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

Please tell us a bit about yourself.

My husband I are both 36.  We have been married about 18 months; this is the second marriage for both of us.  Between us, we have 3 elementary-school-aged children.  We do not plan to have any more.

I graduated with no student loans and have been working for 14 years.  My husband dropped out of college after a year and has been in his industry for almost 15 years.

We live in a suburb of a large city in Texas, which has relatively low COL, no state income tax but really high property taxes.  We moved to this particular town last summer (from a small town 50 miles away) so that we would be closer to our childrens' other parents and so that I would have the option to pursue other job opportunities.

Describe your financial situation.

Income:

I am in IT and make $105k per year.  I changed jobs last month.  The new job cuts my commute time by 15-30 minutes per day, has a higher 403b match, offers more room for advancement, and is allowing me to learn a new and highly in demand technology.  However, I took a 3% pay cut, now have to pay tolls, and am no longer eligible for a bonus (averaged 4-12%) or a pension.
 
My husband is an auto tech and makes about $36k per year.  He has been at the same very small shop for over 10 years; they offer no benefits.
 
I receive approximately $22k per year in child support for my biokids.   This will decrease in 10 years and go away completely in 13 years.
 
After taxes/deductions/403b, we net about $8200/mo
 
Annual Savings:

We are currently saving about 20% of our gross income each year. Currently, this breaks down into:

• 403b: 8.5%  (13% of my salary.  My employer will match 6% dollar-for-dollar after 2 years of service. )
• Roth IRA: 4.375% (max out H's; $1500 for mine)
• Brokerage Account: 1.5%
• Short-term Savings (cash): 2.25%
• College funds: 3.625%

Of this 32k, 4k is deposited into the college funds in January when I reimburse myself from the dependent day care account (pre-tax money). Since the 403b contribution is also pre-tax, the rest of our contributions add up to about $1233/month out of our net pay.
 
Monthly Expenses:
 
Fixed expenses:

• Child support for his bio child: $250;  this will end in 11 years
• Mortgage (incl ins and taxes): $2000
• HOA: $40

That leaves about $4600 for the rest:

• Day care: $1000 (average: more expensive in summer/holidays, less during school)
• Automotive (tolls, gas, insurance, maintenance): $700
• Utilities: 335
• Cell phones: 120
• Satellite + Netflix: 120
• Internet: 65 (high speed internet is necessary so that I can work from home occasionally)
• Groceries/eating out: $850
• Children's extracurriculars: $170
• Medical:   500 (we had a high-deductible plan through June; now on a more normal plan)
• Gym: $50
• Children's allowances: up to $50, depending on how many chores get done
• Extra life insurance: $70 [extra $500k for me, $150k for him; through my company I have $50k on him and 4x my salary]
• Home Improvement/Entertainment/Clothing/vacation fund: up to $600

If there is anything left over I transfer it to short-term savings.
 
Assets:

• $230k in rollover IRA
• $20k in Roth IRAs
• $56k brokerage fund
• $15k cash emergency fund
• $5k cash short-term savings (currently earmarked for a new car; ours are 8 and 9 years old)
• $1.5k in HSA
• $1k in 403b

Our home is worth between 215-250k.
 
We have $43k saved in Coverdell ESA and 529 plans for the kids' college. My xH is supposedly also saving for our two children.
 
I will get a small pension from my last job; it is calculated to be about $1600/mo if I start drawing it at age 60 (or $200/mo if I start drawing now).  The monthly payout is locked in when withdrawals begin.
 
The emergency fund may seem low but it will cover the rest of our essentials for 6 months if I were to lose my job.
 
Debt:

• Mortgage: 162k left at 2.625%; we have 14 years remaining on a 15-year mortgage

Last year we paid off all other debt  :)
 
What are the current financial issues you're facing?
 
I started tracking our spending in January to see where the money is actually going.  In the first 7 months of the year we are averaging about $600 over budget each month but our income easily covered that.  With my new reduced income (less pay + tolls!) this is not going to be acceptable.  Some of these were unexpected medical expenses, which should be greatly reduced next year on our new health insurance plan.  Other overages were related to the new house (landscaping, setting up our media room, etc)...but we have a list of small renovations we would like to do, so I can't just assume those types of costs will magically go away.  
 
