Hey everyone! Welcome back to another episode of Budget Friday. This is seriously my favorite part 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. I know it’s been a while, and I’m glad to be back today with an awesome reader’s budget.
Today’s budget is an anonymous submission. We’ll call her Stella.
Background: Stella is a medical doctor who has been in the workforce for just over 2 years. She has already amassed a sweet savings fund, and is maxing out her 401k match at work. The only problem is that her savings are almost ALL in a money market fund earning like 0.15% interest! I want to help her make the most of her money, and use her high income to build a sweet stash of cash and allow her to hit financial independence ASAP! Let’s check out some numbers:
- Home – $200,000
- Retirement Fund Savings (401k and Roth IRA) – $7,900
- Money Market Savings – $78,000
- Mortgage – $160,000 at 3.65%
- “Pay off house. I’m not in a hurry, my interest rate is pretty good, right?”
- “I want to have a significant savings for my son, so he can use it for school, life, etc. I did not start a VestED as my husband strongly believes that we should have control of that money. He does not like the idea of all the restrictions that come with the VestEds (has to be used for school, minimum age my son can withdraw money, etc.)”
- “I want the option to retire early if I want to, perhaps at 57 or 60yo. I took one 4 hour course on finances as part of residency requirement (basically, this is where I first heard for 401(k)s, and mutual funds, stock market, IRAs, etc) and was told that I need $1-2 million to retire.”
- Come up with plan for money market funds and monthly savings.
- Want an entertainment and date night budget, as well as a vacation budget (possibly to visit family in Vietnam).
Here is her budget:
|Starting Balance||$ -||$ -|
|Total Income||$ 8,000.00||$ 8,000.00|
|Total Expenses||$ 3,075.00||$ 8,000.00|
|Projected Ending Balance||$ 4,925.00||$ -|
|Monthly Income||$ 8,000.00||$ 8,000.00||Way to go!|
|Total Income||$ 8,000.00||$ 8,000.00|
|Mortgage||$ 1,150.00||$ 1,150.00|
|Electric/Gas||$ 160.00||$ 160.00|
|Cell Phone||$ 70.00||$ 70.00|
|Internet||$ 35.00||$ 35.00|
|Car Insurance||$ 50.00||I didn’t see car insurance in the original.|
|Water/Sewer||$ 60.00||$ 60.00|
|Garbage||$ 25.00||I didn’t see garbage in the original.|
|Extra Mortgage Principal||$ 4,500.00||You can pay this house off RIDICULOUSLY FAST! You can hang on to the mortgage at that low rate, or kill it and be done FOREVER. Your choice.|
|Total Bills||$ 1,475.00||$ 6,050.00|
|Food||$ 400.00||$ 400.00|
|Gas||$ 200.00||$ 200.00|
|Date||$ 100.00||To meet one of your goals, have $100 available each month to date your husband! Requirement in any couples budget I put together!|
|Spending Cash||$ 200.00||I split out all discretionary spending. This cash is $100 for each of you to spend however you want without consulting each other. Enjoy it|
|Entertainment||$ 100.00||Separate from date night, family entertainment (movies, fair, outings, etc.) Start here and see how $100 works.|
|Restaurants||$ 150.00||You had this lumped in with Misc. I split it out so you can see what you’re spending on eating out. Adjust as necessary.|
|Retail Shopping||$ 100.00||Same as above.|
|Misc||$ 1,000.00||$ 100.00||$100 for other items that don’t fit into the above 5 categories.|
|Total Necessities||$ 1,600.00||$ 1,350.00|
|Gifts||$ 100.00||Gifts seems to always drain the budget when not planned for. Set aside $100 a month for birthdays, Christmas, or anytime gifts.|
|Vacation||$ 500.00||You stated wanting to taken occasional family vacations and possibly visit family in Vietnam occasionally. I’ve built in $6,000 a year for family travel. I suggest taking advantage of travel rewards credit cards to get sign up bonuses and earn miles/points for these vacations. Having flights and hotel paid for allows for much less stress on your family ventures. You can check out how we do this by reading HERE|
|Total Other||$ -||$ 600.00|
|Total Expenses||$ 3,075.00||$ 8,000.00|
Ummmm….Amazing. That is all I have to say.
Here’s the deal. You have a mortgage with a VERY low rate, and can probably earn more money investing than paying off the mortgage. But here’s the other caveat. If you apply your extra cash to the principal each month, you can pay this mortgage off in 2 YEAR 8 MONTHS! Which is RIDICULOUSLY amazing!!!
So, I’m going to leave it up to a vote in the comments. Should she pay off the mortgage with the quickness, or let it linger around and invest ALL her savings starting now?
