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 CT. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
My wife and I are in our early thirties (32 and 33), have been married for almost 8 years, and have a 2-year old daughter. I’m a mechanical engineer currently working at a power plant. My wife is a licensed CPA, but currently stays at home with our daughter. We currently live in a small (low cost of living) town south of Houston, Texas. We both grew up in this area and have majority of both families within an hour drive. Close vicinity to family was the main reason we chose to move back after starting our careers in Houston.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
My income is stable, but total compensation can fluctuate a little due to overtime and annual bonus. Current total compensation typically ranges from $125k to $140k. The 401(k) match is 8.1%, is tier structured based on years of service, and tops out of 12.1%. I’m maxing out to the $17,500 limit for 2013.
After paycheck deductions, my take home pay averages $6700 per month.
We are currently living in a small wood frame house that my wife’s father and grandfather built many years ago. My wife is set to inherit the house and land, so we’re making payments to her parents so that it isn’t money out of their pocket to let us stay there (home insurance, property taxes, etc.). My wife’s father doesn’t want to rent the place plus he gets free manual labor out of the deal (hauling hay, mowing pastures, mending fence, etc.). The plan is to add on a room or two down the road (two or three years) and provide maintenance/improvements as necessary. We are truly blessed to be in this situation. It’s very sentimental to my wife, and I like taking on home improvement projects.
When my wife did work, we made it a priority to max out our 401k’s and max out our Roth IRA’s. We still have this mentality today.
The financial numbers below are averages:
Expenses
Starting with the positive, my wife and I worked hard and stuck to our plan early in our marriage and careers. We’ve been contributing the max to our 401k’s and Roth IRA’s since 2005 (with exception of my wife’s 401k when she resigned in late 2010). In addition, we put our excess income toward paying down the principal on our first home. When we sold it in 2011, we were able to pay cash for some land adjacent to the place we are living on now. We took my father-in-law’s advice and also purchased a starter herd of cattle (he’s been in the cattle business for about 15 years). I did not include farm/agricultural income because we’ve broken even the last two years. With the recent years of drought here in Texas, cattle prices are high and diesel is still climbing…so adding to our herd or buying more pasture land will be a slow process purely for economic reasons.
Over the years, we have learned that saving the money is a strength of ours. However, I’m not sure we are optimizing the ways our money can work for us and continually grow.
I manage our portfolio because my wife (CPA remember) is very good at taxes and bookkeeping, but shows very little interest in the investing side. I follow a few financial blogs and have read numerous books to further educate myself, but I find myself sometimes emotionally reacting to market fluctuations and news speculation (I know…not a good thing). I’m familiar with index fund investing, buy and hold vs. allocation moves based on bull/bear markets, and various methodologies (dollar cost averaging, lump sum investing, value averaging, etc), but sometimes I feel overwhelmed (especially as our portfolio gets bigger and bad decisions have potential to hurt more). 100% of our investment portfolio is with Vanguard. I would love some pointers on various strategies to grow our nest egg over the long haul. I’d even be willing to learn and try a combination of strategies for further diversification. I believe I’m capable of understanding such concepts, but I need exposure to those who have the experience and knowledge of where to start, what to look for, possible tools to utilize, and how to stay on path. I understand that time is on our side, and we can take on more risk, but a well-defined and thought-out plan would help me not second guess those decisions.
Some other questions include:
As I mentioned before, we will be taking on some home improvement projects in the next couple of years. These will be paid out of pocket as funding and schedule permits.
We have three paid-off vehicles (2000 Civic as work car, 2003 pickup for farm usage, and 2006 SUV for my wife). As they get older and mileage accumulates, I’m sure we’ll be forced to replace at least the car or SUV in the near future.
We are currently building up the Savings account for the home improvements and potential vehicle replacement. The ultimate goal is to try our best to minimize debt as best as possible.
What are your plans for the future (retire early, build your career, etc.)?
I know for sure that I will continue to advance my career by gaining experience in the power generation industry with focus on equipment reliability, outage planning and execution, and machinery (steam turbines, gas turbines, pumps, etc.) troubleshooting and diagnosis. I’d like to see myself reach a point where I can retire and consult on a part time basis. A few years back, I earned my MBA and became a licensed Professional Engineer, so hopefully I can utilize these once I get several years os experience under my belt. Honestly, I don’t ever see myself ever not working. I just prefer to be in the position where I can work on my own terms.
