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

Please tell us a bit about yourself.

I'm a 27 year old single male living in a metro area of about 380k in the Midwest. I currently work for a large Fortune 500 financial services firm, having previously worked for a smaller consulting firm headquartered in Chicago.  I left my relatively high paying consulting gig about 18 months ago to take a position closer to my friends and family.  My last job required extensive travel and uncertainty with long term employment... but the six figure salary, which I had since graduating in 2009, was nice.  I also purchased a foreclosed home about 6 months ago which has been an exciting and expensive project.  I have a bachelor's degree and my MBA, both from public universities in the state system.

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

Income (monthly):

$3,400 - monthly take home, after taxes/insurance/401(k)/etc from my job.  I contribute 4% of my salary to get the maximum match from my employer. My base salary is currently about $60k with bonus potential of around $8k, which is relatively secure but could drop to $4k in a down year (very unlikely).  A $4k bonus (annualized) would add about $200 a month but I don't count it in my cash flow.

Expenses (monthly):

• $1,150 - mortgage payment (including taxes and insurance)
• $315 - car payment
• $300 - food (groceries, restaurants, fast food, etc)
• $250 - utilities (electric/gas/water/garbage/cable/internet)
• $200 - gas/auto maintenance
• $115 - student loan (2.99% fixed, approx 7 years remaining)
• $75 - cell phone
• $65 - car insurance
• $50 - personal/household (haircuts, dry cleaning, etc)
• $30 - 529 plan (for my future kids, or myself)
• $400 - various 0% credit cards (used to fund some home improvements, amortize 12/2014)
• $150 - gifts/charity/travel
• $300 - house expense overflow/entertainment/misc
• $3,400 total expenses

Assets:

• $155,000 - home (2,400 sf home on 1/2 acre lot in an established subdivision, 10 min from work)
• $20,000 - vehicle (5 year old SUV, purchased 3 years ago)
• $37,000 - investments ($27k Roth IRA, $4k brokerage, $5k 401(k), $1k 529 plan)
• $1,000 - cash (severely depleted due to home purchase & remodel)

Liabilities:

• $130,000 - home mortgage (29.5 years remaining, fixed at 3.75%)
• $13,400 - auto loan (2.79% fixed, 4 years remaining)
• $8,500 - "student loan" (refinanced grad school loan to a 2.99% fixed credit card offer, good for life of loan)
• $6,000 - home improvement loans (technically 0% credit card debt, scheduled to be paid in full 12/2014)
• $5,600 - line of credit (final home improvement items, receiving $5k from parents to mostly pay off shortly)

so about $50k net worth, currently.  I've put about $30k into the home so I would expect the appraised value to improve.

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

By far my biggest issue has been the house purchase and remodeling, which of course was way over budget (and still lots more to do).  I used essentially all of my cash for my house downpayment and remodeling, but I should note over $30k of my investments are liquid & can be withdrawn without penalty and I have access to about $50k in unsecured credit ($25k at 8.25%).  I still have about $30k in improvements to complete over the next 24-36 months, so that's on the back of my mind.  I may look to get a new appraisal next spring and try to get a HELOC to help support other improvements. 

I need to rebuild cash and pay off the home improvement loans and line of credit ASAP which would cut out $400+ of monthly cash flow.  The student loan balance is fixed at 2.99% so I'm not as concerned, but would still like to get out of debt the sooner the better (started at $50k student loan balance, so the end zone is in sight).  While earning a six figure salary for 2 years, I applied most of that money towards my student loans & investments but I also purchased an SUV ($40k) and other fun stuff like trips, concerts, etc.

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

Short term - Possibly get a roommate.  My house is huge for a single guy and I can easily get $300/month to rent a room.  The extra cash flow could help cover the home improvement loans, plus cut the utility expenses & help rebuild cash.

Medium term - Complete the home remodel.  The house is by no means extravagant, but it needs basic updates & should appraise north of $200k when complete (mortgage will be about $125k at that point and possibly $20-30k in HELOC).

Longer term - Eventually I'd like to get married and have children, so I'm slowly preparing for that (house, 529 plan, retirement accounts). I work for a great company and group of people, so I'd like to continue to develop my career in this area.  Retirement seems so far off, but I'm trying to get a jump start now so I can relax later in life.

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

"Pennies make dollars" is a phrase one of my older family members used to say.  At the time I thought it was just an excuse to be "cheap" but its so true in my daily life.  It makes me think about the purchases I'm making and thinking how they add up over the course of a month, year, lifetime.

