Reader Profile: CH

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

Please tell us a bit about yourself.
 
My wife and I are both 29 and have two young children. I have a bachelor’s degree in Math and my wife’s degree is in education. I worked for a very small company for my first six years after college in an engineering role and now work for a Fortune 500 company in a technical sales position.
 
We live in a suburb of a major midwest city. We both prefer a rural lifestyle and at some point would like to relocate to a more rural area and live on a small farm or ranch. I thoroughly enjoyed CT’s reader profile from a few months back.

We are very self-sufficient in everything we do. I do all of our own vehicle and home maintenance and repair as well as some large home improvement projects that most would leave to a contractor. My wife cooks nearly all of our meals and buys nearly all of the kids clothes and toys second hand. She potty-trained both kids by 20-months and used cloth diapers 75% of the time anyways. She also breast fed them both almost exclusively. These things are direct reasons why we are able to save at the rate we do while still feeling like we live very comfortably.

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

I am the sole wage earner in our family. My wife is a full-time stay at home Mom and will remain as such for at least the next the five years. I made less than $40k my first year out of school and while I did have a couple of nice salary increases, I feel I was considerably underpaid throughout my time with my previous employer.

In my current position I have a base salary of approximately $64,000. I also receive commission checks throughout the year that could range anywhere from $10,000 to $30,000. This year it will be right around $30,000 for a total salary of $94,000. My total salary last year was also right around $90,000, but my finances are all based on an annual salary of $80,000 as that is a much more reasonable number to regularly expect (excluding any annual raise), as I know I have made some sales that simply won’t repeat.

I put 6% of my salary into a 401k. I get a 50% employer match on that and get another lump sum equal to 3% of my salary every year. Essentially, I put in 6% of my salary and my employer puts in another 6%.

As you’ll see below, I also have a brokerage account I manage myself. I do not consider myself an active trader by any means. I usually hold between 4-6 different stocks and buy with the intention that all gains will be long-term gains. I do all that I can to stay in the 15% tax bracket, thus keeping my long-term capital gains rate 0%. I opened the account in 2009 with a very small investment and have had extraordinary gains ever since. 2013 has been no different with YTD gains over 30%. I could probably write an article on my trading philosophy, but in short I would sum it up by saying I am a value investor. I do not expect these gains to continue forever, but I am also very confident in the value of my current holdings.

Take home pay is approximately $5000, again based on an $80,000 annual salary.

Expenses

• Mortgage – $850
• Property taxes and Insurance – $400 (I do not use an escrow account so I put aside an extra $400 myself each month. I do not consider this account as an asset.)
• Student Loans – $75
• Car Insurance – $33 (I technically pay this in a lump sum each year of about $400)
• Utilities - $275 (Average)
• Cable, Internet - $90
• Gym - $50
• Preschool- $80
• Wife spending - $1200 (This includes all groceries and regular necessities)
• My spending - $200 (This covers vehicle and home repairs as well as some of the miscellaneous stuff. More on these two below.)
• Total - ~$3200

We each have our own small spending budgets. I manage the household finances almost exclusively, but my wife has $1200 that she can choose to spend however she wants, with the only caveat being that she must pay for all the groceries and other basic consumer goods. This gives her the autonomy to spend a little extra money however she wants, and keeps our overall budget reliable. I do not ask her for the exact breakdowns of where all of that money goes and this works very well for us. My $200 prevents her from incurring too many unexpected expenses.

Savings

• 401k - $9600+ annually depending on commissions.
• Brokerage Account - $1500/month
• 529’s - $150/month

This leaves about a $150 excess each month. Extra money at the end of the year gets split between home improvements and the brokerage account. I will also make a significant contribution to my HSA at the end of this year both to stay out of the 25% income tax bracket and because I know we will have significant medical expenses next year where we will hit our out-of-pocket maximum.

Rental

• Rent - $800
• Mortgage - $430
• Taxes and Insurance - $170
• Expenses - $20 (This is an actual average. I keep at least $1000 in our separate rental checking account for the unexpected.)
• Cash Flow - $180

This is a newer townhome that my wife lived in before we were married. I would like to sell it in the near future. It is new enough that it requires very little maintenance. There have been years where I did not have any repair or maintenance expenses at all. When something does need fixed, I usually do it myself.

