Reader Profile: CM

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

Please tell us a bit about yourself.

My wife and I are 31 years, have been married almost 2 years, and are expecting our first child July 1. I run a small sales office for a German IT manufacturer and my wife is a nurse. We currently rent a place in Charlotte, NC and still own a condo in Savannah, GA where we are from. In our first two years of marriage (and a year of being engaged) we had quite a few large expenses including the ring, honeymoon, wedding expenses, my sister's wedding in Australia (she got married 3 months after us... bad for the wallet!), vacation in California, two cars, and her best friends wedding in Hawaii this past Sept.

Needless to say, we spent ALOT of money over these past couple years (and had fun doing it) but knew after returning from Hawaii and finding out we were pregnant it would all be over for a long time. Now, after much time and frustration I feel that we are on the right path... just wish we were moving down it quicker!

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

My wife's income is stable and mine varies a good bit as a large part of my compensation is commission based.  The numbers used below represent good averages.  Depending on the final sales numbers at end of year I am eligible for a profit share and bonus structure which tops out at around $38K (best case scenario) and $10K (worst case scenario). My company does not offer a 401K at moment, but this should change shortly.

Our budget for April was as follows:

Income (monthly)

• Wife - $3400 (after health insurance and 401K contributions)
• Me - $6000 (after health insurance)
• Rent from Condo - $1054
• Total Income: $10,454

Expenses

• Rent - $1225
• Utilities - $250
• Mortgage - $872
• POA Fees - $294
• Wife Car - $350
• My Car - $350
• Phone - $90
• Car Insurance - $125
• Groceries - $500
• Gas - $280
• Restaurants - $400
• Baby Supplies - $250
• Clothing - $100
• Personal Care - $50
• Misc. - $200
• Total Expenses: $5,336

Surplus: $5,118

Assets

• Emergency Fund: $16,000
• Savings: $1,000
• Wife 401K: $30,000
• Condo: $115,000

Liabilities

• Wife Car: $350/ mo. lease (27 mo. remaining)
• My Car: $14,000 @ 1.49%
• Mortgage on condo: $138,000 at 4.25% (at least $23K underwater here)
• Credit Cards: $0
• No other debt

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

Over the past year we have paid off ALOT of debt (about $30K) which has been great. At the moment I am most focused on getting my car paid off and bringing the emergency fund to $22K.  Our monthly surplus is currently being divided equally between these two items. Once these two goals are accomplished (should be done by Sept. 1) I will then focus on how to get us out of her lease (yes, leasing cars is stupid, but doing that last year allowed us to pull $4K of equity out of her old car to pay off a credit card while lowering her monthly payment so I think it was right call at the time) and into something we can pay cash for.  All of this needs to be done by the time we have to start paying for daycare ($1000/ month... ouch!).  Once those items are completed, the focus will be creating a house fund.

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

The biggest priority is to get into a home. We recently considered trying to rent somewhere else (we need more space) for a year, but realized that due to a smoking hot rental market here in Charlotte we would be spending probably another $800/ mo to get an extra bedroom and a little more space which isn't worth it.  Since we are getting a very good deal on our place right now, we plan to stay put through the end of year allowing us to save as much as possible.

I plan to purchase a home we will want to be in for at least 20+ years (target will be 10% down for a home in the $400K range).  Biggest challenge we face is a time crunch. Alot has to happen to pay off the debt outlined above while putting $40K in the bank for a downpayment. The determining factor will be my bonus money at end of year.

Once settled in a house, I plan to pay down my mortgage for my unit in Savannah to get it around $110K (current balance is $138K). We are currently losing $120/ month while having it rented, but this is a vast improvement over the $480/ month I had been losing since I moved to Charlotte in 2009.  Since our income wasn't nearly as high then as it is now, losing this every month was a huge factor and definitely made saving difficult. Luckily, after about 30 attempts over the past 4 years (no exaggeration) I was able to refinance under Harp 2 last year, so my losses have been cut significantly.  The demand for my unit and the property has always been strong (never missed a month of rental income), so if I can get the mortgage down to around $110K and refinance again I should finally be able to cash flow the property (figure $250/ month) or sell it outright.

I also need to get my retirement savings in order since I basically have none.  My employer has said that will entertain a proposal to start a 401K w/ 3% match starting in middle of this year. Not quite sure what to do about this yet as my current focus is getting rid of debt.

