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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.Today’s budget is an anonymous submission. We’ll call him Harold and Marge.
Background: Harold and Marge have done well. They are5 5 years of age and have just finished putting their youngest through college, debt free! They are now looking at retirement and want to retire with a nice giant chunk o’ change saved up. Let’s check out some numbers:
- Home – $375,000
- Retirement Fund Savings (401k and Roth IRA) – $650,000
- Emergency Fund Savings – $6,000
- Home Mortgage – $127,000 (15-year fixed, 3.25%)
- Pay Off Mortgage
- Save $2,000,000 then retire!
- Get that $2,000,000 BABY, YEAH!!!
Here is their budget:
|Starting Balance||$ –||$ –|
|Total Income||$ 6,600.00||$ 6,600.00||Well done on the post-tax, post medical, post-investment income!|
|Total Expenses||$ 4,025.00||$ 6,600.00|
|Projected Ending Balance||$ 2,575.00||$ –|
|Monthly Income||$ 6,600.00||$ 6,600.00|
|Total Income||$ 6,600.00||$ 6,600.00|
|Mortgage||$ 1,300.00||$ 4,000.00||Based on your goals, throwing all your extra money at the mortgage will get you there the quickest. You’ll be debt free in no time!|
|Electric||$ 120.00||$ 120.00|
|Natural Gas||$ 400.00||$ 400.00||$400 seems a bit high, but as we discussed, it’s better to estimate high, and if you come in under, throw it at the mortgage!|
|Water/Sewer||$ 50.00||$ 50.00|
|Phone||$ 105.00||$ 105.00|
|Car Insurance||$ 100.00||$ 100.00|
|Total Bills||$ 2,075.00||$ 4,775.00|
|Food||$ 1,100.00||$ 650.00||This is the one area I know you can improve. You stated that your son is living at home, so I think $650 a month is a realistic number. A solid meal plan will help you win in this category, which is why we use eMeals (affiliate link) for our food budget. I suggest signing up for the 3 – 6 person plan and have them do all the planning for you. Plus, it’ll save you a ton and help you lower this category.|
|Gas||$ 600.00||$ 600.00||Brutal commute, but hey, just know that when you retire, this expenses is going to go WAY down 🙂|
|Date||$ –||$ 70.00||I always build in a date budget. I say never stop dating your spouse, and putting aside money solely for this purpose is one of the best investments you can make with your money.|
|Spending Cash||$ –||$ 60.00||I also believe that you can save money on miscellaneous spending by budgeting in spending cash. Having a set amount for your disposable cash keeps you from spending too much of it. Trust me on this one 🙂|
|Clothing||$ 50.00||$ 50.00|
|Entertainment||$ 100.00||$ 100.00|
|Misc||$ 100.00||$ 100.00|
|Total Necessities||$ 1,950.00||$ 1,630.00|
|Christmas||$ –||$ 50.00||Savings buckets are my way of saving toward irregular expenses. I figure you’re going to throw money at these anyway, might as well have the money in place beforehand. Plus, it makes it so you don’t have to decrease your mortgage payoff or investments when these expenses come up.|
|Birthdays||$ –||$ 20.00||See above|
|Anniversary||$ –||$ 25.00||See above|
|Vacation||$ –||$ 100.00||See above. You’ve got a 10-year+ plan here. Might as well get away and have a little fun during it 🙂|
|Total Other||$ –||$ 195.00|
|Total Expenses||$ 4,025.00||$ 6,600.00|
Wow, I totally wish this was my budget right about now! Way to rock it! With $4,000 a month toward the mortgage, their debt will be killed in no time and then it’s heads down and net worth up trucking toward their $2M goal. Let’s see how they’ll get there:
First things first: Harold expressed his interest in rebuilding his emergency fund to $10,000 before annihilating the mortgage. So I say put the extra $2,700 that was going toward the mortgage into the EF for the first two months. Then it’s mortgage killing time!
Using a handy dandy mortgage calculator, based on their payments, current balance and interest rate, if they throw the $4,000 a month toward their mortgage, it will be PAID OFF IN JUST UNDER 3 YEARS! HOW SICK IS THAT?! (sick = cool). What’s even cooler, they’ll technically be millionaires once the house is paid off!!!!! Now it’s time to laser-focus on the investments to reach their retirement goal.
1. Pay off mortgage – DONE!
2. Retire with a cool $2 Million in the bank!
Now that you are debt free, just put your extra $4,000 a month toward your retirement investing. This, on top of the $1,200 a month you’re already sending off to replicate puts you at $5,200 a month of investment capital! With that amount, here’s how I’d break it down, based on current contribution limits:
i. Up your 401k contribution to $23,000 a year
ii. Up your Roth IRA contributions to $6,500 a year for both = $11,000 total
iii. Put the additional $26,400 in a taxable investment account.
As always, consult your financial planner and tax advisor to review your options on these.
With the tax advantages, you may be able to put a little more away, getting you to your goal even quicker. I threw these numbers into an investment calculator, and you’re looking at hitting your goal of $2 Million IN JUST 9 YEARS! Man, if I had $2 million, 12 years from now…! It’s pretty ridiculously sweet to think about getting there in just over a decade!
Now, I know that you mentioned retiring a little early, and I did notice that this plan puts your retirement age at 67 years old. If you wanted to remove a few years from your retirement edge, there are a few options here. First, obviously, you can just save a little bit less (say, $1.5M instead of 2) and enjoy retirement 3 years sooner. Another option is to look into other investments, namely rental real estate. Now, fair warning, I have never owned an investment property, but it’s seems like a great time to get into it if possible.
If you could get a great deal on a home, rent it out for some positive cash flow and have someone else manage it, it could work out nicely. Not only would someone else be paying the mortgage and giving you a few hundred per month of passive income, but you’d be building equity toward your retirement. You could sell if off when you decide to retire, or keep it, pay off the mortgage and enjoy some extra passive income on top of your investment income. Just a thought I had, and might not be worth the hassle at this point, but I’d check around and see if you can find someone who knows how to make this happen. (Readers: If you have experience doing this, let me know if this is a good idea)
As we’ve emailed back and forth, I’ve gotten to know a bit about your background, your family and how awesome of a family man you are, Harold. I know we didn’t discuss this, but I wanted to give you my honest opinion here. I love your goal to shoot for $2M in retirement. Heck, that’s about the number I’m shooting for as well! But you know what, if you don’t hit it, you are going to be just fine. Looking at a retirement income calculator, you can live well on a $1.5M nest egg , just as well as you are living now, or better. It’s only money, and don’t be discouraged if things come up that slow down your mortgage payoff or investing. You’re already in a great spot, and I have no doubts that you’re going to retire and live very, very well! I hope this budget can help you reach your goals and enjoy a nice long retirement 🙂
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. Harold and Marge have already built a great legacy and saved well, I’m excited to see them ramp it up a few notches and kick the savings into high gear! When I look at this, it’s where I’d love to be at that age as well. Well done, you two! 🙂