Reader Profile: SP

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 SP. She answered my questions (in bold italics below) as follows:

Please tell us a bit about yourself.

I’m a late 30s married woman living in a suburb of a large city in the south.  I have a BS and an MS, both in engineering.  I’ve worked for the same company for more than 10 years.

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

Hubby and I are DINKs.  He is also an engineer and we work in the same industry, though he has worked for his company longer.  We both make six figures.  Our net worth is right around $1M with about $925K being investments/savings.

The net income listed below is after health insurance, pre- and post-tax 401k contributions (we both get a 50% match on the first 8% of contributions) and taxes. We also make $3000-5000/year in side income but we don’t account for this in our budget since it’s variable and not guaranteed.

We have no debt other than our mortgage (7 years into a 30 year mortgage but we’re paying as if it’s a 15 year).  We currently have 13.8 months of expenses saved – 6 months is allocated for emergency funds and the remainder is for future car purchases (plan to only buy cars with cash going forward) and other large expenses such as home improvements.

• Net income   $11,560/mo
• Tithes/charitable giving 1500/mo
• IRAs    917/mo
• Savings   1355/mo (recently increased)
• Mortgage   3350/mo (includes the extra payments)
• Food    875/mo (groceries and dining out)
• Cable/internet   185/mo
• Cellphones   115/mo
• Utilities   325/mo (electricity, gas, phone, alarm, water, termite, garbage)
• Auto related   400/mo (insurance, gas, tags, emissions, basic maintenance)
• Travel    1100/mo
• Personal   300/mo (clothes, hair/grooming, etc. for both of us)
• Other    270/mo (gifts, entertainment, housecleaning, gym, sports, etc.)
• Scholarship fund  208/mo (new line item)
• Investments   660/mo (new line item for investing outside of retirement accts)

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

I’m okay with our spending.  The one area I think we can do better on is food spending (we both eat lunch out at work almost every day) but I’ll admit we don’t try that hard.  The ‘other’ category is also supplemented by any side income we receive (the rest of that income goes to taxes, tithes and a SEP-IRA). 

I feel we are doing well financially so my main concern is how we can do better.  A lot of money over the past few years has gone to debt reduction (my grad school loans, purchase of two cars, cash in to refi the mortgage to a better rate, extra principal to eliminate PMI).  We also did a deck project this summer that hubby had been wanting for years.  With those out of the way, we have a lot more disposable income (hence the two new line items and increased savings amount).  

We have plans to consult with a fee-only financial planner this year in order to review our financial plan and portfolio/current asset allocation.  We both max out our 401k and IRAs but I would like to save more for retirement.  We both currently have pension plans but I don’t want to rely on those plans being continued until we retire and/or us both staying with our current companies until retirement.

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

Our plans for the future are to retire even earlier – current plan is to retire when I’m 55 (hubby is a few years older than me) – and to be more charitable.  We plan to start a small endowed scholarship at my alma mater next year but other than that, there are no definite plans. 

Buying a rental property is a strong possibility.  We made a couple of offers this year but both deals fell through.  We’re taking a break for now but may resume our search in a few months. 

We don’t have any nieces or nephews yet but would like to assist with college for any we may have in the future when the time comes.  I’m also interested in possibly working overseas at some point.   I’ve always wanted to live overseas so I figure, why not.

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

One thing my father impressed upon me was ‘part of all you earn is yours to keep’ so I’ve always saved something starting with my first summer job at age 16.  In retrospect, I could have and should have saved more but I don’t feel like I’ve done that poorly, all things considered. 

My general philosophy could be stated as – take care of the dollars and the cents will take care of themselves.  I automate the heavy hitters (such as giving, saving and investing) and don’t worry so much about setting a firm budget for the rest.  I’ve always been somewhat frugal by nature (thanks again dad) and am a firm believer in intentional spending. 

To me, intentional spending means not being frivolous with money and spending only on what’s truly important to me.  Having the latest cellphone or electronics is not important to me (recently bought my first flat screen TV only because the 10 year old tube TV died) but we spend a huge amount on travel because it’s something we both love. 

All that said, I think there’s always room for improvement, which is part of the reason I decided to do a reader profile.  

Comments

[Clarisse @ Make Money Your Way]

Wow, I'm so impressed that you have tithes/charitable giving 1500 per month, that's so generous of you. Just like you I'm not really a techie person, latest mobiles are not important to me as long as I have a cellphone to use for communications.

[FlyerM]

Thanks for sharing SP, looks like you've got great control of your finances.

One question though, how is it that you don't "income out" of IRA contributions? Do your 401k/charities/interest bring your MAGI down that far? or are your IRA contributions not tax deductible?

[SP]

@Flyer M - Our IRA contributions are not tax-deductible. We do a 'backdoor Roths' every year.

[Luis]

You are doing alright for yourself, really. I'd say if your goal is to retire early then you could divert all of your $1355 savings and $917 IRA into your mortgage and taxable investment accounts for early retirement spending. If you just keep your 401K matching you'll have more than enough come full retirement age with pension and social security to boot. So then now your trajectory of early retirement is actualized a lot sooner. Play with it and see what the effects are for you personally. Then, time the payoff of your mortgage with your newly calculated retirement age.

I'd forget toying with rentals in your particulary case since you are financially free from needing the boost and then avoid the headaches that they will cause you.

[SP]

@Luis - The savings will be reduced in another two years or so once we have enough set aside for replacing both vehicles in the future. Why would you suggest paying off the mortgage even earlier? The interest rate is low (3.25%) so we're likely to get a better rate of return by investing. We definitely plan to increase the amount going to taxable investing over time as our income increases and we reduce savings.

My thought for the rentals was another stream of income that would lower the amount of nest egg needed to retire, particularly since I'm not that confident in the pensions and SS. A lot could happen to either between now and retirement age.

[610Alpha]

You and your husband need to figure out what your goal is for your nest egg. Then I would suggest that you go to a compound interest calculator website and play around with it using a "safe" number of CAGR as your Interest rate to see how much additional $/month it will take to get to that goal, based on a 15-17 year time to retirement. Then you and your husband get to decide what areas to cut in your budget or increase your income. I know it sounds like I am oversimplifying it but in reality it is this simple. We can all make suggestions and you guys might like them or not so it doens't matter. What matters is what you guys are willing to give up to accomplish this goal. Give up some lifestyle or some time (to increase income).

Ex. Recently my wife and I cut out cable TV, we got a ROKU 3 with Netflix ($8/month), we still have internet. This alone saved us $100/month.

6 Sigma would tell me to look for the quick win, low hanging fruit.

[Luis]

@ SP To clarify your question about mortgage payoff....only payoff earlier if you see the opportunity to retire earlier than 55. Reducing expenses in retirement helps you live off of less reducing the risk of draining your investment income. Then, you could potentially withdraw 4% safely and only touch principal thereby protecting your nest egg. Remember also that you do not want to be less in stocks and more in muni bonds while in retirement. Having all this should be more comforting especially since you do not want to have to depend on pensions and social security.

[Luis]

correcton* you want to be less in stocks...

[JimL]

You are in great shape. I have never regretted paying off my mortgage. Sure, you might be able to make more than 3.25%, but it is never guaranteed. You never now when things can change and it is good to have no debt, including no mortgage debt.

[JTS]

Was a great read. Thanks for sharing.

[Ginger]

I am confused. If you are paying it off like a 15 year, why not refi into the 15 year and lower your interest rate?