Assets

• 401k/Traditional IRA’s - $45,000
• Roth IRA’s - $80,000
• Brokerage Account - $115,000
• General Savings - $12,000
• 529’s - $6000
• Primary Home - $250,000
• Rental - $85,000
• Vehicles - $8000
• Total - $595,000

Liabilities

• Student Loans at 3.5% – $7500
• Primary Mortgage at 3.625% - $183,000
• Rental Mortgage at 3.375% - $57,000
• Total – $247,500

Net Worth: $353,500

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

I would not say we have any specific issues. At this point we simply concentrate on saving as much as we can. Up until the start of 2013 I maxed out a Roth IRA for both myself and my wife and did not regularly contribute to the brokerage account. This year I have already maxed out a traditional IRA in her name and have made the decision that all other savings will go into the brokerage account for the foreseeable future. I will maintain my 401k contributions. I think between that contribution and our current retirement plan assets that we are comfortably on track to have enough retirement income after the age of 59 ½.

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

My wife will have a master’s degree by this time next year. Again, it will be years before she goes back to work as we will likely have one more child and she will remain at home at least until they are in school full time. I estimate that to be about seven years from now. At that point, she will likely work part time. Her master’s degree is very specialized and while the income opportunities are not great, the opportunities for part-time work at a decent pay are tremendous.

As for me, I am content in my current position and I feel my employer treats me very well, but I cannot see myself as an employee for much longer. I will likely choose one of two routes. I will either move on in two or three years and likely buy and run an existing business, or I will continue with my current employer for about seven years until my wife works again. I have good reason to believe I will continue to get annual raises of 3-5% and in 3-5 years I should be the front runner for a major promotion. This probably sounds like a great scenario to some, but I do not feel fulfilled unless I am the one making the key business and financial decisions. I think it is that trait that has drawn me so much to the stock market as I thoroughly enjoy examining company’s’ financials and making trading decisions accordingly.

At the end of seven years, I would ideally work and manage a farm while my wife works part time outside of the home. My goals would simply be to make enough money to cover our living expenses. I hope to have enough saved in other accounts by that point that additional savings won’t be necessary and we can simply let our money grow. I would consider this my ideal retirement. It’s hard to see myself not working, as I enjoy both the physical and mental aspect of regular chores and decision making.

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
 
For those that are looking to retire early or at least escape the career mentality like myself, I like to think of this as my “fill the gap strategy”. If I continue to fund my 401k over the next seven years and assume an 8% return, we will have about $2MM in retirement savings at the age of 60 when we can start pulling it out of the IRA’s. My focus now is to fill the gap between the time I quit my job and the time I can start withdrawing from the retirement accounts. I plan to do that with a combination of the brokerage account, my wife’s future part-time income, and hopefully some farm income.

As for advice, I have to go back to what I started on in the first section. Don’t just teach yourself to be good at your job, but teach yourself the other skills necessary to be self-sufficient in the rest of your life. A great deal of money can be saved when you are able to fully provide for yourself with your own labor.

Also, know your tax situation and take full advantage of it. I will have my taxes completed for 2013 by the last week in December and then make one large HSA contribution to keep me in the 15% bracket. I don’t want to pay a single dollar in taxes that I don’t need to, but I also don’t want any extra money tied up in an account that I can’t readily access.

Finally, for some detailed advice, don’t ever have a car payment and only own a vehicle that you can afford to replace. I am lucky enough to have a company provided vehicle that covers my daily commute, but my other vehicle is 15 years old and my wife’s daily driver is 10 years old. They are safe, reliable vehicles that we obviously don’t have much money invested in. We both drive safe and carry liability insurance only on them, thus reducing our cost of ownership even more.

Comments

[Clarisse @MakeMoney Your Way]

Thanks for sharing your reader's financial income, I really enjoyed reading his income and expenses. Surely I will look forward in your next reader guest profile.

