Today we continue the ESI Scale Interview series where people answer questions about their success at working the ESI Scale.
In short, the series focuses on what the interviewee is doing in the areas of earning, saving, and investing. They also get an opportunity to ask ESI Money readers for suggestions if they choose to do so.
If you’d like to be considered for an interview, drop me a note and we can chat about specifics.
With that said, let’s get started.
Today’s interview is with Miguel from the The Rich Miser.
My questions are in bold italics and his responses follow in black.
OVERVIEW
Please tell us a bit about yourself.
My name is Miguel, I’m 35 years old, and my wife Lily is 34. We’ve been married about 3 and a half years. We don’t have any children yet, though Lily is pregnant!
We’re originally from Puerto Rico, but have lived in Miami, Florida, since 2015. We’re both lawyers, and both started our careers working for big law firms when we graduated from law school in 2008.
In 2011, I left the firm to join my father’s practice (which is just us two), while Lily left her firm to work for the federal government a few years later.
What is your current net worth?
We’re currently worth around $425,000.
It breaks out as follows:
Assets
- Home equity: ~$325,000 (approximate house value minus the balance on our mortgage and several home improvement loans).
- Investments and cash: In the high-ish tens of thousands (but not six figures). About 50% of that is in tax-advantaged retirement accounts, and the rest is in taxable investment accounts, and checking and savings accounts. We also have cryptocurrencies, which we keep at ~10% of our total investment portfolio.
- Personal property: In the low tens of thousands. We have one car that we lease, and are therefore not including it as an asset.
Liabilities
- Just our mortgage and home-improvement loans, plus very low balance student loans and the car lease.
- No credit card or other high-interest debt. We’re steadily paying down all debt, and are not incurring in new debt.
How did you accumulate your net worth?
We’ve both earned relatively high salaries as lawyers. I was extremely fortunate to incur no student debt (my parents paid for my bachelor’s degree and the tuition at my state law school); Lily also went to a state school, and incurred a little bit of student debt during law school.
I started saving during law school, since I worked throughout all semesters except the first two, as well as during all breaks.
Out of law school, both Lily and I went to work at some of the best-paying firms in our city, and both lived with our parents for about a couple of years. These advantaged circumstances allowed us to save about $20,000.
Then, when we moved out of our parents’ homes, we lived below our means and continued saving.
EARN
Tell us a bit about your career.
When I left the firm and joined my father’s practice, my compensation arrangement changed. I’m now paid a base salary, but I also get bonuses when a case pays out. This makes my income volatile, meaning some years I might make 2 or 3 times what I make other years. Since I work in a 3-person law firm (my father, myself, and an assistant), there’s really very little formal structure in terms of promotions or progression. I basically work and get paid. I have no benefits besides my cash compensation; Lily’s work provides all of our fringe benefits, including health insurance.
As a US Government lawyer, she has a very predictable and steady income, and benefits that help the both of us. The biggest are government-subsidized health insurance and her retirement benefits, most notably the Thrift Savings Plan (the federal 401(k)), invested in a lifecycle fund. She also has a traditional pension, plus we both pay into Social Security.
Since she works for the government, Lily is on a pay scale. This means that she doesn’t get big bonuses and is paid less than she would make in the private sector. However, she has predictable raises, plus more “work-life balance”. This works for us, and the extra money she would make in the private sector is not worth it to us (plus government work is more stressful and demanding than the stereotype! She works a solid 45 hours a week, while, in a big law firm, it might be closer to 60 or even more).
Our salaries are both in the very low six figures.
Overall, this is a good combination for us. Our base salaries cover our expenses plus some savings, and Lily’s fringe benefits help us both, while my “fat years” (when big cases pay out) allow us to build wealth quickly. We do anticipate having to make some big adjustments as our child’s birth approaches.
Do you have a side hustle?
Just the blog (The Rich Miser), which currently operates at a loss. It does make some advertising revenue, but not enough to offset the expenses.
If you were rating these results on a scale of 1 to 10 (with 10 being best), what rating would you give yourself and why?
About a 7.
With her government experience, Lily could probably get a job in a big firm and make 150% to 200% of what she makes now, but we simply don’t believe it’s worth it. Like others, law can be a very grueling profession with long hours and a pressure-cooker environment, and we don’t think the health and “life” costs of big firm work are justified by the extra income, under our circumstances.
