Reader Profile: KR

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 KR. She answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I'm a 31 year old single female living in the Midwest. For the past 4 years I’ve worked in the marketing department of a university, and spent 5 years before that at an interactive marketing agency. The job change gave me a 13% salary bump and significantly better benefits, plus a huge decrease in stress.

In April 2010 I purchased a townhouse-style condo with about 23% down. Its value has stayed pretty stable and I’ve kept the upgrades mostly reasonable.

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

Income:

I take home about $2,900/month after taxes, 403(b) contribution, HSA contribution, etc. An additional $70/month comes from checking and savings interest.

In a typical year, I earn an extra $800-1,000 freelancing. This could be much higher, but I turn down most projects since I already spend 45+ hours a week at a computer. I also inherited an IRA a few years ago; for 2013, my RMD will be $1,018.

Monthly Expenses:

Typically around $1700/month, broken down as follows:

• $665 mortgage
• $108 March extra principal (I add extra to subtract $500 off the balance every month)
• $130 condo association
• $225 utilities, TV & internet (12 month average; my gas bill is between $15-50 most of the year, but has gone as high as $101 during winter. $30 of my monthly internet bill is reimbursed by my employer quarterly, and I am in the process of switching TV/internet providers to significantly reduce that expense.)
• $200 gasoline, car insurance and maintenance
• $150 food
• $200-250 miscellaneous: clothing, personal care, household items, etc.

Property taxes ($2,300/year) and condo insurance ($300/year) come out of savings as they come up. I’d rather earn a little interest instead of having an escrow account!

Assets:

• $66,000 liquid checking/savings
• $50,500 403(b)
• $62,000 Roth IRA at Vanguard
• $56,000 inherited IRA at Vanguard
• $128,000 condo value (as of August 2012)

Debt:

• $87,000 remaining on mortgage
• No loans, credit card balances or other debt.

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

My next “unusual” expense will be taxes on the second half of my 2010 Roth IRA conversion - around $750 between federal/state/local. Otherwise, I don’t have any big planned expenses for awhile. I shouldn’t need to replace my vehicle (2009 Toyota Corolla with 30k miles) for years. My condo was refinanced in October from 30 years @ 5.75% to 15 @ 3.75%, which took me from $930/month to $775 (payment + extra principal).

I’ll continue to save after the tax bills are paid, by maxing out my Roth IRA ($1250 more for 2013), adding to liquid savings, and possibly setting up a taxable investment account and/or increasing my 403(b) contribution.

FMF readers, any thoughts on a taxable account vs. adding to my 403(b)? FYI: My employer doesn’t do a match; instead, I receive a generous percentage of my salary as their contribution. I’m currently saving 30% of my salary between the 403(b) (20% between my contribution and theirs) and Roth IRA (10.4%).

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

I want to keep saving as much as I can (especially months with more predictable expenses) and of course, continue to build my career. Now that my refi has completed, I also want to move my assets into a living revocable trust. I realize many people don’t have a trust on their radar, let alone people my age. :-) However, my parents ran into issues selling my grandfather’s condo after his death, and a realtor’s oversight cost them thousands in extra probate and lawyer fees.

Early retirement is always a nice thought, but that’d be many years down the road.

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

Besides the typical “don’t spend what you don’t have”, etc. I’m a big fan of keeping track of where I stand financially. I’ve been a Quicken user for years and think their new mobile app is pretty handy for entering transactions on-the-go. I track account balances and overall net worth on a basic spreadsheet at the end of every month. The spreadsheet started on a whim, but after 2 years, it’s motivating to see how much my net worth has increased in that short time frame.

I also check my overall asset allocation a few times a year with Morningstar’s portfolio x-ray. If something needs to be adjusted, I’d rather know about it ASAP so I can fix it as opposed to finding out years down the road!

Comments

[Luis]

What a frugal person you are! How do you make it on a $5 per day food allowance?

I would personally open a taxable account.

[Steve]

Wow. You're doing great.

I personally like having a little of every tax status (Roth/traditional/401k/taxable) b/c each can have its own benefit and you generally get to decide to draw/exchange on the one that makes the most sense at the time (sometimes a capital gain in a 'taxable' account can be taken for very little to nothing, and the rules are always changing so who knows what will be best next)

[KR]

FYI, about food costs - that was a rough average, so some months are higher and some are lower of course, but I'm the total opposite of a "foodie". I don't drink alcohol, rarely eat meals out, and stockpile cereal, etc. when it's on sale. Costco is also a mile down the road and my brother lets me have the 2nd card on his membership.

[T]

Wow you're an inspiration to a single girl like me. Just curious, you didn't mention any student loan debt. Did you not have any or did you aggressively pay it off?

