Budget Friday: Submission 5

Budget Friday: Submission 5

Budget Friday: Submission 5

Hey everyone! Welcome back to another episode of Budget Friday. This is seriously my favorite parts about personal finance, the chance to help others get on a budget, get out of debt and reach their financial goals. I love showing the power of a well-thought out budget plan, and the long term results they can have.

Today’s budget is from Kim from the site Eyes on the Dollar.

Kim age 38, husband age 42, daughter age 5

Background: Kim is selling her optometry practice and will receive a net sum down payment of $84,500. w00t! Nice work on building a successful practice and selling it off for a decent amount. She will also receive $3273 a month for the next ten years as payment for the sale of the practice.

Assets:

  • Home: Appraised value $375K as of 1/2012. Loan balance $171,368 at 3.25%
  • Rental Property: $68K as of 8/2012. Loan balance 47,000 at 4.25%
  • Commercial Property: $125K. Loan Balance 100K at 6% (Former owner financed)
  • Kim’s SIMPLE IRA: $93,391
  • Kim’s Roth IRA: $19,036
  • Husband’s 401K $17,287
  • Husband’s 403b $5000
  • Husband’s Roth IRA $1100
  • Daughter’s 529 $3300
  • Liquid Savings $10,500
  • HSA savings $500
  • 2008 Nissan Altima (All cars paid off)
  • 2006 Toyota Tacoma (4×4 for snow and pulling camper)
  • 1999 Honda Civic (Husband’s commuter car)
  • 2005 Flagstaff pop up camper
  • Various Brokerage accounts $1000

Debts (Balances):

  1. Husband Student Loan – $35,000 at 6%
  2. Kim Student Loan – $30,000 at 4%
  3. Credit Card – $6,000 at 0%

Goals:

  1. Take vacations/visit family
  2. Eat out once or twice a month
  3. Ski
  4. Golf for husband and daughter
  5. Donate at least $100/month to charity
  6. Obtain 2 more rental properties to create somewhat passive income
  7. Retire in 10-13 years or at least work because we choose to not because we have to pay bills.
  8. Help daughter with college

Here is their budget:

 