[MITM]

Wow. This interview resonated with me more than any other

Except for the brokerage thing. Kudos to the interviewee for doing it AND being good at it. I used to pick my own stocks but it took too much time and I'm not confident enough in the future of specific stocks to put my family's money on the line. I much prefer index stocks or a mix of low load mutual funds.

Also, it is nice to see someone who doesn't make over 6 figures use their money so wisely so early. It's always interesting but a bit hard to read the millionaire interviews about folks who make gigantic incomes (well into 6 figures) because I'm so far away from that scenario.

[K]

2 questions... Do most people include 529 accounts in their networth calculations? I don't because I consider the ownership of that money the child's. Secondly, are you able to contribute to an IRA for someone who has no income? I see the wife is a full time stay at home mom in this profile which causes me to assume no income.

[FMF]

K --

1. I used to include 529 values when the kids were young, but as they've gotten closer, I've begun to offset that "value" with a "debt" account in Quicken, so by the time they get to college the two will net out to zero.

2. I don't think you can contribute to an IRA when someone has no income...

[Rachel]

You can contribute to a spousal IRA if they have no income. I believe it is for a traditional IRA only (no Roth option).

[SR]

You can contribute to a Roth IRA for a spouse with no income, provided that you file jointly.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

http://www.irs.gov/pub/irs-pdf/p590.pdf

[Gus]

K --

1. I understand why you'd exclude the value in your 529 account from your net worth calculation. But according to your view (that this value is not yours but the child's), then what about costs for baby food, preschool, diapers, and day care? Do you have these costs included in your Liabilities to offset your Assets? If not, why not? You know you'll use that money for your child, which means that money is his/hers as well.

2. SR is correct -- both spouses may contribute if they file jointly.

[CH]

You are allowed to contribute to either a traditional IRA or a Roth IRA for a spouse with no income under the spousal IRA rules. You still have income restrictions to be aware of, but we are nowhere near those for her. My only option is a Roth IRA due to the company 401k plan, but as I mentioned I no longer desire to fund my IRA anyways.

As for the 529's I include them in my net worth as legally speaking my wife and I are the account owner's and the kids are the beneficiary's. Also, it is my hope that when that time comes the kids will have scholarships. If that is the case, then we will get to withdraw that money penalty free and move it directly into our other savings.

[Ivy]

After a certain income level you can't contribute to traditional IRA for a non-working spouse, you can put the money in IRA but you can't deduct them from your joint filing. I don't remember the exact threshold, but one year I inadvertently exceeded it and IRS sent me a "nice" note about it next year and collected interest. That's when I stopped doing my own taxes :-)
However, with the backdoor Roth option this is now not a problem, you put the spousal (or yours) contribution in an IRA account and convert them to a Roth account next day. No interest, no deductions, just filling a form 8606.

[EAS]

you seem to be in very good shape...kudos. However, you mention you want to take full advantage of your tax situation. Perhaps I'm missing something obvious, but you are currently investing $9,600 in pretax earnings in the 401k and $18,000 in post-tax brokerage accounts. It seems obvious that you could flip the amounts you place in 401k versus brokerage - i.e. max out your 401k at $17,500, reduce the brokerage savings to $10,100 - which would immediately reduce your taxable income by $7,900. A pretty big immediate win for you...

[CH]

EAS, thank you for the compliments. As appealing as it sounds to reduce my tax burden even further, the additional savings do not outweigh the opportunity cost of putting that money into an account that I can't access for another 30 years. I should be safe after the age of 60 without any additional 401k contributions, so my goal to quit working as an employee trumps the immediate savings.

[JW]

EAS, I believe CH is doing the right thing. No need to contribute anything extra to a 401K if you are in the 15% tax bracket. Just contibute enough to get the match. In my case, I contribute 10K to my regular 401K and 7.5K to my Roth 401K. This keeps me right at the 15% - 25% bracket cutoff.

JW

[EAS]

CH: To each his own I guess....but from a factual standpoint (JW), CH is in the 25% tax bracket. Even if he wasn't, I'm not sure what your point is - increasing 401k contributions would only serve to "decrease" your taxable income.

The gist of my comment was that he currently grosses $94,000, has taxable income of $84,400, and saves about $27,600 between both 401k and after tax brokerage accounts.

