Reader Profile: EA

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

Please tell us a bit about yourself.

I am 31 year-old single woman living in a Western U.S. city - large metropolitan area with a comparatively low cost of living (particularly housing).  I just bought my first home last year (townhome with a small patio – perfect size for me) and I also took a new job (home purchase and job move occurred almost simultaneously - about 9 months ago).  I work for a large real estate investment trust (REIT) and work on the transactional/financial side. 

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

I work full-time.  I started my first job exactly one week after I graduated from college (2003) and have worked in the same field for my whole career (with the exception of one year spent in DC working for a US Senator).  I was with the same company for my entire career until my move 9 months ago (former company let me do the 1 year stint in DC and come back). I worked hard and got several promotions and opportunities.  The main reason I took the new job was that it was a pretty substantial title and salary increase (about 25% increase – all-in (salary + bonus)).

Income

• My income: $130K gross annually, plus a 40% annual bonus.  So, all-in – my 2013 income will be $182K.  When I get my bonus, I put it all into savings.
• My monthly take home (just salary) is about $6,600 (after 401K contribution, healthcare and taxes)

Expenses

• Mortgage: $1200 (this includes an extra $100 per month towards principal)
• HOA: $247
• Food/Wine: $500 (I am a foodie and entertain a lot – I recognize this may be extravagant to some, but I enjoy this part of my life and feel like I have some room to spend here)
• House Cleaners: $160 (they come twice a month @ $80 per visit)
• Utilities: $200 (this is electricity, cable and internet)
• Going Out: $300 (same philosophy as my food budget).  I am out most week nights after work and at least one weekend night.  A big part of my job is relationship based and I am often out on weekdays with clients, etc.  This number would be much higher, but most of my really expensive/fun week day stuff goes on the company expense account.
• Clothing/Make-up/Skincare: $250
• Target/Household Stuff: $100
• Services: $200 (Hair, blowouts, nails, eyebrows)
• Car insurance, gas and car wash: $200 (I own my car – 2008AudiA4 – only 35K miles – I will keep for a least a couple more years)
• Charity/Donations: $250
• Savings: I have an auto deduct to this account for $2,500 monthly.  I generally have extra on top of that (although sometimes Clothing is higher).  Whenever my checking account gets too high (about $7K or higher), I transfer a lump sum into savings.  The account is a Capital 360 Account (formerly ING) and I am happy with it.

Assets:

• $230,000 (Townhome value)
• $72,000 (401K – rolled my old one into current.  Company matches up to 3% - I contribute 10% for now – I will make sure it is fully funded)
• $13,115 Fidelity Roth IRA (I can no longer contribute based on current income, so it’s just invested and growing)
• $30,000 (Current Savings balance – I use this as my “everything” savings.  Travel and any other extras come out of this.  I also consider it my Emergency Fund.   The balance is normally about $50K or higher.  I used about $45K about 10 months ago for down payment and renovation on my house.  I expect it to increase again going forward.  The last couple years I have had large expenses (house down payment, house renovation, paid off my car) and I don’t anticipate any other large investments for a couple years.)
• $10,500 Fidelity Investment Account (I have this split between various dividend stocks)

Debt:

• Townhome Mortgage ($189,000)
• No other debt. 

I have never had credit card debit.  I went to a very good public university in California (I grew up there, so I was a resident).  My parents paid for my education and I am SO thankful they did it.  It was a gift I can’t place a value on.  That being said, it was “public university or the highway” in my family (my parents started telling us this in about 7th grade, so we were very clear on their expectations).  The parents paid tuition and housing.  They expected us to get a part-time job to pay for all other living expenses, and they also required that we graduate in 4 years and maintain a 3.5 GPA or higher.  Looking at the above couple sentences, it makes my parents seem really strict, but I never felt that way.  They were always super supportive.  They just acted like we were worthy of high expectations and, thus, always held us to them.

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

I’m happy with my home and my savings plan.  I do wonder if I could be doing more to avoid taxes.  I really get screwed because I make a high income and am single.  I have a mortgage now and can write-off interest payments, but aside from that and fully funding my 401K, I don’t see much else I can do.  Any input here would be helpful.