OLD NEW Comments
Starting Balance  $                 -  $                 -
Total Income  $  12,236.00  $  12,236.00 Impressive   :)
Total Expenses  $    8,106.00  $    8,774.00
Projected Ending Balance  $    4,130.00  $    3,462.00
Income
Income #1  $    2,300.00  $    2,300.00
Income #2  $    4,863.00  $    4,863.00
Residential Rental  $        300.00  $        300.00
Commercial Rental  $    1,500.00  $    1,500.00
Business Loan Income  $    3,273.00  $    3,273.00
Total Income  $  12,236.00  $  12,236.00
Donations
Charity  $        100.00 This is added to meet one of your goals.
Total Donations  $                 –    $        100.00
Bills
Mortgage  $    1,600.00  $    1,600.00
Electric  $        100.00  $        100.00
Natural Gas  $        225.00  $        225.00
Cell Phone  $          86.00  $          86.00
Home Phone/Internet  $          40.00  $          40.00
Water/Sewer  $          36.00  $          36.00
Car Insurance/Umbrella policy  $        160.00  $        130.00 I recommend only insuring the truck when you need it for snow and/or towing. My car insurance company allows me to add and drop cars as needed, so you should be able to save at least $30 on this.
Trash  $          21.00  $          21.00
Satellite TV  $          67.00  $          67.00 You know how I feel about this, and I can appreciate that your husband does not want to drop this. I would just suggest looking into Netflix/Hulu for your media consumption, but as you wish, I will keep this here.
Blog  $            9.00  $            9.00
Mortgage Extra payment  $        140.00  $        140.00
Kim Student Loan ($30k Balance)  $        302.00  $                 –   Killed with the business sale.
Health Insurance  $        160.00  $        160.00
Kindergarten  $        100.00  $        100.00
Kid – Dance Class  $          26.00  $          26.00
Kid – Gymnastics  $          16.00  $          16.00
Kid – College Fund  $        100.00  $        200.00
Rec. Center  $          23.00  $          23.00
Commercial Loan  $    3,995.00  $    3,995.00
Total Bills  $    7,206.00  $    6,974.00
Necessities
Food  $        350.00  $        350.00
Gas  $        250.00  $        250.00
Date  $                 -  $        100.00 This is required. Dating your spouse is one of the best things you can do for your marriage. My wife and I try to day at least twice a month (or more) to get a break from life and enjoy each other.
Spending Cash  $                 -  $        200.00 You need some splurge money. You work three jobs and want to get a massage, enjoy the movies (with popcorn) or need the new Justin Bieber record, go ahead. This money is for spending, and you should enjoy every dollar of it!
Pets  $        100.00  $        100.00
Total Necessities  $        700.00  $    1,000.00
Savings Buckets
Christmas  $                 -  $          50.00 You expressed wanting to have a Christmas budget. This year is shot ( I suggest just cash flowing it with your monthly income), but for your regular budget, I suggest using your savings bucket to save monthly for this expenditure.
Birthdays  $                 -  $          50.00  I suggest using your savings bucket to save   monthly for this expenditure.
Beauty  $                 -  $          25.00  I suggest using your savings bucket to save   monthly for this expenditure.
Car maintenance  $        100.00  $        100.00
Vacation  $                 -  $        200.00 You have a large enough income to justify going on some sweet vacations. This is $2,400 a year to go wherever you want, or you could save up for a few years and go on a really BIG trip! Now, if you want to raise this category, I have no problem with that, but I would suggest still doing research and being frugal on your vacations. Use credit card rewards for flights and hotels, find great travel deal and keep on reading PF blogs to find great savings tips. Just because you can afford doesn’t mean you shouldn’t still be frugal (though I think you’ll have no problem with this!)
Life Insurance  $          70.00  $          70.00
Clothing  $                 -  $          25.00  I suggest using your savings bucket to save   monthly for this expenditure.
HOA Dues  $          30.00  $          30.00
Skiing $                 - $          50.00 I don’t know the total cost of this, but this is $600 for the year to go skiing.
Golf $                 - $          100.00 I don’t know the total cost of this, but this is $1,200 for the year to go golfing.
Total Other  $        200.00  $        700.00
Total Expenses  $    8,106.00  $    8,774.00

 

Kim, you are killing it. Period.

Debt Snowball

Hey, you’ve got $85,000 to kill your debt IMMEDIATELY. I suggest you kill all of it in one fell swoop! That’s $71,000 to become debt free faster than Romney pulled campaign funding. You can donate $2,000 to the Humane Society (as you have expressed interest in doing). Then you can fully fund your emergency fund with the extra $12,000. And your debt snowball is done :)

Investing

Now that you’re debt free and have a decent sized emergency fund, I would recommend investing half of your extra cash in your retirement accounts (about $3,500 a month once your commercial loan is paid off). First, invest up to the company match (if any) at your husband’s work. Then max out your Roth IRAs ($10,000). After that, finish maxing out the 401k. Now, I don’t know much more about the SIMPLE or 403b accounts, but I recommend maxing out your tax deferred accounts first, then the taxable accounts. The reason is to take as many tax advantages as possible when investing to keep more of your money and let that extra money compound. As always, consult your financial advisor and tax accountant to discuss phase outs and eligibility for these accounts, especially since you won’t own your business anymore.

Pay Off The House!

Now that you’re investing  $3,500 a month, your should take the other $3,500 and put it toward early mortgage payoff. I would start with your rental property, because your loan balance will be near $40,000 (we’re talking after you pay off the business loan), and you would be able to pay if off in a year! Then turn your efforts toward your personal residence. If your personal residence is around $165,000 at that point, you could kill it in about 3 years. We’re talking COMPLETELY DEBT FREE IN 4 YEARS TOTAL!!! I don’t know about you, but I think that A-FRICKIN’-MAZING!