I proposed he could instead have a gross of $94,000, taxable income of $76,500 and still save the exact same $27,600 between both accounts. For those counting, that nets CH an additional $1,975 in extra money annually (he's in the 25% tax bracket).

Over time, that can be significant. CH could take that $1,975 and increase his annual savings from $27,600 to $29,575 - without actually saving another dime. You don't have to be a mathematician to extrapolate what that money could turn into over time.

I suppose there are reasons to want that money available and not locked in a 401k. Personally, I have found this to be a great tactic to protect yourself from yourself. Sometimes the ability not to get to your money is a good thing. I am 45 and can promise you the time will go quicker than you think.....If I went back in time and witnessed the 29 year old me try to reduce 401k contributions, there would be a fistfight.....

[CH]

EAS, I am already in the 15% bracket. You are leaving out all of the other deductions. My actual W-2 income is looking to be a little less than I estimated when I wrote this. It will probably be about $92,000 pre 401k contributions. Take out 6% for the 401k, $6450 for the max HSA deduction, $5500 for my wife's IRA, $3900x4 for personal exemptions, and about $16,000 for itemized deductions and I will have only about $43,000 in taxable income; excluding capital gains.

I will then be reporting about $30,000 in capital gains and qualified dividends at a 0% tax rate, since as long as the total of your capital gains and other income stays under the 25% bracket threshold the capital gains are tax free.

In this way, I can continue to strategically record my cap gains so that my "taxable" brokerage account essentially works exactly like a Roth IRA. Now I'm sure (hopefully anyways) my gains and income will exceed the threshold to the point that my capital gains will be taxed in the future, but they will still only be subject to the standard 15% cap gain tax rate.

In essence, this gives my salary room to grow to over $110,000-120,000 (depending on if you count IRA and/or HSA contributions in future years) before anything hits the 25% income tax bracket. If I were to max out my 401k, it would save me roughly $1500 on my tax bill now, but of course it would be taxable as income when I withdraw it. In actuality I have the best of both worlds right now. A brokerage account that is taxed like a Roth and the freedom to access the money at any time! Hence my advice to understand tax law and how to make it work in your favor!

Besides all of this, as I mentioned I anticipate having plenty of money in our retirement accounts by the time we are 60 to live the type of life we would want. Regardless of the tax situation, it does me no good to have any more money in those accounts than I could otherwise spend if that money can benefit me some time significantly sooner.

[EAS]

CH: Fair enough - just my two cents. I wasn't sure what your deductions would be. (1) Given what you describe, I would imagine you are certainly in the sweet spot for the dreaded Alternative Minimum Tax and that continues to be a trap you'll find yourself in with our government searching high and low for revenue....I can't imagine you avoided the AMT on your last tax return(2) $1,500 is still not growing on trees where I live, but I will be on the lookout, and (3) to each his own! Good luck...

[CH]

EAS: No worries! I never would have submitted the reader profile if I wasn't ready for a counterpoint or two, so I welcome the dialogue.

As for the AMT, I am a ways off before it would apply due to the preferential treatment it gives to the mortgage tax deduction and above the line deductions. I can't give you the exact numbers without refiguring it, but last time I did I know I was far enough away to not worry too much about it.

The AMT was designed to tax those that are taking a bunch of deductions, not those that have lower rates due to capital gains. My itemized deductions will be less than $4000 over the standard deduction. My schedule D is relatively straightforward as it only deals with stock and I have never had a loss carryover that would affect AMT. In a nutshell, the only addition to my income in regards to the AMT is for local taxes since even the AMT allows for the mortgage interest deduction.

[Apex]

@EAS,

CH is no where near owing AMT tax. My AGI has been north of 160K for a few years with Taxable income north of 110K, well into the 25% bracket and I have never paid AMT. Granted I am getting pretty close, but CH's numbers are far less than that.

