Reader Profile: MR

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

Please tell us a bit about yourself.

My wife and I are both around 30 years old and live in a mid-sized low cost of living city in the midwest (median household income in this city is ~$41k, typical home price for 3-4 bedroom is $140-$200k). We are expecting our first child later this year. My wife is a veterinarian and works for a good-sized practice with 5 other doctors. I have a background in computer software (BS degree in Computer Science), and now manage a development team for a Fortune 500 company. We live in a house that we built 3 years ago. We love to travel and in the past couple years have been to several places around the world.

I have read FMF for years, and always found the reader profiles fascinating, so I decided I should contribute. I've learned so much from seeing how others have handled their financial situations.

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

My wife and I both work full time at the moment, although she already has a slightly unusual schedule (Tues-Friday, with some Saturday mornings) that will alter further after the arrival of our child (same days, but she plans to drop to about 75% time and leave around 3 or 4pm every day). We have been extremely fortunate to find well-paying jobs and to substantially increase our income -- I began working after graduating from college in 2007, and started with a fairly typical salary for my field but was able to increase my income by 150% over the course of 5 years. My wife's income jumps have been less dramatic than some of mine, but steady and significant. All told, we have a base income over $210k/year with another ~$20k or so of annual bonuses distributed via cash or directly into 401(k) accounts.

I manage all finances in our house. I don't keep a really strict budget, because we have wild fluctuations depending on what our priorities are -- some months we'll buy something big we've been holding out for (like a room full of furniture), some months I'll just throw extra money at investment accounts or debts. However, I'll outline the things that are relatively consistent:

Monthly Expenses

• Mortgage: ~$2100/mo (20 year fixed @ 3.375%) + $200-$400 extra principle every month
• Utilities (power, water, sewer, natural gas): $300
• Communication (phones, cable, internet): $220
• Groceries: $300
• Eating out/other entertainment: $150-$250
• Gas: $500 (I drive 46 miles each day for work, my wife drives 66 miles each day)
• Car insurance: $80
• Charitable contributions: $400
• Medical insurance premiums: ~$300
• Misc (lawn care, web hosting, gym, etc): $200
• Home improvement projects/hobbies: $300 (very much an average; high some months, low others)

Monthly Savings

• Personal 401(k) contributions (total for both my wife and I): ~$2100/mo. This is basically as much as we can legally put in. (NOTE: I am limited to contributing around $8500/year, not the federal maximum of $17,500/year; because I am considered a Highly Compensated Employee and apparently the rest of the company's employees save too little, my contribution rate gets docked. I just got hit with this recently; I'm not sure I fully understand it yet but you can read more about it here)
• Company match 401(k) contributions: ~$750
• Traditional IRA: $416/mo (so we can max at $5k/year)
• Self-directed investment account (mutual funds, stocks, bonds): $1500
• Savings account slush fund (emergency fund, trips, furniture, cars, etc): $750

Debts

• Mortgage: $285k (house appraised at $385k during refi last October)
• Student loans: ~$18k @ ~2.2% (mine; we managed to pay for most of my wife's schooling out of grandparent/parent college savings and then scraped the last couple years out of my starting salary once I entered the workforce)

Assets

• House $385k
• 401(k)s: ~$150k
• IRAs: $8k
• Non-retirement investment accounts: ~$40k
• Cash accounts (checking, savings, emergency fund): $28k
• Cars (two 2011 vehicles, both purchased new and paid off): ~$42k

We have several credit cards but always pay them off in full every month. I put everything possible on the cards to maximize rewards. We primarily use a cash back card that nets us roughly $600-$800 a year in rewards, plus another card that gets us a couple hundred a year toward Amazon purchases (which we certainly use -- I'm probably one of Amazon's best customers). Finally, we have a third card that we use when travelling internationally because it has no foreign transaction fees.

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

We recently got the one car we had financed paid off, and right about the same time my 401(k) contributions were forcibly cut -- two events that freed up a fair amount of cashflow. So I just recently started putting more into my self-directed investment accounts, and will probably siphon some of the additional extra cash into getting rid of my student loans. The relatively low interest rate on those hasn't set a fire under me to pay them off, because I've gotten a higher return on my investment activities, but it would be nice to have them off the books. I also want to direct more into charitable giving, and am trying to determine the best place to give.

