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33-year-old father of two wants to learn...and then quit to work for himself!
Old 05-01-2012, 12:29 AM   #1
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33-year-old father of two wants to learn...and then quit to work for himself!

My Story
Hi there…I’ve always been a personal finance junkie and was recommended to come here from another message board (not finance related). I’m a 33-year-old father of 14 month twin boys. My wife works full time.

I work for a very large global company that has an office here in New Orleans. Both my wife and I are from here and never want to move…so our primary personal goal is to be able to tell my work “no” if they ever want me to move…which will likely happen at some point in time. This is very important for both of us…so we figure the best way to do this is to pay down the mortgage ASAP. We just built a new house that we can live in forever if we need to. Very conservatively, we can get the house paid off by March of 2017.

In addition to wanting to stay in New Orleans forever, I have another goal of either starting my own company or going to work for a small company where I have some ownership. My wife an I started a business on the side in 2008 that has far exceeded our expectations, and I absolutely love being an entrepreneur. Unfortunately, the side biz can't turn into a full time biz. Overall, leaving my cushy job is a big risk that can be mitigated by having no debt. I have no timeframe for this, but would like to be as flexible as possible in case something comes up.

I’m a big believer of emulating and asking for advice from people who are where you want to be at some point…so here I am.

So basically, I'm looking for feedback on how you think I'm doing...I like to be challenged wrt personal finance...I'm here to learn!

Here’s some pertinent info about my situation:

Income/Expenses
• ~175-200k/year (wife’s income is variable)
• We budget very conservatively due to wife’s job, leaving us with about $12k - $35k extra/year
• Additionally, we own a small business on the side that provides us with $10k - $20k additional/year

Debt
• Primary Mtg: owe $150k @ 4% (in year 1 of a 30 year) – house is worth ~ $400k
• Student Loans: $40k @ 1.5%

Assets
• ~$250k in equity in primary house
• $150k estimated value in vacant land that I am holding for sale or potentially build upon
• $30k cash on hand (emergency and future bills)
• $135k b/w ROTH IRA, Rollover IRA and 401k (me and wife combined) - all tied to blue chip stocks and S&P 500 index funds
• Own 2 cars in full (’06 Grand Cherokee & ’04 Accord)

How we use our extra money
• Allocate $10k/year into my 401k (no match)
• Use the rest to pay down my mortgage

Potential Exposure
• I wrestle with not putting any money into my kids 529 plans
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Old 05-01-2012, 01:21 AM   #2
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Welcome to the site!
Did you put $250K down on your house or did you get a heck of a deal?
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Old 05-01-2012, 02:13 AM   #3
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Welcome to the forum. IMO you are doing fine.
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Old 05-01-2012, 07:17 AM   #4
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Looking at your post, you have very high expenses and it certainly isn't in the usual suspects - house and car loans. To become FI, I suggest you get a serious budget established and start living on way less than you make. At your current income level, you should be able to knock out that mortgage in two or three years but I'd recommend building up a larger cash reserve first. To be able to tell your employer "no" to a move, you should have at least a way to live for a year or more without your income.

Personally, I'm not a big fan of 529 plans for the kid's college until everything else is done. You don't know what else will happen between now and when your kids may (or may not) go to college. Also, parent's income/savings is not counted as heavily for scholarship qualification as money in a 529 plan.
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Old 05-01-2012, 07:31 AM   #5
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Yes if I made that much I would be saving at least $100K. Probably $150K. But that's just me - I am single, childless and frugal.
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Old 05-01-2012, 07:34 AM   #6
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Originally Posted by WestLake View Post
Yes if I made that much I would be saving at least $100K. Probably $150K. But that's just me - I am single, childless and frugal.
To save $150k you'd have to add "and evade paying taxes".
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Old 05-01-2012, 08:17 AM   #7
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Welcome to the site!
Did you put $250K down on your house or did you get a heck of a deal?
-Steve
Got a heck of a deal on the land...put the rest of the equity it via down pmt and additional pmts to mortgage after we converted to permanant loan
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Old 05-01-2012, 08:37 AM   #8
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If I interpret your OP correctly, your expenses are over $160k a year? Just curious as this seems high for a young couple. I realize that includes employment and income taxes, mortgage payments, 401k savings, etc. What are your living expenses?

