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.
- 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
- Husband Student Loan – $35,000 at 6%
- Kim Student Loan – $30,000 at 4%
- Credit Card – $6,000 at 0%
- Take vacations/visit family
- Eat out once or twice a month
- Golf for husband and daughter
- Donate at least $100/month to charity
- Obtain 2 more rental properties to create somewhat passive income
- Retire in 10-13 years or at least work because we choose to not because we have to pay bills.
- Help daughter with college
Here is their budget:
|Starting Balance||$ -||$ -|
|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 #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|
|Charity||$ 100.00||This is added to meet one of your goals.|
|Total Donations||$ –||$ 100.00|
|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|
|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|
|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.
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
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!
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?