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.
My questions are in bold italics and his responses follow in black.
OVERVIEW
Please tell us a bit about yourself.
I am 31 years old and my wife is 29 years old.
We have been married for five years, together for nine.
We have a son who will be turning one in a couple of days.
This past year has been the best year of my life watching him grow and accomplish new milestones.
We currently live in the metro Detroit area. We are both originally from other areas of Michigan, but my current job relocated us to where we are.
What is your current net worth?
Our current net worth is $345,500.
I take about 30 minutes on the first of every month to update an excel file. These figures are from January 1st.
- 401K: $82,300
- Roth IRA: $47,000
- Brokerage Account: $38,000
- 529: $5,200 (Invested $5,000 when our son was born and contribute $50 per month. As this number increases over the years, we will probably remove it from our net worth as we plan/hope to pay for our children’s education and this is more of a liability than an asset.)
Cash: $25,500 ($10,300 is an emergency fund with the rest earmarked for future purchases. Almost all this cash is in an online Money Market Account earning 2.2% interest) - Home Value: $146,000 (Purchased the home in January 2014 with a 15-year mortgage with an APR of 3.85%. In December I took about $10K from our emergency fund and paid off the remaining balance. I realize this is not a smart move by the numbers, but it feels good not owing anybody money*.)
- Vehicles: $7,000 (I depreciate our vehicles each month by the cost of the vehicle over five years. After 5 years I have a value of $0 for the vehicle. I am a big proponent of buying a vehicle that is 2-3 years old. I take this a step further by buying salvage titles. I have a background in vehicle repair, so I am comfortable looking over the vehicles before I purchase them. *When I was in college my father helped me pay for a car. I was paying him back for a couple years. When the loan was down to $6,000, I tried paying him the remaining money. He refused the money and told me to forget about it. I keep this negative $6,000 in my net worth in hopes of paying him back somehow in the future.)
How did you accumulate your net worth?
I would be remiss if I did not mention my parents and wife in this section. My parents raised me from a very young age to be smart with money and to spend wisely only on things that bring true value. They also paid for my education which gave us a large head start to our net worth (and life).
When my wife and I married, she had $58,000 worth of student loans. I was very fortunate that despite our different upbringing on how to manage money, she adapted to the frugal lifestyle immediately.
She is a true all-star as this was not natural to her, but she could see the long-term benefits (early retirement).
We were able to pay off these loans in a little over two years. I contribute this to spending less than we earn.
Once the student loans were paid off, we put that extra cash towards our mortgage. While the early pay off for student loans was emotionally and fiscally smart, this was not such an easy decision. We ended up making the final payment on our mortgage as we both feel secure about our jobs and did not mind dipping into our emergency fund.
We use two different credit cards for all our purchases. We do not do a lot of travelling, so we chose credit cards with the best cash back deals based on our highest spending areas (gas & groceries). We pay these off in full each month.
While I don’t agree with everything that Dave Ramsey says, I can contribute our progress to his quote “Live like no one else now so later you can live like no one else.”
I do not believe we have done anything special to obtain our current net worth.
I would attribute it to starting early, doing the little things right, and aligning our life goals together as a couple. If we continue to do those three simple steps, our net worth should grow exponentially.
EARN
Tell us a bit about your career.
I work as a Human Resources Manager for a relatively small company (30 employees).
My wife works as a teacher for a charter school.
Our annual combined income is $104,000. I can receive a company performance-based bonus of up to 15% of my salary. This has been maxed the last two years which added an additional $9,000 per year.
My first job was mowing a financial planner’s lawn. I was paid in $2 bills (sorry Uncle Sam) and I thought it was the coolest thing ever. When he paid me, we always had conversations about what I was going to do with the money. Without realizing it at the time, these conversations have played a big part in where I am today. This is also the time when my parents helped me set up a custodial account.
In high school I worked at my father’s two businesses (auto body shop and a towing company) and delivered pizza for the local pizzeria. I continued working for my father during summers off from college.
While away at college, I sold my body for living expenses (i.e. donated plasma).
After graduation I struggled to find a job with my degree in Human Resources. I fell on my background and worked various manual labor jobs.
During interviews, the most consistent feedback I received was I did not have any office experience. After two years, I decided to take a significant pay cut and worked a customer service job for $11/hour to gain office experience.
After one year there and three years out of college, I interviewed for and received a job in HR with my current company. I started at $41,000 and have worked my way up to $60,000.
Do you have a side hustle?
No. This weighs on me occasionally, but we have no plans to change this in the near future.
I do wish we had a side hustle before our son was born. Now we would rather spend time with him than creating extra income.
My wife did have a part-time job during the summers which brought in roughly $3,000 over the summers. She has not done this the past two summers as she was pregnant and then had a child to watch.