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

I don’t think I will retire early.  I definitely would like to get married and maybe have 1 or 2 kids, but I would probably still work.  Obviously, that could change – I have no idea what it would be like to have kids at this point, but, that’s the plan for now.  I am good at my job and I generally like it, so I can’t imagine being at home full-time.  My current position is very demanding and, at some point, I would like to make a move to something that allows for a little more free time.  I may take a bit of a pay cut if I do that, but it wouldn’t be substantial.  For the time being, I have a lot of fun and I can’t see doing anything different.  I have always been super focused on building my career and I feel like I am finally reaping the benefits of all my hard work (I get to go to the dinners at high-end restaurants, attend the ski trips to Aspen and go to the NFL games now, instead of staying behind to build financial models!).

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

I am so thankful that I worked hard and long hours when I was young.  It isn’t for everyone, but it’s how I got to where I am today.  I was also very lucky to graduate in 2003 (still good economic times – many jobs available.  If I were a couple years younger, things would have been very different for me).  The biggest thing I learned about succeeding in the business world is this:  Be the most likable person in the room.  If you are marginally smart, that’s a plus.  People want to spend time with people they like: people who are fun to be around, have a good attitude and want to help get a job done.  I have used this to my advantage my whole career.  Also, they may say it’s a “man’s world”, but, for me, being one of the few women in my industry has ALWAYS felt like a positive.  No one ever forgets who I am – it’s pretty easy to remember the only girl in a meeting with 20 men – plus, I am not shy about speaking up and bringing my opinion to the table.  Even as a child, my Dad made sure I knew that my opinion counted (if it was well thought out) and I should share it. 

Also – I spent a year in DC working for a Senator as noted above.  It was a much lower income job, in a pretty expensive city, and I never felt like I was struggling financially.  It taught me that I could live on a lot less and be happy – a great perspective to have.  I got a great “education” working on Capitol Hill, and, while the salary wasn’t stellar, I did get paid as a staffer.  As far as “resume builders” go, the job on Capitol Hill has gotten me more street cred than any MBA could have.  And I didn’t go into debt for it.

I am sure many people may not agree with some of my spending habits, but, the fact is that I take home $6,600, which is a lot of money (at least to me).  Also, I benefit greatly from making a relatively high income and living in a place where housing is not very expensive.  I grew up in Southern California and also lived in DC, so I know what expensive housing can do to you financially.  I knew I wanted to have some lifestyle extras and I was willing to live in a cheaper housing market to allow for that (plus, I happen to love my home and my friends, so I got lucky there).

Comments

[Andrew]

You can contribute to a Roth IRA and avoid high income limits legally through a loophole known as "backdoor Ira"

I've done it the past few years at vanguard, and it's an extra step, but works.

[Mc]

Congratulations on doing so well! As a professional woman myself, I think your spending level is just fine, since you are saving a good chunk each month and have no debt apart from mortgage. All I can say as advice is to be very careful who you eventually choose to marry.

Another thing you might start thinking about...do you want to stay in your current profession forever? Could you do something you would like better with more schooling? Would you eventually like to live in another city, or in another country? You have the time, money, and freedom to make a change now if you want to....but after you have children you wont.

[Paul]

I think you're doing great. You're income's high enough that you can afford your luxuries. Saving 1/3 of your net is excellent!

I might increase your 401k contribution. It would lower taxes and help to ensure you can maintain your lifestyle in retirement.

Although you have street cred, I would still consider an MBA while you're young.

[JNEW]

Hi EA

I am VP and chief counsel for a national real estate development company. Real estate can be a very satisfying and lucrative field. If you like it ( and you say you do... ) I would stick with it. Dealing with commercial properties in the 10's or 100 Million range is exciting, thought provoking and fun.

Overall it looks like things are going well for you. At 31, you have a net worth of $165K and growing. And your youth is one of your biggest assets too. Your saving $2500 of your $6600 take home (38%)- on top of your 401K- which is great!

