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Naked With Cash: Laura and Leon, December 2013

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Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs).

For more information, read this introduction.

This year, we have four participants who will share their financial reports, exposing the results of their financial choices. Each participant is paired with one of our Certified Financial Planners. The experts will provide insight and guidance that will help our participants take their finances to the next level by the end of 2014. Learn about this year’s participants and experts.

Laura has a B.S. in Engineering, and a state Professional Engineering licensure. She earns $63,200 per year. Leon has a law degree and has passed the bar in three different states. He earns $60,000 a year. They have $44,000 in student debt. They max out contributions to tax-advantaged retirement accounts and hope to begin aggressively paying down debt. Laura and Leon hope that they can get a plan together to better use their financial resources, eliminate student loan debt, and save up to buy a house. They are 28 years old and have no children, but they plan to start a family sometime.

After reading Laura and Leon’s comments, you can read commentary from Roger Wohlner, CFP. Roger Wohlner appears courtesy of The Chicago Financial Planner.

Laura and Leon’s Net Worth Statement

Laura and Leon’s Income Statement

Comments and analysis from Laura

2013 was a monster of a year for us. We sold our house after being on the market for about four months. Leon was granted a promotion and permanent position after passing his second bar exam. I spent about half the year preparing for and then taking the Professional Engineering Exam. I only recently learned I passed, so it’s too soon to know how this will affect our financials.

The biggest change though has come from deciding it was time to get serious about our finances and start educating myself. I scoured through blogs, books, TV, radio — anything I could find.

Here’s a quick summary of what were some of the most important things I’ve learned and how we’re moving forward:

We have to make retirement a priority. The more we save now, the greater the chance our money has to grow and the less we’ll have to save down the line. Furthermore, you can’t make up for lost time. I started working professionally in 2008 but felt unsure about how to save for retirement, so I didn’t do it. As a result, I missed out on some really strong years of growth and left an abundance of tax advantages on the table. In an effort to make up for lost time, we maxed out our 2012 and 2013 Roth IRAs and contributed enough to get the maximum employer contributions for our 401(k)s. This is a pattern we hope to continue through 2014.

Student loans have special rules. In general, it is okay to continue to carry this debt if as long as the interest rate is low and you invest the difference. In our case, the consolidated interest rate is 6.55%, which just barely tips it in the favor of paying down the loan versus long term investment. Also, unlike our old mortgage, we have the option to pay ahead and push out our next payment due date. This means that if we need major cash flow in a pinch, we could always stop paying for a few months and be no worse off in terms of fees and interest.

When you couple this with the fact that student loans cannot be discharged in bankruptcy and would adversely affect us when we eventually try to buy a house, I see no reason not to hit these loans as aggressively as possible. Our goal in 2013 was to pay $1,000 per month toward the debt, but we were able to pay closer to $1,500 per month on average. In 2014, we’re hoping to step this up and pay at least $2,000 per month.

We should not buy a house until we are truly financially prepared for it. The worst thing we could do would be to saddle ourselves with more debt than we can safely pay each month. Our goal is to save enough to put a full 20% down payment on a 15-year mortgaged house while leaving enough for emergencies. There is no specific dollar amount each month for achieving this. Any amount added to this will come from money that is left over at the end of each month. Once the student loans are fully paid off, the money that was going toward that will switch to building up a down payment. For now, the money added to this fund will have to come out of reduced expenses in other areas like our grocery bill.

Other than these big items, our goals are a hodge-podge of items to make our money more efficient, like carefully planning our meals, occasionally biking to work, taking on a side job, and organizing and selling excess household objects. If I could generally achieve one or two of these extra items I would be pleased.

Feedback from Roger Wohlner, CFP

First of all the two of you should be congratulated on what appears to be a frugal post-college lifestyle. I’m not sure where you live, but your rent and related expense certainly seem reasonable relative to your income.

Laura’s comments about making retirement savings a priority are right on in my opinion. At 28 with no kids you have the luxury of time and you are smart to take advantage of that. Here are a few of my thoughts, shared with the understanding that I don’t know some of the details of your situation:

At the very least you are wise to contribute enough to get the full match in your respective employer’s 401(k) plans. The match is essentially “free money” and is silly to pass up.