Goals

Take vacations/visit family – Added to budget

Eat out once or twice a month – Added to budget as “date”

Ski – Added to budget

Golf for husband and daughter – Added to budget

Donate at least $100/month to charity – Added to budget

Obtain 2 more rental properties to create somewhat passive income

  • If you can truly buy rentals for under $100k as you have told me, I recommend starting with one and ensure it has a positive cash flow before purchasing the second one. If you have a good real estate agent, work with them to find the best possible deal on rentals, as I don’t have any direct experience in this field.

Retire in 10-13 years or at least work because we choose to not because we have to pay bills. With Jim’s pension, rental income, and side income, I think we could.

  • You are well on your way here. With over $5,000 in “passive” income and your commercial loan gone in 2 years, you have the potential to save over $7,000 a month toward retirement! As you can see above, I would recommend killing your debts first and only investing $3,500 for the first 4 years. After that, you can invest the full $7,000 + the $1,600 from the mortgage savings. Running some rough numbers on investing that money at 7% for the next 8 years, that would put you easily over $1,000,000 just from that savings. Now, if you use your tax deferred and tax free investment vehicles, that number could exponentially increase. Not to mention you could have more rentals and passive income to add to this number. If you stick to a budget plan, you will be set for life within the next decade.

Help daughter with college – Added to budget

And that’s it! Kim and her family are well on their way to financial freedom, I have no doubts that they can stick to this budget and really rock their finances. I would just suggest to celebrate the milestones (debt payoff, maxing out retirement accounts, paying off rental, paying off mortgage) to help enjoy the journey. And Kim, remember me when you’re rollin’ in the millions! ;)

Comments: So, what do you think? Is there anything you would have changed about my proposed budget? I’d love to get some reader feedback on what you would do. Kim and her husband have obviously done a great job at building up a great income, and as they look toward retirement and financial independence, they have a great plan in place to reach all of their goals and enjoy life without the burden of being required to work. If you were in there shoes, what’s the first thing you would do after retiring with over $1,000,000 in the bank and over $5,000 of passive income still coming in?

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Comments

  1. I agree, Kim and her husband are killing it! I would probably do much of the same and take the money from the sale and throw it right at the debt. That monthly stipend they’ll be receiving is pretty sweet as well. I think you’ve come up with a good balance of having fun while at the same time knocking down the debt and planning for the future.
    John S @ Frugal Rules recently posted..Frugal Friday: Posts That Ruled This Week, Thanksgiving is NEXT Week Edition!?My Profile

    • Thanks John. Yes, they definitely have room to put in some more fun money and activities, but I find that having a good guideline to follow will help curb excessive spending, especially with so much free cash available. I’m a big advocate of giving every dollar a name, but budgets can and should be very flexible to adapt to changing needs.

  2. Hey Kim, what are you going to be up to now that you’ve sold your practice? Are you doing the same thing for someone else now or focusing on other stuff?

    The difference between Kim’s household income and expenses is big enough that I think budgeting (though not tracking!) become optional. If you set and meet savings goals for retirement and debt repayment, which you clearly can, does it matter how much you spend on your child’s enrichment? What I’m saying is – don’t have $3500 in ‘leftover’ money every month to apply to your goals – meet your goals and live on the $9000 ‘leftover.’ Most of the budget categories are fixed/not under your control anyway so if you are not a habitual overspender it’s not going to matter if you spend $100 or $120 per month on date night.

    Jacob and Kim what do you think of making a budget optional? I would only recommend it for certain incomes and personalities.
    Emily @ evolvingPF recently posted..Blog Statistics Update October – November 2012My Profile

    • Though they can still be sittin’ pretty without a written budget, the way I see it, the more money you make, the more trouble you can get in. Kim has talked about getting into lifestyle inflation and debt because of increasing their spending without discretion, so I believe that having this guide will help her meet all her goals.