My ultimate goal in building long-term wealth will be investing in real estate. I would eventually like to have a portfolio of rental properties consisting of apartments, duplexes, and trailer parks. I have learned alot about what to do/ not to do with my unit in Savannah and continue to spend alot of time learning about real estate from books and from those that actually do it successfully. Still much to learn!

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

I'm not sure if I am in a position to give advice yet as I know that we are WAY behind where we should be at our age in regards to net worth, but I think the most important advice I could offer is to be constantly committed to learning and improving. Unfortunately, I didn't really figure this out until age 29 or so at which point all the spending starting to become really painful. Thanks to resources like this blog and people like Dave Ramsey, I now spend time every day trying to educate myself further. There are incredible resources out there if you take the time to find them.

It is also paramount to disregard to status quo. Just because certain things seem completely normal to alot of people (like big car payments) doesn't mean they are smart. Educate yourself, commit yourself to a set of beliefs and practices, and stick with them. Disregard what others have to say about it.

Patience is also extremely important and something I struggle with constantly. In my work and elsewhere I like seeing instant results. When it comes to finance, I know this is not an ideal combination as good things take time.

Track everything. I use mint.com and I make budgets in excel every month after my wife and I sit down and discuss what expenses we have and if there are any items we need to plan for in coming months. Being open and honest in your communication with your significant other makes life much easier. There should never be any surprises regarding big purchases.

I feel that the most practical and useful tips regarding financial common sense can be summarized by several of Dave Ramsey's goto comments:

1. Debt is dumb
2. Don't take advice from poor people

If people can grasp these concepts and apply them to their lives effectively every day, they will/should live happy and fulfilling lives.

Last, I would love some input on my current plan.  Here are some specific questions I have:

• Am I doing the right thing by splitting my monthly surplus between my car and the emergency fund?  I am only doing both at the same time since we have baby on the way and I am not comfortable with not having sufficient cash reserves while welcoming a new dependent into the world.
• What should I do about retirement planning?  My employer has said they are open to doing a 401K with a 3% match (I will be in charge of setting everything up) starting around June but I'm not sure if I should be focused on this until I get rid of my car debt. Is a 401K or IRA a better choice?
• If anyone has any suggestions on possible options on my condo, I am all ears. My property is in a 340 unit complex and there have been ALOT of foreclosures and short sales, some as low as $80k. Do I just continue to tough it out and pay it down over time until I can refinance and cash flow positive?
• Does anyone know next months winning lottery numbers they would like to share? :)

Comments

[Luis]

My take would be not to split between emergency and vehicle but to put all in emergency until you have what you need. Then, plan where to pay down other debts or invest your cash. What are the interest rates on your car loans?

You have cash flow so my answer regarding retirement vehiclesis is to contribute to both IRA and the 401k up to 3% matching.

You'd probably enjoy tracking your own net worth so set up an Excel sheet for yourself and you will see how spending will wise up. Don't go to weddings if you cannot afford it.

You are doing well on income so it would be nice for you to have term life insurance and then wills and trusts done shortly after your baby's born.

[JimL]

You are doing well, but your next moves need to be carefully thought out. I agree with Luis on the emergency account and life insurance. These are both crucial with a new baby on the way. After taking care of both, I would split remaining monies on paying off debt and working towards fully funded retirement accounts. As to the home, I would not but until you have at least 20% down and also have the condo In a cash flow positive position (or sold). A new home is very expensive and your financial condition could go sour in very quick order with a high payment, associated costs of owning a home and baby expenses.

[Paul]

You're doing good on offense, maximizing your career and bringing in a lot, but your defense needs work.

You two are high earners, especially for that part of the country. You really need to do a better job of saving for retirement. I hope your landlord plan works out, but if it doesn't you need more to fall back on.

I'm not from the area, but isn't $400k a LOT of house in Charlotte? (A whole lot?) You will continue to struggle to save with that mortgage. Buying other properties takes cash too, which will be in short supply.

I would just tough out the condo. $23k's a big loss, it will get better... eventually.

With you car note @1.5%, I wouldn't pay that off early. That's practically free money at that rate, you've got other priorities.

[Ivy]

You have a pretty decent monthly surplus, which gives you options. But your savings really need catching up, as you yourself realize.

I would focus on building up the emergency fund first and foremost - especially with the new baby you never know what may be needed (unexpected medical expenses, your wife needs/wants to stay home longer, etc). And I would prioritize funding an IRA (at your income level you might not be eligible for deduction, but you can do backdoor Roth) or if your employer does start offering a 3% match go for it, it's free money. Don't hurry to pay off the car loan for a 1.49% return, you are not hurting for cash.