Beyond that whether to fund a Roth IRA or contribute more to your 401(k) depends upon several factors:

  • The quality of the 401(k) plan: Does it offer a solid, low cost menu of investments? Are the fees and expenses low?
  • Does either of the plans offer a Roth option? If so, you can actually contribute more under the Roth umbrella to a 401(k) than is allowed for an IRA.
  • What are the Roth IRAs invested in? Do you have access to low fee accounts in terms of fees and trading costs for stocks and ETFs? Do the accounts allow access to a wide array of no-load, no-transaction fee mutual funds?
  • If you are working with a financial advisor is he/she paid based upon the investments sold? If you are doing this yourself do you feel comfortable managing your own portfolios?

At 6.55% it does make sense to aggressively pay down these loans, especially while you have two incomes and no kids. It seems like you are doing a good job of balancing this against saving for retirement.

I also applaud your approach to buying a home. While a home can be a good long-term investment as well a great place to raise a family, there is no reason to strap your selves financially to own a home at this juncture.

Overall it looks like the two of you are getting a great start on your financial future.

Feedback from Luke Landes

It’s clear you and Leon are taking a smart and considered approach to your finances.

Sometimes the comparison between the student loan interest rate and the anticipated rate of return of an investment isn’t the only consideration when deciding whether to accelerate your student loan paydown. This wouldn’t change your conclusion to eliminate the student loans as quickly as possible. The long-term return of the stock market comes with some risk. Yes, student loans are risky to hold as well for some of the reasons you mention, but your equivalent rate of return won’t waver like the stock market given your consistent payments.

I’d like to hear more about your goals other than buying a house once you’re ready. When you prepared your bio, your combined income was $120,000 a year, and with the P.E. certification, I expect you’ll be able to command a higher salary when you choose to. Taking a look at your income statement, the opportunities I see are in the groceries/household category, although it’s unclear what that includes — if it’s mostly food, you can cut that back. But you have great cash flow, so I wouldn’t worry too much about cutting back expenses. The best opportunities for you are probably a new position and side jobs — but only if they’re worth your time.

It’ll be fun to watch your progress this year; I expect we’ll see good things.

Updated February 1, 2014 and originally published January 31, 2014. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 6 comments… read them below or add one }

avatar Laura

Roger,

Leon and I live in a relatively small Midwest town. I did some quick searches and found the median income for our zip code is $30,367 while the cost of living index is 72. To be honest, we live in some of the nicest apartments in town. Our rent includes access to the workout room, gas grills, and high-speed internet, all of which we use on a very regular basis. Furthermore we located about within a 15-minute drive to either of our work places and within a 5-minute walk to our nearest grocery store. While it’s likely we could find a cheaper location to rent, I do feel okay with our current situation given we only put about 12.2% of our take home pay toward housing.

As for our investments, both our 401(k)s offer a selection of low ER index funds plus a few more expensive managed funds. I thought our broker expense fees were low, but as I try to search for more concrete numbers for you, I am finding mixed information about how much it costs, so really I need to do some more in-depth research and get back to you. Would it help to see all the funds available or would that be a bit too much information?

I do know that neither of our 401(k)s offer any Roth options.

Currently our Roths are invested in three places. It seems like a bit of a mess largely because we’ve been learning and changing our mind quite a bit since we’ve started.

1) About $4.7k is in a developing world mutual fund with an amazing history of growth but very high front loads and expense ratios. There was more, but I reallocated a fair amount after I educated myself on how detrimental these expenses can be. The remaining amount technically belongs to Leon and I’m letting him be the judge on if and when he wants to reallocate the remaining amount.

2) We have about $2.6k in a discount brokerage service that charges on a per-trade basis. Occasionally Leon will research a particular company and then buy a small amount of their stock with the intention of holding it. He does not use the account to day trade. So far he’s up, but I know purchasing individual stocks requires more careful management than funds so I prefer not to do this for now. We’ve agreed that we will not put more money in this account than we can afford to lose completely.

3) Everything else is in Vanguard Target Retirement Funds directly with Vanguard, the recognized leader in low expense index funds. This is where my monthly auto-draft will be going for the upcoming year.

