- Reader Case: Can Costa Rica Save Their Retirement? - July 12, 2021
- Have The Roaring Twenties Begun? - June 28, 2021
- Will Runaway Inflation Derail The Recovery? - June 21, 2021
It’s Friday, and you know what that means: Reader Case time! And for the first Reader Case of 2019, we’re gonna pick a doozy.
- Gross Income: $95,000 (Combined)
- Myself: $50,500/year.
- My Husband: $60,000/year
- Net Income: $75,000 (Combined)
- Myself: $30,600 ( After tax, health insurance and 401k contributions)
- My Husband: $45,000 (we pay his taxes deductions at the end of the year)
- Monthly net income: Myself $2,550. Husband: $3,750 [Combined: $6,300/monthly]
- Transportation – $575 month (Ubers really add up quickly) [$6,900/year]
- Cable – $127 (he can’t seem to live without sports channels) [$1,524/year]
- Cellphones : $150 (both of us) [$1,800/year]
- Utility Bill: $60 (Average Monthly) [$720/year]
- Apartment Insurance: $14 [$168/year]
- Entertainment ( Netflix & Apple Music): $20 [240/year]
- Monthly grocery shopping : $320 ($160 X2 month) (Not too bad for a foodie) [$3,840/year]
- Eating Out: $1,000 – $1,200 (Our hobby is to eat out on our day off, checks range $250-$300 weekly) Our money goes on food I KNOW, experiences! [12,000 – $14,440/year]
- Rent: $2,000 ( Paying for convenience, we live in the heart of the city) [$24,000/year]
- Helping Retired Parents: $400 [$4,800/year]
Total Monthly expenses: Approximately $4,800. The remaining income (~$1,500/month) goes to:
- Paying off Credit Card: Ranges ~$1,000 – monthly payment
- Saving: ranges $300-$600 monthly.
Fixed Assets: None (We are renting, thinking of buying. Don’t have a car and don’t consider it an asset)
Debt ( All Credit Cards Combined):
- $2,496.28 – 14% Interest Rate
- $1910.90 -6% Interest Rate
- $768.52 – 20% Interest Rate
- $981.34 – 0% Promotional Interest Rate
- $374.66 – 26% Interest Rate
Total Outstanding Balance: $6,531.70 (Minimum payment on each card ranges from $20-$35)
- Cash – $18,000. (checking/saving account)
- CD – $352.69 (2.23% Rate)
- 401k ( I Invest 25% of my income, company contributes 4%)
- $9,705.55 ( 3.19% Rate of Return since 01/18) 100% on Balance Asset Allocation
- $11,486.43 (4.23% Since 01/18) 90% Stocks, 7.8% Bonds, 1.6% Money Market
- Stash – $383 (5.47% Return)
- Acorns – $312 (2.28% Return)
- Fundrise – $513.35
Total Assets Combined: $40,753.02
(Minus debt, total: $34,221.32)
Little bit about me:
- 24 year old millennial living in Washington DC
Thanks, I would love to hear how we are doing 🙂
OK while my natural instinct is to start tearing into those spending numbers, there’s a couple more alarming issues to deal with first.
Never Hold Credit Card Debt!!!
The #1 most obvious sign of a financial newbie is when they simultaneously hold credit card debt and a cash balance. Mathematically, this makes absolutely no sense since credit card debt is costing you 15%-25% in interest while cash is earning 2% (if you’re lucky). However, people amazingly still do this, and it’s usually based on some emotional bullshit reason.
Something about holding a cash “emergency fund” feels safer “in case I need it,” when in reality that credit card interest is hammering you every single month. It’s totally irrational, and I know people in real life who think like this. No matter how many times I explain the math, they just fall back on the reasoning of “yeah, but it just feels better.” And they just continue doing it.
This approach makes zero sense. Even if an emergency does come up and you’re forced to go back into credit card debt, that’s still a better idea than voluntarily staying in credit card debt the entire time even with no emergency happening. That’s like voluntarily paying a hospital bill even though you haven’t been to the hospital!
In finance, few things are black and white. This is one of them. DCMillennialGirl, if you’re reading this, stop what you’re doing NOW, take that cash you’re sitting on, and pay off every single credit card.
Except maybe that 0% interest rate one. That one you can leave a balance on, but as soon as that interest rate becomes non-zero, kill it immediately.
Net Income Seems Suspicious
OK this one isn’t DCMillennialGirl’s fault, but her understanding of “net income” is wrong. Net income is the money you make each year after taxes. Her description of her net income as $30,600 (After tax, health insurance and 401k contributions) seems to indicate that she’s leaving her 401k contributions off her net income.
That’s wrong. The money you put into your 401k is still your money, so those contributions (and any employee matching that’s available) count as part of your net income. So that means both her and her husband’s net income numbers are under-reported here.
OK before we continue her analysis, we’re going to have to figure out what their actual net income is. Assuming their gross income numbers are correct, I’m going to use SmartAssets’ super handy-dandy tax calculator to estimate their taxes. Using 20500 as their zip code (which is the zip code of the White House, which I’m pretty sure is in DC), putting in DCMillennialGirl’s info (including the fact that she’s contributing 25% of her pay to a 401k), we get the following.
There. SmartAsset predicted a take-home pay of $31,830, which is pretty close to what DCMillennialGirl reported since that’s what she sees on her paycheck, but the actual number we care about is the circled one: Income After Taxes of $42,289.