Here are a few thoughts for you to consider. I think maxing out your 401K is a must. You stated you put in 10% so you are leaving some on the table. I think you can put in $17500 for 2013. This will also help your tax situation. It also looks like you keep alot of money in cash. You should probably educate yourself on asset allocation and start letting that money work for you. You could do a simple 3 fund portfolio to start. Or put it all in Vanguard Wellseley fund (a conservative, safe, balanced fund) while you figure out what is best for you. Vanguard is a great outfit for simple low cost index/ETF investing. Check out their site or read some book/article from Bogle (founder of Vanguard).

Do you save or spend your bonus?

The only other thing is that at your age-- maxing out your ROTH every year might end up being a good thing. If the governmrnt does not change the rules along the way ( always possible) having a stash of cash that you can access without worrying about taxes can give you much flexibility as you get near retirement.

Good luck...

[Erik]

@JNEW, @Paul

She is maxing out her 401K at 10% her salary plus bonus will hit the maximum amount for the year. Note she says that 10% for now so how I read this is if her bonus was lower than expected, she plans to raise her monthly amount to compensate.

Being in this type of earning and saving position at 31 is a huge plus. My advice is to remember that this elevated level of income could be temporary. You already seem to be taking this advice by keeping your spending in line but just something to remember.

There is nothing you can do about taxes and don't invest money specifically to avoid taxes as that can be a big loser. There are some things you can do to avoid taxes on your investments but I think you are talking about income taxes and that is just a cost of earning money in the US.

Great job.

[Old Limey]

I echo my congratulations on your success. Any parent would be very proud to have a daughter like you. Marriage and kids are great and your biological clock is ticking away but one thing you absolutely must do is to be 100% totally sure that you are making a wise choice when "Mr. Right" enters your life. If you are a very healthy young woman with good genetic qualities make sure that the man you eventually marry comes from a good background and is also very healthy and shares most of your interests and aspirations.

I am very knowlegeable where mutual funds are concerned and I echo JNEW's comments on Vanguard's Wellesly fund. If you want three good Vanguard funds to hold for the long term I would suggest, VWINX, VWELX, and VGHCX.

[JNEW]

@Old Limey

I agree with your three (3) Vanguard fund choices 100%.

[JTS]

Another note of congratulations on your career and your finances. It sounds like you are in a great situation with a lifestyle you want and a job/career that you enjoy.

As others have said, there isn't a whole lot you can do about paying taxes short of starting a business and writing off certain expenses. Fortunately, having to pay a lot of taxes is a nice problem to have. :o)

Finally, I will also echo the statement to be careful about a significant other (not that finances are the driver for that anyway). I don't think it has to be someone who is as interested in finances or even making nearly the same amount of money, but more of a personality that does not feel they "deserve" certain things and does not let lifestyle inflation get out of hand. I am fortunate to have married a woman who definitely helps keep the lifestyle inflation piece in check.

Good luck to you in the future.

-Jon

[jim]

EA is doing quite well with a very strong income, good savings rate.

Looks like you're saving about 1/3 of your gross base income before that fat bonus. Thats great. Your spending level is fine.

'I do wonder if I could be doing more to avoid taxes.'

No not really. There really aren't any magic loopholes to lower taxes in general. Certainly not at your income level.

I think your parents attitude on college was perfectly good one. Paying for a good public school and expecting good grades is extremely fair and good motivation.

[Brooklyn Money]

Hi EA,

Congrats on a life-well managed and lived. I'm you, but on the East Coast and fast-forward 7 years. No hubby yet, but having fun dating. Also, I don't want kids.

I would say that my budget is actually very similar to yours. It's nice to see other successful single women spending similarly.

One thing I would echo from Old Limey and others above is be careful if you marry who you marry, and I would even consider a prenup. I know if I ever get married I will do that.

[sb]

Great profile. I agree with others that your spending is just fine. The fact that it is a conscious decision and not a huge % of your budget says to me that you have it under control.