Side note: We pay $165/week for an in-home daycare (Bargain anyone?). Since my wife has summers off, I view this as a raise/side hustle of roughly $2,000 a year (not accounted for in the annual income).
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?
6.
Compared to the annual household income in my county, we are absolutely killing it.
However, if we were to compare our annual income to other FIRE enthusiast, I believe we would be below average.
The three-year delay on my career from graduation to my first salaried position put a bit of a hamper on my current earnings.
I also did not negotiate the offer I received. I have since learned that this is the easiest raise you can receive by simply asking for more when starting a new position.
I believe this is the biggest area of improvement needed for me on the ESI scale.
What are your future plans regarding growing your income?
Our future plans are to decrease our household income. God willing, we plan on having another child in roughly two years. At that time, my wife will stay at home with the kids. However, she plans on picking up part-time work as to continuing maxing out her Roth IRA. She plans on going back to teaching once all kids are in school full time.
In February, I will receive a 13% increase in salary. I plan on meeting with my boss (President of company) to lay out plans on getting to $80,000 base salary in two years. I would need two more years of double digit raises, which will be difficult to do purely based on performance.
Our company has had rapid growth the past few years and I think we can lay out a plan for a promotion. This would make the transition to one income easier to manage.
I have also been toying with the idea of going back to school for an MBA on a part-time basis. My employer reimburses up to $5,250 per year for education classes. There are also certifications I can obtain in my field which would increase my value to the company.
SAVE
What percent of your gross income do you save?
Historically, I have not done a good job of tracking this. I just did a rough calculation and I believe we save around 36%.
This will be increasing as we no longer have a mortgage starting this month.
How did you get to this level?
Saving has always been natural to me. Before marriage, I never needed a budget as I believed that only allowed for extra spending. I always aimed to spend as little as possible and save the rest.
Once I got married, I realized we needed a budget to allow for spending beyond the bare minimum, but as not to overspend.
Each year we have been married, I believe our savings rate has increased. The numbers are a little murky as we have been making over payments on loans since day one of our marriage.
If you triple your payment for student loans, is any of that considered saving? Same question for our mortgage?
I have a hard time giving money to a lending provider and then classifying it as savings.
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?
7.
Always room for improvement. We do have some frivolous (IMO) spending in our budget that we could cut out. I bet my wife would disagree.
What are your future plans regarding saving your money?
I want to focus on finding a good balance in our life with spending vs saving.
All I have ever known is to save as aggressively as I can, but I think we are at a good spot to start reevaluating that philosophy. Maybe the answer is to start allocating a portion of our salary increases towards discretionary spending which we have never done in the past.
INVEST
What are your main investments?
I am a big fan of set it and forget it. I have been investing for 17 years (albeit small amounts of money for most of those years) and have only sold once.
That was after our son was born and I sold some mutual funds to open a 529 account.
Wife’s 401K: $25,600
She contributes 11% with an employer match of 3%.
- BSPSX: 65%
- VSIAX: 25%
- VTWSX: 10%
My 401K: $56,700
I contribute 17% with an employer match of 4%.
- BSPAX: 90%
- TEFRX: 10%
We increase our contribution with each annual raise. I typically receive larger raises which accounts for a higher contribution percentage.
Wife’s Roth IRA: $20,600
Monthly contributions that max in December of each year. She has been maxing for 3 years.
I handle this through TD Ameritrade. Once the money is deposited, I have seven different ETFs that I purchase (not all of them every month). I realize this is over kill, but it makes me feel like I have some say in my overall returns (probably does not) and keeps me from buying individual stocks to obtain this feeling. Below is how I have them weighted:
- Small Cap Blend: 25%
- Mid Cap Blend: 20%
- Large Cap Value: 16%
- Large Cap Growth: 14%
- US REIT: 15%
- Foreign Large Blend: 5%
- Emerging Markets: 5%
My Roth IRA: $27,000
Monthly contributions that max in December. I have been maxing for 3 years as well. The larger amount is mainly due to opening it sooner than my wife’s.
Remember that financial planner I use to mow for? I currently have my Roth IRA managed by his replacement when he retired. This goes against my mantra of keeping fees as low as possible. I plan on keeping my Roth IRA with him for a few more years and compare returns between mine and my wife’s.
I am 50% invested in FKDNX & 50% invested in FRDPX. These have high expense ratios and a front-end load fee (The Horror!).
Brokerage Account: $38,000
Monthly contributions of $150. I managed this account through TD Ameritrade as well.
I split this up through three different ETFs:
- Large Cap Growth: 65%
- Small Cap Blend: 25%
- Foreign Large Blend: 10%
I have an account with Personal Capital which helps me see the grand picture of all these accounts.
I always recommend Personal Capital to anyone who is willing to talk finances with me (sadly, not many people).