Other than Lily changing jobs and us continuing to work on the blog in order to eventually monetize it, I really don’t see what much else we could do right now to make more money, given the time and energy we have left over, and especially with a kid on the way.
What are your future plans regarding growing your income?
For the time being, keep plugging away at our day jobs, growing professionally, and growing the blog. We’re investing time and money into The Rich Miser, and project it will turn profitable at some point this year (likely Q4).
In terms of our day jobs, Lily receives steady (albeit small) raises in her federal job. My income is not guaranteed and continues to be volatile, though it can be very high in good years.
When I have good years, we don’t plan on making any major purchases. We’ll just save and invest.
SAVE
What percent of your gross income do you save?
About 5-10% on a “low” year (when I don’t make much more than my base salary). Up to 50% on a “high” year (when I get big case bonuses).
How did you get to this level?
We’ve always lived below our means, accumulating very little student debt and living with our parents the first couple of years out of law school.
Next, from around 2013-2015, we lived in an apartment in a somewhat sketchy neighborhood (saving around $45,000-$50,000 in rent during a 2.5 year period), plus bought cars that were cheaper than we could afford. We did not live as frugally as we could have, but still saved and did not go into debt.
Also, 2013 and 2014 were very big years in terms of my cases, and I simply saved the money (which we later used for the house we bought).
Overall, we’re moderately frugal. We consistently live below our means and invest, but we also like “living well” and do spend more than we absolutely have to. We don’t buy too many material things, but we eat and drink out, and travel. To defray the cost somewhat, we do some travel hacking, and have been eating at less expensive restaurants than we used to.
If you were rating these results on a scale of 1 to 10 (with 10 being best), what rating would you give yourself and why?
About a 6.
We save, but less than we’d like. We want to continue to find new ways to save, and spend less on unnecessary things. Ideally, we’d like to save at least $2,000-$3,000 per month in taxable accounts, plus maximize Lily’s TSP contributions.
What are your future plans regarding saving your money?
Continue to save every month, saving most of Lily’s regular raises and my case payouts. We also plan to save whatever the blog makes, once it’s profitable.
Also, we’re planning on doing a big “spending audit” soon (before our child is born), to trim the fat that we’ve accumulated in our budget. For example, our cable TV and internet spend is too high. Our car lease is up this year, and we’re downgrading to a cheaper car.
When our child is born, we plan to invest in the Florida Prepaid College Savings Plan, which currently costs around $192 per month and guarantees full prepaid tuition for a bachelor’s degree at any state school in Florida. We also plan to contribute about $150 per month to a 529 or similar college savings plan (for room and board, books, etc.). The goal is to fully fund our child’s bachelor’s degree at the state school level.
Before college, we plan to send our kid to public schools, which are very good in our area. Still, we’re a good ways away from finishing up our post-birth financial plans.
INVEST
What are your main investments?
We contribute around $700 every month to our taxable investment accounts, plus the contributions to Lily’s TSP (just a little more than required for the employer match). We want to contribute more to retirement accounts, but our earnings are too high for a traditional or Roth IRA. We’ve been considering a “backdoor Roth” or another alternative like a SEP IRA linked to the blog, but we’re still in the planning stages on this.
We’ve accumulated cash and liquid investments in the tens of thousands. Lily’s TSP also has tens of thousands, plus I have an old IRA with a few thousand dollars in it. The TSP is completely invested in a lifecycle fund, while my IRA is 100% in a low-cost S&P 500 mutual fund.
Our taxable investment accounts have returned around 10% annually, and our crypto accounts have grown about 20% in less than a year. The retirement accounts essentially perform as the markets do.
If you were rating these results on a scale of 1 to 10 (with 10 being best), what rating would you give yourself and why?
Around a 7.
On the positive side, we have a relatively-high net worth and are funding retirement accounts, plus Lily has a traditional pension that will help when retirement time comes.
On the negative side, we should definitely be investing more in retirement accounts. We also feel we should be investing much more in our taxable accounts (at least 3x more).
What are your future plans regarding investing?
