Reader Profile: KP

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

Please tell us a bit about yourself.

I am a 29 year old single man living in the southern midwest region. I was very fortunate to have a good paying job right out of college in a city with a very low cost of living. I attended a public university where my four years on campus cost my parents and I a combined $25,000 (my parents paid $21,000 and I paid $4,000 with loans). This low cost was enabled through a combination scholarships and some federal/state grants. Through summer jobs I was able to graduate college with no debt.

My gross pay each year is $110,000. We do not have a 401K match, but do receive a profit sharing contribution each year (company stock; should be ~$10,000 this year for me).

If I stayed at my current company until age 55, I would be able to retire with a very nice net worth. However I am currently debating transitioning to a lower stress job in a different city.

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

Income

• $9,200 a month gross pay

Expenses

• $1,900 a month for mortgage + property tax + home insurance
• $100 a month for gas / car maintenance (benefit of driving a hybrid)
• $200 a month for food
• $200 a month for going out with friends
• $500 a month for charitable donations
• $150 a month for utilities
• $100 a month for employer health and disability insurance
• $60 a month for internet (no cable)
• $100 a month for home improvement projects (typically done by myself)
• $50 a month for clothing (I have a minimalist closet)
• $100 a month for hobbies
• $300 a month for travel (like to take trips to see family/friends)
• $200 a month miscellaneous (estimate)
• $450 a month for Roth IRA

Assets

• Home ($203,000) purchased in 2009 for 192,000 (including first time home buyers credit)
• 401k ($130,000) mixture of three ETF's
• Profit Sharing ($56,000) all company stock - will increase by $10,000 in July
• Roth IRA ($54,000) - Index Funds + a few individual stocks
• Cash ($40,000) - current checking ($15,000) + slush fund ($25,000)

Liabilities

• Mortgage ($102,000, 4.25% - 15 years)
• No credit card debt - paid in full each month
• No car loans - paid in cash for a new car in 2011

Net Worth

• $381,000

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

This may sound ridiculous, but with interest rates so low, my biggest issue is knowing where to park excess cash. My 401k is maxed each year as is my Roth IRA contribution. One reason my mortgage balance is so slow for only having lived in the house 4 years, is a do bi weekly payments and also made a one time $20,000 payment a few weeks ago. I am somewhat risk adverse, so I do not like to have too much money in the stock market. I do plan on doing about $5000 in home repairs this summer (new paint + driveway) which is why the checking balance is a bit high.

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

Longer-term I do not plan on staying in my current job until I hit 55. I am worried I would get burnt out and not be happy looking back. Over the past few years I have dabbled in side startups but nothing has worked out (part of my hobby budget). Ideally I would love to start a business and run it full time. I do wish to have a family in the future and be able to take future kids on trips (not just Disney but also international) as well as pay a portion of their college costs (maybe 3 years or something). When the family does start, I will front load the 529 plans as much as possible.

I have worked since I was 13 (my parents owned a small business and I was paid $1 an hour until age 16!!) and consider myself to be financially savvy.

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

Best advice: In college I read John Bogle's (Vanguard founder) book on index funds. The vast majority of investors should follow his advice and keep costs low by investing in index funds. Also never but a load fund; only no load funds.

My personal philosophy is money is nice to have but it won't make you happy. I'd rather have a middle income/net worth life with a happy loving relationships (family & friends) versus a high income / networth life without them.

Comments

[Jake]

Nice job @KP.

Everything you posted details you are on the right track. But just like you would front load those 529s, front load your retirement now by putting a bit aside in a taxable brokerage weighted toward long term buy and hold stocks/etfs etc. Siphon a little in each month from then on. You seem like a "do-it-yourself" guy so read up and you will be fine if your time horizon is age 55/65/75 whatever. Get a fee based FP if that doesn't suit your fancy. You may also be a candidate for real estate with your hands on approach to your current house.

You have what us married guys with kids don't - TIME!

You didn't detail what you are looking for in a lower stress job.

I am VERY interested in this minimalist closet approach. Any tips?

Best of luck regardless!

[KP]

Thanks Jake!

Miminimalist closet approach is simply not buying more clothes than you need. I usually only something new when I have to discard an older piece of clothing.

The lower stress job is more about not burning out and also doing something I would be proud of. My current job is a typical corporate job; help produce profits. I would like to do something that can help reduce poverty or fight climate change.

[Paul]

You're on a great track KP. Not much room for improvement. As @Jake said, fee-based financial planner is next step.

[KP]

@Paul,

Why should I use a fee based financial planner?

I can directly invest in very low cost index funds myself.

What benefit would a financial planner give? I would like 1% each year for their fees.

[Nick @ ayoungpro.com]

If your goal is early retirement, I would say to start investing your extra cash into things that will create extra income streams (dividend stocks, real estate, online businesses, etc). That way, when you look to retire you will already have income to support you.

[Apex]

@KP,

Saving the world happens one small influence at a time. If you want to make a difference look around you and find ways to make a difference right where you are. If you keep thinking you want to tackle global problems the odds are slim that you will ever make a real difference. Make a difference where you are. And perhaps that will grow into something with wider reach.

[Paul]

@KP Fee based planned work for a fixed fee, not a percentage.

a CFP can guide you beyond your current portfolio. One big benefit is tax minimization strategies.

And if you think you're sitting on too much cash, they can help you fix that problem too.

