Chase sapphire card might be a good choice for you. It can be used for travel. Its flexible and not tied to a single airline or hotel.

Id keep the money for a down payment in safe savings or CD. if you buy stock or bonds you could lose a significant % of that money in short term of 5-6 years. Risk of losing principal is too high.

FOr the inheritances, JD siad : I don’t want to rely on our inheritances or assume their existences for purposes of retirement" and thats the right attitude. Don't count on it. Plan as if you won't get anything and if you do get an inheritance then its a bonus.

The trading account with penny stocks seems like a red flag to me. Penny stocks are worse then gambling in Vegas. But the account only has $175. Please don't treat those as investments. If you want to gamble away some spare money as entertainment thats fine, but penny stocks are not investments. They're pure speculation with poor odds, in other words just a form of gambling.

[Brooklyn Money]

Dude, move to Astoria or Greenpoint or Jackson Heights -- somewhere super close where you can get a nice one bed for less than 2K. You could save an additional $6K a year doing that. Better to sacrifice now while you can in terms of your living situation before you have kids. Also, if you moved to like a South Orange you can get a cute house for about 400K (i know I looked). The taxes are killer, but at least you get them as a writeoff.

[jim]

I would agree with other commenters that you ought to increase your retirement savings substantially. All I see right now is 2% of the wifes income. You should be targeting around 10% of your household income into retirement. Your potential inheritance and future school costs should not impact that. Retirement savings is a high priority.

[Paul]

Concur with others, if you add up all your goals, you need 10x your income :) That's the unfun part of money management - prioritizing. You're off to a great start though.

I think its better to heed advice than to find out things the hard way. For instance $600k house + 1 income + 2 kids + 5 years = may be unrealistic unless you plan to stop saving for retirement or reduce some other goal.

[X]

"My question is how we should go about investing the $2,000 a month we set aside in savings prudently (how much risk should be taken) to achieve this short-term goal and also considering the tax consequences of any investment realizing we will be selling the investments to finance the down payment and avoid PMI."

"I began a Roth IRA after college ... I was not able to contribute towards it in 2012."

Since you haven't been funding your Roth IRA lately, I would immediately max those out for both of you. You have another month to put in contributions for 2012, then start putting the $2k/month in for 2013 until that is maxed as well.

You can then use this for all or part of your down payment if needed without worrying about taxes (all contributions + up to $10k earnings if the account has been open at least 5 years)

[Old Limey]

I'm curious. Is a "Legal Contractor" an individual that has a J.D. degree but has not yet passed the Bar examination in the state where he/she is employed?

[JH]

Old Limey, I think a "Legal Contractor" is a lawyer who hasn't found a permanent position and is thus working on a short-term contract. It's a consequence of the huge glut of lawyers.

[Sarah]

...which is why I think this guy should be fiscally cautious. It sounds like he is basically working as a high-level temp right now. When the contract ends, will he be able to find another one (and the next and the next)? I really hate to say it, and mean no offense to the poster, but he's not necessarily on a track that leads to a stable full-time career, whether in-house or elsewhere. The legal profession is undergoing a big upheaval/reorganization right now, and his foot has already missed the first rung.

Therefore, I would emphasize savings over anything else right now, esp. if the poster is planning on having kids soon. Does he even get benefits at his current job? It sounds like no retirement account, and possibly the health insurance comes through his wife's job--which means that if she leaves the workforce to have kids, and he experiences a gap in employment, there could be some serious issues.

[indio]

JD, I think you are doing really well considering your future is ahead of you. I agree that you could probably find a cheaper apt or get rid of the car to save on parking costs, tolls, etc. A car in NYC isn't cheap but it's a nice luxury, which a zipcar rental can easily cover. I know attorneys start charging $400 and up per hour. When you get a permanent gig or start your own biz, your salary will increase quickly. I bought a house in suburbs of NYC when I was 28, right before the housing market took off. Deals in bedroom communities are hard to come by but if you start looking it will help you to figure out where you want to live and give you time to research school districts.

[MO]

If having 2-3 kids is important to you both, I wouldn't wait. Fertility can drop significantly as a woman ages. The added expense and stress of fertility treatments, or adoption, might not be what you bargained for...