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- How Has Covid-19 Affected Your FIRE Journey? Part 5 - June 26, 2020
Hi all! As you know we’ll going to be at Chautauqua Ecuador in 2 weeks with Mr. Money Mustache, JLCollins, Vicki Robin, and Jesse Mecham from YouNeedABudget. Since we’ll be spending most of our time with the attendees, the next Reader Case will be replaced with updates from the events. So before we head out, I picked a really meaty Friday Reader case for you to chew on. Enjoy!
I’m 23 years old. I’m a fresh graduate with $50,000 in student loans and am starting my very first full-time job teaching 2nd grade in Bethel, Alaska!
I’m getting married soon (more like “eloping” though, not spending any money on ANYTHING) and will be bringing my boyfriend/ husband who has an additional $10,000 in student loans, not to mention our collective $13,000 in credit card debt (financial aid didn’t cover my summer courses unfortunately). So, in all we have a collective $73,000 in debt and I’ve accepted a job in bush Alaska making $58,000 before tax.
–Annual family income: $58,000 before tax (He will also get a job, but we can’t plan on how much it will be at this point)
–Monthly family spending: projected $2,750- $3,000
–My student loan debt: $50,000 student loan interest: between 3.86% and 6.8% (average 5.08%) monthly minimum payment: unknown, based on income
–My credit card debt: $9,000 credit card interest: 0% APR on various cards, earliest 0% APR ends September 2017 (should have it paid off) monthly minimum payments: about $100 collectively
–His student loan debt: $9,700 student loan interest: 3.86% monthly minimum payment: $210
–His credit card debt: $4,000 credit card interest: 0% APR until November 2018 monthly minimum payment: something under $100
–Fixed asset: Truck worth about $3,000, paid off
–Savings: $0! 😀
Now, Alaska is a unique place to live; 0% property/ state income tax, much higher cost of moving due to import costs, and needing about $10,000 in moving costs because we have to barge over our truck due to the town not being connected to any roads… We also do not plan on staying here permanently. The idea is to take advantage of the VERY high teaching salary for 5-10 years, save everything, and then retire early! Also, being a teacher I qualify for the federal loan forgiveness program, but I don’t want to plan around it because I personally can’t see it living through this Trump/ Devos era.
Of course, in working out the kinks of my master plan, I’ve come across some dilemmas. The most harrowing being whether to rent or buy a house. I’ve read your blog, so I know your opinions on buying a house, but hear me out:
Option 1: We rent a house for $2,100 monthly with utilities (like I said, cost of living here is high due to its remoteness). That’s $25,200 per year, and pretend we stay in Alaska for 5 years. That’s $126,000 in rent money that we have dumped into our landlord’s pocket and leave Alaska with nothing to show for.
Option 2: We buy a house for $126,000 and live in it for 5 years. The housing market over there is awful (very expensive shacks…) so say at the end of 5 years we sell it for $115,000. Minus $15,000 in collective maintenance, minus $10,000 in seller fees, minus $20,000 in any other homeowner expenses (just for fun), and we actually only make back $70,000 from our original $126,000 house purchase. HOWEVER, compared to renting, that’s still $70,000 that we leave with in our pockets as opposed to renting. Which means that after 5 years we really only spent $56,000 on a home instead of $126,000 on renting.
To me, I think “buy!”– but after reading your blog, and your very strong opinions on buying, I still can’t find a good long-term, mathematical reason not to. I assume I must be missing something, and I want to go into this mission in Alaska with a ready-made plan for early retirement, so I want to know from the expert what the best situation is that I can make for myself.
Aside from this rent/ buy question, there’s also the question of how long we would need to be in Alaska before FI became a reality. On only my paycheck, it’s a long shot. But, while my paycheck will be enough to cover our cost of living and a tiny bit of saving, his entire paycheck can be pocketed. He’s a mechanic, but wants to work part-time so we can travel when school is out in the summer. So I’m estimating an additional $21,000 before tax to add to our savings ($15/ hour X 35 hours per week X 40 weeks).
So, my second question, with this information and the investing I plan on doing based on information from your blog, how realistic is my 5-10 year plan for early retirement?
|Current Gross Income:||$58,000/year|
|Estimated spending:||$3000*12 = $36,000/year|
Hoo boy. There is a LOT going on here. I see the words “credit card debt,” and “student debt,” and “collective $73,000” and “I want to buy a house” which immediately makes me want to vomit.
But as I dug deeper into the numbers I realized that this case study is best analyzed by trying to answer 3 questions:
- Should she buy or rent?
- Should she move to Alaska?
- When can she retire?
Get it? Got it? Great. So first…
Should She Buy Or Rent?
