Free Money Finance
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Posted: 06 May 2013 05:05 AM PDT
The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.
If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going. Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit. Next in the series is FMF reader SB. She answered my questions (in red below) as follows: Please tell us a bit about yourself. I am 33 year-old married woman. My husband is also 33. We live in the San Francisco area; we don't have any kids yet but are expecting our first early this fall (very exciting!!). We also have a dog. We are fortunate to both work in high-demand, well-compensated sectors; I work as a business consultant for a well-known consulting firm and my husband is the director of a local non-profit. Collectively we earn approximately $290,000 in base salary and $20,000-$25,000 in bonus annually. This is a HUGE jump up from our salaries of just a few years ago. We both plan to continue working full-time, but in the long-term I am looking to transition into a career that is not quite as intense. While financial security is very important, I've been fortunate to get to a point at which having more work / life balance is a bigger priority. I easily work 60-80+ hours a week and don't want to look back on my life (particularly with kids) thinking I spent too much time working. My husband and I both attended private liberal arts colleges; I attended a top full-time MBA program and he did not attend graduate school. We were very fortunate to have a mix of parent support, scholarships, and loans for undergrad and graduated with $26,000 in loans (those are now paid off). I graduated business school nearly 3 years ago with $165,000 in loans (ouch!) although that is now fortunately significantly lower. Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.). Income In addition to our salary, we also have a rental condo from when we lived in DC. We could sell it but it's in an up and coming area that we believe will continue to appreciate in the coming years, and we have no trouble renting it for significantly above our mortgage. We rent it for $2,700 and pay $1,500 in mortgage + insurance + condo fees. We don't have any plans to sell anytime soon. Expenses Our monthly expenses, including savings and debt reduction, are as following:
Assets
Our major issues are to plan for the baby and save up enough for a down payment on a house in the bay area. Child care costs will be the most significant, at least $2K a month. I am fortunate to have a really generous paid leave and so we won't have to begin child care until March next year … but still, we need to start planning for it. Then there is everything else that comes along…medical bills, baby "stuff," etc. We are not really big "stuff" people, but I know it's easy for that to change when a baby comes along. We want to open up a 529 plan and will likely contribute $500 a month. We also will purchase life insurance, I expect around $1 million each, and create wills. The other issue is saving up enough for a down payment on a house in the bay area. I know choosing to live here may not be a popular decision in this community, but we have family and large social networks of friends and colleagues here, and we both really love just about everything in the bay area – the weather, the outdoor activities, the diversity, the incredible food and cultural options, etc. – and want to plant our roots here. We recognize the significant costs that come with that. I believe we can afford to live here long term, but a big factor in that will be getting a mortgage at a low interest rate, and so I want to take advantage of those low interest rates within the next 12-18 months. The only issue is the down payment. We'd like to put at least 10% down, which means at least $90K including closing costs. This is where I sometimes wonder if I should have been saving money more aggressively vs. paying down my student loans. What do you all think? With real estate prices rising here (we are looking at a few communities and many houses are going for 10-20% above asking price, w/ cash offers) I'm starting to get worried. I also really want to take advantage of the current low interest rates. What are your plans for the future (retire early, build your career, etc.)? Longer-term I'd like to transition into work that affords me more work / life balance. I am fortunate in that my experience as a business consultant would make it easy for me to transition into a marketing, strategy, or business development role working for a client. This is a common path for ex-consultants and I have many former colleagues who report that they are happier, still as challenged professionally, and have much more time for family / life after they've transitioned into a corporate role. Making this transition does likely mean a reduction in my long-term earning potential, as consulting partners can easily make 5x or more my current salary, but at a certain income level, quality of life is just so much more important, and I would have a pretty grueling 5-7 years ahead of me, including pretty intense travel, to get to partner (plus a continued strenuous schedule upon becoming partner). I see the lifestyle of the partners I work with and I just don't want to raise kids that way. We don't really see ourselves retiring early, but I could imagine that one or both of us work part-time at different stages in the future. What's your best piece(s) of financial advice and/or your general philosophy on personal finances? For those in this community who are earlier in their careers, I would say don't be afraid to take on debt when it is a thoughtful long-term investment in your career. Be thoughtful about it, of course! But if it makes sense, don't let the short-term debt scare you off from something that will greatly increase your long-term earning potential. My income is 2x more than it was prior to business school, and the job I have today – with raises of 10-15% a year, and really good job / career security – is one that requires an MBA from a top school. It was a significant investment for me, of two full years of my time and that monster debt, but one that changed the trajectory of my career for the next 30+ years. Even with all the debt payments I'm making today, I still have more financial "wiggle room" than I did prior to business school. My other observation is that life is a journey, and that setting aside money for fun and dreams along the way is important. Most Americans don't save nearly enough for retirement, and so they don't need to hear that message, but I think it's possible to go too far in the other direction too – beating oneself up for the morning latte, or the vacation, or whatever it is. I think it's important to know what you need for retirement and for short-term savings, and to make sure you are saving enough to get there. Once you are, great! Then don't beat yourself up if you do end up spending what's left over. Every budget should have buckets for saving / debt reduction, needs, AND wants – even if that wants bucket is pretty small. I've learned a lot from this community and look forward to hearing feedback from the readers. Should I put more money into savings rather than focusing so much attention on my student loans? Am I misguided in thinking we need to save a down payment within the next 12-18 months? What would you do differently if you were me? |
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