@Old Limey, JNEW
Don't want to hijack the post, but I always see recommended funds on here for Vanguard. Could you point to some equivalent or similar funds for Fidelity?

[Leigh]

@sb
http://www.bogleheads.org/wiki/Fidelity

[JNEW]

@SB

There are a lot of good funds out there sold by fidelity or many other shops. The kicker is-- how much do you pay- annually- for the priviledge of owning it?

A typical NO LOAD fund has an annual fee of 1%-1.5%. That's alot. For every $100,000 you invest you pay them $1000 ANNUALLY-- right out of your bottom line. Most people, given a choice, would rather keep the $1000 for themself. It might be worth paying 1% for a fund that outperforms on a regular basis. But, as luck would have it, identifying NEXT years winner is always more difficult than identifying LAST years winner.

All that just to lead up to the reason I (and probably OLD LIMEY) love Vanguard--- low fees. REALLY low fees. The managed funds Old LIMEY suggested have annual fees of about ( I am guessing here..)--0.35% per annum. So for every $100K you invest cost only $350 v the $1000 above. Index funds and ETF's cost even less.

Ok-- to the point-- Fidelity has lots of great index funds that they allow you to trade for FREE and the CORE selections have annual fees of only about ( I am guessing again) .01%-.15%. This brings the annual cost of your 100K investment to $100-$150 annually. You can see how FEES matter. I am a big fan of Index funds.

But if you want me to name names---- I like the Fidelity Balanced fund-- It is a safe, conservative fund that hold about 60% large stocks and 45% bonds. It has an expense ratio of about .60%-- high compared to Vanguard (the low cost leader) but reasonable when compared to the whole mutual fund universe.

[JNEW]

@LEIGH

......Perfect.

[Leigh]

Your total budget is pretty much mine, but we spend consciously in different ways. I spend $300 on groceries, work lunches, and eating out and then $150 on entertainment/social, but I spend almost $150 on average on sports. And your clothing/make-up/skincare/services/house cleaners budget is my travel budget. Interesting to make those comparisons! My parents also paid for my college education and that was a HUGE boost. I am so thankful for that.

Definitely make sure your 401(k) is fully funded. Since you don't have any old 401(k)s or Traditional IRAs lying around, you should be eligible to do a "Backdoor Roth IRA" - http://www.bogleheads.org/wiki/Backdoor_Roth_IRA It's pretty easy to do at Vanguard and probably is at Fidelity as well.

Make sure that you're investing in index funds or individual stocks outside of your retirement accounts and be conscious of long-term vs short-term capital gains, but other than that and tax-advantaged accounts, there isn't much you can do to cut down on taxes. I've watched my income tax paid increase each year and there's not much I can do about it, but at least it's because my income is going up! At the very least, you only pay Social Security Tax on the first $113,700 of income. One thing that I would be cautious of is that your bonuses are taxed appropriately. Mine were only being taxed at 25% federal, which wasn't enough, so I adjusted that.

I agree with you on being a woman! I definitely think it helps a tiny bit. I go to so many meetings and work on so many projects where I'm the only woman. Everyone remembers me. It doesn't help though that I look young (I'm in my mid twenties and can still pass for a middle/high school student). I think that we just need to be more vocal than men do to have our voice heard sometimes.

I agree with the suggestions of being careful of who you marry. Divorce is one of the most expensive life events you can go through. I plan on getting a pre-nup to protect myself when I do eventually get married. (I'm single now.)

One question - your net worth is $165k and you're 31. You've been out of college for ~10 years, which means that you've only stashed away an average of $16.5k/year. Has your income gone up a lot the last few years? Those numbers don't quite add up - I would have expected your net worth to be higher.

[EA]

Hi All-

Thank you for all the comments. This is so helpful to me. In your financial life, it often feels like you are living in a silo (particularly when you are single), since finances aren't something you share with many people. It's nice to know that you think I am doing ok!

I am a dedicated FMF reader and I thought I might get a little pushback for my food and clothing spending - glad to know I am not too over the top!