We want to increase Lily’s TSP contributions to the maximum possible, and find tax-advantaged retirement accounts that work for us.
For those retirement accounts, we plan to continue to invest in lifecycle funds comprised of low-cost index funds.
In our taxable accounts, we take some more risks with our money. We invest mainly in mainstream stocks and bonds (in ETFs), but do experiment a bit more with market timing and short-term trading (yes, we know we shouldn’t, but it’s one of those “can’t help myself” kind of things).
We think a bear market is lurking somewhere close, and so we’ve taken profits in our taxable accounts and are currently holding mainly bonds and cash. We’re considering peer-to-peer lending and other alternative investments, but haven’t completed the research yet.
I’m also a technology enthusiast and like cryptocurrencies, and so we’ve invested around 10% of our total portfolio in them (mainly Ethereum). So far, we’re up by double-digit percentages. I believe in the technologies behind crypto, and so will continue to invest 10% of our portfolio in it.
Nonetheless, we believe we’re not saving enough, and still have too many expenses. We’re continually trying to optimize our spending (and mostly succeeding in it), but it’s been a gradual process.
WRAP-UP
What money mistakes have you made that others can learn from?
Looking back, I made a mistake in buying a luxury car, and I should have started travel hacking sooner than I did. We also leased another luxury car in 2015, when we really should have gone with a less expensive car.
I’ve made plenty of stock trading mistakes (like panic-selling Netflix several years ago). If I could go back, I’d have more faith and patience with stocks from companies that I believe in.
Are there any questions you have for ESI Money readers regarding any parts of your finances?
Yes!
- What kind of retirement accounts should we open, besides Lily’s TSP? A backdoor Roth, SEP IRA, or something else?
- What on earth do we do about daycare costs when the baby is born? We have zero family in Miami, though we both work from home several days of the week, and so don’t think that we need 5-day daycare. Do we need some sort of nanny to come to our house some days, or how does that work? How do we minimize that cost? We don’t want to burn through our savings!
- Any other advice on child-related expenses?
- For our kid’s college savings, should we go with the Florida prepaid, or put all the money into a 529 or similar plan? We want to fully cover a bachelor’s degree, including room and board.
(ESI, gonna apologize up front. Laying out some opinionated content below.)
Hey there! Congrats on the baby; that awesome. We have three kids and they are our pride and joy. I wouldn’t trade the hustle and bustle of three kids for anything.
I am going to be up front with you. You aren’t saving enough! It seems that you know that, though. At a >$200,000 income, you should be putting away $30,000 to $40,000 per year bare minimum. And that is to retire by 60-65. It looks like you have < $100,000 in retirement accounts and yet probably finished law school in your mid to late twenties. You've got some work to do, but have some time to catch up.
Here are some answers to your questions:
1) In order of tax advantages. Fund your 401K at work and max it out ($18,500). Fund your wife's TSP and max it out ($18,500). Then do a backdoor Roth ($5500 each = $11,000). If either of you have a high-deductible health care plan, make sure you are doing a Health Savings Account (triple tax free). If your wife has a governmental 457, I'd fill that up, too. It's essentially another 401K ($18,500) because it's backed by the government. THEN, I would put money in a taxable account.
**Do NOT do a SEP IRA as you will not be able to do a backdoor roth and will get caught with the "pro rata" rule.
**If you need help with backdoor Roths there are tutorials for this sort of thing. A pretty good one can be found on many sites, including my own.
It should also be mentioned that you are speculating with 10% of your investments accounts and trying to time the market with cash. Two things most readers on this site – and many other personal finance sites – would tell you not to do. Fortunately, your speculation is <10% (most recommend 5% if you just can't not do this). Holding cash in hand instead of in the market simply loses money to inflation. Who knows what the market is going to do. Put the money in passive/index funds, set it and forget it, and check it once each year to rebalance.
2) Child care is expensive. We know. We pay $1800 each month for two kids. It hurts. Make sure you are taking advantage of a dependent care flexible spending account, if you have one. I believe its $5,000-$5,500 of pre-tax money for child care you can get reimbursed post-tax. You will also get the child tax credit because you make less than $400,000.
Do NOT touch your savings for this. I already mentioned your savings rate needs to be higher (based on $200,000 per year). You need to deflate your lifestyle if you feel the need to dip into your retirement accounts to pay for childcare.