Expenses-wise, baby is not yet here and you are already spending $250 a month on baby supplies? What are you buying? Babies don't need that much (first time parents tend to get carried away:-), do you have friends or colleagues with a bit older kids - people are usually quite eager to give away baby gear and clothing if you indicate you are open to taking them. Save your baby funds for the day care.

I would also echo the previous opinion - buying a house is not a matter of urgency. Sort out the emergency fund, put retirement on track, get down the condo mortgage and save 20% for the new house. Give yourself a bit of time to tackle things, rather than jumping into a new debt situation, with PMI. At your income and savings level it will take you less than 2 years to get there, even without the year-end bonus.

[getagrip]

From a pure financial POV I'd be leaning towards getting some money in the 401K once you get it set up, especially if there is a company match. Put in 6% for now (about one added car payment out of your $5100 surplus), you get 50% on your 6% (minus fees and such of course, but still 50.00%-fees versus 1.49%?). Also it may not look good to your employer not to participate in the 401K you set up and asked for.

If you do the above you'll still have $4750 a month or so you can divy up any way you want. So it really is a question of priorities. If you are concerned about making sure you have cash on hand, then drop some into savings. If you want to eliminate the car payment, take care of that. It'll get done one way or the other.

If I were in your shoes, baby first, so I'd spend two months getting the emergency fund up and few more thousand in savings in anticipation of medical copays and unknowns (though that may be what your $250 a month is meant to cover). Then I'd look to get rid of the car payment prior to baby arrival if possible. Then savings for new home and wife's new vehicle in split shares.

As already mentioned I would be careful of rushing to get a new place, with a new baby, and stretching for a new house, etc. A new house isn't just the mortgage versus rent. It's the two of you looking at empty rooms and wanting to fill them with stuff, it's your utility costs doubling or tripling, it's needing lawncare and home equipment, etc. There is no law saying you have to buy a house when you have a baby. The time crunch appears to be self imposed. Another year or two of inconvienence now, even if that means spending another 800/mo in rent, may have a huge payoff later if it means you can save longer towards a downpayment or ensure you can get a home in the community and school district you want. Otherwise you risk becoming house poor.

I will also echo the wills and term insurance considerations. These are more important than many folks realize because like many things, once it hits the fan it's a bit late to get them.

[John @ RLD Investments]

You are doing good right now, plus this is a great opportunity to make a sound decision regarding your future. I agree with Luis on the emergency account and life insurance. It's very important with the new baby on the way. After that you are going to want to plan for the retirement as a priority. Maxing out all available options toward the comfortable golden years is a priority. Whenever you consider pulling money out of your home, make sure you feel very good with it. It's easy to convince yourself it's a good idea a little early in the process.

[Jonathan]

I'd pay the minimum on your car loan since it's such cheap debt, beef up your cash cushion (more for your emotional comfort than because I think that's absolutely necessary), and if you want to lower your debt then I'd work on the condo mortgage because it's nearly triple the interest rate of the car loan.

I have a couple thoughts on the rental mortgage and real estate investing in general. First of all, if you're seriously interested in real estate, you need to get convince yourself of the falsity of the mantra "debt is dumb." Second, consider your options on your current condo rental from an investor's perspective. Using your numbers, you say that right now it's costing you $120 per month, and that if you were to pay down another $28k on the mortgage and successfully refinance, you'd have a positive cash flow of $250 a month. Therefore, for $28,000 you can buy yourself a cash flow of $370 per month, or $4,440 per year. This is a 16% return on $28,000, which is pretty good - so if you're confident in your numbers, go for it. I am assuming in each case that you are only looking at cash flow and not considering mortgage principal reduction in your calculations. Third, if these condos rent as easily as you claim, run the numbers on buying some of those foreclosure units for $80k. With the right purchase price, those could be very profitable investments.

[Mike Hunt]

Congrats on your upcoming first born. We are just 1 week ahead of you for the expected date of our first born... I'd say you are ok to pay off the car note faster- your monthly surplus is good, if you can drive the surplus even higher it would be better but that will be more challenging with a child on the way.

Plan on living as frugally as you can for the next decade and you will have a nice net worth built up.

-Mike

[Apex]

To echo what Jonathan said about debt, I will offer this.

It is often said that practice makes perfect. But that is a drastic over simplification. It's only true if you practice doing it perfectly. Dumb practice makes dumb, bad practice makes bad, perfect practice makes perfect.

