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Another Friday, another Reader Case! Yaaaay!
Today’s reader comes from the Bay Area. Home of Silicon Valley, the Golden Gate Bridge, and some of the most unaffordable housing in the country.
Let’s dive in, shall we?
F&W,
Thanks for your work. My partner (26) and I (29) have been reading for months and appreciate your insight and blunt honesty!
Hoping you can give us your opinion on our situation… thanks in advance!
Your gross/net annual family income
Me: $100K gross / almost 80K net (including 401K and HSA, mine and employer’s contributions). not counting those, it’d be 57K salary net
$10K gross side hustle
Partner: about $100K gross; variable, not a consistent income
Your monthly family spending
Condo mortgage – $2500
Groceries – $500
Utilities – $150
Health insurance (partner) – $400
Car – $125
Dog food – $50
Misc – $400 (budgeted, avg spend around 200)
For any debts you have, please include:
The interest rate
4.8% mortgage
Your minimum monthly payment
$2500
The outstanding balance
$335,750
Any fixed assets you have (house, car, etc.)
Condo – worth about $400K
Car – Prius, worth about $9000, paid cash
And investments or savings you have (cash, bonds, stocks, etc.)
Checking/savings: $90K (will be investing soon)
401K: 75K
Roth IRA: 47K
Investment: 29K
HSA: 12K
Checking/savings: $40K
SEP IRA: 20K
Biggest questions we have:
– Should we have/keep this condo? It’s not in a super hot area of the Bay Area, but the ‘hot’ sections seem to be spreading further out from SF/Oakland every year. Comparable rental probably about 2500-3000 depending on proximity to SF/Oakland.
– Other reasons for condo are that my partner (he’s a real estate agent, please don’t shun us!! :)) can claim some of the payment for home office use on top of the other deductions. When we sell, we don’t need to pay listing commission, when we buy, we get either paid or get a deal. By no means are we tied to the idea of keeping this condo, though.
– The real estate gig is part of the reason we’re still in the Bay Area. My job allows for more flexibility and working for home (at least for now), but is a tech role and if I ever needed to switch jobs being in the Bay would be ideal. Additionally, we don’t really know where else we’d move to at this point, and it’ll be a while until we’d take advantage of int’l geoarbitraging (due to our dog). Thoughts on these variables with respect to our FIRE journey?
– What would you two advise in general for us to FIRE? I’ve already told my partner to try and sell as many houses to house-horny idiots as possible, but other than that, what do you suggest?
Thank you!
BayAreaConundrum
OK so before we get to the questions, let’s summarize our dear reader’s numbers and see if anything pops out as unusual, shall we?
Note that as usual, I’m not including their condo value or their mortgage balance since residential real estate can’t be used to help you retire. What we’re showing here is investible assets.
| Summary | Amount |
|---|---|
| Income | $200,000 gross, $157,520 net + $10,000 side hustle |
| Expenses | $4,125 monthly, $49,500 annually |
| Debt | $0 |
| Savings | $313,000 |
So let’s see, what numbers jump out at us? Well, for one, it seems this couple makes a ton of money. Grossing $100k each plus a modest side hustle ain’t too shabby at all. One works in tech, the other in real estate, so that explains that. That being said, this is the Bay Area. High earnings don’t matter if your cost of living is also bonkers.
Which leads me to the next number that jumped out, or rather didn’t jump out at us. Their expenses, including the costs of the condo, is $49,500 a year. That ain’t bad at all, especially considering the fact that they live in the Bay Area. I’m used to reader cases from California spending easily twice this, so this was a pleasant surprise.
So yes, we have a $400k condo. But on the other hand, we have combined earnings of $157,520 net, plus a $10k side hustle, and modest spending of less than $50k a year. Does the high savings rate cancel out the expensive condo? Let’s find out by MATHING SHIT UP!
When Can They Retire?
First of all, there’s something interesting in their earnings numbers: A side hustle already grossing $10k. That’s actually really helpful.
As I’ve mentioned before, post-retirement income is super-duper useful, as it reduces your withdrawal pressure. And since side hustle businesses can continue after retirement, we need to take this into account by subtracting it off their spending. So even though they’re spending $49,500 annually now, the amount they’d have to withdraw from the portfolio would be $49,500 – $10,000 = $39,500.
That gives us an FI target of $39,500 x 25 = $987,500.