3) You’ll live and learn here. Breast feeding is free, by the way 🙂 Sorry, I am a physician. Had to say it. It’s good for mom and baby.
4) I’d favor a 529 plan so that you have flexibility. We use Utah because it’s one of the best, but check to see if Florida offers a tax advantage if you invest there. Otherwise, find one with the lowest costs/fees and good index funds. $300 per month from birth should provide plenty.
Sorry for the most opinionated comment ever written on a blog 🙂 I’ve never been one to hold back.
TPP
Haha! I love opinionated content!!! 🙂
Hi Physician Philosopher,
Thanks so much; we appreciate all advice and constructive criticism 🙂
1. You’re absolutely correct. I don’t have a 401(k) at work, but Lily has her TSP, which we haven’t been maximizing (but should be). However, we are taking concrete steps to deflate our lifestyle (just yesterday we downgraded our car and will save about $6,500 over three years, compared to the car we downgraded from). We’re also making the last payment on Lily’s student loans (paying them off early). As well, a backdoor Roth is high on our to-do list.
2. We hadn’t really thought of a dependent care flexible spending account. Thanks, we’ll look into it. We have enough in our budget to afford children, but need to cut further in order to keep saving (and increase our savings rate).
3. Thanks! The plan is to breastfeed.
4. Yes, we’re strongly leaning towards a 529.
No need to apologize. You shared such great advice!
Thanks! 🙂
My site is geared towards high-income earners. So, this was right up my alley!
Reading between the lines somewhat, it sounds like one area to trim is home improvements and house projects. It’s amazing how simple projects and maintenance can add thousands in costs each year! Delay, delay, delay those :).
I vote for the backdoor Roth. I used Betterment, and the betterment chat guy walked me through the whole thing. They literally have a one button backdoor Roth – super easy. That’s $11,000 if savings right there.
Thanks Sara,
We’re mostly done with the home improvement, except for some minor landscaping and a bathroom that needs to be redone because it’s quickly deteriorating. We don’t plan on taking on new debt for any of this.
Thanks for letting me know about the Betterment backdoor Roth! We have a Betterment account but did not know they facilitated backdoor Roths!
Am I missing something here?
A few comments are referring to “backdoor Roth” instead of just a Roth IRA.
Roth IRA = $5,500 per person (subject to taxable income amounts)
Backdoor Roth IRA = the amount above $5,500 and the 401k capped by the federal government (which is around 54k this year I think)
The original poster and commenters seem like they are referring to the former (Roth IRA). Unless I’m missing something.
Original poster didn’t post full numbers but indicates household income is greater than 200k. Very strong and has the potential to save lots, esp with no student loans.
Not sure how long they have managed such a high income, but I’d expect to see much more in savings and investments given the income.
But, considering this is a finance blog, I’m sure the interviewee has a strong financial future in the cards and coming years.
Hi Ben,
The issue is that above certain income thresholds, tax-advantaged Roth IRAs are not allowed. As I understand it, a backdoor Roth is a workaround whereby you open a traditional IRA (that is not tax-advantaged because of your income) and convert it to a Roth later. It’s a somewhat complicated maneuver that I’m still learning about.
The main thing that’s kept us from saving more is that we bought a big, expensive house (that we love) in an expensive city (Miami). Still, we’re steadily cutting down on expenses and bringing up that savings rate. 🙂
Personally I wouldn’t plan to “work from home” when you are trying to take care of a newborn or even as the child gets older. You will likely be sleep deprived as it is for a while, making work and care difficult. You can think they are into a routine, then they suddenly change that routine as they grow. They can have bad days, weeks, or months as they are growing, all increasing the amount of attention they need. While they are good to stay put those first few months of slug stage, once they become mobile things get tricky fast. One word of warning, when it gets quiet, you need to check, nine times out of ten they are up to something, from chewing the lamp cord to examining the kitty litter. Best to always have eyes on them. They will want and demand your attention more often than not. So I would plan on help or daycare for all workdays, and if by chance you get the golden child then you can back off as circumstances allow.