Obviously with our first kid on the way, our finances could look quite different in a year -- although it looks like we're going to be fortunate to not have to pay typical childcare costs, as we have family members that are insisting they can watch the baby while my wife's at work. One very tactical financial issue we'll continue to face is the length of our commutes and the resulting gas bill -- moving isn't an option, as we go in opposite directions. We're already optimally placed. Our vehicles are near the top of their class in fuel efficiency. Spending that much on gas just really bugs me. It's like burning money. By the time we need to replace one of our current cars, I hope Teslas are more affordable :)

Short term significant financial expenses, aside from the baby, include a number of home improvement projects -- we've been in the house for 3 years and have probably averaged $7k-$8k/year in such projects, but have increased the value of the house by a rate of over $16000/year in the same time period, by making smart choices and by doing some of the work ourselves. We purposely built the house with these future projects in mind, anticipating we could increase the value this way over time.

My biggest goal is to be able to enjoy our lives now while still socking away quite a bit for retirement -- I think we're doing decently well there, especially considering I've only been in the workforce for 5 years and my wife for 3 (and for my first 2 years, we couldn't save a thing). I am continually afraid of having to worry about money rather than enjoying life when we reach our retirement years, so maxing out our retirement savings was one of the first things I did as soon as I felt we could afford it. In the last 18 months, I've had to face the (admittedly good) problem of what to do once you've exhausted the usual tax shelters for retirement -- something that's complicated by our high income. As I noted in the outline above, I can't put as much as I'd like into my 401(k), and my IRA contributions aren't deductible because of our income level. I think I'm at the point where I may need to hire a financial advisor to make sure I'm making the most of the options that are out there.

Additionally, I face a constant internal battle because I tend to have expensive tastes and hobbies -- do I indulge a bit to reward myself for success, or do I try to hold back and save even more? I do try to defer gratification as long as possible, but it's difficult. My wife helps me rein some of this in because she's extremely frugal by nature.

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

I would love to retire early and do something low stress where I don't care how much I get paid (who wouldn't, right?). As for my current career, I'm sure I'll move jobs again at some point -- I'm in my third since leaving college 5.5 years ago. However, I would like to find something a bit longer term and slower paced by the time I'm in my 40s. Whether that's really "retiring" and doing something completely different, or just a significant adjustment in workload and responsibility, I'm not sure yet. We'll see. I expect I'll step out of the workforce gradually.

My wife, being a veterinarian, has wanted to be a vet her whole life and will probably continue to be a vet for as long as she can. We may have an opportunity to buy the practice she works at -- another thing that could change our finances significantly. That's going to be a major event, and purchasing a business is something I've been trying to educate myself about. What happens on this front will likely dictate a great deal of our financial future.

Our two huge "fun" goals for later in life are to get few acres of land and build a custom home (designing homes is a hobby of mine and I've been working on our dream home in my head for years), and to travel -- a lot. We have an enormous list of places we want to go. We'll never stop traveling in the meantime, but the list is so long I know we'll never get to it while we're working all the time (and raising kids). The non-retirement investment accounts are intended to fund these goals.

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

I sometimes don't feel that I'm very qualified to offer financial advice, because I only have a few years of experience and because we've been fortunate to have such a high income relative to our expenses. I feel in some ways I've just been lucky. However, there are a few things that I can call out:

• Try to maximize your salary as early in your career as possible. This may be a "duh" moment, but it's worth saying -- your future salary level is determined by your current salary level, and a % increase on a high number is greater than a % increase on a low number. I supposed paired with this is to know what you're worth -- I am able to push for a higher salary when the time comes because I've demonstrated my capabilities and know that I'm valuable.
• FMF says this all the time, but...live in a low cost of living area if you can. Our financial position wouldn't be as strong if we were living on the coasts. And we have plenty of money to travel wherever we want, partly thanks to living where we do.
• Spend less than you earn! (shocker, right?) My corollary to this is: have a crash plan. We could live on just one income if we had to, without losing the house. Our savings rates would drop dramatically until we paid off the mortgage, but it could be done. Never back yourself into a corner such that one life event could completely ruin your way of life. If one of us suddenly lost our jobs (extremely unlikely given our high performance), I know exactly what would be cut out of our budget so we could keep going without dipping into savings.
• Finally, consider marrying someone who will challenge you! OK, maybe you can't plan this one quite as much, but it has helped me. My wife and I are very different, in many ways. Financially, she's actually the frugal one. No one's ever accused me of being cheap or frugal -- she, on the other hand, was excessively cheap (cheap in that way where you sometimes buy cheap things only to have to replace them because they were so bad), so we've found a great middle ground. She reins in some of my more indulgent ideas, and I help her realize we can enjoy life but still save.