I would also plead with younger people to understand the importance of credit at an early age.  Open a credit card when you get your first job (hopefully before, if you're responsible) to start establishing that credit history.  I see so many talented, hardworking college grads who can't get a car loan, mortgage, or even a credit card (or get charged a lot higher rates) due to no credit history or prior banking relationship.

Comments

[MITM]

Good job EA! Sounds like you've got a good plan in place to improve your financial picture. You're right on by being wary of those home improvement loans. They can get big really fast.

I especially like your thoughts on getting a renter to help you out. They can be great. Especially if you found one that wouldn't mind helping with the home improvement projects.

[DoneIn2040]

I'm in a similar situation. 28, bought a home earlier this year and am planning for the future (max out $17,500 this year in retirement accounts). The home has brought with it unexpected projects along the way so I'm not able to save as much as I'd like.

I decided to get 2 roommates to help pay the mortgage while I do improvements. It is a HUGE help as I'm paying less than $300 to live in my own home. If you can stomach having some folks in your space for a year maybe it is certainly worth it.

Great job thus far. I don't see any place where you're overspending so you're in a good spot thus far.

[getagrip]

Currently it doesn't appear you have much of an emergency fund. I guess you could tap a percentage of your Roth if you have to, just keep in mind you will likely need the money the most when it is getting hammered to it's lowest value or will cost you the most to withdraw (Murphy's a real pain). So I'd recommend building up at least few more thousand in cash on hand.

I'm seeing a lot of money flow here, mostly out of your pockets to enrich others. A seven year loan for a used SUV? 0% loans to be paid on time or else interest is back charged? Looking towards a HELOC of $25-35K soon? A lot of this debt is home equity through improvements, so unless you're flipping the place you're putting a lot into something that won't pay off for a long time. I'm guessing you have a plan and all this is possibly short term, but that plan needs to eventually lead to more money going into your pockets, not enriching others.

Additionally all those payments are fully dependant on you being employed (isn't that the case with most of us :-). Do you have any disability insurance? Might want to consider it rather than a 529 at least until some of these loans are paid off and the home improvements finished.

Looking towards the future I see the saving of only 8% towards retirement and that's too low for even a traditional retirement at 65. I think that could be an issue if not changed soon because if you get married and have children it will become that much harder to save for retirement versus other savings goals. I'd recommend as you pay off the credit card and car payments you redirect some of that money to get a higher percentage into long term savings. If you want to go slow you can start by saving an additional 1% a year, whether in the Roth or company plan or investing, and you'll hardly notice the difference day to day. Usually that ends up as a percentage of pay increases anyway, so you don't notice it. I'd recommend at least 15% of income into long term saving by your mid thirties if you're shooting for a traditional retirement.

I think you're in a good position and with a few tweeks you can be in a great position while not really sacrificing any of your current lifestyle. Best of luck.

[Sarah]

If it's available through your job, you should definitely be looking into disability insurance. Shouldn't be too crazy expensive, but right now your earning ability is by far your most important asset. Make sure you get at least partial "own occupation" coverage.

[Ivy]

You are currently paying almost 60% of your take home pay into various debts - mortgage, student, car, credit cards. And almost nothing into savings. This is not a sustainable situation and it doesn't seem that you have a solution for the near term (flipping the house).
I would definitely try to reduce expenses where possible and get rid at least of one of the loans and free up some cash flow. And not use 529 - you may not go to further school, or have kids, for all you know. Why tie the money in a restricted use account for the small tax savings.
I've been in similar situation temporarily but it's very risky. If you lose your job tomorrow you have very thin safety net.

[Old Limey]

Personally I believe it's almost always a huge mistake to give up a high paying 6 figure income for a far smaller one, especially at your young age. I'm 79 and most of my life is behind me so I have a good perspective on what it takes to have a great life and a great retirement. There isn't room for more than a couple of major mistakes in life and I believe you just made a big one.

It was tough for my wife and I at the age of 22 to leave our friends and family back in England and emigrate to Canada to take a job that was paying 5 times what I was making. Two years later we moved to Denver, Colorado for another nice increase and two years after that we moved to our final destination with another pay increase, a company paid program to get my MS in engineering, and to live in the fabulous climate of the San Francisco Bay Area. Along the way we had 3 kids. One lives in Maui, the other two are in our general area and we see them fairly frequently. I feel the four most important decisions we made were 1) getting married 57 years ago, 2) Leaving England for the New World, 3) Spending our life in a wonderful climate, 4) Making several very successful financial decisions that made us multi-millionaires.

[JimL]

I agree with Ivy and Old Limey. You have too much debt, too little savings and gave up the income that was needed to support this level of current debt. You are only one or two events away from having a big problem. I would hold off on more improvements at this time. Your idea on getting a roommate is good, but you need to try and get more than $300/month. I think you need to focus on ways of improving cash flow by at least $2000/month through, expense reductions, rental income and maybe a supplemental part time job or job change.