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?
7.
Outside of my Roth IRA, we have managed to keep all expense fees low.
Our average Expense Ratio for the ETFs are 0.063% with the highest being 0.11%.
All the ETFs we invest in through TD Ameritrade do not have transaction fees unless we sell within 60 days of purchase. Since we are buying and holding, we incur no fees other than the expense ratio fees.
Although we have limited fund options in our 401Ks, I am happy with the options and the fees associated with them.
My wife’s employer has lowered the expense ratios twice since she has been employed.
I am the 401K administrator for my employer and have been lobbying for lower fees for a few years now. This past year in Q4, I was able to convince my boss that the company should incur more of the fees related to our 401K. We will see significantly lower expense ratios in a few months. Score one for the good guys!
What are your future plans regarding investing?
As we get closer to retirement, we will probably start incorporating bonds into our investments.
My thoughts (without much research) would be to start allocating 1% of our investable assets in bonds starting at age 40. I would increase this 1% each year until I reach 40% bonds when I turn 80. Any thoughts on this plan?
I would like to max out my 401K, but this may become difficult if we drop down to one income.
WRAP-UP
What money mistakes have you made that others can learn from?
Not sure if it counts as a mistake, but I’m still not sure paying off the mortgage was the correct thing to do.
Having a mortgage was not keeping us up at night nor causing any stress. Putting the money into the stock market was probably the correct thing to do for our situation.
I started thinking about paying the mortgage off on a Sunday. I called my mortgage company on Monday to make the final payment. Moral of the story, take more than one day when making money decisions.
Continuing to invest my Roth IRA into mutual funds is probably another mistake. I have been with this financial advisor since high school, so it has been difficult to cut ties with him.
Are there any questions you have for ESI Money readers regarding any parts of your finances?
I tried to be as transparent and detailed as possible, so I can receive readers’ feedback. I would love everyone’s input.
- My goal is to retire by 50 (or at least have the option available), with my wife’s retirement sometime before that. I am concerned about our ability to withdraw our assets without penalties and be tax efficient as well. Should I start focusing more on the brokerage account? To the point I start putting more in that account before I max my 401K? Both of our employers offer Roth 401Ks, should we be utilizing those to help with funds post retirement? I would appreciate any advice you have on steps I can take now to help prepare for early retirement.
- Does anyone regret saving too much for retirement? I am starting to wonder if we should enjoy our life a little bit more now while we have the energy. We both love the outdoors and I think we could still be fiscally responsible while also enjoying more trips. We spent two weeks camping and hiking out in Montana a couple summers ago and had a blast. I struggle with if we should be doing more of that or continue pushing for a comfortable early retirement.
Thanks for reading!
Bravo! You are clearly on the right track. Financial freedom is just around the corner. Stay the course.
Paying your mortgage off was the right choice. God forbid you ever lose your job (which happens) and your wife wasn’t working, you have given yourself the flexibility and time needed to get back on your feet and protect your family.
There is a balance needed between taxable and non-taxable accounts as you near your FI age. Suggest you estimate those two target numbers now and start working toward those goals. You can use the SEPP rules to withdrawn penalty free from tax advantaged accounts before age 59.5 but those rules could be altered before you reach FI. Look up SEPP if you are familiar.
Only other advice would be to get the MBA and don’t be afraid to take a bigger leadership role elsewhere if you want to achieve FI quicker. The best income pickups come from job changes – usually outside the company you work for.
Excellent job overall!! Best of luck with the family. You are doing it right.
Thanks for the suggestions. I am unfamiliar with the SEPP rules, so I will need to do some research
Why do you think that reducing ones emergency fund and paying off a mortgage puts one in a better position if you lose your job? Except for unusual circumstances, you have reduced the number of months of running time you have for your emergency fund, even after considering the lack of a mortgage payment.
That said, I’m not saying Scale47 made the wrong decision, just questioning this justification.
I’d much rather know that I have a house that the bank can’t take away when my e-fund runs out than worry about the temporarily lower balance. Now Scale47 can replenish the e-fund with what he would have been paying on the mortgage.
I really appreciated the perceptiveness shown by your comment about having 7 ETFs in one of your accounts “keeping you from investing in individual stocks”. Very well done. I do the same, more or less, but also have a couple individual stocks. I struggle between “put everything 50/50 in vanguard total stock market / total bond market ” or “complete DIY using more complex strategies”. I think a balance is often the best idea so that one avoids abandoning the simpler for the more complex, or vice versa. It really sounds like you’re on the right path here.
Thanks for the comment. Glad I am not the only one who feels this way.
This is the first Scale interview I’ve read from beginning to end. Well done! I like your plan on raising income and if you can’t get there with your current employer make a move.