[JNEW]

KR-- I agree that you are doing great. You are on top of your financials and you are thinking long term. You have enough liquid funds for an emergency and you are saving in your retirement accounts.

Regarding the taxable account vs adding to 403 (b) question- technically you probably should max out your 403(b) so that you get the tax benefit. But lets look at your big picture.

As I look at your finances you have plenty (probably too much) in you "emergency fund". The rule of thumb is 6-8 months of expenses. Your expenses at $1700/month x 8 months is $13,600. If you are conservative-- keep a year's worth at $ $20,400. or 18 months at $ $30,600. What ever makes you comfortable. But in my way of thinking-- you should think about investing some of that additional money. You need to take advantage of market returns over the long term---time is your number one friend when it comes to investing. It smooths out the volatility and it allows for compounding interest to work its magic. Waiting, in this particular circumstance, can hurt you. You are young-- and you need to use that to your advantage.

Now that does not mean that you need to go hog wild and invest in oil futures or other high risk stocks. You can invest conservatively if you want. You have to be able to sleep at night.

I noticed you are a Vanguard customer already. Good for you. They are a great shop with the lowest fees around. And they are customer friendly. Spend some time on their website and educate yourself about investing. They have some great advice on their site.

Depending on your risk tolerance you might decide to invest in their simple 3 FUND portfolio. It includes a total USA stock market fund- a total international stock market fund and a total bond fund. With these 3 funds you are heavily diversified and no one stock or market will impact you too much. From here you simply chose your allocation. 60% stocks/ 40% bonds maybe? Or the more conservative mirror image of 60% Bonds and 40% stocks?

As an example-- if you wanted 60% stocks and 40% bonds, I would split the stock allocation equally between the USA stock fund (30%) and the international stock fund (30%)-- with the remaining 40% in the bond fund.

I think the main point is that you need some stock exposure if you want to meet your long term retirement goals. Don't forget to look at how your other accounts are invested too. Are the IRA accounts already in stocks? Make sure your entire overall allocation is right for you. Don't look at each account by itself. If its 60% stocks that you want--- make sure that your entire portfolio reflects that.

If all of this seems too complicated--I apologize-- you could accomplish your allocation of 60% stocks and 40% bonds by buying one balanced fund. Checkout Vanguard Wellesley or Wellington funds. Either of those will be a one fund solution.

Bottom line is-- keep it up. Continue saving a good percentage of your take home. In crease it whenever possible. Whenever you get a raise-- increase your savings by at least one-half. Max out all your retirement accounts. Keep tabs on unusual expenses and be sure that you are prepared for them.

If you do this-- you will end up a millionaire. Really. At your age the sky is the limit.

best of luck!

[getagrip]

Based on the above you're doing great.

One thing you may want to consider is some type of disability insurance if you don't have that covered already. To some extent you're self insured but you may not want to have to pay for a few months of not working because of a short term disability. Run the numbers and see if it's worth it for you.

I'd recommend maxing the Roth and adding a taxable investing account.

Finally one thing I'm not seeing above is any fun stuff and self enrichment. Obviously not all of that takes money or that can come out of the money not accounted for, but a vacation fund never hurts and reminds us, even if not used that particular year, that we should be working to live, not living to work. May want to consider a separate budget line for that as a suggestion.

Best of luck in the future.

[Jake]

You are a rock star. Max the 403(b) & IRA then and put the excess in a taxable account. Move some $$ from the e-fund over to this taxable account. Leave 12 months cash in the e-fund. Lather, rinse, repeat.

I only say this next part b/c I have a younger sister your age but please, please make sure you don't date/co-habitate/marry someone who doesn't share your frugal values and work ethic. I am not sure if this is even on the table for the future but you are setting yourself up for a great career/life and I wouldn't want someone else spoiling it.

*Steps down off soap box*

[Old Limey]

I second Jakes' personal advice but I sense you are well aware of what he said and are obviously too intelligent to associate with losers.

I also agree with JNEW that Vanguard's Wellesley fund, VWINX, would be perfect for you since it is a low volatility income fund that will serve you well through good and bad markets.

Since 9/1/1988, the start of the database to which I subscribe, VWINX's annual rate of return has been 9.62% with a maximum drawdown of -21.77% on 3/9/2009.

By comparison, the Wellington fund, VWELX, had an annual rate of return of 10.31% but its maximum drawdown was -36.1%, also on 3/9/2009, and its volatility is almost double that of VWINX.

VWINX is a fund you can hold forever, and at this juncture in the market that you can best dollar cost average into using your $66,000 liquid account. The fund pays a dividend of about 20c/share every 3 months.

[Kurt @ Money Counselor]

Well done! I think you should take on a side hustle as a personal finance blogger. Many do who are far less qualified than you! :-)

[KR]

T, I graduated without student loans. My parents made a deal that we'd split tuition 50/50, and any scholarships would come out of my half since I had earned them. I had about $300 to my name when I graduated but I was debt-free.