We are considering pulling $40k from the brokerage account as a down payment on a house that we could rent out.  There is a 3-year-old home down the street from us that is in foreclosure and only needs about $5k to make it ready for renters.  I estimate we could net $5k per year after the mortgage, which should cover current maintenance costs/future maintenance fund and leave a cushion for times when the it is empty.  That house would also be an option for us to downsize into when our children are out of the house in about 20 years.
 
I also don't think we are allocating our savings in the right way.  I'm debating putting less in the 403b and instead maxing out my Roth IRA...or maybe putting more money into the brokerage account.  I'm also considering closing out the HSA since I can't contribute to it anymore and repay myself for all the medical bills accrued this year (money would go into the car fund).

What are your plans for the future?

My job change gives me a lot more opportunity to grow my career.  Within 3 years I will be an expert in a field that is growing by leaps and bounds.  I'll either be able to parlay this experience into a higher-paying opportunity elsewhere, or I will be able to move around - and preferably up - within my current company.

I would like to pay for 100% of the children's college tuition/fees/books (at a public university).  For housing, they can live at home, get scholarships, work, convince their other parents to help, or take out loans.

My husband is likely going to have to stop working in his current career by the time he is 55.  At that point, he may segue into more of an office/sales type job, but that is not guaranteed.  I would like to retire, or at least work part-time, at 60.  We plan to stay in our home for the next 20-25 years and then downsize.

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

In my first marriage, I trusted my husband to be in charge of all the finances.  I knew where the money was and what it was invested in and was content to ignore it.  That was dumb.  I ended up a single mom with half the assets and no idea what to do with them...and no idea how much I was actually spending each month or how to live on a budget.   I did a LOT of reading (including blogs like this one) to educate myself.  Even if you aren't the money handler in your relationship, make an effort to sit down once a month or once a quarter and discuss everything with your partner.  Not just where the money is, but WHY it's going there and HOW that decision is helping you meet your mutual goals.
 
In that vein, I am teaching my children about money matters - they get allowances and have bank accounts and college funds, and we go over the statements with them every quarter.  When we go on vacation, we match whatever money they save during a certain time period and that is the only souvenir money they get. The 5-year-old does an excellent job at budgeting and assessing value; his sisters are getting there.
 
I have a 5-year plan for my career at any particular company. I don't want to plan much longer than that because there are so many different kinds of opportunities; what I am doing now I never would have really imagined when I started working 14 years ago.  I've learned that if you haven't reached that goal in 5 years, it's time to move on to a new job, develop additional skills, or look for a different kind of opportunity.  I absolutely do not regret walking away from the money from my last job; as hard as it was to leave the pension behind, in the long run I will be much happer in the new position and have the potential to make a much higher overall salary.  There was no room for advancement in my previous company.

Comments

[JimL]

You seem to be doing okay. While you may be comfortable with you emergency savings, it is still too low. Consider at least doubling what you have. As for the rental, I don't think the time is right. If you have unexpected repairs and vacancies, you will drain your cash. Instead, I would focus on paying off your mortgage first. This will greatly increase your cash flow and help you better fund future college expenses and increased retirement savings, while also giving you more cushion should you then decide to buy a rental.

[Paul]

Moving from 403B to Roth IRA may be a good move for the next year, but once the employer match hits, I would definitely switch back to the 403B. I am wondering if you may be slightly oversaving for the kids' college, at the expense of not putting enough into your retirement. Asking the kids to shoulder a small percentage of college expenses might motivate them to take ownership of their college experience. Kids with a free ride tend to not appreciate the opportunity as much. Finally, I would hesitate to purchase a rental home until I knew my budget was being met consistently month to month.

[KP]

Thanks for the comments so far! One of the reasons we are saving so much for college is because I want to make sure that the child support is directly benefitting the kids. I feel guilty funneling that money into my retirement savings.

[Old Limey]

I would not buy a rental home if I were in your position. It could be a "headache" that you don't need right now. Also our experience has been that when our kids left home it would not have been a smart financial decision to downsize and this has been borne out by the value of our home increasing greatly, especially after the kids left. We enjoy the extra space and love the neighborhood in which we live.

You could do a lot better as Savers, there's way too much money going out the door with no long term benefit from it. There's basically way too much fat in your budget you need to get a very sharp knife and cut a lot of it out. Try to become much more frugal.

$700/month for car related expenses seems excessive especially since your husband is an auto-tech. Eating out is another luxury that needs to be greatly reduced.

[[email protected]]

At 36 and with both of you having gone through a divorce I think you guys are doing great.

