It’s Friday again and you know what that means? It’s Reader Case time!
Now, before I jump in, I just want to warn you, this one is extremely long and meaty. Of the reader cases we’ve done so far, I would say this is definitely one of the more challenging ones. So put on your thinking caps cause we’re about to MathThisShitUp EXTRA HARD:
I’m not sure my case will be the most exciting to feature in a post, but I feel it does raise a question many readers may have and I hope you can write about.
The basic question, before talking details, is how to reach from 0 to FI *after* you’ve already had kids. You touched a few times recently about being FI with kids, travelling with kids and world-schooling, but the vast majority of examples involve couples who reached FI or were well on their way prior to having kids. My reader case and general question is what to do if you wake up later in life?
Some details and background to frame my situation and question:
We are both 40 years old health care workers in southern Ontario – me in healthcare delivery, wife in the admin side. Two young kids (Grades 1 and 3). We think we have decent salaries and we hardly buy “stuff” but we still feel like we can’t manage the daily financial needs, not to mention savings.
– Total combined income: ~120k *NET*
– Total assets: ~350k in RRSP/TFSA/RESP/Cash. Practically all saved prior to having kids. Crappy mutual funds, working on convincing the wife to change.
– Never had any debts, not planning to unless we buy a house one day.
– We both contribute to our pension plans (big, stable, public DB plans), but we both entered those public sector jobs later in life so not much there yet.
– Two cars fully owned. I’m not even sure what their market value is, but it ain’t luxury cars.
Our spending seems out of control, but we don’t know where to cut:
– Housing: 30k / year. (Our rent is 2,100$ + 315$ utilities, which is the norm for this area. It is more than we need but there isn’t a lot of choice around our school)
– Childcare/education: 25k per year. (childcare, before/after care, summer camps and activities)
– Transportation: 11k / year. (That’s for two cars, gas, insurance, maintenance. We unfortunately both need to commute to work as I work in various locations, none accessible by transit and my wife is in an adjacent town. ).
– Groceries: 20k / year. (Our groceries spending is the one thing we know we overspend on but have been unable to bring down despite conscious effort).
– Eating out: 8k (all the restaurants, Tim stops, ice cream stops etc).
– shopping: 12k (cloths, school items, birthday presents, electronics – everything which is not food/transportation/education.)
This is already over 100K spending for the year, and there are little things I kept out because my spreadsheet is far too detailed to bore you with. Needless to say, there is no “savings/investing” column as we are usually in a negative cashflow and are eating down our savings just to get by.
So – we are spendy. But we don’t feel like we can cut much out. I keep a very detailed account of our spending and we cut all the fat out (minus some food expenses that we have a hard time disciplining ourselves to do).
We could have had an excellent saving rate if we didn’t have kids, or if we learned about the FIRE concepts earlier in life. But it is hard to keep saying ‘no’ to everything so we sometimes do eat out or go on an outing (and I do mean “sometimes”. maybe once a week some timbits; a movie or an attraction once a month or two). It is hard to find comfy, clean apartments in my city that are kids friends, and our rent, while high for us, is in line with our neighborhood. We are contemplating moving but that will require both of us to find new jobs (not a certainty or an easy thing to do), or for one or both of of us to commute significant distance.
So – how do people who wake up to the FI concepts after having started their family life manage to save enough?
At this point I am so down about the whole situation that I have given up on any retirement (early or late) and I am planning ahead to educate my kids so they can have an early start and hopefully be in a situation like you two. This makes for a pretty shitty life though (emotionally), and my wife and I are bursting at the seams from stress, despair and paralysis. We read about the examples of families in an FI situation and how much better it is to be able to be with your kids, and we are a bit jealous. I wish I could spend more time with my kids and not work all the time just to tread water – and with no exit plan at sight.
So – for the sake of all the children out there with confused parents who brought them into this world before being enlightened to FI – how do people start saving while raising kids?
Wow, that sounds stressful. DP seems to be trying to paddle and is barely keeping afloat, despite a healthy family after tax salary of $120,000 (the average for Toronto is $70,000 and this is southern Ontario). This seems like a situation that a lot of people can relate to. Especially since they are PAYING to work (transportation costs, childcare costs, etc). But before I dive into gory details, let’s look at a summary of their situation:
|Expenses:||$30,000 (rent) + $25,000 (childcare/education) + $11,000 (transportation)+ $28,000 (food) + $12,000 (shopping) = $106,000/year|
Now, their investible assets look pretty good, but their spending is out of control! With yearly expenses of $106,000/year, 88% of everything they make is going straight out. YIKES!
At this current crappy savings rate of 12% and $350K in assets, it would take them:
28 Years!!! Since they’re already in their 40s that would put them at a retirement age of at least 68—beyond the normal 65 retirement age.
So DP is right. If they keep going at this rate, they are not going to be able to retire early.