Just a couple points of clarification:
- I am maxing out my 401K. I do 10% until around August and then verify I won't end up over contributing by year-end based on when and how my bonus is paid out. This is only the second year I will max it out.
- I put my bonus directly into my savings account, so I don't spend it right away. Sometimes, I will take a little something to by a nice new purse or piece of furniture.
- Thanks for the comments about moving more income into Vanguard funds. I will research that a little more and perhaps some money into a fund or two. I do like that comfort of having cash, but, Old Limey, you are probably right...I have a little too much in cash.
- I appreciate the comments about picking my significant other. That is very much in my mind. In fact, that has been a big challenge for me, because I have rarely met a man who shares my philosophy. The longer I spend on my goals and the older I get, the harder it gets to "settle" for someone who doesn't share my goals. It's quite the quandry. I'm thankful to have a great family, wonderful friends and a generally fun life...so I don't feel like I am in a tough place. As far as kids go, I think it would be nice, but I don't feel the "biological clock" at this point. I could see not having kids and being fine.

[Leigh]

@EA I know what you mean about being single and not having anyone to bounce ideas off of. I have a good girl friend who I talk budget with somewhat and big picture ideas, but not real numbers of net worth/investments. That helps somewhat. And I talk investment strategy with coworkers sometimes. If you're looking for a single woman budget/investing buddy, feel free to email me! I'm always open to that. [email protected]

[EA]

@leigh - thanks for your comments! To answer your question, yes, my income increased about 20% a year ago when I took my new job. First 4 years out of college it was 40-90K, then I did a year in DC working on Capitol Hill and made $35K, then back to Real Estate about 4 years ago...started back at about $100K total and have worked my way up from there. With all the moving, income variance and renting in high cost places, I really didn't start growing net worth until last year. I do have some ground to make up there.

[Noah]

EA,

You are the same age as I am and grew up in the same area. If you went to UCI (my guess is UCLA though) or lived in the OC area, I may have met you at one time.

I'll echo everyone else's sentiment and say good job on your finances.

[Nick @ ayoungpro.com]

Not much to say here, you are doing awesome! The only thing I would say is to work on paying off your mortgage, that will allow you to have flexibility when you want to start a family because you won't have that large payment every month.

[jim]

EA, you said:

"- I am maxing out my 401K. I do 10% until around August and then verify I won't end up over contributing by year-end based on when and how my bonus is paid out. This is only the second year I will max it out."

Your employer matches up to 3%. How do they pay that match?

If you only contribute to the 401k up until August then you might me missing some of your matching funds by doing it that way.

here is an article on that topic:

http://www.forbes.com/sites/ashleaebeling/2012/01/13/the-big-401k-match-mistake/

If you employer bases the 3% on each payperiod then you could be losing up to 1/3 of the match.

Some plans account for that and make sure you get the full match but some don't.

[08graduate]

@jim

Wow! I'd never heard of that particular obnoxious practice. Thanks for the warning. I've never had such a churlish employer myself, thank goodness, but I will certainly start giving friends and family the heads-up as needed.

[Apex]

@08graduate,

I would venture to guess that most employers do it the way that will result in less match if you max out early. I have never had one who didn't. I doubt they are trying to be churlish, because very few people actually face this situation anyway so it wouldn't actually save them much of anything. I suspect it's just a matter of simplicity. Most plans match a certain percentage of your contribution each payroll. Mine matches 50% of my contribution up to 6% of my salary each payroll period. If you read that sentence very carefully you will see that if I max out early they won't be giving me any match in later payroll periods, because they match my contribution each payroll period. If my contribution in a given period is 0, then their's will be too. They also match only up to 6% of my salary each period so if I put in 40% of my pay in a given period, I only get matched on 6% for that period.

This is just a simply way for them to do the payroll. Most people are not maxing out at all let alone early so for most people this is not big deal at all. For them to put in place procedures to detect someone who over contributed early and then calculate a way to match it later on such that they could still get the match is less than trivial.