I have no idea about the rental market in your community but if the numbers work and there is a strong rental market I would not hesitate to take the leap into buying a rental property. This is a good way for you to diversify your assets - but again it all depends on the numbers of this specific property.

Sounds like you have great job security working in a high demand field. The only recommendation is to avoid lifestyle inflation as you advance with your company.

[KP]

I definitely agree that we need to do a better job at frugality. This is the first year I've tracked expenditures, and I think for next year I'd like to put us on a more formal budget. This month we are about $1000 under my target, so we may be getting ourselves back on the right track.

The car-related expenses are primarily gas ($250/mo), tolls ($300/mo), and auto insurance ($100/mo). Not a lot of room to cut that category at this time :(

[Sarah]

With three small kids, your husband's salary being relatively low, and intentions to pay for college, I wonder if you are a bit underinsured. Does nine years of your salary really get them all out the door?

[M19]

Hi KP

Congrats on educating yourself and thinking about improving your families future. My favorite part of your bio is the part where you want your kids to benefit from the child support and you feel guilty using that money for yourself. Good for you-- that says much about your character.

Regarding your finances-- I think you are young enough that all of your hopes and dreams can still be accomplished. But you need to get serious.

Time is your #1 ally. Honestly--- time is what makes you rich. And you still have about 30 years until you are 67 ( retirement age). But you need to utilize that 30 years effectively to accomplish your goals.

So, here are my thoughts:

1. Max out your 403B immediately. Just do it-- I think it maxes out at 17% of salary ( you are now putting 13%-- so its not that big a jump). Keep it maxed out forever on. And invest it in a manner appropriate for your age. To me that means invest 90/10 -- 90% in a low fee S&P 500 Index fund-- 10% in a low cost bond fund. Leave it alone and look at it again when you turn 50 so that you can INCREASE it again to take advantage of 50 and older the "catch-up" contributions. At that point you can make your allocation a bit less aggressive as well. Maybe 60/40.

2. Keep putting all the child support in their college account if that's important to you. I think its a great way to go. $22K for the next 10 years gets you $220K in the account--plus growth. That should be plenty for in state tuition. Invest that money in a target date fund with an end date that matches 12 prior to the kids college start date. You might reach your goal sooner than you think if the market cooperates. At that point the $22K/ yr becomes a windfall. See #4 below.

3. Take the remaining "take home pay" and save 25% of it in two brokerage accounts. One as an emergency fund invested for safety ina CD or conservative short term bond fund . This is your safety net-- shoot for 8 months expenses. The second account is for long term investments-- and this should be viewed as a vehicle to increase your net worth only. Do not raid this account for consumer items. Think as yourself as CEO of the KP Corporation. Put as much into this account as possible but take money out of this account only if the end result increases your NET WORTH. Example- once you start getting bigger balances—you might pay cash for your cars to avoid interest charges (this increases your net worth long term). I would max out hubby's Roth each year from this money as well.

4. You are headed in the right direction trying to maximize your career and income. Make sure hubby is doing the same. Can he get a higher paying position? How about another with the same pay --but with benefits? Take all windfalls like tax refunds, gift money, inheritances, etc... and put them in your brokerage account. Pretend you never received them.

5. Learn to live on the balance of your take home pay. Period. Do whatever it takes. You would be surprised how easy it can be to have a fulfilling life without spending a fortune. Have a picnic rather than eating at a fancy restaurant. Utilize free parks and playgrounds. Look for free entertainment, free festivals etc...

If you do this. You will end up likely end up with quite a lot of money and you can then volunteer to be interviewed by FMF in his Millionaire series.

Best of luck to you.

[BH]

I guess I'd be concerned that you are saving for kids' college and not maxing out retirement accounts. In my opinion, retirement should be your first priority; education, second.

Additionally, I think you have a few moral hazards with the way you've set up your savings.

First, if you have $220k saved up for your kids' school when they start college, you could end up footing the entire bill because you have available funds and your ex could claim he does not. Could you save this money in a taxable brokerage account and earmark it (in your own mind) for their college?

Second, can't your current husband get a better paying job or take a second job?

I'm sorry to be cynical, but I would just encourage you to make sure you're not in a position to be taken advantage of by either of the men in your life.

Good luck and keep up the good work!

[KP]

When you're divorced with small kids, everything is more complicated - even financial planning.