Like 2B, I'm not keen on 529 plans and just saved for my kids college in taxable funds. As it turned out, DD went to college during my peak earning years and I was able to pay for her college from cash flow and DS has (so far) decided that college is not for him (but I have $100k of my taxable accounts earmarked for college if he changes his mind).
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Old 05-01-2012, 09:18 AM   #9
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Welcome to the forum, tiger fan.

If you really want to be in a position to say "no" to a possible relocation, you need to reduce your expenses as much as possible and build a sizable financial cushion in taxable accounts. Paying down the mortgage is a good strategy IMO (as it has the potential to lower your expenses down the road), but most of your savings seem to be currently locked in 401Ks. You cannot count on that money to pay the bills if you lose your job.

You are lucky to live in a fairly low cost of living area and making a very good amount of money. You need to start saving a lot more than $12K-$35K a year IMO.

If you are concerned that your job might be going away, it may not be a bad idea to start getting used to living only on your wife's and the side business' incomes. That way your income can be used to aggressively pay down the mortgage and add to your savings. When, in the future, you say "no" to your employer, it won't be a big financial shock to the system if you have learned not to rely on your income to pay the bills. It may sound pretty drastic, but plenty of us in dual income households lived on one income and banked the other. It can be done.
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Old 05-01-2012, 09:26 AM   #10
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Originally Posted by 2B View Post
Looking at your post, you have very high expenses and it certainly isn't in the usual suspects - house and car loans. To become FI, I suggest you get a serious budget established and start living on way less than you make. At your current income level, you should be able to knock out that mortgage in two or three years but I'd recommend building up a larger cash reserve first. To be able to tell your employer "no" to a move, you should have at least a way to live for a year or more without your income.
Quote:
Originally Posted by 2B View Post

Personally, I'm not a big fan of 529 plans for the kid's college until everything else is done. You don't know what else will happen between now and when your kids may (or may not) go to college. Also, parent's income/savings is not counted as heavily for scholarship qualification as money in a 529 plan.

Thanks for the response. Agree that I should be able to pay off in 2-3 years...note in my original post I said "very conservatively by March 2017"


I'm intrigued by your "very high expenses" comment. I do track my expenses diligently, so I'll be glad to answer any specific questions, but I guess I should add some clarifications (which I will also add into my original post - which it won't let me edit right now ).


Quote:
Income/Expenses
Quote:
• ~175-200k/year (wife’s income is variable) - This is gross based on tax returns...before taxes, insurance, 401k, etc...Our actual abudget is based off of $70k...the rest is bonuses and commission
• We budget very conservatively due to wife’s job, leaving us with about $12k - $40k extra/year - This is all extra (note have just changed this to $40k after looking at it a bit more closesly)
• Additionally, we own a small business on the side that provides us with $10k - $20k additional/year

Expenses
Code:
Mortgage                                                     $  18,700
Code:
Day Care                                                     $  10,000
Food                                                         $    8,150
True Discrecionary (Entertainment, Clothes, Vacations, etc)  $    7,090
Utilities ( alarm, Electric, Gas, Internet, Water/Sewer)     $    6,450
Student Loans                                                $    4,580
Auto (Fuel, Maintenance, registration, etc)                  $    3,090
Gifts                                                        $    2,550
Life Insurance                                               $    1,570
Various                                                      $    1,490
Home Maintenance                                             $    1,280
Other Baby Expenses                                          $    1,080
Vacant Lot Taxes                                             $    1,030
Medical                                                      $    1,020
Donations                                                    $125
 
Total                                                          $68,230
 
 
Excess (based on 100k Budget (before taxes)                 $    1,170

So even if we truly eliminated 100% of our true discretionary funds (which obviously I don't want to do in order to keep my sanity), that would only save $2500 in interest over the 9 months it would shorten off of my mortgage.
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Old 05-01-2012, 09:32 AM   #11
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Originally Posted by pb4uski View Post
If I interpret your OP correctly, your expenses are over $160k a year? Just curious as this seems high for a young couple. I realize that includes employment and income taxes, mortgage payments, 401k savings, etc. What are your living expenses?