Considering that their original FI target would have been $49,500 x 25 = $1,237,500, that $10k side hustle income represents a 20% drop in their FI target!
Now, an additional wrinkle is that we have to be careful to take into account taxes on that $10k differently before retirement and after retirement. After retirement, we can assume that a $10k side hustle income would be tax-free since it would fall within a married couple’s standard deduction. But before retirement, because there’s other income involved it will get taxes much more heavily.
So by plugging in their combined income into SmartAsset.com’s tax calculator, we can see that their total net income, including side hustle income and assuming both make the maximum 401(k) contributions each year, would be $164,245.
Combine that their spending of $49,500 a year, and we get a savings rate of $164,245 – $49,500 = $114,745. That’s everything we need to model their retirement date.
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $313,000.00 | $114,745.00 | $18,780.00 | $446,525.00 |
| 2 | $446,525.00 | $114,745.00 | $26,791.50 | $588,061.50 |
| 3 | $588,061.50 | $114,745.00 | $35,283.69 | $738,090.19 |
| 4 | $738,090.19 | $114,745.00 | $44,285.41 | $897,120.60 |
| 5 | $897,120.60 | $114,745.00 | $53,827.24 | $1,065,692.84 |
Just 6 years, baby!
In this case, the condo really hasn’t held them back all that much. Their crazy-high income and their relatively normal spending has done most of the work for them. And more importantly, it shows that it’s still possible to live in the Bay Area without spending six-figures a year.
What About The Condo?
Before we deal with the condo, we have to caveat this part of the analysis by saying that I’m deeply suspicious of their housing-related spending numbers. They’ve only listed the mortgage and utilities as monthly expenses, but where’s the property taxes, the home insurance? And a $400k condo with no condo fee? Something’s deeply wrong here.
But fine. I can’t just make up numbers and can only run the math with the inputs I have. So let’s say BayAreaConundrum sells the condo. After a $400k x 5% = $20k real estate commission, they’re looking at $380k net. After paying off the mortgage balance, they are left with $380,000 – $335,750 = $44,250.
Let’s add that to the starting balance of our retirement projection. So instead of $313,000, we start with $313,000 + $44,250 = $357,250.
We will assume she rents an equivalent place for $2500, which is the same as the mortgage so her FI number doesn’t change. What does this do to her FI date?
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $357,250.00 | $114,745.00 | $21,435.00 | $493,430.00 |
| 2 | $493,430.00 | $114,745.00 | $29,605.80 | $637,780.80 |
| 3 | $637,780.80 | $114,745.00 | $38,266.85 | $790,792.65 |
| 4 | $790,792.65 | $114,745.00 | $47,447.56 | $952,985.21 |
| 5 | $952,985.21 | $114,745.00 | $57,179.11 | $1,124,909.32 |
6 years.
So that didn’t really do anything. That means that either decision is fine, but since I’m assuming BayAreaConundrum would rather not move than move, keeping the condo seems to make more sense.
Now Onto The Questions
Should we have/keep this condo?
Yeah, sure.
The real estate gig is part of the reason we’re still in the Bay Area. My job allows for more flexibility and working for home (at least for now), but is a tech role and if I ever needed to switch jobs being in the Bay would be ideal. Additionally, we don’t really know where else we’d move to at this point, and it’ll be a while until we’d take advantage of int’l geoarbitraging (due to our dog). Thoughts on these variables with respect to our FIRE journey?
Because of your low living costs, I don’t actually think you need to geoarbitrage at all, but the fact that your job is remote presents some interesting possibilities. A previous Chautauqua attendee realized that her ability to work remotely can really help you lower costs. As long as she stayed in the same time zone, nobody would even notice, so now she travels in Mexico with her husband, allowing them to drop their costs dramatically.
What would you two advise in general for us to FIRE? I’ve already told my partner to try and sell as many houses to house-horny idiots as possible, but other than that, what do you suggest?
Absolutely. Sell as many houses to idiots as possible, pocket their money, and use it to retire. I think that’s a great idea!
Otherwise, though, you seem be doing everything right. You’ve managed to keep your living expenses down, you both make good money, and you didn’t let the condo swamp your finances. Good job!
Aaand We’re Done
Well, that’s it for today. What do you guys/gals think of BayAreaConundrum’s situation? Let’s hear it in comments below!