  3. Way to go! I think you are going to be fine and I would also get rid of the debt faster than you can shake a stick which will open up so many avenues for you. Stick to your goals and (the grocery game) ya and you will get to where you want to be. I like that you pull a vehicle off the road in the winter. We do the same thing and it saves us money as well. I really don’t know what we would do with all of that money but I do know that I would make sure my kids were taken care of and that our retirement was what we want it to be even if that means travelling the world. Great Job on the budget breakdown! Mr.CBB
    Canadian Budget Binder recently posted..My Best Financial TipMy Profile

    • Thanks Mr. CBB! Kim has built a great thing, and can really start killing it in the next 8-10 years. Early retirement is definitely on the table, and the more capital they have, the more opportunities there are.

  4. I would agree with your assessment that they’ve done a great job of making money and growing their income. However, with people in that situation I often see that they get lazy (good thing Kim is a PF blogger though) and take their income for granted. What I’ve seen the most is the lack of discipline required to put money aside in those savings buckets you suggested…I think that’s a MUST though. The greatest thing I’ve done as far as budgeting is concerned is specifically saving every monthly for those expenses that come periodically throughout the year. It’s such a life-saver! :)
    WorkSaveLive recently posted..Saving Money on Your Home Security SystemMy Profile

    • Savings buckets are absolutely great. They are my goal-getters (see what I did there ;) ) because you set a goal, reverse engineer it and break it down into easy monthly buckets. You will ALWAYS hit those goals when you put them in your budget this way. It’s a no-brainer!

  5. Wow you guys are doing great! And that is awesome about the sale of your practice.
    Michelle recently posted..What’s On Your Beside Table?My Profile

  6. Holy crap, this is very emotional to see it all in black and white. I can’t thank you enough, Jake, for doing this. There is still the possibility that the whole thing could fall through, but with about a month left until sell date, it looks to be pretty likely. I know there will be some people who look at this and think that we are swimming in money, but really it’s all the result of some luck in buying when I did, and tons of hard work and 80 hour weeks. I sometimes feel like I have worked enough in almost 13 years to equal a 25 year career. I know there are people who work two or three jobs and barely make ends meet, so we are truly lucky.

    With our income, we have certainly done the lifestyle inflation thing and racked up lots of debt. We could easily have a Lexus, a vacation home,eat out every night, and continue to be up to our eyes in debt, working until we’re in our 60’s or beyond to keep making the payments, but things just aren’t worth it to me anymore. Whatever I need to buy either has to make money for me or bring lots of joy.

    To answer Emily’s question, I think we always need to budget. We are like recovered alcoholics and could easily fall back into bad habits. We could also lose a job or have something happen with rental income, so I always want to have a backup plan.

    I also want to say that there is noting special about us at all. We put ourselves throught school, borrowed for good purposes to get our degrees and to buy a business and income property, and I think anyone can do it. If you have a job that doesn’t have that kind of income potential, then you just have to work smarter and look at other avenues. You might have to move to the right area. I strongly believe being a business owner is the top way to generate income, but you have to be careful about doing research and making smart buys.I’m pretty good at looking at P&L statements by now, so if I can ever help, let me know.

    Thanks again for doing the budget series. It’s flippin’ sweet! I will make you proud!
    Kim@Eyesonthedollar recently posted..Small Tips for Holiday TravelMy Profile

    • Kim, thank you so much for submitting this budget. It has inspired me even more to pursue small business more seriously, and know that you can build tremendous wealth small bits at a time. And I agree, you deserve early retirement, running a business is HARD WORK!

      I’m glad you’ve learned from past mistakes, and you have a very bright future ahead (I am trying to drop in as many ‘eye’ puns as possible). As you can see, you’re a millionaire by the end of this decade!

      And I totally agree with your assessment. Small businiess is really the way to prosper in North America. Most other places have a glass ceiling.