On top of that, we have to take into account the 4% her company contributes, so that’s an additional $50,500 x 4% = $2,020 of income, creating a grand total of $42,289 + $2,020 = $44,309.
So that’s her’s. Now let’s look at his.
Plugging his numbers into the tax calculator and leaving the 401k contributions field at 0 gives us an after-tax income of $46,103. That’s pretty close to what DCMillennialGirl reported at $45,000, so that suggests that the husband’s not contributing to a 401k at all. To which I’d respond: Why not?
If he were to match DCMillennialGirl’s contribution rate of 25% of his gross, or $15,000, his taxes would look like this.
Now with a 401(k) contribution lowering his taxable income, his net income jumps to $49,780. Pretty good for doing no work, huh?
So How Are They Doing?
OK now that we have more accurate numbers, we can now MATH SHIT UP. To summarize, assuming they:
- Start contributing to his 401(k) at a rate of 25% gross
- Pay off the credit card debt
Their numbers are…
|Income (Net)||$44,309 + $49,780 = $94,089|
|Expenses||$4,800 (monthly) x 12 = $57,600 (annual)|
At that rate, how long would it take for DCMillennialGirl to retire?
Well, at an annual spending rate of $57,600, as per the 4% rule they will need $57,600 x 25 = $1,440,000. Yeowtch. $1.44 million. If that sounds like a tall order, that’s because it is.
And with a savings rate of $94,089 – $57,600 = $36,489, that sounds like an even taller order. Plugging those numbers into our spreadsheets, we can project DCMillennialGirl can retire in…
Now, she’s only 24, so that puts her retirement age at 45. That’s already pretty damned good, and a full 20 years before normal retirement age of 65.
But I think we can do better. Why?
Their Spending is NUTS
Now, I know everybody’s budget is different, and I know not everyone’s into budgeting like FIRECracker is, but we’ve been travelling around Europe all year, eating out whenever we feel like, and our living expenses still came out to be around $40,000 for 2018. DCMillennialGirl is spending almost 50% more than us while living in one place! There’s clearly some wasteful spending here.
And the most obvious one is Transportation. $575 a month for Uber?!?
OK, I get the appeal of living close to downtown, and maybe paying a little more in rent for it. But if you’re paying $2000 a month in rent to not need a car, I’d expect your transportation costs to be a little more reasonable. $575 a month is what people pay in car costs when they live in the suburbs and have to drive to work every day. You don’t own a car, yet you’re still paying car-owning prices!
This is just wasteful. A monthly transit pass in the DC area costs $120. $120 x 2 = $240. That should be the maximum you’d ever have to pay for transport if you live downtown. And if you can manage to walk or bike to work in the summer like we did, you could drive this cost even lower.
Also, your food budget is just way too high. We like eating out as much as anyone else, but our total food budget (groceries + restaurants) rarely went above $1000 a month, and that’s in Europe.
What really helped us in this department was FIRECracker started cooking Paleo recipies, which involve a LOT of meat (hello steak!), fresh vegetables, and usually covered in delicious delicious butter. We ate better than ever before, our food budget plummeted, and somehow FIRECracker lost weight in the process. She’s never looked back, so check out an article she wrote on this for ideas.
And finally, the sports channels. Now, I’m not the most qualified person to give advice on sports channels, since I don’t watch live sports much these days (the Toronto Maple Leafs can only disappoint you so many times before you give up on watching sports forever). But paying $127 a month for a premium cable subscription AND a $20 Netflix subscription just seems redundant.
There are ways of getting access to sports channels without a cable subscription. Dish network, for example, offers Sling TV, where you can get access to ESPN/2/3 for $25 a month. If you have a Playstation, Sony offers another service Playstation Vue, which gives you ESPN access for $29.99 a month. And again, this is not an endorsement since I’ve never used either service, but if these work for DCMillennialGirl’s husband, that’s another $100 a month you can save right there.
Put it all together, by just getting these 3 areas under control you could potentially bring your spending down to $3900 a month, or $46,800 a year.
Annual spending of $46,800 a year means your portfolio target becomes $46,800 x 25 = $1,170,000.
That also bumps their savings rate to $94,089 – $46,800 = $47,289.
What does that do to their retirement?
It drops from 21 years to 16. That means our 24 year old millennial could retire by the age of 40.
What Do You Think?
So that’s our two cents. To be honest, spending $46k USD/year seems inefficient to us, considering the fact that we’ve just pulled off a year in Europe for $30k USD/year, but hey. Maybe that’s what it costs to live in DC.
What do you all think? Is DCMillennialGirl’s spending reasonable given where she lives, or does it still seem high to you? Let’s hear it in the comments below!
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Earn a 1.25%* everyday interest rate. No Everyday Banking Fees.: Open up an EQ Bank Savings Plus Account! (Canada only, excluding Quebec)
Are you an American looking for a High Interest Savings Account? See what's offered through SaveBetter.com!
Travel the World: We save $18K a year by using AirBnb. Click here to get $40 off your first booking!
Don't Pay FX fees: We used the Scotiabank Passport Visa Infinite card to eliminate foreign exchange fees around the world! Plus, get 40k points in the first year, and free airport lounge access too! Click here to sign up!
Earn 10% Cash-back: Earn an extra 10% back for a limited time with a Tangerine World Mastercard! Click here to sign up!
*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.