I do think life should be enjoyed so make sure to find some balance but I also worry about setting the right example for my own kids. I have an amazing income but it’s teally unlikely they will reach the same level so I want to make sure we live a reasonable lifestyle.
Although I absolutely love my current employer and boss, I realize that I may need to look else where in the coming years for a large increase in salary. For now I am happy with the experiences and projects that are building my resume.
Always always network in a professional manner knowing you are capable of moving on. Opportunities have a tendency to present themselves when the time is right. Good job so far, you are ahead of a majority of the others in your age group!
Thank you for the interview…i learnt a thing or two. I constantly struggle myself what is the risk to take, Higher education/Job Change and Paying off Mortgage decisions.. Thanks again & Good Luck in your future ventures
We can argue opportunity cost on the pre-pay versus investing, but don’t sweat it. Since the mortgage is now paid off, I suggest moving on in a way. It’s done. The positive to know is that it’s paid off. Most people your age cannot say their mortgage is paid off. My own mortgage is not paid off and I’m 43. What a great accomplishment you’ve done.
As far as living now versus saving for retirement. There always should be some form of a balance. Finding the right balance is no doubt, difficult. And it’s hard to think about all the possibilities. You have the mortgage which is now paid off. It still has to feel good so go with that at this point. My wife and I had a bonkers screened in porch put on the back of our house over 10 years ago. A terrible monetary decision. But we love it. And it’s impossible to think about having more money without the porch; we can’t do it, it’s impossible.
Keep frugal, keep communicating about what brings value to your life, and keep saving. Look for income growth where you can but balance that with other factors (moving for a new job versus staying put, etc.) You’re off to an excellent start in life. I don’t feel qualified to get nitty-gritty with more personal finance suggestions for you I’m afraid, as what works for me may not work for you.
Congrats on all that you’ve done to date. I believe that creating wealth is a first a mindset- the consciousness to live below your means – save/ invest what you earn – make provisions for increasing income and having specific goals with a timeline. You have all of that and you’ll likely always be okay because of the discipline you have.
So was paying off your mortgage the “ right thing to do”? Well , since that’s what you did – of course it was! Lol. No need to second-guess yourself now. The math on that probably doesnt make sense at a sub 4% rate but it depends on your personal philosophy and your goals. Leveraging home equity is a very effective way to more quickly advance your cash flow and balance sheet if you do it properly. Imagine taking a 50% LTV on your home and being able to invest in a rental property that spun off $500-600 of income each month in profit (post mortgage ). Depending on the market, that is relatively easy to do. Just a thought. Real estate is a compelling consideration for cash flow – especially if part of your plan is retiring at 50.
The MBA thing is great – if your company will pay for it and if you can increase your salary as a result. Still , consider creating cash flow outside of your “ main thing “ as you progress.
I was personally in a similar situation as you 20 years ago. As I grew my primary 1099 business – I slowly invested in the market ( mainly for tax purposes in a SEP IRA ) and used the remainder to create cash flow through investment real estate. Remember cash is not king. “ Cashflow” is king – especially if you plan to step away. I now have 3 buckets – my small business, (nearly passive) – my real estate – and my qualified retirement plans. It’s just something to think about.
Congrats on your accomplishments. You are doing great.
I left a good job with a great boss for more money. Honestly, sometimes I think the extra money is now worth it. I much prefer to be part of a good team with a great boss than a bad boss with a semi-ok team, even if it means less money.
Seriously think about that. Because in the pursuit of money, I lost out on a great boss.
Playing devil’s advocate…
The flip side is also true in that your “great boss” could move on and you could be stuck with a terrible boss in your current job. I have been in both situations:
1) I stayed because of a good boss, they ended up moving on and the replacement was pretty terrible.
2) I left the good job / great boss for more pay and had a terrible boss.
My point is that there will always be external factors you can’t control so don’t get stuck in analysis paralysis thinking about the never-ending what-ifs. Either way you decide, SFL makes a great point to really consider every aspect of the move before you leap and that it’s not always about making another buck. Best of luck!
I agree you can’t control external factors…but at some point there are variable outside of just money.
Would I go back to making less money now that I have increased my salary significantly? Not at this time. They way I look at it, if my salary allows us to save at the rate we are saving, we should be good in 10 years, will be close to FI if not FI by the time are are 40. I’m 28. So, I’m continuing on the path.
Your fixed income plan is too risky to retire at 50. Pfau, Kitces, and others have researched a variety of approaches. I personally like a u-shaped equity glide path, but I worry about 80 year old me (or my wife) implementing it. Victor Estrada has a recent paper in favor of a constant 60% stock allocation.
Good stuff. I really don’t understand the need to keep Expense Ratios low- unless you are in index funds. Total returns are all that matters IMO. I’d pay 2% for a fund that returned 3% more than the others. 😉