- Reader Case: Single Mom in Debt - October 12, 2020
- Reader Case: Choosing Between Health and FIRE - September 25, 2020
- Let’s Go Exploring! Singapore: Futuristic Foodie Paradise - September 18, 2020
One of the things I love about reader cases is finding badass people. Those brave, gritty badasses who refuse to let their circumstances define them and find a way out without whining or wallowing. Yes, empathy is important and yes I agree, sometimes we do need our feelings acknowledged. But really at the end of the day, after you’re done feeling shitty and crying, you still have to pick yourself up and DO something about it. Wallowing accomplishes nothing. And that’s why I love this reader case (note: email has been edited for brevity):
I know y’all are extremely busy given the huge status of your badass blog but I would LOVE it if you guys could make sure I am steering my boat in a good direction.
Became debt free from my massive student loans (over $100k) at 29.
Had a second job as a waitress for the last 10 years, just quit it 3 months ago once my emergency savings was completed.
I am now 30 years old.
Live in Nashville, TN in a room I rent from my friend who owns the house. It is the homeowner, her smelly dog, myself, and one other girl who lives there.
My goals (Other than finding a husband, of course):
1. Make sure I have enough to retire around the age of 55-60.
2. Be able to pay at least half in cash (approximately $6k) for a 4 year old used sedan in the next year.
3. Have some free money to travel every now and then as well as afford the occasional dinner out, and small shopping endeavors without worrying I am hurting my net worth.
4. Possibly one day buy into the housing market a few years down the road without having to pay PMI and putting at least 20-30% down. I know, I know, a house is not an asset and is a liability, but I will not want to rent a room and live with 2 other roommates when I am 35-40 years old. And rent is kinda outrageous here in Nashville.
Your gross/net annual family income:
Gross 2016 Income: $52,110.08
Net 2016 Income: $37,375.78
Your monthly family spending:
Expenses: Approximately $1,650 per month
Savings: Approximately $1,300 per month
Monthly Roth IRA Contribution: $450 per month
For any debts you have, please include:
I am completely debt-free
Any fixed assets you have (house, car, etc.):
I own a 14 year old Honda SUV (valued at $2,300)
And investments or savings you have (cash, bonds, stocks, etc.):
Emergency Fund (in a money market account): $10,200
Individual IRA (from a rolled over 401k): $7,400
Roth IRA (in a Target Retirement Fund at Vanguard): $1,450 (Just started this in April of this year after I funded my emergency fund)
Old employee stock at ETrade: $1,900
Current 401K (in a Target Fund): $5,500
Current Savings: $2,000
I have refused in the last few years to follow the crowd, aka my friends, when it comes to buying and LEASING (what?!) brand new huge impractical SUVs, houses they have no business buying (including the one I live in) where they weren’t able to put any money down, nail and hair salons on the regular, extreme shopping, and nights out with huge dinner and drink tabs. I want the things they have, but I want to be able to afford it all first and not live paycheck to paycheck in order to have those things. The majority of these said friends make more money than I do, and some have husbands so they definitely make more money than myself, but my net worth (although it is small for my age) is more than the majority of theirs thanks to their debt.
My plan is to keep contributing $450 per month to my Roth and max it out every year, bulk up my current savings to buy a used vehicle AND start investing money (for non-retirement purposes) to be able to use in 10(ish) years for a possible house down payment. I plan to invest the approximate $1,300 per month I can save into an Ameritrade account just like your investment workshop says to do: BND, VTI, VEU.
If you were debt-free, making a low-median income, renting a bedroom in someone else’s house with roommates, driving an old ass car, single, and 30 with a net worth of only $30k, what would you do?! Is investing in a non-retirement index funded taxable brokerage account wise?
Thank you times a million!”
Well, NB, first of all, give yourself a massive pat on the back for paying off $100K in student loans by the age of 29! And even MORE impressive is how you got a second job as a waitress for 10 years to help you pay off that debt. No wallowing, no whining about how other people had it easier, no handouts. You simply went out, got a second job and murdered the hell out of that debt. I love that “get shit done” attitude! Kudos!
Now let’s look your situation and see how we can get you to your goals. So without further ado, let’s MATH THIS SHIT UP!
|Net Income:||$37,375.78 /year|
|Spending:||$1,650 *12 = $19,800/year|
|Debt:||0 (it used to be $100K! Wow! Fantastic job murdering that debt!)|
|Investable Assets:||$10,200 + $7,400 + $1,450 + $1,900 + $5500 + $2000 = $28,450|
Okay, so looking at your high level numbers, you’re actually doing pretty well! With a savings rate of 53%, if you wanted to retire early, you’d only be 15 -18 years away!
But is it well enough to meet your goals? Let’s find out.
GOAL 1: Retire by the age of 55-60
Based on your current spending of $19,800/year, you’ll need $495,000 by the 4% rule. You are currently putting away $17,575.78 /year + $450/month * 12 (Roth IRA) = $22,975.78/year.
And since you’re starting with $28,450 of investible assets, your time to retirement looks like this:
So you will reach your $495K portfolio number in a little over 12 years, assuming a conservative average 6% return.
Since you’re 30 years old now, that means you’ll be able to retire at the age of 43! A full 12 ahead of your goal of 55! Boo-yah!