With respect to the TSP, you have a long time horizon, so while I like the lifecycle funds understand that the date they list, say the 2030 fund, is the year their distribution mix matches the L income fund, which is basically a fund mix meant to just keep up with inflation and protect your assets at limited risk. So if you are following their suggestions and pick the L fund close to the date you plan on retiring, I feel you end up short changing yourself for potential growth given a planned 30 plus year retirement. One suggestion is to pick the L fund that most closely matches your anticipated life expectancy, and in your case that would likely be the current furthest out fund, the L2050, and then pushing to the L2060 fund when that is set up, etc., but that’s up to you and your financial plans. After all, when considering the TSP with the taxable investments, it may make sense to let the entire TSP be your “bond” fund for your retirement mix.
I used 529 plans for my kids. While they worked for me in my situation, my recommendation would be to use other investment vehicles instead unless you are getting an actual tax break on the 529. I do think given the ever rising cost of college, and I see no real end to it, the tuition pre-paid a good idea particularly if you never see yourself moving out of Florida. The issues I’ve heard from others is about flexibility if the kids chose not to go to college plus many 529s don’t seem to be invested particularly well. Other people have suggested using a Roth for college savings, don’t know how practical that would be but it is an option to consider. We had multiple kids so I always figured if one didn’t use the 529, switching to another or even to some fun courses for myself in retirement wouldn’t be an issue.
Best wishes and enjoy the new arrival.
Hi getagrip,
Thanks for sharing that knowledge! We’re heavily leaning towards daycare the first few years. We’ve looked at some local places, and they offer things that we can’t. For example, they have structured educational programs, and lots of socialization. I grew up painfully shy, and don’t want my daughter to go through that. Plus, we need to work 🙂
Good idea about the TSP. We’ll recheck the allocation, because I’m 99% sure it’s all in a lifecycle fund targeted to our projected retirement date.
We’re heavily leaning towards a 529 for college, but still not 100% decided; we still need to do some more in-depth research.
Thanks!
I completely agree with GetaGrip, if you both are full time employees, you need full time daycare. There will be enough times in your child’s life that will take one of you away from work, check local facility rules, there are many common infant illnesses that cause you to have to keep your kiddo home for up to 2 days before going back to the facility. The costs are the highest at infant stage, legally this is when you are paying for the highest staff/child ratio, they get better as your child gets older. We are in a low cost of living area and had a great provider at a phenomenal cost, but even then infant care was $225 per week. Every year our child got older was like getting a raise because the rate tended to drop 10-15 bucks per week between age groups. We exited daycare for school at $185 per week. This is out of date by 3 years but if you want best case scenario costs I would suggest these are them.
Also worth checking is child care options through your wife’s work. The local Federal Building in my city has a on site program that is for federal employees only (easier to get into) and is cost sensitive.
Thanks Hillary,
Agreed; the more we research, the more we lean towards daycare. We’ve found at least one good place close to our house that is about $1,000 per month, for basically full-day care.
Unfortunately, as far as we’ve been able to see, there’s no federal employee daycare in Miami. Like you say, there is in some cities, but not here 🙁
Hi Miguel,
Thanks for sharing your story and congratulations on your new arrival!
Now the tough news: as the physician philosopher correctly stated, you are spending way too much and are going to face challenges after your family size grows. Run your monthly expenditures and see how deep you can cut. Involve Lily and make sure she is comfortable as it is always tough to trade down, and doubly so with a newborn on the way, it will be tough but you have to do it.
Begin investing in assets that pay you for holding them: quality dividend paying stocks, Real estate or REITS and the like. The added cash flow will help you compound your income over your life and that of your child.
It will be tough but most certainly will be worth it!
-Mike
Hi Mike,
Thanks! You’re 100% right. We’ve managed to “painlessly” cut out a few hundred dollars per month that were mainly “budget fat”, but are now at the point where cuts = sacrifices. Still, like you say, they’re necessary.
We have investments (including income-producing bonds and dividend stocks), but need to increase those monthly auto-deposits to the investment accounts.