Like 2B, I'm not keen on 529 plans and just saved for my kids college in taxable funds. As it turned out, DD went to college during my peak earning years and I was able to pay for her college from cash flow and DS has (so far) decided that college is not for him (but I have $100k of my taxable accounts earmarked for college if he changes his mind).
Sorry, can see where that needed some clarification...it won't let me edit the OP right now...but you can see the detail in teh post directly above this one. Actual expenses are ~$69k.

thanks for the feedback on 529...I think I feel the same way
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Old 05-01-2012, 09:33 AM   #12
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welcome!

let me guess which company you work for....there aren't many options left in NOLA. I picked up shop and ran as soon as I could from that...city.

I like the 529 accounts, granted I now live in a state which has a "good" program. Especially with multiple children, you can roll on over to the next child. So, I plan to have at least one full education (4 years @ a state school) in a 529 for the first child. By the time that happens, I can feel out what the other children think. Interesting fact I learned the other day, no federal income tax on I bond income used for education expenses.

it's not clear to me if you are contributing extra $10k to 401k after tax or after the match. if it is the former, I would use that money to top off and max out IRA's for you can your spouse. and if those buckets are full, I would invest it in taxable accounts, which can help boost your "cash".

again, welcome.
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Old 05-01-2012, 09:37 AM   #13
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Welcome to the forum, tiger fan.

If you really want to be in a position to say "no" to a possible relocation, you need to reduce your expenses as much as possible and build a sizable financial cushion in taxable accounts. Paying down the mortgage is a good strategy IMO (as it has the potential to lower your expenses down the road), but most of your savings seem to be currently locked in 401Ks. You cannot count on that money to pay the bills if you lose your job.

You are lucky to live in a fairly low cost of living area and making a very good amount of money. You need to start saving a lot more than $12K-$35K a year IMO.

If you are concerned that your job might be going away, it may not be a bad idea to start getting used to living only on your wife's and the side business' incomes. That way your income can be used to aggressively pay down the mortgage and add to your savings. When, in the future, you say "no" to your employer, it won't be a big financial shock to the system if you have learned not to rely on your income to pay the bills. It may sound pretty drastic, but plenty of us in dual income households lived on one income and banked the other. It can be done.
Thanks...yeah, putting the $10k a year in 401k vs. something more liquid is something else I appreciate being challenged on. My dad has been in financial services/banking for all my life, so it's always kind of been ingrained in me to dollar cost average to make sure to catch the market at all swings.

Very interested to hear thoughts on what I could/should be doing with that 10k/year.

And further clarification on the potential relocation....I should have probably stated it better in the OP, but it's likely a minimum of 5 years away. I'm in no fear of losing my job (barring something drastic)....just something I'm very conservatively planning for.

Right now we basically live on my income alone and bank the wife's.
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Old 05-01-2012, 09:43 AM   #14
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Thanks...yeah, putting the $10k a year in 401k vs. something more liquid is something else I appreciate being challenged on. My dad has been in financial services/banking for all my life, so it's always kind of been ingrained in me to dollar cost average to make sure to catch the market at all swings.

Very interested to hear thoughts on what I could/should be doing with that 10k/year.
Just to clarify, I am not saying that you should not keep putting money in your 401K (you are probably in a fairly high tax bracket, so it makes sense to shelter as much of your income as possible). I am saying save more, so you can keep contributing to the 401K and add money to your taxable accounts.
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Old 05-01-2012, 09:53 AM   #15
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Just to clarify, I am not saying that you should not keep putting money in your 401K (you are probably in a fairly high tax bracket, so it makes sense to shelter as much of your income as possible). I am saying save more, so you can keep contributing to the 401K and add money to your taxable accounts.
Gotcha.

Thoughts on putting all money towards mortgage vs. splitting up b/w mortgage and more liquid taxable accounts?
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Old 05-01-2012, 09:55 AM   #16
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welcome!

let me guess which company you work for....there aren't many options left in NOLA. I picked up shop and ran as soon as I could from that...city.