We’d like to purchase more land and expand our farm business such that it provides some supplemental income, but the ultimate goal is to provide a source for home grown food (beef, chicken eggs, venison, vegetables, fruit, etc.).
Obviously, we have a daughter to raise, send off to college, and marry away someday.
My wife may decide to take on a few clients for tax preparation and bookkeeping services, but that’s not in the nest egg accumulation plan for now. This way, anything she does can be put back toward college or our daughter’s wedding or just makes us reach our financial goals quicker.
In the near future, we’d like to look for opportunities to give back to our local community and broaden our charitable work.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
These sound like I took them out of the table of contents of several books I’ve read over the years, but they’ve worked for us.
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 CT. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
My wife and I are in our early thirties (32 and 33), have been married for almost 8 years, and have a 2-year old daughter. I’m a mechanical engineer currently working at a power plant. My wife is a licensed CPA, but currently stays at home with our daughter. We currently live in a small (low cost of living) town south of Houston, Texas. We both grew up in this area and have majority of both families within an hour drive. Close vicinity to family was the main reason we chose to move back after starting our careers in Houston.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
My income is stable, but total compensation can fluctuate a little due to overtime and annual bonus. Current total compensation typically ranges from $125k to $140k. The 401(k) match is 8.1%, is tier structured based on years of service, and tops out of 12.1%. I’m maxing out to the $17,500 limit for 2013.
After paycheck deductions, my take home pay averages $6700 per month.
We are currently living in a small wood frame house that my wife’s father and grandfather built many years ago. My wife is set to inherit the house and land, so we’re making payments to her parents so that it isn’t money out of their pocket to let us stay there (home insurance, property taxes, etc.). My wife’s father doesn’t want to rent the place plus he gets free manual labor out of the deal (hauling hay, mowing pastures, mending fence, etc.). The plan is to add on a room or two down the road (two or three years) and provide maintenance/improvements as necessary. We are truly blessed to be in this situation. It’s very sentimental to my wife, and I like taking on home improvement projects.
When my wife did work, we made it a priority to max out our 401k’s and max out our Roth IRA’s. We still have this mentality today.
The financial numbers below are averages:
Expenses
- Rent/Property Taxes/Insurance: $260
- Utilities (electricity, trash, etc.): $175
- Communication (cable, internet, phone): $240
- Groceries: $350
- Dining out / Entertainment: $130
- Gas / Transportation (includes maintenance): $600
- Car Insurance: $175
- Life and Disability Insurance: $160
- Medical (doctor visits, medication, etc.): $130
- Charitable Contributions: $300
- Pets: $170
- Roth IRA’s: $916
- Other (clothes, toddler stuff, consumables, etc.): $1000
- Savings Goal: $2000
- Land, Cattle, Farm Equipment: $130000
- Vehicles: $30000
- 401k’s: $152000
- Roth IRA’s: $147000
- Traditional IRA’s: $129000
- Joint Brokerage: $6600
- HSA: $24000
- Checking: $12000
- Savings: $31000
- Emergency Savings: $20000
- NONE (hope to keep it that way)
Starting with the positive, my wife and I worked hard and stuck to our plan early in our marriage and careers. We’ve been contributing the max to our 401k’s and Roth IRA’s since 2005 (with exception of my wife’s 401k when she resigned in late 2010). In addition, we put our excess income toward paying down the principal on our first home. When we sold it in 2011, we were able to pay cash for some land adjacent to the place we are living on now. We took my father-in-law’s advice and also purchased a starter herd of cattle (he’s been in the cattle business for about 15 years). I did not include farm/agricultural income because we’ve broken even the last two years. With the recent years of drought here in Texas, cattle prices are high and diesel is still climbing…so adding to our herd or buying more pasture land will be a slow process purely for economic reasons.
Over the years, we have learned that saving the money is a strength of ours. However, I’m not sure we are optimizing the ways our money can work for us and continually grow.