The same is true of debt. Dumb debt is dumb. Ah but we have been told repeatedly by many people especially financial experts that debt is bad, therefore all debt must be dumb and bad. But that's simply not true. Most people who have debt problems have dumb debt so it is true for most people today which is why it gets shortened to things like debt is bad.

It's also the case that many people who say debt is bad have mortgages and car loans and student loans. Why do you have those if debt is bad? Clearly you thought it was better to take out debt to buy a house than to not buy a house. Same for the car. Same for the college degree. But if debt is bad then those decisions must have been bad and wrong. That's not to say that all mortgage, car and student loan debt is not bad. Some can be. But if you believe debt is bad then all mortgage, car and student loan debt must be bad, right? And bad things would be better if we never did them, right? Therefore if you don't have cash for a house a car and an education then you should not do any of them because debt is always bad, right? If you follow a thought to it's logical conclusions you can usually find how the thought is over simplified and not accurate. Debt is a tool, just like a hammer. If you use a hammer stupidly, it can be very bad. But there are many ways to use it productively. It all depends on how you use it.

But lets go to Dave Ramsey's other statement that you quoted, "don't take advice from poor people."

Presumably then the advice you should take is from people who are not poor, especially from people who are rich. Most people who are rich use debt. Many of them use lots of debt. It's actually very hard to get rich starting with nothing without using debt. If you have a great career you can get very financially comfortable over a lifetime, but the truly rich use debt. There are smart ways to use debt and dumb ways.

It's also interesting to note that Apple which has $145 billion dollar of cash on hand just today offered $17 billion dollars of bonds in the largest corporate debt offering in US History. Why the heck would a company with so much cash take on that kind of debt? Well part of their cash is overseas so they can't get it all back here to do what they want. But all they are going to do is buy back company stock and perhaps give out dividends. Why not just do less of that. They clearly think they can offer the debt in this market so cheaply that it is more beneficial to take on the debt and buy back stock and invest it in ways they think are wise than to not take it on.

Debt it the hands of the fool or the ignorant leads to destruction. Debt in the hands of the wise and the informed leads to increased opportunity and often to abundance.

Building a real estate portfolio without debt means either that you were already cash rich when you started or you will a limited portfolio.

[mysticaltyger]

I echo the sentiments of others who say you're pushing too hard on getting a house, especially a 400K house. If you do that, you'll be getting yourself out of the hole only to get into an even bigger hole. Doesn't make sense.

I'd put a higher priority on the retirement savings. Do at least 6%..and realistically you'll need to save more than that for a confortable retirement. Most people need to save 10% to 15% consistently throughout their careers if they want to retire in their mid 60s.

[jim]

CM is doing great over all.

Here's my main piece of advice: Shoot for 20% downpayment as a priority to avoid PMI.

I would focus on saving for that downpayment and shoot for a 20% downpayment instead of 10%. Id save for the downpayment rather than paying down the car loan. YOu're looking at paying down a 1.5% car loan and then taking on a ~3% home loan. I wouldn't be in a rush to pay off the car at 1.5% to borrow to buy a home at 3%. Saving that extra $40K to get to 20% will keep you from having to pay PMI. The cost of PMI would probably be around $2200 a year and thats like paying an extra 5.5% to borrow that extra $40k. That makes the combine cost of that 10% around 8.5% if you have a 3% loan. Waiting a few more months to save the extra $40k can save you effectively 8.5% on that 40k difference in down payment money if you shoot for 20% to avoid PMI.

Definitely make saving with a 401k to get the full match a priority if/when your employer offers the match. That match is free money and a 100% return which should be a high priority.

Personally I also wouldn't be in a rush to pay down that rental even though its underwater. Being underwater only hurts you if/when you sell it. Till then being underwater is just numbers on an accounting ledger. Its a liability but theres no pain from that unless you actually sell. If you get that property cash flow neutral then theres no reason to rush to pay off the loan. You'd be sinking cash into an illiquid investment. Worst case you pay down that loan and then hit a financial disaster and end up losing the extra principal money. 4.25% isn't too high that I'd be in a rush to pay it off just to save the interest, but if you get to the point hat you've got piles of cash and nothing else to do then maybe pay it down then. But you also said you wanted to buy other rentals so maybe your cash would be better invested in a down payment or in your 401k or in college savings for your child.

Ramsey does help a lot of people and I don't generally fault his philosphy but he is a little too fanatical about debt. Debt is not 'evil'. In fact 0% car loans and 15 year fixed 2.5% mortgages are pretty great if you ask me. 1.5% car loans and 4.25% mortgages aren't too bad either.