Now I started preparing a big long analysis talking about ownership costs, and PMI, and the 1% rule, but then I realized that this entire exercise was pointless because of the following:
–Savings: $0! 😀
You have $0 savings, a pile of debt, and you want to get into more debt? Ignoring the philosophical debate about “good debt” vs “bad debt” and whatever crap the real estate industry feeds us, you need at least 5% to put down before the bank will give you a mortgage. So a house is quite simply off the table, for now. Even if the math suggests that buying is a good idea, you’ll need to rent and work for at least a year to pay off some of that credit card debt and save up for the down payment. After that, you can start worrying about interest rates and carrying costs.
Should She Move To Alaska?
OK so here’s where things get really dire. If AB rents for the first year instead of buying since she has no money saved up, then her estimated living expenses jumps from $3000 to $5100 a month, which means her living expenses goes up to $61,200 a year. And given her pre-tax salary of $58,000…
Her living expenses would eclipse her pre-tax salary. So even if she somehow paid 0 in federal and state taxes, by taking this job she’s actually cash flow NEGATIVE from day one. Which makes it impossible to either pay off her debt, or save up for a down payment. So in this case, even if housing did turn out to be a good way to lower her living expenses, there’s no way to actually get there because her salary doesn’t come close to paying the living costs of being in Alaska!
So basically, DON’T TAKE THIS JOB!!! The living costs are so high that you would actually LOSE money by moving to Alaska.
This whole thing doesn’t work because the cost of living is so damned high. $2100 a month in rent?!? I know people in New York City who are paying less than that! Hell, Numbeo suggests that the average rent in Anchorage, AK is only $1200, not $2100, so something is going horribly wrong with AB’s rent estimate.
And looking back through the reader email, I think the “horribly wrong” part is right here:
We rent a house for $2,100 monthly with utilities…
Uh, no. You can’t rent a house. Nor can you buy a house, because you don’t have any money yet. That’s how money works.
So throw out the idea of living in a house for now. Ain’t gonna happen. But lets say she can rent a nice one-bedroom apartment for Numbeo’s estimate of $1200. Does the math work then?
Well, let’s assume she’s a little careful with her spending and can hit the lower estimate of $2750 for living expenses. Then we add rent of $1200. With that, we get $3950 a month, or $47,400. So that’s better.
But when we plug her salary in a tax calculator, we get an after-tax salary (assuming no 401k contributions because AB’s gonna need every dollar she can get now) of $48,503. So now this job is juuuuuuust barely paying her living expenses. And I hope to God that the $2750 per month she quoted includes the monthly minimum payments on her credit card and student debt. If they don’t and we have to add that on top, this job is once again cash-flow negative.
So can she move to Alaska?
Maybe. If she keeps a clamp on her living expenses, rents a $1200 a month apartment instead of a house, and just pays the bare minimum on her credit card debt and student loans, the job will just barely cover her living expenses. She won’t be able to save anything or make much progress on her debt, but at least she’ll be in Alaska, so yay?
When Can She Retire?
Short answer: She can’t. Taking this job locks her into a savings rate of around 0%, which means she will never become FI.
Or at least, not on her own. Remember, she DOES have a boyfriend/future hubby. Because if she can cover all living expenses on her own, then every after-tax dollar he earns can go towards debt repayment/retirement savings. So basically, their retirement plan hinges completely on him. No pressure, buddy 🙂
But first, the idea of working part-time isn’t going to work. None of this 35 hours a week, 40 weeks a year BS. You just got out of school and you’re thinking of working part-time to travel already? You can think about doing that when you have maybe a couple hundred thousand socked away, but right now you 2 have no money and a bunch of debt. You’re gonna have to work the salt mines full-time like the rest of us.
So assuming he works full time at $15 an hour, he’d make $31,200 pre-tax. The first few years should be spent using that money to clear off the debt. Credit card debt first, then his student loan, then AB’s student loan. After that, you can start contributing to both of your 401(k) plans and to reduce your tax burden. This would bring your after-tax earnings to $78k, and your savings rate from 0% to a respectable 40%.
Your FI number would be $47,400 x 25 = $1,185,000.
And how long would it take to get there?
21 years. Which, after adding the 3 years it would take to pay off the loan, means she can retire at 47. So not in your 30’s, but in your 40’s, which is already pretty good considering most people retire in their 60’s.
And again, this whole thing hinges on the boyfriend’s/husband’s earnings. If you were to find just $500 a month of expenses to cut, and his earnings were to rise to match yours, it would slash 8 years off your retirement and then you’d both be able to retire in your 30’s. And then you can ride off in your truck to explore the Alaskan wilderness all you want.
Okay, let’s open the floor up to our intrepid readers. What do you guys think? Am I putting too much pressure on AB’s boyfriend? Or am not putting ENOUGH? I think I’m not putting enough.
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