But a lot of the high costs are due to raising kids, which, according to DP is causing them to lose hope of ever retiring early, does that mean they’re doomed? Obviously, they can’t cut those costs because kids are just too damn expense, right?
Well, I can’t speak for everyone, but having been raised by parents who started off in Canada barely making above minimum wage and still having to stretch their meagre earnings to support my grandparents, cousins, aunts and uncles back in China. I have to tell you, kids will rise to the occasion if you let them. I never felt deprived growing up because I knew that money was tight but spending time with my Dad was more important than shiny things. The idea that kids absolutely need to have all sorts of activities, nice clothes, presents, etc to be happy is not true. Kids need YOU. They need you to spend time with them, that’s the most important thing you could give your kids. Not clothing, shoes, or fancy electronics.
As I said before, kids aren’t expensive. Parents make them expensive. And the proof that kids aren’t expensive is something we’ve seen again and again from early retirees like Justin (who lives under $40K a year with his family of 5), MMM, who despite his rockstar blog earnings, still lives on only $24K a year with his family of 3, or the Jeremy, aka GoCurryCracker, who lived on $50K/year with his family of 3.
But since I don’t have kids myself, I’ve decided to reach out to the experts, Jeremy and Justin, to get what their take is on this whole situation.
“Kids aren’t expensive. It is the stupid shit you justify because of kids that is expensive”
What if he quits his job, becomes stay at home dad, they move next door to his wife’s job in next town, and he learns to cook?
This way, they can sell one car and he can try to do online work from home while kids are in school.”
“The kids are in grades 1 and 3 but childcare costs are as if he’s paying for full time daycare for at least 1 plus a ton of other stuff. But before/after school care sounds like they’re in free public school (assuming free since the house is extra expensive to be in good school district??).
Limit paid extracurricular activities would be a huge one. Sounds like one spouse could quit working, cut groceries in half, keep restaurants to about 1/4 (use as a special treat a few times/month). Mostly eliminate childcare costs. That would save $10k groceries, $20k childcare, $6k restaurants = 36k right there without even downsizing housing. After taxes we’re talking a $50k salary to generate that kind of cash which is probably what the least paid spouse makes.
Oh, and that stay at home parent would have to cook a lot more obviously
And the side income work from home is a good idea.
Or one spouse finds a job that doesn’t require summer work, then stay at home w/ kids over summer. After taxes would probably save a lot of money
Bottom line is this family is spending nearly $30k on food, and 75% of that is pure convenience food vs. need to eat food (check out Canadian national stats on average household food expenditures or use the US #).”
Wow, great insights guys! Okay, so some takeaways here:
1) One spouse stops working to cut back on transportation, eating out, childcare and extracurricular activity costs.
2) Cut back on food costs
3) Cut back on shopping
So let’s go through each of these ideas:
Idea 1: One spouse stops working
If one spouse earns more than half of their net 120K combined income, it may make sense for the lower earning spouse to quit. This has the effect of freeing up one of the cars since the stay-at-home spouse no longer needs to drive to work, so that cuts transportation by half to $5500.
This also has the effect of freeing up the spouse to reduce childcare costs. If the spouse could watch the kids to avoid having to pay for childcare costs, so that would get them $25K back right here.
So right there, we know the cost of PAYING to work for one spouse is $25K + $5500 = $30,500!
To generate that passive income, you would need a portfolio size of $30,500 x 25 = $762,500. WOWZA!
And we haven’t even dug into how much they could save in food costs, if the spouse had the time to shop in bulk and cook more.
Which leads us to the next option:
Idea 2: Cut back on food costs
As much as I feel for DP’s situation, I have a bone to pick for this category. With a cost of $20K/year (groceries) and $8K/year( restaurants), that’s a combined $28K/year on FOOD! Are you kidding me? I’ll admit I have a bit of a food fetish but $2333/month?! That’s basically their RENT! I know they have 2 kids but unless they’re tiny little sumo wrestlers, kids do not consume THAT much food!
In fact, as Justin suggested, I looked up the average household food expenditure in Canada, and according to a study by the Dieticians of Canada, it costs an average of $868/month to feed a family of 4. That’s $10,416/year, or almost 1/3 of your $28,000/year food spending!
So you are overspending on food to the tune of $17,600/year or $1465/month above the average. WOW. I don’t have visibility into your food budget but statistically, you’re doing something horrendously wasteful. On average, You could feed a family that’s double the size of yours on that budget and STILL have money left over. YEESH.
So if they were to cut their food costs down to a comfortable $1000/month (slightly higher than the national average), that would reduce their yearly spending by $16,000/year or a portfolio size of $400,000.