Stella, it’s obviously up to you and your comfort level with debt. I won’t tell you my vote until later in the comments, but either choice is still pretty awesome.
1. Pay off house
As you can see above, you have the ability to pay off your mortgage in less than 3 years. But as you said above, you’re not in a hurry because of an EXTREMELY low interest rate. I leave this up to you.
2. Savings for son/Early Retirement
This is where it gets fun. Your goals of saving for your son and early retirement are going to follow a similar path, as it involves making your money work for you in the stock market. So I am going to join them together, but explain how to hit both goals.
First, you can read the investing book that has shaped my current views on investing: Millionaire Teacher. It’s a very easy and engaging read, and can help show you the benefits of using index funds to help invest for your IRA and other investing accounts.
You have the power to build significant wealth in a relatively short amount of time, but you also don’t want money managers and financial planners sucking your returns dry with all their “fees”. So give that book a read and then reach out to a Vanguard professional to help you get started. (Disclaimer: I am not a investing professional of any sort or kind. I have read a bit about it, and am thoroughly convinced the average investor needs index funds. But consult a professional [preferably at Vanguard, because they're a non-profit and don't want to kill you with fees] before executing on any investment decision).
I suggest opening a Roth IRA with Vanguard first, as you are just under the income phase-out limit ($178,000 for married filing joint in 2013), and you want to take advantage of the tax break when possible. You can open one for both you and your husband, and contribute $11,000 per year, as long as your income is below the “phase out” amount. (Hint: Get a cool tax guy to help you figure this out). You have $78,000 in savings, so if you wanted to pay off the house, you could take $11,000 of that savings per year to invest in the Roth while talking the house with your monthly savings.
Next, I would take all but $24,000 (keep this cash in money market as your emergency fund) of your savings and put it into a taxable investment account (again, at a place like Vanguard), and look at investing in a comfortable mix of index funds. Consult with a professional on what mix you’re would be comfortable with, and make sure to state your goals and risk tolerance. I know the stock market can be a scary place, but historically it has done well, and your money will work hard for you when invested.
Once you decide to either pay off the house, or invest the funds, I would first max out your 401k contributions up to $17,500 per year. That give you’re the most pre-tax savings of any retirement account, and will lower your tax bill quite a bit. Once that is funded, take the rest and do the same as above. Get a good mix of funds and let them work!
Since the most you can contribute to retirement funds is $28,500 per year, and you have AT LEAST $4500 per month to invest (over $5,500 when mortgage is gone), you will have PLENTY of savings in your accessible investment accounts for your son’s college, savings, down payment on home, etc. If you invest that $25,000 for the next 16 years at 8%, you’re at over $1 Million dollars. I think he will be well funded
Now, if you take all the money invested at 8% over the next 15 years, you will have $1.8 Million, not including the tax savings! You stated in our emails that you wanted $1 – $2 million to retire. There it is! RETIRED ONLY 15 YEARS FROM NOW!
I know that was a lot of info, so let me do a quick recap:
- New budget. WOOHOO!
- Pay off house (or not).
- Invest in index funds.
- Retire in 15 years, net worth about $2 million.
Your financial outlook is positively AMAZING. And here’s the great part, you can retire if you want to, or keep working if you enjoy what you are doing. You will be financially independent of having to work a job ever again, and you can choose what to do with your time for the rest of your lives.
Now, the key to this is what you seem to have already mastered; Avoid lifestyle inflation. With your low expenses and modest spending, you can build wealth very quickly, allowing you to “retire” MUCH earlier than anticipated. Assuming you are under 40, you will be done before your goal of 57-60 years old. And I’ll let you in on a secret: YOU DON’T MEET $2 MILLION TO RETIRE!
Your current expenses are $3,500 per month, including the mortgage. When you are done here, your expenses may be closer to $3,000, because the mortgage is gone. So you only need $36,000 a year to live your current lifestyle. If you keep expenses that low, you could retire on $1 Million and never touch your assets using the 4% rule. And you could get there in just 10 years investing at an 8% return. But again, it’s all about your comfort level, and if you need more, just work a few more years.
And lastly, if you want to find some fun reading on someone who did something similar to the plan laid out above, read through Mr. Money Mustache’s blog archive, starting at the beginning. He worked with his spouse for 9 years, then retired, enjoying a simple, frugal lifestyle. You are well on your way to a similar financial place. Well done!
UPDATE: New poll added. Vote below!
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. Stella is going to be BALLIN’ on this budget, financial independence her she comes!
Disclaimer: The link to the book is an affiliate link, and I get a few pennies if you purchase it. Thank you so much for your support, I hope you enjoy the book as much as I did!