- How Has Covid-19 Affected Your FIRE Journey? Part 6 - August 10, 2020
- The Power Of Forgiveness - August 3, 2020
- Reader Case: Lawyer in Pain - July 31, 2020
Since the last Reader Case somehow generated over 11K views in one day and a front page feature on the RockStar Finance, it looks like these Reader Cases are kind of popular. So…back by popular demand, this Friday we’re doing another reader case!
And to all the house-horny idiots who accuse me of being unfairly biased against housing, you’ll be happy to know that this reader asks whether he should buy a house. *sharpens claws*
Here we go (email edited for brevity):
“First and foremost, your blog is incredible and is inspiring me to invest in my knowledge about the market and take action. I was always the “this stock will win” kind of guy where every few years i’d pick a “winner”(loser), throw a dart and invest $500-1000, and watch it all tank away, I was the “this is how you lose money in the stock market” guy you talk about. I knew diddly about dividends, volatility, indexes, or really anything that is beyond a savings account or buying a single loser stock. I still to this day have $0 invested in a 401(k) because I was too ashamed to invest in something I knew nothing about. I still don’t know all that much…but i’m learning from your blog and have purchased the top 2 books from your “shit we love” list to start reading and learning. When I get passionate about something I don’t stop until I get dangerous 🙂
I’ll be 35 in July and was also stuck in the “work and be loyal” crowd for a long time so instead of investing in my education (either college or self study), I just jumped into the work force and found whatever job(s) would pay me enough to pay my bills and play a little and worked my ass off 50-60 hours a week trying to climb the “ladder”. I climbed the ladder in various stressful sales jobs until 2015 when I was reaching for a director role and was then laid off.
After that I decided to get out of sales and get my life together by doing something I loved. I knew I was going to take a financial hit for a bit until found my footing, so I threw caution to the wind and followed my passion for cloud computing/CRM, got certified and got a job.
I’m now doing better than I ever have, and am being courted by companies that are going to start me in the $100-120k(USD) range starting either end of 2017 or early 2018. So now that I work in a great ecosystem that I enjoy and some good companies, I can start working on getting my finances back in order and putting money in the RIGHT places. I’m kind of treating “now” like I just graduated from college since I finally have a job I LOVE, its lucrative, and will allow me to work remotely from home. But understanding where to start the journey for FI is where i’m struggling and why I could use your wisdom.
So here’s the situation. Any paltry savings my wife and I had was washed up when my son was born. He had severe medical issues and caused us to blow through savings and take out a short term loan to pay off ridiculous medical bills. So like I said prior, with a new career, decent pay, and 0 savings i’m treating now like i’m just starting out because I kind of really am.
• Car Lease (up in May 2019 with $10k buyout if I decide) $215/month
• Personal Loan (up in August 2018) $248/month about $4200 remaining
• Rent: $800/month (includes rent, property taxes, gas, water, electric) – long story, but we can get out whenever we want. We have $9k tied up in the house earning interest which we get back when we leave.
• Misc Fixed Expenses(includes gym, subscriptions, misc dues, car insurance, etc) $1200/month
My income is $70,000/year before taxes, current take home is $52,650. My wife works a part time job during the school year but I don’t count that toward any financial goals because its so very little ($80-100/week) and we mainly just use that for groceries.
1. Become financially independent in 10-15 years
2. Buy a house – Now I KNOW what you’re going to say to this lol. Houses where we are targeting (Southern Delaware) are cheapish. You can get a modest 12-1500 square foot home from $180-225k with about $1500/year in property taxes in a good school district. The area we are targeting has become a target for retirees and small families trying to escape the INSANE house prices and property taxes in NJ and NY and builders can’t keep up with the demand, as well as a ton of businesses moving in. So we are thinking the house will without a doubt appreciate.
We have a goal of getting a home there with a 10-15 year goal of appreciation and trying to keep maintenance and furnishing costs down so we make money in the long run, and once my son is out of college profiting off of the sale and moving into a smaller rental somewhere.
Our home now is 980 square feet, no storage, the town is starting to fall apart around us, the school system is sucking, and the county in general is crumbling, we need out. To rent in the area we are targeting to move to will cost significantly more than owning ($300-500/month on average).
Where should I start? I can’t enroll for 401k until open enrollment in November, so between now and then its just a matter of getting my priorities in line and the journey started.”