      Let me know how things are going in 6 months, I’d love to do a follow-up. :)

  7. They are doing awesome. I totally agree with you- pay off all dabt with lump sum payment then put monthly sum toward mortgage prepayment. You could be 100% debt free in absolutely no time.
    Holly@ClubThrifty recently posted..The Amazing Power of DebtMy Profile

    • 100% debt free is a distant dream of mine. I hope to be there in the next 15 years, but we’ll see. She could be there in 4 years, which is A-MAZING! Then you’ll be twins with her, right?

  8. You guys are doing a really great job and this budget looks pretty good. Just remember in 2013 ROTH contribution limites increase to $5500 so that’s and extra $1000 between the two of you, but you should be able to fund that difference no problem!

    Personally I would go hard and try to get well over $1MM saved and then consider setting up a legacy like a scholarship fund or something like that to leave a lasting legacy (maybe for others who want to be eye DRs). But like I said you guys are on the right track, tackle your debt and save like crazy and you’ll be out of the rat race soon!

    • I would really love to do that. I got lots of scholarships that helped me through school, and my business has always give a small one for my former high school. I guess we forgot to budget for that, but I can adjust the charity portion to cover it. My two big causes I would love to support are local animal charities and ones that encourage young people to go on to college or find meaninful careers.
      Kim@Eyesonthedollar recently posted..Small Tips for Holiday TravelMy Profile

    • Great ideas Brian. And good call on the Roth contribution. I think they’ll hit $1M by the end of the decade, which is RI-DONK-ULOUS!

  9. I’m trying to understand this right… Do you own the building your practice is in? Is that the commercial real estate and commercial loan payback? Then the sale of the business is just for the practice, and they’ll continue to stay in the building at market rent?

    Kim – I know this is random, but did you run as an S-Corp? Sorry if that’s too nerdy of a question for here. =)
    Mrs PoP @ Planting Our Pennies recently posted..Local Tax Time – Property TaxesMy Profile

    • Yes, that’s correct. The buyer of my business will stay in the space and rent from me. He is only purchasing the business for now. Down the road, we may look into selling the building, but not for a while anyway.

      Yes, we are an S-corp. Not nerdy at all. Well, maybe, but I’m a nerd.

  10. I love these budgets! I agree I’d totally pay everything off then reallocate debt money back into the budget. This also makes me want to consider buying into a practice but like Kim said she worked a 25yr career into 13…the one thing that terrifies me if I became a business owner. Looks like Kim can retire early!
    Catherine recently posted..Weekly Reads: 16.11.12My Profile

  11. I would pay the 6% debt with the windfall and then make extra payments with the monthly stipend. I would then use the rest of the windfall to purchase another rental property. With $50K or so down on a similar rental as the one already owned, the mortgage should be very low, and the rent could cover both loan repayment and the student loan interest. Otherwise, amazing job!
    Pauline recently posted..Friday recap, a boat ride and a giveaway!My Profile

  12. Keep the satellite tv! Geez, it’s $67/mo which is super cheap and 0% of their income….
    Leslie recently posted..Switching from Contract to Pre-Paid Cell Phone PlanMy Profile

    • I kept it in there, it’s not hurting them financially at all. My hatred for all things cable and TV go beyond the financial cost, but that is another post for another time, probably for another blog ;)

  13. I love that donations and charity were added to the budget. It’s an important part about personal finance that many people overlook. I don’t even think I’d change anything at all, except that I do agree with Leslie. No need to get rid of satellite – don’t cut things out just “because”. That $67/month or so won’t go that far to changing the financial outlook when they are already doing well.
    Daisy @ Money Smart Guides recently posted..The Round Table – November 17, 2012My Profile

  14. This sounds like a pretty great financial situation for a family of 3. Having all that extra money from selling a successful business and having a option of paying of 2 mortgages is like a dream come true for a lot of families. I also like the fact that you have a lot of money invested in retirement accounts. We all should be so disciplined with our finances. Thanks for sharing!
    Elena @ Lack of Sleep recently posted..Amazing Health Benefits of a Good Night SleepMy Profile

  15. Wow you guys are doing great on your income streams. I also love that you are saving for your children’s college education. That is such a powerful gift.

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