[Mark]

KP, I think you're mostly on track with your thinking about money as well as your net worth. The one thing I'd say is I think you have too much of your net worth tied up in company stock. Maybe it's not possible to sell it, but if it is, I would sell at least some of it.

[BH]

I'm going to be a contrarian and suggest that you either invest your cash or pay down your mortgage (unless it's sub 3%) and get a HELOC in case of an emergency. I know everybody else will tell you to have sizeable emergency fund and they're more prudent than I. If you got fired, you could always take a loan against your 401k or use the HELOC. No use paying interest on a mortgage when your cash isn't doing you any good. I doubt anyone else will agree but that's my two cents.

[Kevin Watts @Graduatingfromdebt]

It looks like you are on a great track! Like a commenter above posted I think focusing on different income streams will allow you do to more things. If you are thinking of quitting what's holding you back?

[Jake]

@BH interesting approach on the HELOC. I would probably open the HELOC and use it as a "last line of defense" (but be wary of the closing costs, fees etc and don't use the credit card they give you - store it away). If it hit the fan and you tapped the HELOC you are now in debt and have to make regularly scheduled payments. Hopefully at that time you still have equity in the house and the bank doesn't shut you off.

[BH]

@Jake - yes, he would need to avoid fees and do research. My general philisophy is to be an interest-collector rather than an interest-payer, so KP has good equity in his house and a relatively sizeable 401K if an emergency arises - I would advocate putting $40,000 of the cash to work, but admittedly it's not the best course for most people (psychologically, if nothing else). Another option is to put the cash in a whole life insurance policy that he could borrow against if bad stuff happens. Again, there is a lot of reasearch required, and most policies are a rip off due to fees, but at least the cash wouldn't be sitting there making the bank money and doing nothing for KP.

[Sarah]

Couple of points: if that company stock isn't somehow restricted, I'd be looking to diversify out of it. It's like a seventh of your net worth, and its value is tied to the same institution that pays your salary. If things go very wrong there, you could lose (most of) both at once.

Also, why ETFs in the 401(k)? It's not like you're going to be trading them on a regular basis.

HELOCs are never a great idea because the bank can and will freeze them if it thinks you're getting into trouble. So, just when you might actually need the money, it's not there.

I, too, am in a situation where I have taken maximum advantage of retirement accounts, don't have any debt, and don't have anywhere good to put short- to medium-term cash. For now, I've been gritting my teeth and overweighting my supplemental retirement fund. My sense is that there are very few good options (i.e., ones that don't charge ridiculous fees and/or offer inadequate return for the loss of FDIC protection in a simple bank account) out there right now. I spent my twenties as a broke grad student so I don't suppose the shot in the arm hurts.

[Sarah]

P.S. If your heart is telling you to get out of the corporate environment, you should do it. You've been doing a pretty good job at avoiding lifestyle inflation, which is the first, and hardest, step towards escape.

[KP]

@Sarah,

Can only use company stock since it is profit sharing; not too bad since it's free money and the stock yields 3% a year.

For 401k, we only havae choice of a few ETF's

[KP]

@BH,

I don't see why whole life insurance is a good idea at all.I have term and I can just invest the difference.

I like having $25k in a just incase fund if anything were to arise.

[BH]

@KP: It's probably a bad idea for most people. But for those of us who own our own business, a keyman policy has advantages: it is a good asset protection tool (my state it is judgment proof and bankruptcy proof), the returns are actually quite decent and consistent, you can borrow against it or you can pledge it as security for a loan. We hired an insurance consultant to negotiate the policy for us though. I hate having more than $10,000 in cash sitting around, but I knew this would not be a well-received strategy. Maybe I have a higher tolerance for risk.

[No Waste]

I cannot help but soak up every detail of this kind of article.

Peering into the statements of strangers is addicting!

In summary, this guy has an embarrassment of riches!

Well done!

[Jane]

I'm relatively conservative on investing as well but there instead of just cash I'd recommend looking at some balance mutual funds. The kind that invest not only in stocks but bonds as well. you generally get more growth than in cash but aren't as exposed to the volatility of the market. Start slow and gradual.

[Jane]

Oh KP, I just read your what you's like to do addition. You can start to work on bettering the world at your current job as well. A friend of mine works as a corporate lawyer and runs a charity that operates 2 schools in Uganda. She goes there every other year to check on the actual facilities and does her fundraising every year. Not saying this is what you want to do but don't wait to start contributing to the "world"

[Mike Hunt]

KP,

You are doing great, with a good net worth for your age. Think about a higher paying or equal paying job with less stress. For example- I used to run a business / manufacturing facility but I stayed with the same company and am the head of Sales for a few business units, including the one I previously ran. I earn the same salary but find the job much less stressful and with much more flexibility- perfect timing as we are raising a newborn (first child).

Think outside the box and put your request out there and the answer will come... just make sure you are open to hearing it.

-Mike

[Tommy Z]

@KP

$110k/year income is incredible. Mind sharing your secret on how you did it with just a 4 year degree?

[ccm]

Wow... you are killing it. Wish I had half your maturity when I was in mid-late twenties. Keep up the good work!

[SA]

Great job KP, I was reading and said wow we have alot in common...income, age, status, and desire to leave the well paying job to make more of an impact on society and to most likely come out better off based on work ethic & passion alone.

Definitely consider all the comments provided...they are great. Less stressful job with similar pay is key and using your disposable cash to build income streams (cash flow) is the key to early retirement. My gateway is Real Estate. Good Luck!