Reader Profile: CR

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

Please tell us a bit about yourself.

My significant other and I are both in our mid-twenties with jobs close to home which have good opportunity for career growth. We purchased our first home in Midwest earlier this year. At this point in time we decided to combine our finances. Our plan is to get married in the next year to year and a half, we have not yet decided when. We have no kids at this time but we do have 2 dogs.

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

Currently we have several sources of incomes, the primary being from our full time jobs. My weekly take-home after taxes and a 10% contribution to my company 401k is 1000/wk. Year-end I typically have received a bonus around $10,000. Additionally I have part time job with a take home of around $350 bi-weekly and I do some bookkeeping for a few small companies on the side which generates about $300-400 per month. My significant other takes home roughly $1200 bi-weekly after a 15% contribution to her 401k. She also receives $5000 in bonuses annually. On an average month our income is about $8,000 after taxes and 401k contributions excluding bonuses.

Expenses per month are:

• Mortgage (Includes prop taxes which are very high in our area) 2010
• Association Fees 90
• Car Insurance 150
• Car Loan 395
• Student Loans 105
• Other Debt 1000 (Further explanation in later section)
• Life Insurance 20 (250k on me, she has 100k through work)
• Food 400 (Includes some eating out)
• Gas 300
• Misc 500 (Higher do cost involved with new home purchase)
• Cable/Internet 105
• Gas 75
• Electric 60
• Water 50
• Cell 145
• Pets 100 (Various Expenses)
• Car misc. expenses 100 (Oil Changes, general maintenance)

Total monthly is about $5,600. This leaves a surplus of approximately $2,400 per month with our yearly cash surplus being roughly $29,000.

 Assets

• Cash 15k
• 401k ~40k
• Home ~300k
• My Car – Few years old, low mileage, paid off
• Car Loan – Also newer, low mileage, car loan

Total Assets: 355k (Excludes value of cars as they are depreciating assets)

Debt

• 259k Mortgage
• 17k Car Loan (Financed with no credit history, high interest, which is why the loan value is still high, recently refinanced when we combined our finances – now 3.25% Interest)
• 5.4k Student Loans (6.5% Interest)
• 13.5k Family Loan (0% interest for a year, minimum payment of 1k per month)

Total Debt: 295k

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

Our current focus is paying down the family loan, while we realize the loan is interest free we would have much greater peace of mind knowing that it was paid off. We typically try to throw as much extra cash as we can each month. Last month we were able to pay $2,500 off. Our goal is to have this paid off by the end of August or October at the latest. At that point in time I plan to quit my second job as I would like to pursue my Masters degree this upcoming fall. This will reduce our income but not significantly and I believe we will still be able to pay extra towards remaining debt. We would then focus on paying down the student loans because they are a higher rate than the car loan and the balance is much smaller making it easier to pay off. I would like to take our bonus income and use it towards investment. I have always been interested in real estate investment and believe I would like to purchase my first property in the next 12-18 months. The bonuses could also be used to pay off all remaining debt outside of the mortgage.

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

Our current plans are to advance our careers as much as possible. I have excellent career growth opportunity at my current place of employment and she continues to move up in her company as well. In the next 4-5 years or so once I have completed my Master’s and we have established our finances we intend to have 2 children. We would like the option to retire from our primary jobs after our kids have graduated high school.  I would like to work part time as a financial advisor later in my career or post retirement because I have always had an interest in helping others with their finances and investments. Our retirement plans will be heavily contingent on our career growth and whether she continues to work full time once the children are born.

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

Set goals, pay yourself first and invest for your future. I have always been very aggressive when paying down any debt and save as much as possible and my significant other is learning to do the same.

Comments

[Luis]

You are off to a great start. You didn't mention whether your employer offers a match. Since you mentioned real estate interests a possible option for you would be to reduce 401k contributions to the match and then use extra income to pay down debts faster. That would accelerate your timeline and start investing in real estate sooner.

[Carole]

Why wait to get married? Your money is already intertwined. A lavish wedding is not necessary. I understand that combining finances with someone you're not married to can get sticky. Also, married people seem more stable and respectable than those "playing house".

[Kay]

In contrast to Carole's opinion, I totally understand on waiting for the wedding... you probably want to be more stable financially before taking the leap. Maybe I'm just more sympathetic because I'm in a similar situation... but you're doing a great job. Just make sure you continue to stay committed to each other, and the marriage just becomes a piece of paper at that point.