[Nick @ ayoungpro.com]

First, stop leasing cars it is the single most expensive financial transaction you can make! Second, I'm sorry about the condo situation, we are in a similar one. I'm just paying it down and hoping for some equity to return so we can sell it.

[Coley]

Love this place... had no idea I would get so many comments. Thanks!!!

Yes, Ramsey tends to oversimplify and to be honest I am a little worn out listening to him although he has certainly helped me get in the right mindset over the past 4 years. If anyone has any suggestions of some good podcasts to further my financial education I'd love to hear them!

As for debt, completely agree with the comments so far. Not all debt is bad. Credit card debt, leasing cars, financing couches for 24 months, etc is what I consider bad debt. Fixed rate mortgages are not bad... possibly even short term ARMs if done properly. Agreed that this kind of debt is necessary to build wealth in real estate. I still have alot to learn here.

Jonathan, this is awesome insight and definitely something to consider - much appreciated perspective:

"Using your numbers, you say that right now it's costing you $120 per month, and that if you were to pay down another $28k on the mortgage and successfully refinance, you'd have a positive cash flow of $250 a month. Therefore, for $28,000 you can buy yourself a cash flow of $370 per month, or $4,440 per year. This is a 16% return on $28,000, which is pretty good - so if you're confident in your numbers, go for it"

Based on the input I've received here and from thinking about this hard the last couple weeks, I've also come to the same conclusion that I will hold off on paying off car and will focus on saving as much cash as possible. My current tenant is set to move out end of June, so I may wait on setting on the retirement planning until the unit gets leased again. My property management company has always had my placed leased up within a couple weeks, so I hope it goes smoothly again. Once new tenant is in place, I will set up 401K and IRA.

Nick: "First, stop leasing cars it is the single most expensive financial transaction you can make! Second, I'm sorry about the condo situation, we are in a similar one. I'm just paying it down and hoping for some equity to return so we can sell it."

A big 10-4. Only car we have ever leased and will definitely be the last.

Thanks again - did I mention I love this blog?

[Luis]

I really enjoy listening to Clark Howard the most. The whole "teaching" podcasts are a bore once you've established a base understanding of PF.

I'd personally sell at first opportunity your "forced rental property". When that time comes, read Apex's series on real estate to find a suitable 'replacement' rental and start yourself over from scratch. Reason is that local properties are desirable to "stay in the know". You can get as good cash flow or even better than $250 per month.

If your wife is an "RN" nurse...not entirely sure but feels like she is being underpaid for her profession. If so, may need to ask for a raise?

[Apex]

All things being equal, I would agree with Luis that it is usually much better to have local properties than to have remote properties that someone else manages and you are less versed on what is going on or as Luis said unable to "stay in the know"

If you can replace that property with a local one I would agree with Luis that is probably the smart thing to do long term.

[Ted]

Good profile read (Chuck). And congrats on the baby.

I agree with adding to the emergency fund up until you reach your target level of emergency fund comfort. Then focus on the car payment, then saving for the house downpayment.

Depending on what your modified AGI (married filing jointly) ends up being for this year and future years, you should consider contributing to a Roth IRA for you and/or the Mrs. if you fall just under the $178k modified AGI limit to be able to contribute. You can always pull contributions out of a Roth up to the amount you have contributed, without any penalties, since it goes in after-tax.

Even though it's a retirement vehicle, it is a place that "emergency fund cash" can be parked in the years that you are working through debt repayment and other goals and feel like you can't take advantage of a Roth IRA because you "don't have the extra cash/cash flow". (this doesn't apply to Roth 401k's though). I think a lot of people miss out on the opportunity to contribute to a Roth IRA for a few/several years while they are in a 'paying off debt' or 'saving towards other goals' mode, and then once those goals are accomplished, end up with more than enough cash flow to fund IRAs and 401k's up to the limits in later debt-free years.

[Coley]

Dammit Ted - so much for anonymity. Feels weird that you know all that about me now but oh well, happy to have your input.

Should have mentioned that home prices in Charlotte are pretty darn strong. $400K is actually not alot of house here unless you want to live 30 min outside of town (which we dont).

Also, regarding life insurance I have a $1.5mm term life policy and my wife has $500K should we should be all set there.

We will focus on building up cash reserves and will go from there.

[Apex]

@Coley,

I think that is about right on the insurance. You are going to need that insurance for at least 20 years, maybe more though so make sure you have a long enough policy. You are better insured than most that is for sure.

[Coley]

@Apex - They are both 30 year terms.

Thanks again for input.