I manage our portfolio because my wife (CPA remember) is very good at taxes and bookkeeping, but shows very little interest in the investing side. I follow a few financial blogs and have read numerous books to further educate myself, but I find myself sometimes emotionally reacting to market fluctuations and news speculation (I know…not a good thing). I’m familiar with index fund investing, buy and hold vs. allocation moves based on bull/bear markets, and various methodologies (dollar cost averaging, lump sum investing, value averaging, etc), but sometimes I feel overwhelmed (especially as our portfolio gets bigger and bad decisions have potential to hurt more). 100% of our investment portfolio is with Vanguard. I would love some pointers on various strategies to grow our nest egg over the long haul. I’d even be willing to learn and try a combination of strategies for further diversification. I believe I’m capable of understanding such concepts, but I need exposure to those who have the experience and knowledge of where to start, what to look for, possible tools to utilize, and how to stay on path. I understand that time is on our side, and we can take on more risk, but a well-defined and thought-out plan would help me not second guess those decisions.
Some other questions include:
- whether Roth or Traditional 401k contributions are better for my situation?
- should we convert some of the traditional IRA to Roth IRA or vice versa?
- 529 vs ESA for college savings?
As I mentioned before, we will be taking on some home improvement projects in the next couple of years. These will be paid out of pocket as funding and schedule permits.
We have three paid-off vehicles (2000 Civic as work car, 2003 pickup for farm usage, and 2006 SUV for my wife). As they get older and mileage accumulates, I’m sure we’ll be forced to replace at least the car or SUV in the near future.
We are currently building up the Savings account for the home improvements and potential vehicle replacement. The ultimate goal is to try our best to minimize debt as best as possible.
What are your plans for the future (retire early, build your career, etc.)?
I know for sure that I will continue to advance my career by gaining experience in the power generation industry with focus on equipment reliability, outage planning and execution, and machinery (steam turbines, gas turbines, pumps, etc.) troubleshooting and diagnosis. I’d like to see myself reach a point where I can retire and consult on a part time basis. A few years back, I earned my MBA and became a licensed Professional Engineer, so hopefully I can utilize these once I get several years os experience under my belt. Honestly, I don’t ever see myself ever not working. I just prefer to be in the position where I can work on my own terms.
We’d like to purchase more land and expand our farm business such that it provides some supplemental income, but the ultimate goal is to provide a source for home grown food (beef, chicken eggs, venison, vegetables, fruit, etc.).
Obviously, we have a daughter to raise, send off to college, and marry away someday.
My wife may decide to take on a few clients for tax preparation and bookkeeping services, but that’s not in the nest egg accumulation plan for now. This way, anything she does can be put back toward college or our daughter’s wedding or just makes us reach our financial goals quicker.
In the near future, we’d like to look for opportunities to give back to our local community and broaden our charitable work.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
These sound like I took them out of the table of contents of several books I’ve read over the years, but they’ve worked for us.
- If possible, automate your saving and investing vehicles.
- Keep things simple.
- Live below your means.
You are in really good shape and your strategy/lifestyle is very interesting. I really can't comment on the growth potential or profitability in expanding your farm business and assets, but you seem to be in a good position to make it a success.
Regarding your liquid investments, I would suggest 2 things:
If you are a fan of Vanguard and relatively inexperienced, try following the Boggleheads forum - link below. In the "Help with personal investments" chat room they very often answer questions where people ask for review of their investments and advice - see how it works and you could do the same, you'll get better and more detailed advice than we could give you here without specifics.
http://www.bogleheads.org/forum/index.php
If you want to try your hand at something more adventurous why not set aside $10-20K and just play with it (individual stocks, P2P, whatever you are interested in). You can afford the risk on that small a base and it will allow you to experiment more. We've personally done something like this within one of our IRAs to avoid the tax on selling stocks.
We have a mix of Roth and traditional, I frankly don't worry too much about the exact balance as long as you have a mix. I wouldn't take the tax hit of conversion unless you have a very strong reason
I am curious about 2 aspects of expenses
- why do you spend so much on gas, esp with your wife not working currently - is that a very long commute, or farm business related?
- why is the pets expense so high, when living on a farm? (I've lived on a farm as a kid and the many cats and dogs around cost us almost nothing)
Best of luck, you are doing terrific for your age!
Posted by: Ivy | June 04, 2013 at 10:23 AM
You are doing really good. Congratulation!
I think keeping a balance of traditional and Roth is the way to go. You are at around 50/50 right now and you should continue that to give you more tax options down the road.