[Apex]

@EA,

Your two pieces of advice are:

1. pennies make dollars.

This is true, but dollars aren't worth that much. 100,000 of dollars are what matters. So you are saying that you have been successful in watching the pennies but you have put 30K into your house and plan for another 30K. Much of which is borrowed and you list HELOC and unsecured credit at 8.25% as potential sources of future funds for this.

I think you need to realize a few things about this. First this is pure consumption. If you were fixing it up to sell and pocket the difference it could be an investment but if you are fixing this up to live in and as you say its way more than you need it is not just consumption but it is excessive consumption. Furthermore it is consumption with borrowed dollars which is the worst kind of consumption. Don't be fooled because it is an asset that can hold value. It has carrying costs and loans have the worst carrying costs.

I have another phrase to add to your pennies turn into dollars phrase. That is penny wise and pound foolish. That is what this appears to be. You may be saving some pennies or dollars along the way by watching what you spend on the small stuff but you seem to think that this 60K in current and future spending much of it borrowed is not a problem. It's a big problem. It is a huge set back to your financial health. At this point you are in pretty deep but honestly your best financial move at this point is to fix up the house as quickly as possible, sell it, pocket the profit and get a place that is more what you need. Beyond that it cannot be looked at as an investment.

2. You implore young people to get credit so they can get loans.

This is not going to be likely to help most people's financial situation. See my comments above about loans concerning issue #1. Loans for credit cards, and cars are never good. Loans for houses can be ok, but unless it's an investment property it's not really that good and if it's used to fund a house that is more than you should probably buy or need, then it's purely bad.

You can come out of this in pretty good shape if you sell that house, but if you keep it and keep piling extra money into it to live in something you admit is far too big for you with borrowed money, you are worrying about pennies and dollars and overlooking the 10's of thousands and 100's of thousands of dollars.

You can build wealth slowly over time but doing a few big things right and not doing a few big things wrong is more important than all the little stuff combined.

Sorry this is negative, but I really think these are the issues that are important that you are not seeing.

[Concojones]

EA, the way I see it, you make good money but you're not saving much.

Without spending, your net worth would rise $51k a year ($57k if you maxed out your 401k). In other words, you have a lot to work with!

Right now you're saving around $7k a year (student loan, 401k) that can grow/compound, and another $5k in dead money (increase in home equity). So your savings rate is 10-15%, depending on how rosy your glasses are. Increase that by another 5% and you're in good shape for retirement. Then spend what's left on those home improvements if they mean so much to you.

If I had your cushy income, I'd save a round $40k and live off $17k (single guy in the Midwest).

[Concojones]

In my last post I made a mistake in the math ($51/57k should have been $48/54k) but the message remains essentially the same.

[Mark]

The comments of Apex (as well as Old Limey & Ivy) may be hard to take, but I believe they are spot on. 40K on an SUV (for a single person, no less) with borrowed money? YIKES!!!

It seems like you are doing the typical stuff people do to lock themselves into a lifetime of financial servitude--blowing way too much money on a car & a house.

Downsizing to a lower paying job before you had all your debts paid off (and then took on new ones at a lower paying job) also appears to have been a bad move.

[Old Limey]

Mark,
You have highlighted a very common affliction of many young people. It can be summed up as "I want it all now!"

Sometimes when I pass by homeless people and those standing at intersections or at the entrance of supermarkets and stores holding up their cardboard signs I wonder about their stories and the path they went down before they ended up where they are today.

I would bet that none of them were immigrants. When my wife and I took the plunge to leave the safety of our home country and our family we arrived without enough money to buy a car or to buy a ticket home, that's why we were savers then and are still savers today even with a net worth of over $9M. I would be too embarassed to mention some of my frugal ways because I still have them and have a great difficulty making some purchases. My children often tease me about them but it's very difficult for me to spend the way some of my grandchildren do - another reason I buy used cars, keep them a very long time and take great care of them, especially my 1991 black Mercedes 560SEL.

[MoneySheep]

Many financial advice use the defensive approach, encourage the peon way.

There is another way, the entrepreneur way. This is what American forefather did, and what make America great --Venture out to start your own business.

I believe people younger than 35 year old should strike out on their own. You don't need college degree to do this. If you have one, that's good too.

If you succeed, you will be very rich by 35, and you will have left your mark in the society.

If you are meandering about, you can continue if you choose so, because your business can supply income to your family. You can always quit.