There is a financial adviser we’re working with who is commission based. This is the same guy who recommended the #1 Roth funds and his currently holds all our taxable investments in lower yielding bond and income funds. When we first started investing about a year ago, I definitely did not feel comfortable in selecting and allocating our funds, so this person was very helpful to us. Since then, however, I’ve learned a lot and am now convinced we can probably invest for ourselves a bit cheaper and simply rely on the occasional fee-based advice.

For now, I’m going to leave our taxable investments where they are until we’re ready to use them on a down payment on a house. After that, I doubt we will continue to use his services very much. He’s a great guy but this is business, and nobody will care about our money more than us. If I may ask, are there any intermediate level books you would recommend to educate myself about investment strategies?

Thank you so much for your time and help.

Sincerely,
-Laura

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avatar Laura

Luke,

Our long term goals are admittedly very nebulous at this point. When pressed, I suppose there are a few things we’d like to make happen if possible. I feel like whether we actually pursue these specific goals or change course in a year or two, our game plan will probably be the same regardless.

- Have enough resources so that one of us could stay home with any children for at least a while if we wanted.
- Provide quality schooling for our children all the way from their formative years through undergrad. We both attended the same college-prep school and highly value a rigorous liberal arts education. It would be nice if we could provide the same foundation for our children.
- Eventually (perhaps 20 years from now) have enough passive income sources and draw-down assets that we could choose to cut down or stop working entirely. Some people refer to this as Financial Independence or even Early Retirement.

You also commented on the most likely opportunity to cut expenses was in our grocery/household spending. I absolutely agree with you on this. My current tracking system relies entirely on Mint. The reason I have groceries and household as the same line item is because we do 95% of our shopping at the same superstore and the software only shows where we spent our money.

Truthfully, I’m not sure where all that money is going or even how much is going to food versus household supplies. We eat in most nights but perhaps we’re shelling our too much for gourmet options, or out-of-season produce, or prepackaged meals. For the month of February, I think we’re going to save our receipts and examine exactly where everything is going and then figure out how to trim this down.

As for increasing income with side jobs, this is something I will definitely have to think about. We currently have a good work-life-family balance but that does not mean we couldn’t find something worth our time. I’ve been tossing around the idea of tutoring for a while, so perhaps I’ll do some research on how much I can expect to do with this. Leon could possibly become a private mediator or legal researcher if his firm approves. Nothing will earn nearly what our day jobs do, but I will push us on looking into these and update you on any side jobs we take.

Thank you for hosting this and challenging us along the way.

Sincerely,
-Laura

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avatar DonnaFreedman ♦2,448 (Dollar)

I think “not buying a house until we’re ready” is a smart move. Too many people buy because you’re SUPPOSED to buy. (Sez who?) They don’t think it through, e.g., “Is this where we want to live?” or “Am I really cut out to be a homeowner at this point in my life?”
Congratulations on the recent milestones.

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avatar Ivan Widjaya

I can say that I am in a similar situation. I’m 27 and I need to save up for a house. But then, I haven’t really thought about retirement or savings. For me, house is a priority right now and I have no college debts or other debts. But then I don’t know what to do.

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avatar Tiffany

I can’t believe how low their auto / transit expenses – looks like just gas, no car payments/ leases & insurance is counted elsewhere? For us this category is our second largest, although I include our one car payment ($270), insurance for both of use ($220), and gas (around $400) (we both commute over 20 miles to work). I’m always intrigued when people’s transit costs are so low, that seems great!

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avatar Laura

We own our vehicles outright (they were gifts from our respective parents many years ago) so the amount shown is for gas and maintenance. We each work less than 5 miles from our apartment and we walk to do 90% of our shopping so our gas use is fairly small. Not every month is as cheap as the ones shown. Just a few months ago I wrote a check for over $1k to do the 100k mileage maintenance on one of the cars. A relative confirmed that the price was perhaps a little high but not unreasonable. The insurance line is mostly auto and liability insurance with a little bit of renter’s insurance.

Our plan is to drive these cars until it costs more to fix them than the scrap they’re worth, and then buy the next car with cash or at least 0% financing.

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