Comments

[Ivy]

You are in terrific shape given your age. I really enjoyed your profile, since your lifestyle and goals are quite similar to yours (though we have a few years and a couple of kids over you:-), we travel a fair amount (admittedly less now that kids are still in the toddler/preschool age) and my husband really wants us to custom build our next home

Just a couple of comments:
- since you can't do deductible tIRA anymore, why not do backdoor Roth. Part of your $8K are probably non deducted anyway, but even if they were, you could bite the bullet on one time conversion taxes to be able continue to put away $11k per year in a tax-free growth vehicle that can also be used flexibly. Here is an article on this topic (and by the way, I would heartily recommend the whole Bogleheads forum)
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

- have you considered negotiating working from home 1-2 days a week, as a way to reduce the commute? It's true that you manage a team, but it's a software development team, and you surely have ways to connect virtually. I work from home 3-4 days a week, and my team is all over the world and it works just fine, as long as you don't have too many juniors to train and coach. And it makes things much more flexible once your kid arrives.

I wouldn't worry too much about expensive tastes, you can afford some splurges and nothing in your profile indicates a likelihood to go overboard with spending. When you are working hard and saving a lot, you deserve some areas of indulgence.

Good luck with the baby!

[Steve]

If your wife is a partner in the practice I would think some kind of SEP could be set up to drastically increase the amount you can get into retirement accounts.

[Jonathan]

First of all, you're doing great. Nice work. Second, it sounds like you're at risk of starting to spend all your excess cash if you can't find new investment opportunities since you're maxing out all of your tax-advantaged savings. If I were in your position (and frankly, mine is not too much different, and this is what we do), I'd get into real estate investing. That can take all the savings you want to throw at it! Moreover, it can put you in a great position to reach (and maybe far exceed) your goals in the timeframe you've laid out. Good luck!

[Mike Hunt]

Nice post, you are doing well. Does anyone at your work live near you so that you can try carpooling to work?

Can you open up an IRA to supplement your 401k savings?

-Mike

[Brooklyn Money]

I am in a similar position -- got back about 4K when my 401K failed the anti-discrimination test last year, and I max out my IRA but its not deductible. I also pre-pay against the mortgage principal every month ($500) and now I'm putting $500 a month in my taxable investment account. I plan to stick to that plan until I pay off the mortgage. I'm trying to save up enough in liquid savings equal to the mortgage balance. I think I'll feel a lot more secure when I reach that point, even if I don't actually pay it off.

[Nick @ ayoungpro.com]

Knock those student loans out ASAP!

[BH]

Just a thought. We have a mortgage of about $340,000 that we refinanced into a 5 year ARM at ~2.5% (no cost refinance). The ARM reset can never be more than 2% every 5 year period, with a ceiling at 7% over the term of the loan. Like you, we were making extra principle payments already. Now, the cost of our mortgage is $1,550/mth and we continue to make the same payments as before $~2500-3000/mth. All things considered, this is paying down the principal much faster than had we stayed at 3.3% on a 30 year fixed mortgage. Given that you are a dual income family with good savings rate, maybe this would work for you as well.

Also, I just stopped contributing to the traditional roth in addition to the 401k. I am your same age, with a new child and I decided that I have enough in retirement and the traditional IRA isn't as tax advantaged, and in any case, I want that money to be invested in something more liquid, because I want to be able to retire early. Plus, soon you will probably want to start a 529 plan (in fact, might as well start now), and even more of your money will be tied up for long term goals.

[JNEW]

I think you are off to a great start! My Thoughts:

* With a child on the way you should consider a 529 plan ( as others have stated) or a prepaid college plan if available where you live. Starting a savings plan for college ASAP will put you in the best position to help your kid(s) out when that time comes (and it comes fast). Some of these plans are tax advantaged as well which helps you solve one of your stated issues.