Concerning the tax deferral argument, your take seems to be that the best tax strategy is to always pay the least amount of tax you can in each year possible because that is giving you "more money." This is incorrect tax planning strategy. Most people do fall into this kind of thinking about taxes but it overlooks the more complicated long term implications of various tax decisions. The correct strategy in most situations is something called tax smoothing. That is to smooth out your taxable income over longer periods of time. If you talk to good tax accountants they will tell you this is a key aspect of good tax planing (among other things), but that most people are more interested in paying as little tax as possible on the current year return because they believe this saves them money, but that is incorrect.

If you know you are going to have a relatively high or increasing income and are likely to continue to have a relatively high and perhaps even higher income later in life the correct strategy is not to minimize taxes now but to make sure not to push off too much tax for later when it will be taxed at higher rates.

CH is doing something extremely smart here and not understood by many. In fact I will use a phrase I have used in describing this to others. If CH were to allow his taxable income to fall significantly below the 15/25% bracket cut-off he would be doing something that I refer to as "wasting his 15% bracket." The tax code is designed to give lower income earners lower tax rates. It does this in a way that gives everyone a certain amount of income that is taxed at lower rates. Even if you make a very high income, you get the same amount of your income taxed at lower rates as someone making much less than you does. But this is done in a way that cannot be shared across tax years. Each year there is only a certain amount of income that you can have taxed at 15% or less. If you do not use it all in a given year, you lose it, FOREVER. That means if you do things to get your income artificially lower in a given year or years relative to your long term average then you have wasted a portion of your cheaper tax rate that results from the tax bracket system. Eventually you will pay tax on that money because the taxable nature of it has not been eliminated, only deferred. You will pay tax on the deferred money as well as any gains on it. If you will be in a bracket higher than 15% when you pay tax on it, what looked like a money savings is now a money loss.

As an example that is not 401k related, my dad is a farmer so he has the ability to move expenses and income around from year to year by paying some expenses ahead and deferring some income into future years by selling grain but having the buyer hold the check until the next year. Farmers play these games all the time to affect their taxes. Unfortunately it is not always used in the wisest manner. My dad one year told me proudly how he had gotten his taxable income down to 17K and would owe very little tax that year. He was very happy with himself. Unfortunately it was already too late for him to fix this very costly mistake. He had gotten his income so low that he had "wasted" his entire 15% bracket for that year. He is retired now and getting rent from his land, drawing down his retirement funds based on required minimum distributions, and collecting social security. His taxable income exceeds 100k every year, well into the 25% bracket. He constantly complains how he pays way too much tax and cannot get his taxable income down to a number he would be satisfied with. In fact he is still playing games trying to keep his income lower by taking his rent payments for one year in the next year. This is not an advisable situation to let yourself get into. What he would give now to have paid some cheaper tax 10 years ago on an extra 50K. Trying to defer too much income into the future to pay less taxes now is a mistake.

In essence that is exactly what a 401k is doing. Using a 401k to drastically lower income when your taxable bracket is already pretty low and likely lower than it will be in the future is not good tax planning. Furthermore based on his current capital gain strategy he is taxing his current gains at 0%, not even the typical capital gains rate but at 0%. If he were to put more into his 401k, that extra money would not only likely be taxed in the future at 25% but his gains would as well because gains in a 401k do not even get preferable capital gains treatment. When he gets into a higher bracket, his gains that are outside his 401k will still get preferable capital gains tax treatment but the gains in the 401k will not, and will all be taxed in a higher bracket.

What looks like an immediate $1500 savings right now is not a savings at all. It's a loss when you go to actually get your hands on the money.

[JW]

Apex, well stated.

[EAS]

Apex: Whoa - trying to make sure ones income sits exactly at the top end of the 15% tax bracket sure seems like a lot or work to me! I think we're well into the nitpicking area now. I imagine this will be even more difficult for young CH as he continues to make more and more money, invest well and advance in his career. One day - probably sooner than later - he won't find himself in the 15% bracket - and I can promise you that it won't be anything to sulk about!

This reminds me of some of my fancypants acquaintances who told me I was silly for paying off my mortgage because I'd have too much income and miss out on that $2,500 reduction in my taxes from mortgage interest. I know it sounds silly, but I'd rather pocket the $18,000 annually than take the deduction.