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Looks like they’re doing just fine. If they can keep their COL at this level, they’ll be able to FIRE in a very reasonable timeframe. I’d keep the condo. You have to live somewhere. They are in real estate so they already know more than I do. Good luck!
I sent you an e-mail.
I’ve been to Santa Barbara, California once. I hope to make it back to California again sometime in the near future. I’d like to take a real estate tour as an aspiring and potential future buyer.
Thanks Wanderer for the call out 🙂 It’s great to see that your reader was able to keep their cost of living low while living in the Bay Area with all the temptations surrounding them. By working from Mexico not only did we reduce our cost of living further but we were also able to discover a great culture and enjoy some amazing food.
We will be more than happy to share our experience with BayAreaConundrum if they want to reach out to us via email or through our blog.
Mexicans can make some really great food. In fact, their food is so good that it’ll keep you coming back for more. If you’ve ever purchased a Mexican burrito or topical formal food truck from anywhere in California and compared it to the taste of Taco Bell, you never eat Taco Bell ever get a day life. Just one Mexican burrito is big enough and delicious enough to be breakfast, lunch and dinner.
DNN, it’s really going to depend on where they are in Mexico. There’s many regional cuisines and a burrito is more Norteño than “Mexican.” Mexico is not a monolith and should not be seen as such. You should do some travel there like we have and find out for yourself what a fantastic and varied country it is.
thanks wanderer and firecracker and all current/future commenters!
to clarify on a couple things: we aren’t married, so possibly more (or less?) complicated tax considerations to consider. and, not sure if this is a typical structure with mortgage payments everywhere, but the typical ones in this area include property taxes, insurance, and sometimes also the HOA fee.
mr NN i’ll be reading that linked article and reaching out!
thanks wanderer and firecracker and all current/future commenters!
to clarify on a couple things: we aren’t married, so possibly more (or less?) complicated tax considerations to consider. and, not sure if this is a typical structure with mortgage payments everywhere, but the typical ones in this area include property taxes, insurance, and sometimes also the HOA fee.
mr NN i’ll be reading that linked article and reaching out!
Yeah, they’re doing fine. Big income, and relatively low spending. They’re well on the way to FI.
If they like where they live, they probably should keep the condo. Unless they need more space for a family, there’s really no reason to try to trade up.
that’s what you call living frugal and humble 🙂
500 for groceries? Are they eating cat food? 50 for dog food? Is the dog eating hamster food? 150 for utilities? Do they use candles?
All their expenses seem way too low. They don’t take vacations ever? No nice dinner at a restaurant? No gifts during the holidays? 150 barely covers power where I live. Plus internet, plus cell phone, plus water, plus cable tv if any. No Netflix either?
Hard to believe.
$500, if you play your cards right, and get you a decent month of food in your refrigerator. If you do your research online and know where to shop and have special alerts set up for special meat and seafood deals, you’ll know where to get healthy food at half the price. It’s possible to eat healthy food or a $500 a month food budget, lose weight, build a lean body, and get good solid nutrition within.
i dont have any alerts or do any research (probably should)… and shop at a pretty bougie supermarket. if we were vegetarians / we did more piecemeal shopping (like chinatown for meat, etc) it’d probably be closer to 350, 400. even with ridic purchases like 5lbs of beef short ribs (10/lb, $50!!) and 2 lbs of salmon (sometimes up to $30-40) once in a while, 500/mo is possible.
Vet’s bills????? Our cats (who were left with me by a former roommate when I was a poor graduate student, too soft to leave them in a shelter) died three years ago, and I decided no more pets until our financial situation is more stable. That means debt-free and maxing our IRAs with ease. I’m sorry; I don’t believe a dog only costs $150/month. Maybe you’ve been lucky, but you can get hit with a $2500 vet’s bill out of nowhere.
for sure. we have been very lucky with our pup. i’d have to look at my misc category again, but off the top of my head:
i go to a great clinic (15 for rabies/dhpp boosters, that’s every couple years at this point) and do heartworm (25 for 6 mo box, goes more like 12 mo bc it isn’t necessary to do that every month) and flea/tick (180 for 12 mo… i don’t do this as much in fall thru early spring so kinda stretches a bit longer also).
so ends up being 50ish for food and 20ish for ongoing maintenance meds. bullies, jerkies.
she doesn’t destroy toys so any add’l is just to add to the arsenal.