All right, first of all, let me just say, I really admire your hustle. Considering how you didn’t end up investing in an Ivy League degree, jumped into the workforce and worked your ass off until you pushed your salary up to 100-120k USD /year, that is amazing! Kudos.
Now, let’s take a look at your situation:
Current Net Income: $52,650
Spending: ($215 + $248 + $800 + $1200) * 12 = $29,556/year
Investable Assets: $9000 (available only when they move out)
Now, since a couple things will be changing for StartingOutAt35 (moving to a new city, new job with higher salary, etc), we’re also going to look at his projected income situation:
Projected Gross Income: $120,000
Projected Net Income: $94,060 (Source: https://smartasset.com/taxes/delaware-tax-calculator#ItJWomvDRj)
- A $225K house
- To avoid the PMI, assuming he waits until he can save a 20% down payment. For a $180,000 loan @ 4.375% 30-year fixed mortgage, the monthly payment would be:
- Ownership costs: $125/month (property taxes) + $187.50/month (1% of home value for maintenance) + $66/month (insurance) + $200/month (utilities) = $578.50/month
- Total monthly costs: $1566.50
- Plus, setting aside some money for one-time costs of home inspection ($400), lawyer fees ($500).
Now, I know all the house-horny idiots are going to assume I’m going to yell at him for buying a house in Southern Delaware, but given that the home prices in DE are less than 2X his gross salary, he actually LOVES his job, and the rental prices in that area is around $1200-$1500, his decision to buy a home in this case is actually *gasp* not idiotic. With his new higher salary, he could easily handle the mortgage, or (even better) pay it off pretty quickly.
Given his new house spending, his new projected yearly cost would be:
Spending: ($215 + $1566.50 + $1200) *12 =$35,778 (assuming personal loan paid off by the time he has enough for the down payment)
In order to generate this passive income, he would need a portfolio of: $894,450
To add a cash cushion for 3 years of living expenses, he would need $107,334, but since the portfolio would return at least 2% in dividends, he will only need $53,667.
So to include the cash cushion, he should aim for a portfolio of $948,117.
With his shiny new salary of $94,060 after taxes, he would be able to set aside $58,282 each year. But, that’s only AFTER he’s saved up the $45,000 down payment and paid off the personal loan. Which, at his current rate of savings rate of $23,094/year, should only take him 2 years.
So, assuming by beginning of 2019, he’s saved the down payment, bought the house, paid off the personal loan, gotten the new higher paying job and maxed out his 401K, here’s how far he’s from retirement:
* 9000 -900 (house closing costs) = $8100
So StartingOverAt35 is able to reach his target, with the house, in slightly over 10 years from 2019! And since he needs 2 years to save up the down payment that’s only 12 years from now.
Okay, now for all those whiners complaining about not taking into account mortgage interest write-off?
Let’s see what happens if we do that shall we?
Of the house payments, $7800/year is interest. So plugging that into the Delaware tax calculator, he ends up having $94,170 after tax salary instead of $94,060 (Source: https://smartasset.com/taxes/delaware-tax-calculator#MHXxTc1FMp)
A WHOPPING tax savings of $110/year! BIG. FUCKING. WHOOP.
And what does this do to his time to retirement?
NOTHING. Absolutely NOTHING. It’s still 10 years from 2019 (plus 2 more to save for the down payment). I find it hilarious that people gloat about saving $110 bucks in taxes while forking over thousands in property taxes, maintenance, insurance, etc.
Oh and guess what else? I’m also NOT going to take into account home appreciation. Why? Because he says he won’t be downsizing or moving to a rental until his son is out of college, so the appreciation is useless.
If you have a problem with that, here’s Chris Brown to explain exactly how many fucks I give:
So as usual, money in a house is dead equity. But because our intrepid reader here is opting NOT to buy an overpriced house that will swamp his net worth, StartingOutAt35 gets the Millennial Revolution’s seal of approval for *gasp* BUYING A HOUSE. It still delays his retirement by 2 years since he has to save up for the downpayment and that money can’t help him retire, but in this case buying the house DOESN’T blow up his finances.
The reason? He will earn a lot, his house value is modest, and he’s not relying on home appreciation to retire.
What do you think? Chime in in the comments!
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