So just by having one spouse stay home, save on transportation, childcare costs, and food that’s a total savings of $5500 + $25,000 + $16,000 = $46,500. Geez, that’s pretty much a person’s after tax salary right there. Now, if they’re about even in their earnings, then losing half the salary to recover this cost doesn’t quite make sense. But if one spouse is earning less than $50K after tax, that spouse is essentially working for FREE. That’s why I call it “PAYING to work”. Because you’re coughing up these expenses for the privilege of working but not making enough to make that worth it.
Idea 3: Cut back on Shopping
Looking at this, $12k/year on miscellaneous outside of food, transportation, housing and childcare seems pretty excessive to me. I mean what exactly are you getting by spending $1000 every single month? Internet bills and phone isn’t going to take up more than $150, toiletries shouldn’t cost more than $100 (less if you plan ahead and buy in bulk), so where is the other $750 going? I just don’t get it.
This is definitely an area that can be trimmed. I get that the kids might have to give gifts to their friends when they attend birthday parties but EVERY SINGLE MONTH? And do they really need new clothes every single month as well? Considering how these are costs outside your main staples (housing, food, transportation, childcare) I think this can be trimmed down by at least half.
So let’s wrap it all up. By adding together the savings in these 3 categories, they would get back $5500 (down to 1 car) + $25,000 (eliminate child care/after school costs) + $16,000 (cook more, buy in bulk) + $6000 (decrease mindless shopping) = $52,500/year.
However, in order to get the transportation and childcare savings, one spouse would need to quit their job. It would only make sense to lose that salary if the spouse is making less than $50K/year after tax.
If they make around the same salary, they stand to lose more than $50K/year in earnings, then having one spouse quit their job makes less sense. In this case, it would make sense for the spouse to continue working, keep the 2nd car, BUT cut back on other costs.
Food costs can still be cut by $16K/year to match the national average, shopping can be cut back by $6000/year, and childcare costs can even be trimmed by avoiding paid after-school activities.
As Justin mentioned, the kids are both school-aged (grade 1 and 3) and yet they’re paying $25,000/year or $2083/month for childcare costs? You’re spending $30,000 on rent to be in a good school district and yet are still paying the equivalent of full day care costs? What’s the point? If this is after-school care, it should only cost on average $600/month/kid or $14,400/year for 2 kids. And as Justin and Jeremy suggested, cut back on extracurricular activities, to save money in that category, and you’ll end up with a savings of $10,600/year. Not only that, after-school care is only required until the kids are around 10 years old. So in 4 years, the youngest will be old enough not to require after-school care anymore, and you’ll be able to get back the full $25,000 you’re currently spending on that.
So if you go with Idea 1, assuming the spouse’s salaries are uneven and one is earning less than $50K after tax, they would be losing $50K/year in salary, but still retain $70K/year from the other spouse’s earnings.
This would give them a combined income for $70K/year
By shaving off $52,500/year from having the spouse stay home, and cutting childcare, food, transportation, and shopping costs, that would bring their yearly savings to $16,500 or 23% and be able to retire in:
Hmm, better (they retire in their 50’s at least) but not great. It looks like here the suggestion of the lower paying spouse staying home didn’t have as big of an impact as we would have liked.
However, if both parents continue working, they would need to keep the 2nd car and the after-school care (but only for another 4 years until the youngest is old enough not to need it). In this case, you could still cut food costs (because so much of it is waste and expensive groceries) down to a comfortable $1000/month, childcare costs down to $1200/month for after-school care for 2, and shopping down to $500/month. This gives you a new total yearly spending of $73,400/year (30,000/year + 11,000/year + $14,400/year + $12,000/year + $6000/year)
So that means from year 1-4, their savings would be $120,000 – $73,400 = $46,600
But after that, the after-school care expenses would go away, bringing down their costs to $59,000. This would require a portfolio of $1.475 Million, thus cutting their retirement to:
|Year||Starting Balance||Annual Contribution||Return||Total|
That’s better. Turns out the answer is, unless one spouse is making significantly more than the other, it’s better to bring down their spending to the national average.
One more thing to note is that starting from Sept 1, 2017, Ontario is expanding access to before-and-after school care programs, so if their school starts offering these programs, you could reduce your childcare costs even more or have it be free. Check here for more details.
This maxed out family seems to be spending over $100K for a $30-40K year quality of life. Both parents are stressed out of their minds and they don’t even feel like they’re living extravagantly despite having to throw away 88% of their combined salary, yet believe there’s not a single ounce of fat to be cut. This is just not true, since the average Canadian family is spending less than half what you spend to feed a family of 4. They’re also spending 40% less for after-school care. If DP can get his spending on these 3 line items to the average of what everyone else is spending, they’re out in 11 years. And if they can’t, they’ll retire LATER than the average retirement age of 65.
What do you guys think? Do you think they can do it?
PS. Shout-out to Justin(RootofGood) and Jeremy (GoCurryCracker), thanks for your 2 cents and insights on kid expenses!
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