she’s only gotten 2 eye infections, medical bills-wise. a $40 Rx for an eye dropper fluid of some kind. was able to use the same one for both instances… so yes we’ve definitely been lucky!
groceries – we eat well and shop at berkeley bowl (honestly, very bougie and can probably do even better on this line item). meals out, not often, covered under misc.
pup – 4 for the cost of 3 at pet food express \o/, plus an 18lb dog = yep, $50 for dog food! and 50% of the food is that fancy raw stuff. she eats better than we do probably.
utilities – water covered by hoa which is in turn covered in mortgage payment. electricity/gas is probably around 30-60/mo depending on time of year. internet, 30, phonex2 90 (at&t 🙁 ), no cable. a shared netflix account w a friend that i pay for with the occasional meal/drink out 🙂 some of this is under misc instead of utilities.
vacation – sadly haven’t done a real trip in probably 1.5 years. a couple staycations though 🙂
What part of the Bay Area are you in? It’s not easy to find a condo for 400k near SF. Are you in East Contra Costa County? Like Pinole, Hercules, Richmond area?
A condo for 400k is way too much $ gUaP $. You can buy a house with that. Agree?
yes.
i dont think condos under 750/800k exist in SF. and yes you’re right 🙂
It’s wonderful to read a case study where the couple are doing so well, especially in the Bay Area. I live in Vancouver, BC, and all of my friends (we are all early 30s) are jonesing to buy into the real estate because “we want to get in before it goes up!” One of my friend’s let slip to me that she and her boyfriend have a combined mortgage of over a million dollars – she is a teacher and he’s in construction. They both make good money, but nothing that can justify that! I’ll keep directed people to your blog, it’s what everybody needs to read before making such huge purchasing decisions!
Never do a mortgage with a girlfriend or boyfriend, nor a joint bank account. Only in marriage is that ok.
oops, then! 🙂 we have been together for 10 yrs though so i guess that almost counts as married.
If you’re living together and not married, that’s known as common law marriage and you’re pretty much shacking up which is forbidden. One thing about marriage people don’t take seriously is after you say I do, there is no such thing as divorce and remarriage. How do you feel about that my friend? ?
? <–this sums it up pretty well! hehe
If Sacramento is not far from you, get a look at the video and Google his name and add Sacramento with his name in the search section. It’s good to come on out sometime and hear the truth. 🙂
Don’t sweat the marriage. Been unmarried for 35 years, 2 kids, a house. All it is, is a piece of paper although there can be tax implications. I am Canadian so different rules here. If you save $$$ on a wedding, you are further ahead IMO
impressive! it’s very unromantic (?) but if being married means better taxes and free health care for my SO, i may consider it. he’s a bit more sentimental than i am about the whole marriage thing. not a big priority anyway 🙂
To quote Adam Conover: “I always cry at contract signings.”
I have to bust your bubble on this one. Marriage is more than just a piece of paper. You cannot divorce and remarry while your first spouse is still in the land of the living. The courts say you can do it. But the courts are wrong!
Did I unwittingly wander onto a religious fundamentalist website?
need to sweat it good brother. If your first wife is still living and you claim to be unmarried, guess what? You’re still married no matter what.
Please don’t push your fundamentalist religious beliefs on me. We are here to talk FIRE and not your medieval beliefs. Thank you. Besides, I worship Wotan.
You are still married to your first wife no matter what if she is still in the land of the living.
Overall I think you guys have done a pretty good job! I’m living in the Bay Area too and finding any house/condo under $1M where my fiance and I live right now is next to impossible. As a frugal person myself, I find your budget very doable. Are you planning on having children in the future? If so, plan on working for more than 6 years since you definitely won’t be able to maintain your current expense levels. I’d also invest more of your checking/savings for both of you. You only need a few months of expenses in your savings account for emergency.
it is definitely very tough to find something under 1M here. although a 300-450k condo can apparently be OK as long as your expenses aren’t crazy. if you are looking to buy something, i would rec a multi-unit. my SO has seen some that are around 800k, but you can make a good amount renting out in-law/whatever the units are. i personally am wound too tight to be able to deal with tenants and too stingy to pay a property mgr so here i am! 🙂
also, agreed on the investing more. i def have scarcity mindset-lite and i like to have a pretty big cushion, but even so, a bit much. i’ve just been lazy on getting things into the darn investment accounts.