(I went to a local state university for 2 years, then transferred to a local private university after picking a major. Had I gone somewhere that required living on campus, I would have had to pay for room/board.)

[Mc]

What is the reason for the trust? It's baffling me, frankly. Why cant you must make a will?

[Brooklyn Money]

Congrats, girl! Love to see single ladies rocking it.

What's your long term goal? Seems like you could benefit by having one. Even if it is financial in nature and not big picture. Maybe pay off the mortgage in 5 years? Something like that? For me that gets me energized to keep saving.

[jim]

KR is doing very well.

If you keep up that savings rate then your retirement income will exceed your working income by your 50's sometime. So you're easily on track for early retirement if you choose.

Regarding a trust, what are the probate fees in your state? Your retirement and bank accounts can have a beneficiary and not go into probate. Probate fees on a $128k condo probably won't be too excessive. I'd also check into probate rules for your state. Probate may not be required for 'smaller' estates and somestimes 'smaller' is a pretty big number like $250k. If you're listening to Suze Orman who insists everyone have a trust setup then I think that 'one size fits all' advice is misguided for many/most people. Theres other benefits to a trust but avoiding probate doesn't often require it or make a trust worthwhile.

[Retire By 40]

Great job! You are living well within your mean. I would max out the Roth IRA contribution and then increase the 403(b) contribution. Do you have an option for a Roth in your 403(b)? That might be a good way to go while your are still in the lower tax bracket. You are doing quite well.

[Mark]

KR you are doing great! I think JNEW's investment advice is spot on.

[KR]

Thank you all for your comments! To answer a few questions/make a few comments of my own:

Jake - I completely agree! Being a financial disaster is a deal-breaker, and a pre-nup would be non-negotiable.

Jim - my parents' trusts were about $1200 each. (Their assets exceeded the upper limit for setting up 1 trust.) Putting my grandpa's condo through probate was $4k after lawyer fees, court fees, etc.

Retire by 40 - I do have the option for a Roth 403(b) but hadn't considered it because I didn't want to do anything too major until the 401(k) conversion taxes were paid, just in case. Now I'll look more into pros/cons.

getagrip - My parents have 3 weeks of timeshare in Myrtle Beach and on Hilton Head Island. The condos sleep 6 and we get along well, so I usually have the option to tag along. :) We usually drive, but any flights, etc. come out of liquid savings as they come up.

JNEW (and Old Limey) - After my grandpa's inheritance was divided up, I paid the financial advisor at my uncle's CPA firm a flat fee to review everything I had and make some recommendations. Since then I've made trades here and there, but a significant portion of my portfolio is in VTSAX (Total Stock Mkt Index Admiral Shares) and VTIAX (Total Int'l Stock Mkt Index Admiral Shares). I'll definitely look into the Wellesley and Wellington funds, especially if I do a taxable account - thanks!

Brooklyn Money - Not having a mortgage would be awesome, of course! Now that I have my 401(k) conversion taxes paid and the refinance done, I'll run the numbers on what an extra $100, 150, 200, etc. a month in principal would do to the length of my mortgage. 5 years may be pushing it, but 8-10 could be a very reasonable option.

[Old Limey]

@KR
You're certainly extremely knowledgable about your finances for a 31 year old. I hope you are also doing all the right things that it takes to lead a happy and satisfying life. I'm 76 now and my wife is 77 and we have thoroughly enjoyed every phase of our lives during our 61 year relationship and 56 year marriage. It's really great when you have the financial side of your life well in hand but, believe me, when you get right down to it, being in a great longterm relationship is also every bit as important.
I wish you lots of happiness as your future unfolds.

[Nick @ ayoungpro.com]

Thanks for sharing your story, you are doing a great job!

[jim]

"my parents' trusts were about $1200 each. (Their assets exceeded the upper limit for setting up 1 trust.) Putting my grandpa's condo through probate was $4k after lawyer fees, court fees, etc."

OK so doing a trust is $1200. Your granpas probate estate costs were $4000.

If thats all there is to it then doing a trust may make sense and should save you money.

Just make sure that you would have to do probate at all via the trust and that the trust would save you that full $4000.

I assume you live in the same state as your grampa did. Probate varies a lot from state to state, so if he was in a different state then his experience doesn't apply to your state.

[Adam]

I'll echo the others in that you are doing well but should set up a taxable account for investing that extra cash. However, I would add the suggestion to keep it more conservative than your retirement...you may want that money liquid in 5 years, not 35 years like your retirement.

Also I would personally stay away from a Total Market bond fund because long term bonds have a poor risk/return ratio with interest rates at near zero. I'd look at short term and intermediate term funds instead.

Alternately consider investing in real estate.