When I was trying to max out my 401k I did exactly what EA did by under contributing early, waiting to see what bonus was and then calculating how much I needed to contribute the rest of the year to hit the max on the last paycheck. It's a bit of a pain but its what you have to do if you want to get the full match.

I no longer try to max my 401-k because I conserve my cash for my real estate business so it's simpler now. I just contribute 6% to get the full match. But if you are facing a bonus situation then it gets a little tricky if you want to ensure you max the 401-k and get the full match.

I think that is partly why EA does what she does. Although she said it was to make sure she doesn't over-contribute. I am not sure if every plan works this way or not but mine won't let me over-contribute. Once I have maxed out it will simply stop withdrawing contributions. the nice part of that is if I want to get the full 17,500 in the plan I can work out contributions that get me to 17,548, or 17,617, or whatever it comes to. Then that last pay check will just have a few dollars less in it because the max will be reached. Trying to get it to come right to 17,500 can be tricky, because my plan only lets me choose the contribution in percentages and not dollars, so I have to play with the percentage amount to get it close to the max contribution level.

[08graduate]

@Apex Yes, I understand the issue. I still think a paycheck-by-paycheck matching rule is silly at best. My current employer matches XX% of contributions, with no limit aside from the IRS limits. My previous employer contributed YY% of pay regardless of employee contribution. These rules are simple and clear, with no bizarre dependency on when you contribute. Why would an employer choose to use a complex paycheck-by-paycheck rule instead?

[Old Limey]

@SB
I compared all of the Fidelity and Vanguard funds that have a history of 20 years and Max drawdown of less than 30% and Fidelity doesn't have any that compare with the 3 Vanguard funds I mentioned previously which were VWINX, VWESX and VGHCX.

I am a Fidelity customer and when I was actively trading mutual funds I was actually blacklisted by Vanguard and 2 or 3 other fund companies because I was doing what they don't like you to do, which is buy their funds when they start a nice uptrend and sell them as soon as its clear the uptrend has broken. This often results in short term trades, which they don't like. Since I have been a Fidelity customer for well over 20 years I never had that problem with Fidelity funds.

Vanguard caters to Buy & Hold investors that buy for the long term and ride funds up and down. I have never believed in that concept which is why since retiring in 1992 my annual rate of return has been over 17% and my worst ever drawdown was 16% in March 2000 which took place over 4 market days when the Internet Bubble burst and I got out as quickly as I could. I have been in bond investments since the end of 2007 when at age 73 I reached the point where I had all the money I needed and wanted to give up active trading and lead a less stressful life in my old age. The stockmarket is not at all like it used to be. Since the Great Recession the Federal Reserve has been manipulating the market by loaning billions of dollars each month to the largest investment banks which use that money to make large profits from computerized trading systems and also support the primary averages like the S&P500.

[jim]

08grad,

I agree with apex that employers do this for simplicity sake.

How and when does your employer make the matches? What happens when an employee hits the IRS limit?

Some employers do a 'true up' deal where they will make sure your contribution rate is matched fairly when you hit the cap. I don't know how common it is to do it.

For that annual contribution what happened if you left the company early? I think at least some employers do that partially on purpose so they don't have to pay anything to people who leave mid year. IBM notably changed their system to that style. My employer has an annual contribution and its not prorated if you leave before the contribution date.

Many of the ways companies manipulate retirement contributions and pensions systems has been geared towards saving the company money and often that comes at the expense of the employees.

[08graduate]

@jim

At my current employer, matches happen in the same paycheck as contributions, so they stop naturally when you hit the IRS limit. My previous employer divided its fixed contribution evenly over each paycheck in the year. Both of these approaches seem not just fair, but also pretty simple. No true-up required.

It is true that both these rules allow an employee to get some matching in the year of departure. Compared to the other costs associated with turnover of an engineer, I don't think that matters much.

In any case, I entirely agree: complex benefit schemes exist to save a buck at the expense of employees who aren't paying close attention. There are many such obnoxious practices, and this 50%-on-6% thing isn't the worst, but I still think it's unpalatable.