If you fail, you can still fall back on the peon way, work for some business guys, and earn your salary, save and then retire. No shame on that. You have 30 years from 35 to 65. How do you think the companies you work for get started? Why not at least try to be the starters instead of the workers?

[Old Limey]

MoneySheep,
Silicon Valley, where I happen to live, has a great many people of the type that you describe, many of which have become young billionaires. One of my best friends at the Lockheed Missiles & Space Company where I worked for 32 years, was highly intelligent and one of the stars of our department. He had become an expert in a particular field of software that automobile companies were starting to become very interested in. He decided to quit and form his own company. It was, and still is, a two man company. To find the other man he needed he approached a professor he knew at Stanford University and sought out thir best student in the particular software field that he needed help. Once the software was at the stage where it was marketable he approached all of the likely buyers with descriptions of its capabilities. One morning he was sitting at his desk when the phone rang. The caller said he was from General Motors. My friend thought it was a crank call and hung up. Shortly thereafter the caller called back - he really was from General Motors and they became his first customer. Chrysler and Ford quickly followed suit. Today he has become very wealthy and lives in a gorgeous home in a very prestigious area with great views over the Santa Clara valley and the Santa Cruz mountains. His story has been repeated very many times in this area - it's a hotbed of innovation.

[Mark]

@Old Limey...

In general, I agree with you regarding young people. But I would argue this "live for today and everything will magically work out" mentality started with the Baby Boom generation in the 60s & 70s. We now have a very large portion of people in their 50s & 60s who are not financially prepared to retire. The children of the boomers are just the product of what their parents (didn't) teach them.

As far as homeless folks go, they most definitely have a "day to day" mindset. I will say, however, most long term homeless folks come from homes where there was serious physical & sexual abuse (and the attendant drug/alcohol abuse that goes along with the other two)...and those are huge barriers to overcome.

There is no question, most legal immigrants are better with money. But they are a self selected group. As you say yourself, both you and your wife came from fairly nurturing 2 parent families. That makes a huge difference in terms of wealth building.

[Mark]

@MoneySheep.

I don't think our poster is psychologically ready for entrepreneurship. If he had the right mindset, he could have stayed at his 6 figure job in Chicago and kept his expenses low ('cause Chicago's COL is pretty reasonable compared to the NE metros or California). And instead of buying a 40K SUV on credit, he could have invested the difference. By his early 30s he could have been at least half way to financial independence, but that's not likely to happen for him now.

[Old Limey]

@Mark
I was born in 1934 and still remember the declaration of war between England and Germany in 1939. Looking out of my bedroom window I watched the soldiers marching down the main street, with bands playing, and on their way to the railway station and a train to take them to one of the embarkation locations. Being raised during WWII with the air raids and strict food rationing made a big impression on me. I also remember my mother taking me down to the "Clothing Exchange" where I could exchange the clothes that I had outgrown for larger ones. Another vivid memory I have is of a FW190 German plane passing so low over our home I could see the pilot, then two bombs falling from it followed by large explosions when they hit a nearby hotel that housed many Canadian airmen, killing quite a number. BTW the plane was being chased by Hurricane fighters and was shot down as it passed over the coast nearby. I think this is the kind of childhood that breeds frugality. The government motto that was pasted up everywhere was "Waste not - Want Not!"

[Mark]

@Old Limey....I think that is why younger generations, starting with the Baby Boom generation have so much trouble saving. Yours was the last generation that had the experience of WW2 and the Great Depression. In many respects it simply wasn't possible to buy a lot of consumer goods in those days because of rationing, etc. People were effectively forced into saving, first by the Depression, then by the War. Younger people didn't have those experiences, but in some ways that was a negative....It's not human nature to be good at thinking long term and subsequent generations haven't been forced to as you were. I think it also helps that you're an engineer. I know I've said this before, but engineers get it when it comes to money compared to the populace at large.

[Old Limey]

@Mark
I agree with your comments on why saving comes naturally to some people whereas spending comes naturally to others.
I have only ever owned two homes, the first was purchased in 1963 and the second in 1977. Both appreciated greatly. However when we decided it was time to step up and sell the first home I was gung ho to boost my ego and prove my success by moving to a prestigious development in a small village 7 miles away from where we were and also another 7 miles away from my work. It would have also meant that our three kids would have to move to new schools and then make new friends in a new school district. That's when my better half started to influence me. She was quite opposed to uprooting our kids and convinced me that we could move a mile away to a new custom home development of really nice homes on much larger lots, all unique and stay in the same city and school district. In retrospect that was one of the reasons I married her after realizing in many ways she has more commonsense than me. It seems that an engineer and a teacher make a well balanced combination.