Also (I deal with this too), it's prudent, as the higher earner, to not jump into decisions like that too soon. :)

[Lemon Limey (AKA JNEW)- (no relation to old or young limey)]

I immediately hesitated when I read that you decided to combine your finances-- I agree with Carole that it can get "sticky" (as she said).

Otherwise-- you guys are making a good incme for your age and I think you have a bright future ahead of you. I would reccomend a few basic steps to solidify your finances. Most importantly, I would beef up your cash emergency fund a bit . Currently it is less than 3 months expenses... you should take that up to 6 months...maybe 8 months.

Then start investing that monthly overage and let compounding work its magic. If you are able to invest $2500/month starting at your age....your net worth will grow exponentially and you will have the opportunities available only to those lucky few who are financially independant.

Retiring after the kids graduate high school is a lofty goal for sure...... but go for it. I am sure you know many things will change along the way that might change or defer that goal.

I know if you invest $2500/month for the next 40 years until you are mid 60's--- you will be a millionaire many times over.

good luck.

[JimL]

You are in relatively good shape when considering your Young and have strong cash flow. A year from now, you could have all your debt paid off, except for the mortgage.

Here is what I would suggest. I would take your existing cash and pay off the loan due to The family. Spend the following 2 months paying off the student loan. For the remainder of the year, you can rebuild your cash right back to where it was as you now have even stronger cash flow. You the take all available cash for the first 6 months of next year and knock out the car. With those things knocked out, you just added $1500 a month to cash flow from where you are at today? That should more than make up for eliminating the extra jobs.

[Paul]

You're off to a great start and on a good track. Good to have goals, but prepare to be flexible, that's a lofty one indeed :)

You may want to put off school until you're out of all of your debt (other than mortgage), not just the family loan. I hope your work will pay for part of school. I wouldn't buy an investment property until I had paid off that school, but I may be more conservative than you.

[Apex]

@Paul

--- Time for me to harp on the bad debt equivalency mindset again. I may have to change my handle to something like The Debt Defender or something here pretty soon. :) ---

"I wouldn't buy an investment property until I had paid off that school"

Why? What is magical about his school debt? If instead his mortgage debt was larger and he had no school debt would it be ok then or would he have to pay down more of his mortgage? Are you looking for a magic debt to income ratio? Are you looking for a certain cash flow margin? I don't get the sense you are. If you could make an argument along those lines then it could be analyzed and it might make sense. But it seems like you are just making a statement about being averse to moving forward while you are holding certain debts.

The difference with investment property is it is not something that you are waiting for it to pay off. In the current market it is easily cash flow positive on day one. And by the way the market is heating up. It is getting less cash flow positive every day. These windows don't stay open for ever. It will get very hard to cash flow investment property again one day.

If the investment property is cash flow positive and he has a cash buffer to cover unexpected costs, how is other debt that is easily covered by his current cash flow of any concern, from either a financial stability standpoint, a cashflow standpoint, or a risk standpoint?

[Paul]

I understand your point Apex, thanks. I wasn't clear, I was referring to his plan to start graduate school in the fall. Student loans will be at 6.8% again after July. That's a magically high interest rate in these times. I'd avoid them if possible.

[Jenny @ Frugal Guru Guide]

Marriage isn't about the fancy ceremony. It's about building a life together. There's no reason to put off the wedding--and many reasons why it's a bad idea to do so.

Other than that, you look like you're making good progress on your goals.

[Nick @ ayoungpro.com]

Cut your expenses down a bit and pay off your debt. You should be out of debt within a year at the most given your numbers (excluding mortgage). You will feel much better and have a lot more money to put towards your future.

[Mark]

I agree with others who say you shouldn't put off the wedding. I also agree it's generally a bad idea to buy property, etc. without being married. I admit, as a gay person, I get a little riled up when I see people take the marriage contract for granted, as if it isn't that important. That contract matters a great deal.

Other than that, CR is doing well.

[Rich Guy]

You don't need to be buying rental properties when you have $35,000 in debts.

[MrFrecklesman]

Congratulations on your up coming wedding. The best wedding present you can give each other is paying down non-mortgage debt as soon as possible. Consider using your emergency fund to pay off the car loan and student loan first while still paying the minimum on the awesome generous family loan.

$35.9k debt
($15.k)free cash
$20.9k balance
/$2500 free cash per month
8.3 months and all debts will be paid

then you'll have $2500/month to rebuild emergency fund toss in your up coming bonuses and with 1 year you'll have all NM debts paid and rebuilt your emergency fund..

[Reehindownere]

Article is interesting, but i wonder where i can find good company for pre settlement funding, any ideas?