I like the 529 accounts, granted I now live in a state which has a "good" program. Especially with multiple children, you can roll on over to the next child. So, I plan to have at least one full education (4 years @ a state school) in a 529 for the first child. By the time that happens, I can feel out what the other children think. Interesting fact I learned the other day, no federal income tax on I bond income used for education expenses.

it's not clear to me if you are contributing extra $10k to 401k after tax or after the match. if it is the former, I would use that money to top off and max out IRA's for you can your spouse. and if those buckets are full, I would invest it in taxable accounts, which can help boost your "cash".

again, welcome.
NOLA is picking up big time my friend...GE coming in with an office, google is strongly rumoured, tons of entreprenuership, etc.

$10k is before tax and after match. We're above the income limit for Roth IRA.
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Old 05-01-2012, 10:35 AM   #17
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Gotcha.

Thoughts on putting all money towards mortgage vs. splitting up b/w mortgage and more liquid taxable accounts?
I say build up the liquid accounts. You should have a very low interest rate on the mortage so I would not be in a hurry to get rid of it. Besides, if you taxable accounts do well, you might very well be able to pay the mortgage off in the not too distant future. Cash is king........
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Old 05-01-2012, 10:52 AM   #18
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Thanks for the more detailed budget info. Just having it available says you know what you're doing. The expenses are pretty reasonable based on your income. Even with taxes and 401k, you should be able to save pretty aggressively. Go for it.
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Old 05-01-2012, 11:06 AM   #19
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I say build up the liquid accounts. You should have a very low interest rate on the mortage so I would not be in a hurry to get rid of it. Besides, if you taxable accounts do well, you might very well be able to pay the mortgage off in the not too distant future. Cash is king........
+1 took the words right out of my mouth. Paying off the mortgage is a great feeling, but this early in your career and with a two income family there are better places to apply those funds (like building a taxable account). At the low rates we're seeing today, paying down the mortgage is essentially locking your money into a 2-3% growth rate that can be difficult to access later if you need it... selling the house... or taking a HELOC at likely a much higher rate than what we're seeing right now.
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Old 05-01-2012, 11:07 AM   #20
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Thanks for the response. Agree that I should be able to pay off in 2-3 years...note in my original post I said "very conservatively by March 2017"


I'm intrigued by your "very high expenses" comment. I do track my expenses diligently, so I'll be glad to answer any specific questions, but I guess I should add some clarifications (which I will also add into my original post - which it won't let me edit right now ).





Expenses
Code:
Mortgage                                                     $  18,700
Code:
Day Care                                                     $  10,000
Food                                                         $    8,150
True Discrecionary (Entertainment, Clothes, Vacations, etc)  $    7,090
Utilities ( alarm, Electric, Gas, Internet, Water/Sewer)     $    6,450
Student Loans                                                $    4,580
Auto (Fuel, Maintenance, registration, etc)                  $    3,090
Gifts                                                        $    2,550
Life Insurance                                               $    1,570
Various                                                      $    1,490
Home Maintenance                                             $    1,280
Other Baby Expenses                                          $    1,080
Vacant Lot Taxes                                             $    1,030
Medical                                                      $    1,020
Donations                                                    $125
 
Total                                                          $68,230
 
 
Excess (based on 100k Budget (before taxes)                 $    1,170

So even if we truly eliminated 100% of our true discretionary funds (which obviously I don't want to do in order to keep my sanity), that would only save $2500 in interest over the 9 months it would shorten off of my mortgage.
To nitpick, your utilities seem very high to me. Usually heating your home is the primary culprit but since you live in NOLA I would think that would be minimal. I am guessing electric bill to cool it is the biggest factor?

Assuming those are fixed and you can't do anything, I would then look for way to cut on the Food. I feel like I eat well and buy healthy food but spent less than $3,000 last year as a single person without event trying to skimp, cut coupons, etc.....may be some room to squeeze out $1,500 per year on that line item. Nothing else looks out of whack to me on the surface though. I think you have a good plan/approach. I personally would pay off the student loans despite the low interest rates but many would disagree. I hate debt of any type and physically feel better without it.
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