Reader Profile: WC

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

Please tell us a bit about yourself.

I am a male, 25 years old, with a Masters in International Development. Born and raised in N.Y.C, I recently took a job with a Federal agency in D.C. in the general field of Economics. This was a big move since I had always lived in New York. My parents emigrated from the Dominican Republic to give my brother and me the opportunities they lacked. Last but not least, I proposed to my long-term girlfriend and am set to get married in November 2013. It’s been busy!

A bit of what I will share is speculative—my fiancé is currently working in NYC, with her monthly take-home pay at $2100. She is looking for work in DC currently, so we don’t know what our combined income will be. She is 23 and has no form of debt. Importantly, we do not plan on having children for at least 5 years, if not longer.

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

As a Federal employee, I’m on the GS pay scale. As a GS-9, my salary is 51K this first year. Next year, it jumps to 63K as a GS-11 and the following year to 75K as a GS-12. The ladder at my current position stops at the GS-12 level, with 3% yearly increases thereafter. After one year as a GS-12, I am eligible to apply to GS-13 positions. My current position involves the Chemicals and Energy industry, and I plan to leverage my experience in my next position, possibly in the private sector (utility company, major oil, etc.) if not another Federal agency.

I have debt, as so many Millennials do. I owe 37K in Federal student loans at 6.5%; living in Virginia, I purchased a new car (this was a mistake, I know this now) and owe 19K on a 6 year loan at 4.2%. I have 5 ½ years left on the car note; I plan to own it at least 10 years. Lastly, I owe my parents 4K. I have no credit card debt; I have an excellent score.

The wedding is in NYC, and my fiancé and I have taken steps to ensure that our spending is under control and that everything is paid in cash. Our respective parents helped some, but my fiancé and I are paying for the majority of things. We will have 10K in savings after we come back from the honeymoon as a cushion while she looks for work. A caveat on my move to the DC Metro Area: I have been living with relatives, paying $500/mo for rent, food and utilities. This is extremely generous, but will change once I move to the apartment (September 2013). The fiancé and I chose to live in Arlington, VA to be close to the District.

The apartment we found is a true bargain—$1280/mo with parking and utilities included (water, electricity and gas). The average price for a 1 room apartment in the area is $1600 without utilities.

My take-home pay is $2500/mo after taxes,  paying for medical/life insurance and contributing 5% to my 401K and 2% to a Roth IRA. In addition to an automatic contribution of 1% of my gross salary, my employer matches the first 3% at 100% and the next 2% at 50%. These accounts are under the Federal government’s Thrift Savings Plan (TSP). Next year, I’m thinking of increasing my contributions to 8% (401K) and 7 % (Roth IRA). Below is my monthly budget.

Budget ($2500 Take-Home Pay)

Fixed

• Contribution – 160
• Rent – 1280
• Student Loans – 435
• Car Insurance – 175
• Cell Phone – 110
• Cable, Internet, Home Phone – 100
• Total: $2260

Variable

• Gas – 100
• Laundry – 40
• Food – 300
• Metro – 100 
• Total: $540

Total Fixed and Variable: $2800

As you can see, I have a $300 monthly shortfall. Once my fiancé lands a job, this will change dramatically. The plan is to either save/invest or pay my debt with the majority of her income. Any thoughts on what our course of action should be are welcomed.

Net Worth

Assets

• 401K/Roth IRA – 2,500
• Savings – 10K
• Total – 12,500

Liabilities

• Student Loans at 6.5% – 37,000
• Car note at 4.5% – 19,000
• Parents – 4,000
• Total – 60,000

Net Worth: -47,500

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

The big issue we are facing is whether we should put all our excess money towards my debt, as Dave Ramsey suggests, or follow the pattern I’ve set of saving while paying down debt less aggressively. I think contributing to the 401K makes sense because of the matching funds. Other than that, I am not sure if we need to be saving anything besides an emergency fund? My hesitation is the compound interest we would earn by starting earlier. Thoughts?

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

My future wife wants to start her Masters in the next 2-3 years. Her dream school is Georgetown ($$$). At this point, I would want her to work while she studies, but there are many unknown variables (school, program, cost etc).

Fortunately, my job is low-pressure: 40 hours a week with a consistent monthly cycle of responsibilities. Therefore, I am looking to secure a second source of income for the middle of 2014. I am looking to break into the real estate market, perhaps into home inspections. I have an acquaintance with his own company, and he would train me. Also, I am looking to go into possibly index investing next year. I hear great things about Vanguard; any suggestions on an aggressive growth index? What is a suggested initial investment?

By 30, I’d like to earn 6-figues and be debt free. By our mid thirties, we’d like to purchase a home (20% down, 15-year mortgage). This is really going far out for us, (10 years) but it’s never too early to start thinking.