* Glad to see you have a low rate 20 year mortgage. This should be paid in full about the same time your first child goes to college and will open up cash flow opportunities at that time which will provide flexibility in paying for school or ramping up your savings. I followed a similar path sucessfully.

* My company also failed the 401K discrimination test-- but we solved the problem by taking advantage of the "Safe Harbor " provisions in the law. This allows highly compensated employees to again save the full IRS max of $17.5 annually. I am surprised that your Fortune 500 employer has not taken advantage of these safe harbor provisions actually-- might be worth a call to your HR department to see if it is in the works.

* Although often cited as a toss-up, I think that younger individuals will benefit more from a Roth IRA vs a traditional IRA. You might want to give that issue some thought. There are pros and cons both ways......

Hope that helps..... good luck.

[JimL]

Looks like you are doing well. I would figure out what the dream home would cost as well as buying into the vet business for your wife and the set savings goals for each of those. It will help give you to focus and motivation that you need when you are tempted to buy larger extravagances.

[jim]

MR and his wife are doing quite well. I don't envy their commutes though.

[Sarah]

No reason to rush to pay off loans at a (fixed) 2.2%, especially if you can afford to survive on one income. You look a little under-insured, though, especially given that your wife works in a physically demanding career.

When I hit the limit on tax-advantaged retirement accounts, I just opened up another account that I treat as one (i.e., it's a one-way flow of funds). Make it a fixed auto-deduction, like your 401(k) was, or you may "lose track" of the money.

[Old Limey]

It gives me great pleasure to read about a young couple that are off to such a great start in their careers and their marriage. You were smart to both pick careers that will always be in demand.

Apropos Steve's post, my daughter went to work for an attorney when she was quite young and became salaried shortly thereafter. She was very fortunate that her boss wanted a SEP-IRA for himself and the story was that he had to also offer it to all of his salaried employees and give them the same percentage of salary as himself for their annual contribution. When I retired in 1992 I took over managing the investment for her SEP-IRA, at that time it had a value of $64,427. She later became office manager and still telecommutes to work to take care of all the billing even though she recently moved from San Jose, CA to Maui. She is now 54 and as I look at her account today it has a value of $1,848,261 and that's without her ever contributing a single dollar of her salary. His contribution to her SEP-IRA for 2012 was $4,680.

[Old Limey]

@MR
Like yourself I ended up managing software development projects for my company, which is now the largest aerospace company in the US, but that didn't happen until near the end of my career. I started off as a structural engineer but soon found that I preferred writing software that made other people's work easier rather than doing that work myself.

My wife worked as a teacher once the youngest of our 3 children was old enough to be left. Also, like yourself I take care of all the finances and investments whereas my wife complements by liking to do all the things that I don't like doing. I think that's often the formula for a happy marriage and we will have our 53rd. anniversary in July.

[Old Limey]

@MR
It's great that you have also found opportunities to do some oversea travelling. We did the majority of ours after the youngest child was old enough to take care of himself. Before that our trips were primarily back to England to visit relatives.

Out of our many trips the two that were the most memorable of all were:
1) A "Smithsonian" trip to China called "Hiking the Sacred Peaks". It wasn't long after China opened up to foreigners and we went completely across the country from Beijing in the East to Kunming in the West.

2) A "Wilderness Travel" trip to Africa that started in Nairobi, Kenya and visited Zimbabwe, the Okovango Delta in Botswana, and a small plane flight into the Kalahari deset to visit the Bushhmen. Higlights of that trip were game viewing and visiting a Masai village in the Masai Mara, going to Victoria Falls, close up and then flying over it in a small plane. Then in the Okovango delta we went through the delta by dugout canoes and camped on small islands. Part of the trip was spent in Game Lodges, amd the rest was in a converted ex-army personnel carrier towing a mobile kitchen that allowed us to go cross country.

[Old Limey]

I apologize for having to split up my post into 3 shorter segments but I find that the Typeset software that this blog uses has a tendency to swallow up long posts for some unexplained reason, whereas short ones get accepted. I for one will be very glad when FMF completes his switchover to the different product that he has under consideration.

[Old Limey]

PS
In my earlier post I should have said that our next wedding anniversary on July 14th. will be our 57th and NOT our 53rd.

[Andrew]

@Old Limey - congratulations on your 57th wedding anniversary! Wow ... perseverance and wise management applies not only in finance ...