Do you have bonds in your asset allocation? If you're nervous about the stock market, bonds will help stabilize your portfolio.
The farm is interesting. I would like to hear more about it. Does it take up a lot of your time? It sounds like a lot of work to me.
Posted by: Retire By 40 | June 04, 2013 at 11:29 AM
You're doing very well.
You had 3 questions.
I'd stick to the traditional 401k for now.
I wouldn't convert to a Roth IRA at this point.
I think a 529 savings is fine.
You're in a mid-high bracket now and no reason to pay taxes today. You may plan to switch to part time in the future and that should drop your income and bracket so you could pay taxes then instead. Yu're also on a path for early retirement eventually if you choose. Thats why I'd stick to traditional 401k and not do Roth at this point.
Posted by: jim | June 04, 2013 at 01:58 PM
Wow, you're doing really well. I'm a similar age and I'm not doing bad, but you're doing much, much better.
Not much to add, but I noticed you're may be getting ripped off on your car insurance. You probably haven't shopped around in some time. Every little bit helps.
Posted by: Paul | June 04, 2013 at 03:14 PM
To second Paul's comment regarding car insurance, I recently dropped comprehensive coverage as my car is now 7 years old and only has a few good years left. My insurance bill was reduced by more than half.
Posted by: Jonathan | June 04, 2013 at 03:20 PM
I just wrote you a pretty long and detailed response-- but unfornunately--- it seems to have failed to post. I do not have time to rewrite it for you so-- here is the jist.
Allocation is key. Set your allocation up based on your risk tolerance. Watch out for fees (Vanguard funds and ETF's are great for low fees). Time horizon is crucial as well. You are young and have time on your side--- use that advantage!
Otherwise, the 401k vs roth delemma is an unknown. What will your tax bracket be in the future? What will tax rates be like in the future? who knows..... All you can do is make a reasonable assumption and go with it.
Save for college any way you can. 529's can be good. Same rules apply. Watch out for fees. Careful with your allocation.
Good luck.
Posted by: jnew | June 05, 2013 at 09:25 AM
@ Ivy
I browsed Bogleheads a couple of years back, but I will start reading it on a regular basis.
In regard to the high gas expense - I have an 88 mile roundtrip commute and we include annual state registration fees, annual inspection fees, and regular maintenance (fluid changes, filter changes, etc.).
In regard to the higher than expected pet expense - we have two older dogs that are on some medications to help with hip/back problems for one and a skin allergy issue for the other. One was a stray that wondered up years ago and the other my wife has had since a puppy. Both are very good with our daughter. Honestly, we're just trying to make them comfortable as their years left with us dwindle down.
@ Retire by 40
Bond allocation is about 5% in the Vanguard Total Bond Index fund.
The farm/ranch time consumption is seasonal (vaccinate cattle herd twice a year (early Spring, early Fall), calving season in Spring, gardening in Spring, cut and bale hay in Summer, etc.), but we use this as family time. My in-laws and brother's family help us out.
@ Paul and Jonathan
We have liability coverage on the Civic (work car) and full coverage on the truck and SUV, but I'm going research our options.
@ jim and jnew
Thanks for the input.
I appreciate the feedback.
Posted by: CT | June 05, 2013 at 12:14 PM
Hi,
I had posted earlier but it doesn't show up. So will write again. I too find investing a little too daunting and time consuming not to mention feeling of being clueless most of the time. I have decided to move my funds to personalcapital.com. They offer complete personal finance consulting for a nominal fee with no other charges like commissions for portfolio adjustment. I liked their pitch so far and would try them out. I also have wife's IRA with Vangaurd in total stock admiral and am happy with it so far. Will see how PC works out and then decide whether to go with them entirely. Once the funds accumulate it makes you nervous with each up and down. Having PC to manage hopefully will smooth out the downward drift that I find to happen in the market.
Posted by: Aks | June 05, 2013 at 09:33 PM
@ jim, jnew
401k or trad IRA vs Roth IRA is a moot argument.
CT is married and thus his salary under joint filing qualifies him for Roth IRA without the need for performing the "backdoor" Roth conversion. As he is maxed out on the 401K, the Roth gives him additional opportunity to entend his tax shelters. $17.5K + 5.5K(x2)= $28.5K per year.
Posted by: Luis | June 06, 2013 at 11:25 AM