And this is assuming your salary is only increasing at the rate of inflation to offset inflation costs. If you get any promotions or raises (which is very likely, considering your amazing hustle), you’ll get there even faster!
Another thing that could help you retire faster is contributing to your 401K. You mention that you have some money in your 401K but you don’t mention contributing to it on a monthly basis. If you did, you’d able to decrease your tax burden and add money towards your retirement fund faster because of saved taxes and employer contributions (and no, you don’t have to wait until 59.5 to withdraw it. Read this article about the Roth IRA conversion ladder on how to get it out).
So in terms of goal 1, you can easily blow past it continuing at your current savings rate if you invest appropriately. (If you just leave it in a saving account the money will get eaten up by inflation and your portfolio will shrink, year over year).
GOAL 2: Buy car with at least 50% cash in the next year
Given that your current numbers gives you a 12-year tail wind, if you were purchase a 12 year old Honda Fit (best used car, as chosen by Mr. Money Mustache: http://www.mrmoneymustache.com/2012/03/19/top-10-cars-for-smart-people/) for $12-15K, that wouldn’t break the bank. And if you could sell your existing car and put the $2300 toward the “new used car”, you’d be out of pocket $9700, which would take you only 7 months to save up for it if you pay in cash. I would not advocate getting a car loan, considering the rising interest rate environment, and how you just managed to dig yourself out of the 100K debt hole. That debt monster is dead. Do. Not. Resuscitate.
So if you bought a $12K car with cash, you’d only be setting your retirement back 7 months, which isn’t a big issue since you’d still be 11.5 years ahead of your goal.
That being said, a car depreciates in value over time, so it’s generally a shitty investment. If the option were available, I’d rather use a car sharing service to keep the costs down, as we mentioned in this Monday’s post.
GOAL 3: Money to travel and eat out occasionally
This depends on how often she wants to eat out and where she wants to travel to. However, given that her savings rate is 53%, she has $0 debt, she rents and thus has predictable expenses with no surprise maintenance costs, and is 11-12 years ahead of her retirement schedule, I would say spending a couple grand a year on vacations and eating out isn’t going to break the bank. But again, this is a number that NB would have to calculate and see how that affects her retirement date.
GOAL 4: Buy a house with at least 20% down
Given that you live in Nashville, with an average rent price of $1426/month and a median home price of $228,500, buying a home in the next 5-10 years is actually not a bone-headed idea. But given your salary, savings rate, and goals, does it make sense?
In order to put 20% down (the minimum to avoid PMI), you would need $45,700. Add to that additional costs of ownership like property taxes (2,280/year, https://smartasset.com/taxes/property-taxes#UmlukNZVtp), insurance ($1200/year), maintenance ($2,285/year) + home inspection ($400) + lawyer fees/closing costs ($500).
Using the monthly calculator, her monthly payment would be:
$377.58/month principal, $557.25/month interest = $934.83/month
Adding in the additional costs, we’re looking at $934.83 + $190 (prop tax) + $100 (insurance) + $190 = $1414.83 / month. Plus add one time closing costs of around $900 for home inspection and lawyer fees.
Of course this is an approximate cost. Maintenance varies from house to house, and since she’ll be moving from a smaller space to a bigger one, she’ll also have to account for extra furniture costs, as well as increased utility costs for an increased space. Also, we are not including interest rate increase, which will definitely affect her mortgage as well.
Of course, American readers will yell at me if I don’t include the tax deductions, so let’s see how much that actually helps.
The difference between the taxes paid with and without mortgage deduction, using this handy-dandy tax calculator, we can see her tax burden of $8936 without the mortgage deduction go down to $8897, a whopping difference of…$39.
So in this case the mortgage deduction once again…does barely anything.
If she wants to buy a house, it will take her 2 and half years to save up the down payment. Even though she has 10K in her emergency savings that she could deploy towards the downpayment, I would recommend against it, since it’s always a good idea to have at least 6 months of living expenses set aside, just in case.
So if she wants the house and the car, this would have the following effects:
- Push out your retirement by 7 months to save up cash to buy the car
- Push out your retirement by 2.5 years to save up for the downpayment
- Add $1414 a month for mortgage + home ownership costs
- Subtract what you’re paying now for rent. Because she didn’t provide her own personal rent, I’ll have to just guess this is around $700 for a shared bedroom in an apartment. Feel free to correct and rerun the math yourself.
Put all this together and this has the following effects:
- Her annual spending rises from $1650 a month to (1650 + 1414 – 700) = $2364 a month, or $28368
- Her FI number rises from $495k to $709k
- Her saving rate goes from $22,975.78 to $14,407.78
And also remember that savings up the downpayment for the house and car added an additional 2.5 years onto this plan, so our retirement date jumps from 12 to about 25.
BUT keep in mind, our reader wanted to be able to retire at 55-60, so because she’s only 30 right now, that puts her right on the path to retire at 55!
So it looks like all 4 goals are very achievable when you’re a badass like NB. She proves that you don’t need to make a STEM salary to live a good life.
As for her goals to find a husband, well, judging by the traction we had on Wanderer’s “frugal hook-ups” article , I’m sure our readers can help her out with that in the comments…
*bow chica wow wow*
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