1 Year Goals:

• Set up 6-month emergency fund of 17K
• Begin investing in an index fund

5 Year Goals:

• Tithing
• Be debt free
• Live off of 1 income (After 2 years of being married)
• Earn 100K/year

These goals are subject revision—we are young and in need of guidance.

As a long-term goal, my fiancé and I want to build wealth and eventually be financially independent, able to give back to others the blessings we have received. I love real estate, and see it as an entrepreneurial opportunity. 

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

I am learning the discipline of patience in saving and living below my means. Although our consumerist culture makes it difficult to do this, the FMF community shows that it’s more than possible. Thank you!

Comments

[getagrip]

First some clarification on Government positions and pay. The position you were hired for is a full performance GS-12. You were likely hired as an intern GS-9 and put against the position and provided your performance is good you will get the jumps from GS 9 to 12 as described. The raises you mention are not 3% raises. The federal payscale has been frozen at 2010 levels for the last three years. The increases you are getting are step increases on that payscale and follow a pattern of 3 at 1 year, 3 at 2 years, and 3 at 3 years. So you will get a step increase each year until step 4, then every 2 years until step 7, then every three years until step 10. Though I don't think you plan on spending 20 years at that position :-).

Additionally it should be pointed out that the salary for DC includes a locality pay increase over the base rate of something like 20-24% and is one of the highest in the country. Most places get less with many getting just the base rate. Also of note is that while GS-12 is often the typical max staff position for advanced degree required jobs in major cities, commands, and headquarters the bulk of positions across the country top at GS-9 or GS-11, just to put it in perspective.

That said, congratulations on your upcoming wedding. Move and marriage, lots of excitement and changes in store.

I would reassess counting on your wife to make money. It could take her many months to get a job as Government is currently shedding positions and that is impacting contractor support in the area. Meanwhile your expenses are going up after she arrives. You can likely count on the pay increases with the Government but need to be careful. This is potentially you and your wife's greatest opportunity to spend less than you earn and banking that difference. Your salary will go up over 25% ($63K to $80K) in five years while your wife could be earning $30-40K on top of what you're making. Even if you just keep your earnings in check, you could bank at least an additional $10K a year. If you can bank all your wife earns at a potential of $20-30K of takehome, that could be awesome. All this is before the second job, taking a higher paying position in industry, or making money off investments, etc.

I see you are planning on building up the emergency fund to about six months of expenses, which is good. Getting rid of debt follows. With respect to Vanguard, probably a good bet for an index fund with some of the lowest fees, I believe they want $2500 to open an account, but you should get the prospectus from them to find out the details. As with anything you plan on investing in, understand what it is you are putting your money into and decide before you invest what your reaction and actions will be if things take a turn for the worse.

You are in a lot of flux now with major transitions occuring. I would plan on eventually putting more like 15% of my own money away for retirement (and even more in other investments if you want to gain financial independence). One way I did that was with every step or COLA taking a percent and added that to my retirement. So for example, right now you are putting in 5% to the TSP. When you get your jump to a GS 11 add 1%. Jump to 12, add another percent. After two steps you're up to 9% plus the matching 5% for 14% plus the anything else you're saving and you've suffered no serious pain to your lifestyle. If you want you could make one of the larger jumps a 2-3% bump to accelerate that. Point is you do this regardless of job or where you are specifically saving and you get to 15% plus matching by your early thirties. It one realatively painless way to do it, but certainly not the only way. Find your own balance and may it be better than mine.

Best of luck.

[JNEW]

Hi WC:
Congrats on all the good things that have happened thus far! You are young, engaged, have a nice job for $50K in DC and you are thinking about your financial future early in your life... and THAT is a huge advantage.

I think initially you should take a look at FMF's two recent postings on NET WORTH and how to attain WEALTH. If you follow his advice-- you will end up a rich man.
At this point-- you are doing just fine.

When things settle down after your honeymoon you need to begin a lifelong strategy of living below your means and investing the excess in a properly allocated portfolio. You are on the right track using Vanguard and sticking with low cost index funds too.

You will hear different opinions about paying off debt vs investing -- but I think for you, the best thing is to get into the habit of saving and investing. Do this in your retirement accounts and in after tax accounts as well. You will benefit tremendously from compounding interest starting at your age --and the joy of seeing your balances grow larger each year will help solidify your commitment to lifelong saving and hopefully hook you for life.

Once you have a comfortable amount in your emergency fund and portfolio-- you will have the luxury of options. At that point you can begin to pay off the debt at a faster clip if you want. This may be a good idea if the rate on your loans is higher than your investment returns. I am a fan of being debt free--- but at your age--- there is time for that yet and the amount of debt you have is not too bad in my opinion.