In my opinion, you should both be maxing out a retirement account (if your firm doesn’t offer one, you could research the options and try to get one implemented), and you should fund what you can into a 529 plan starting at birth and skip the prepaid plan, as you don’t know yet where your child will end up for college, and it seems pretty risky to assume they will want to stay in Florida. I started a very similar career path at the same time as you and have maxed out my 401k every year and it has proven to be a very good decision. Similarly, I’ve contributed up to the gift tax amount per year into a 529 plan through automatic contributions out of my salary and that has been a very good strategy as well. Finally, it is impossible to be a good lawyer and care for an infant at the same time, so you’ll want to look into day care, an au pair or a nanny, regardless of whether you work from home or an office.
Thanks! I really have no viable way to get an employer-sponsored retirement account, though we do need to maximize Lily’s. I agree as to the 529 – it seems a better option than the Florida Prepaid. I also agree as to caring for our daughter, and like the option of a good daycare. It should also provide education and socialization that we’re not in a realistic position to give her.
I tried both a nanny and day care and I liked day care better. My child was ultimately safer in a day care setting than home alone with a nanny, something we unfortunately learned the hard way, and later, the education and socialization was an added bonus (by age 2 or 3, depending on your city, you can transition from day care to full time preschool, which is nice).
Good luck and great start!
My two cents on nanny vs. daycare: It is a strong personal preference.
I had the ability to work from home and hired a nanny to be in the house to watch our son, while I worked. This gave me the ability to:
– focus on work
– gain confidence and build trust with our nanny that if I wanted to leave the house, I could without any concerns
– I didn’t feel like I was missing out on my child during the day (could pop downstairs between calls, lunch time, etc) this was the most important aspect of the arrangement.
When our son was 18 months, we transitioned to part time licensed day care.
Explore options and choose the one that puts both parents at ease, especially since this is your first child!
Congrats and all the best.
Thanks! All valid points to consider. Honestly, I worry that our daughter might be introverted (like me), and so I lean towards daycare since it’ll help socialize her earlier. There’s nothing wrong with being introverted, but I want our daughter to have great social skills since very early.
You can contribute max retirement for both of you to the TSP if married. No need for your own retirement account. Agree re the lifecycle plan advise, go for latest date fund. Reduce your crtpto speculation below 10 percent and diversify across more than one crypto. Your speculative stocks and timing of market has about a 10 percent chance of doing better than the lifecycle fund. Odds are simply not in your favor. Stick with a good low fee funds. Uncle Sam is dragging down performance annually in taxable accounts so fund tsp first. Money in taxable accounts should be in tax advantaged funds. Morningstar has good info on all of these points. I cant help with child advise but sounds like good advise provided already. There is rarely a good reason to lease over buying cars too. Avoid leasing typically. Good luck.
Thanks Diana,
I’ll look into that as to the TSP, which would be major for us 🙂 In crypto, we invest mostly in Ether, but also have some Bitcoin, IOTA, and other tokens. As to the car leasing, I concede that it’s mostly a lifestyle choice, in terms of the ease and convenience of having a new car every 3 years. I also value that a leased car is under warranty, guaranteeing I won’t have to pay for major repairs. Still, we made a mistake with our first lease, which ends next week. Just this Tuesday we got a substitute car, which will save us about $2,000 per year in leasing costs.
Thank you for the information, although you have made some mistakes it is nice to see you are self aware and looking to correct going forward. With your income you should be able to achieve at least 50% savings rate next year and get on a track to retire in 10-15 years.
Thanks M40,
I think one of the most important things to recognize is that all of us make mistakes. I try to operate from the belief that I’ll always be wrong about something, but, the more I can learn and correct, the better my life will be.
Thanks for sharing your journey with us, Miguel. I have appreciated your replies to the comments. It seems you know what you need to do and are working on it. Also, congratulations on expecting your first child. There is nothing greater!
I agree with The Physician Philosopher. We are firmly planted in the breastfeeding camp. We are expecting our third child in January. My wife has breastfed both of our children and will breastfeed the baby once he/she arrives. While cost was not a factor in our decision, I can’t even imagine how much we have saved (and will continue) to save by not using formula.
All the best to you and your growing family!
Thanks Cody!
We’re set on breastfeeding, though I’ve been extremely surprised to learn that the recommendation is to do it for a year (at least). I had no idea it was so long; I had always assumed it was just for a few months, and even then not so many times per day!
Congratulations on your third!
Thank you! 🙂
Love this scale interviews. Keep them up!