I think there's been a bit of confusion. I'm trying to spend the full 22k of child support on the kids, but it is not all going to college funds. The child support goes to day care (12k per year), college funds (about 4k per year for these 2 kids), and the rest to medical, extracurricular, and misc expenses. I don't want to decrease our current college savings rate, because in my mind that is "their" money, not necessarily "my" money. When day care expenses eventually go away, I still want to save the money for them, and I like the idea of earmarking after-tax funds to give them as a gift (maybe when they graduate). Thanks for that idea!

I plan to foot the entire tuition bill because a) my stepdaughter's mother currently cannot afford to contribute and b) I can't legally force my xH to contribute for our children; if either of them does help out, that would be a bonus for the kids!

Sarah brought up life insurance. If something happens to me, my two biological kids will go live with their dad, who outearns me and who will get an automatic "raise" to cover the costs of them being with him full-time since he won't be paying child support anymore. If they get their existing accounts plus an extra $50k each now, properly invested that would cover their college tuition. My husband will then only be supporting himself and his biological daughter. I *think* that 8x my salary would be okay for him.

I've been hesitant to push my H to find a different or better paying job. It took a while for him to be comfortable with the idea that I outearn him by so much, so those discussions have to be handled with care. That said, a year ago he started talking about possibly moving on, but we agreed to delay any actions on his career until I was settled in a new job; now that I am, I'm leaving it up to him to decide when or if he's ready to look. We've also decided that we will give up a bit of extra money in order to have more time together as a family - a lot of the higher paying jobs in his field require Saturday work, and that would lead to much complications with his custody schedule. For us, that's not worth it, especially when they are young and actually want to spend time with us!

PS I'm really enjoying this - thanks so much!

[Old Limey]

KP
I sympathize with you on the challenges that you are facing. I am almost 80 now and grew up in England during WWII. Almost all of the problems that you have had to deal with did not exist in my generation, primarily becauses divorces were unknown among the working class and living together out of wedlock was unheard of. I met my wife when I was 16, we were from identical backgrounds and got married when I was 21, emigrated a few months later, and have now been happily married for 58 years. Our three children on the other hand have accumulated 4 divorces.

I think there are multiple reasons for this but the primary one is that the USA is a melting pot of many races from many backgrounds, quite unlike the society that I grew up in. Hopefully now that there is a multitude of dating services available through the Internet it will help people to find compatible partners more easily and hopefully the divorce rate will drop.

[Jnew]

@old Limey

I think the divorce rate today is terrible as well. I am not sure why all of a
sudden it is socially acceptable. On the other hand I would not want
My child to stay in an unhappy marriage either. Half of my friends and family
Are divorced.

I think your melting pot theory is a good one and true---but I also think that because it is
socially acceptable that "we" as a nation do not try as hard to make marriages work. And
I do not mean that we are consciously not trying --but that the fabric of society is
More loosely woven that it used to be.

The breakdown of support groups ---extended family , religion and the support of families, neighbors and communities around us is partly to blame as well. Life is just harder these days.

I am glad to see my friends who have ended up divorced mostly getting married
again but with pre- nups. That in itself is a bit of a problem. They commit but not
everything.

This is a tough topic. Not politically correct to discuss I know.

I am not judging anyone- please know this. I am just commenting on what I see
and trying to decipher why it is.

[Old Limey]

@Jnew
There are also a huge number of cultural changes that have taken place since I was a mere youth of 16. It was totally unheard of for a young unmarried couple to be living together - how times have changed! My father told me how when he was dating my mother he had to take a younger brother along to be a chaperone. My grandmother was actually ostracized by her whole family when she married my grandfather because she came from an upper class family and my grandfather was working class. I believe similar situations did exist in the USA since there has been a class structure for a very long time and it hasn't gone away. I actually got to know my grandmother very well during WWII because their home was bombed and they came to live with us for quite a while. A maiden aunt of mine actually became an English version of "Rosie the Riveter" during WWII and I think it was an eye opener for her to be working in an aircraft factory, alongside men, helping to assemble gliders for the forthcoming invasion of Normandy.

[Jnew]

Very interesting indeed! Thanks for sharing.

[YoungLimey]

Your situation looks ok. Our household income is about 70% of yours and we are slightly younger, yet we have more net worth and assets in every category that you have shown (401K, Roth, Emergency fund, etc.), without the generous child support payments coming in (the downside of not getting divorced, I suppose - haha!). In my opinion, you really need to step up your savings - 30% minimum.

[DivorcedDad]

Wow - it really sounds like you and your current husband really made out on the child support deal. $22K coming in, $3K going out. Divorce pays for women!