Other than that-- make sure you always take advantage of any "match" available-- and ratchet up your 401k contributions every year so that you max out asap too.

Good luck !

[JayCeezy]

Amazing start to what looks like a great life ahead for you, WC. Wishing you all good things, as you and your new wife begin your new life together. There is a 'stress test' developed by Holmes & Raye, which might be of interest to you and your new wife. http://www.mindtools.com/pages/article/newTCS_82.htm It measures the potential impact for life events (moving to a new city, marriage, new job, etc.) You are both quite accomplished as individuals, and you may find it helpful to keep in mind that you will really need each others' support and will be able to accomplish so much more together.

Just two thoughts...1) pay off your parents immediately from your emergency fund, and take them to a nice dinner to say 'thanks' for everything they have sacrificed to give you a better life. Clearly, they have succeeded. 2) Don't tell anyone that you have a "low-stress" government job that started you at $51K; even on an anonymous PF board, nothing good can come from that revelation. Good luck and continued success to you, WC.

[Mrs PoP @ Planting Our Pennies]

I'd not count on salary increases. I have several friends who are with various govt offices in DC, and despite being high performers and being asked to do the work of the position above them, they have not been able to get a formal promotion and the next GS for several years now. Furloughs were a possibility even though they ended up being avoided, they would have meant a pay cut, not just a non-increase.

Best of luck to both you and your fiancé as you begin your lives together. Perhaps your wife should aim for a job that includes tuition reimbursement as a benefit if she is considering returning to school so soon.

[JimL]

Your gap is more than $300 isn't it as I do not see the car payment listed in fixed expenses. Your near term finances will be mostly impacted by the income provided by your future spouse. With a Government job and with her income, I would suspect you have a somewhat level of security, so I would focus on debt repayment. It is always a tough situation to owe money to family. I would pay that off immediately. If your future spouse finds something that pays a similar salary, you can pay off the car within a year and then put total focus on the student debt.

As for her Masters, I would encourage her to find a job that offers tuition reimbursement. You will not be able to afford the additional cost of her education.

[Kman]

Like others, I would caution you not to count on future wage increases being exactly or maybe even close to what you're expecting them to be. Unless you're in a government position where you can vote to raise your pay, government jobs are no longer as secure as they once were. I'd certainly hope for the mentioned increases, but don't count on it, especially not to the point of making questionable financial decisions because you're "going to be making a lot more soon anyway."

Along with your income-outflow ratio being incorrect as JimL noted, you also made a mistake on your net worth assessment. Presumably the car that you owe 19K on is not worth nothing, so whatever its present value is should be included in your assets.

Also, you mentioned tithing in your five-year goal plan. If you believe in tithing but can't "afford" to tithe now, I think that's an issue you should try to address sooner rather than later. There are always things that will keep you from tithing (or other charitable giving) if you let them, so I would try to get things in order, exercise your faith and commit to it as soon as you can, and then stick with your commitment.

[Rachel]

Congrats on your upcoming marriage!

As Kman mentioned above, I also agree that if tithing is something you want to do, it would be best to start as soon as possible. I'm assuming you are a Christian, as most non-Christians don't refer to their charitable giving as a tithe. The tithe in the Bible is considered a "first-fruit" tithe - meaning it's the first thing you do with your money after earning it. That's one of the reasons it is such a big deal. In the days that the Bible was written, many were farmers and therefore gave their first crop - they didn't have a guarantee that the rest of the season would go swimmingly. Giving your first and your best indicates a trust that God will provide for your needs (not necessarily wants) and will bless your obedience.

I would challenge you to immediately begin tithing if you are a Christian - if you do, I think you'll find that your other expenses will still get paid, as you work through what you actually need and how you can do without other things. On the flip side, if you always spend your money before tithing, you probably will never get around to tithing ever. Your heart and priorities today are very indicative of your heart and priorities tomorrow and 10 years from now, and there will always be more things to spend money on.

I do think contributing as much to your 401(k) that will be matched is a good idea, but would advise you to hold off contributing above and beyond until your debt is paid off, particularly what you owe to your parents - I would try to pay that off as soon as possible! You can only plan to a certain extent, but if something were to happen and you were no longer able to work, it would be better to have less debt, and therefore require less monthly income, than to have loads saved in a 401(k) or IRA, which can be tricky and expensive to tap into in an emergency.

Good luck! (And sorry this was so lengthy...)

[Mike Hunt]

Hi WC,

Congratulations on getting married soon.

You should start to work some details on how you would execute your 5 year plan- are you counting on making a move into the private sector? If so then I think $100k a year or more is quite possible. Otherwise this may not be possible to achieve while working for your current employer.

-Mike