My original post was one of admiration - I was congratulating CH on some damn, fine work. I merely made a casual observation that he could pocket a little more money by maxing out his 401k. I will still stand by that advice, I think CH agrees that is factual - he just chooses not to have that $ tied up for 30 years in the 401k and is fine with forgoing the additional $1,500 he could pocket annually.

I have no problem with that. There are a lot of people that would agree with him. Kudos again to him. Best to CH, and to you, too, Apex....

[Apex]

@EAS,

My post obviously fell on deaf ears here at least with respect to the larger point I was making. The post was intended to provide general information to a broader audience so that is fine.

However, I will state the crux of it one more time. This is not just about having access to the money now versus having more money for later as you seem to think it breaks down to. The point of the detailed post was to point out how certain activities that defer taxable income can actually cause you to pay higher taxes later and thus give you even less money in the future than if you just pay the tax now.

Instead of address that you simply restate your position and argue that:

1. It's a lot of work.
2. It's nit picky.
3. My point reminds you of people who you consider to be fancy pants.
4. Your point is factual and CH agrees.

There is not much I can say to that list now is there?

[JW]

@EAS,

If you have a good idea of what your income and deductions will be for the year it's not a lot of work. For 2013, I want my income after deductions to be at $72,500. It takes me about 10 minutes in January to calculate how much I should allocate to a regualar 401K and how much I should allocate to a Roth 401K to hit this target. My calculation is usually within a few hundred dollars of the 15% cutoff. I think most people would agree a Roth is better for someone who is young and in the 15% tax bracket, like CH.

Although APEX nailed the explanation of this strategy, this is probably a good topic for FMF to explore.

[EAS]

Apex & JW: In the interest of not extending this disagreement, I'll defer to your expertise. You both have fine points. Also, I retract the fancy pants comment....:) Best...

[Gus]

Wow, Apex, kudos -- you nailed it again. Great explanation! I've really been irked about this "mistake" people (including me) were making regarding their tax myth that deferring the most tax now is the best strategy. When I explained to them why they would actually save less (lose more) in the long run in certain circumstances (i.e. 15% bracket), most of them never really got my point. However, now if I showed them your post hopefully they'd understand it better. But obviously, you can teach calculus to anybody, but not everyone will get it. :)

[Apex]

@Gus,

Thanks for the comment. If my explanation can shed any light on it for others that would be great. It is a complicated topic and a bit counter intuitive. It also feels wrong. How can paying more money in taxes save me money. Just feels so wrong. So there are some walls that need to be broken down before people can open up and at least consider the points.

[Aks]

It's great that you are self-sufficient and manage a lot of auto and house maintenance yourself . I have different rationale in my case. I hire services from different folks and service centers. I would save a bundle surely if I apply myself and of course it would add to my net worth as well as free up more $ for charity. But I feel I contribute better by providing work to so many people. I help the economy and it is better than charity. It frees up my time where I can spend more time improving my skills, doing overtime and overall be better at what I do. By doing everything yourself you are getting rich but you are not contributing to economy. That's my take on it. Of course it may not be perfect and I would to hear what readers think about it.

[CH]

Aks: I'm here to support my family and do what's best for them, not the "economy". I'd argue my additional savings/investments helps it more anyways. If someone desires to supply me with a service, the burden is on them to generate enough demand from me to pay for it.

[Sarah]

Apex: for your analysis to be complete, you need to allow for the time value of money. This is the chief reason to delay recognition of income. In this particular case, I suspect your analysis is correct, but you can't discuss the problem in general terms without taking that into account.

[Apex]

@Sarah,

You are correct. The topic is already a bit complicated so adding time value of money really muddies the waters. But in fact that is exactly why some farmers do this in the extreme. Every extra dollar they save in taxes now regardless of the tax bracket is one less dollar they have to borrow to fund their operations for the year.

So you are correct that it is a little less clear cut than just comparing brackets. However the issues that businesses face with needing to borrow money to fund operations are different than what most W2 employees face. The time value of money benefits for a business are greater than for a W2 employee even though there are still benefits for the W2 employee as well.

An example with real numbers would add clarity and would probably be instructive. I am not going to do that right now but any discussion that explores this in greater detail should include real number examples.