Reader Case Study: Should We Stay (In San Francisco) Or Should We Go Now?
Welcome to this month’s Reader Case Study in which we’ll address Melanie’s questions on whether or not she and her family should decamp from the San Francisco Bay Area. I am delighted to delve into Melanie’s story because it brings up a number of questions that many folks grapple with: how to save in a high cost of living area, how to plan for a growing family, and how to achieve the life you know you want to live, but aren’t currently pursuing.
Case Studies are financial (and life!) dilemmas that a reader of Frugalwoods sends to me requesting that Frugalwoods nation weigh in. Then, Frugalwoods nation (that’s you!), reads through their situation and provides advice, encouragement, insight, and feedback in the comments section. For an example, check out last month’s case study.
I also provide updates from our Case Study subjects at the bottom of each Case Study several weeks/months after their story is featured. To see what past Case Study participants have decided to do, check out the Case Study section and scroll to the bottom of the individual posts.
P.S. Another way to get support on your financial journey is to participate in my free Uber Frugal Month Challenge! You can sign-up at any time to join the over 20,000 fellow frugal sojourners who’ve taken the Challenge and saved thousands of dollars.
I probably don’t need to say the following because you all are the kindest, most polite commenters on the internet, but, please note that Frugalwoods is a judgement-free zone where we endeavor to help one another, not to condemn.
With that I’ll let Melanie, this month’s case study subject, take it from here!
Hello, Frugalwoods folks! I’m Melanie (age 29), my husband is Kurt (age 31), and we have an adventurous son named Oliver (age 1). Kurt and I met in San Francisco, CA about five years ago and were married in 2014. We still live in the Bay Area, but we’re growing tired of life here and need your help. Both of us have always been savers, but we got serious about financial independence two years ago after reading Frugalwoods and other blogs.
I have a Master’s in Education and teach Language Arts at a public middle school, while Kurt is in software, making the world a better place one website at a time. He holds a degree in economics (and was once a financial analyst), but transitioned into software engineering a couple years ago because he yearned for something less monotonous.
Our hobbies include visiting the park, the library, or one of our many local museums. We love biking and recently purchased a second-hand bike trailer for the kiddo from Craigslist. I enjoy reading novels, sewing, volunteering with my local mom’s group, and making music and art; Kurt likes skiing, working out, and figuring out how to retire earlier than his co-workers. Together, we like to cook, travel, and hang out as a family.
In general, we aim to be quite frugal and unfancy, even in our high cost of living area. We have a home gym in our garage, and rather than eating out, we host friends for dinner on Sundays. We cut our own hair, do most of our own car maintenance, and spend our money consciously. We have no student debt (thanks to very generous parents), no credit card debt, and we’re still driving the car that I purchased (new – yikes!) way back in high school. Kurt and I consult one another on purchases over $20, which is a system that works well for us. We’ve done our best to trim our spending down to the essentials, but it always helps to have more sets of eyes on our plan!
Melanie and Kurt’s Home
For the past five years, we’ve lived in a cozy one-bedroom apartment, and there are some definite perks to living here. Our apartment is less than a mile from both daycare and my work, and a ten-minute bike ride to the train station for Kurt. Our rent is super low (for the Bay Area) because we’ve lived here for so long.
When Oliver was born, the three of us shared the one bedroom for a while, but now he has the bedroom to himself and Kurt and I sleep on a pull-out couch in the living room (we all seem to sleep better this way.) I have dreams of living in a tiny house someday, so this is good practice! However, as our son becomes more mobile, the lack of space here (especially safe outdoor space) is increasingly problematic. Additionally, we hope to have another child soon, and the high cost of living here simply doesn’t feel sustainable.
The Cost Of Living In The Bay Area
Having a second child here in the Bay Area would mean at least $20,000 per year in additional housing and daycare costs (and that’s just for renting). To buy a house or condo would cost, at minimum, close to ONE MILLION DOLLARS.
If we scraped and suspended our tax-deferred savings (401k, 403b, etc.), we could save up a 20% down payment, but we’d be left with a mortgage payment more than double what we currently pay in rent plus $10,000 per year in property taxes and/or HOA (home owner’s association) dues. Altogether, buying a home in the Bay Area would entail a $40,000 annual increase in our spending. Technically, we could afford this, but we don’t want to because we think we can achieve a better quality of life elsewhere (and also achieve our early retirement goals).
Something to note, when and if we do leave the Bay Area, Kurt can stay with his company and work remotely, but he will take a significant pay cut (perhaps 15%). I plan to continue teaching, but leaving the Bay Area would mean a salary decrease for me too. We’re hoping that the cost of living in our next locale will be similarly reduced, even with renting/buying a larger home.
Melanie and Kurt Want To Move
So we want to leave… but where (and when) do we go? We’re considering Colorado and northern New Mexico due to ski resort proximity, school quality, home prices, and general outdoor loveliness, but the decision will likely come down to where I can find a teaching position. Other considerations include needing to move in the summer (I’m under contract as an educator for the school months), not wanting to move right when we have a newborn (or when I’m hugely pregnant), and the ability to locate near natural beauty.
Where Melanie and Kurt Want To Be In 10 Years
To put it simply, we’d like to be somewhere else! Our dream is to be early retired, own a small house with a backyard and a rusty home gym, and be within biking distance to a grocery store, a library, and some nature. Kurt would appreciate living close enough to a ski resort to make frequent day trips. We’d like to spend abundant time with Oliver and his sibling(s), garden, hike, fish, ski, paint, bake cookies after watching Great British Bake Off reruns, volunteer in our community, travel a bit, and do miscellaneous fun/home projects during our retirement.
Ideally, we’d have enough money to send all of our children to college without debt. While we might dabble in open source software or pro bono Certified Financial Planning work (Kurt) and teacher preparation programs (me), ultimately we want to spend our retirement together as a family. Sidenote: I’ve considered getting a PhD in Education someday, but only if it’s at no cost to me. I would pursue this only after all of our kids are in school.
Melanie and Kurt’s Finances
We max out our Roth IRAs, HSA, 401k, and 403b accounts each year. My work might be adding a 457b account option in the near future, which would allow us to save an additional $18,000 tax deferred (fingers crossed that this happens soon). Kurt also owns shares from his company, but they are privately held and of indeterminate value.
|Kurt||$6,006||This is after taxes, 401k contributions, and HSA contributions.|
|Melanie||$3,100||This is after taxes, 403b contributions, and health insurance.|
|Rent||$1,785||For our 700 square foot 1 bedroom. Seems high, but is a great deal in the Bay Area. Similar units go for ~$2,200+. We don’t have renter’s insurance, but we have very little of material value worth insuring. Except for a few family heirlooms, everything we have we could afford to replace.|
|Daycare||$660||This is actually $800/month for 10 months out of the year since I’m home during the summer months.This is a great deal as most daycares are $1,200-$1,600/month in our HCOL area. We have a friend paying $2,000/month for daycare in a nearby area. YIKES!|
|Groceries||$400||Mostly Costco and some Trader Joe’s. This includes most of our lunches during the week and bulk toiletries, some OTC medicine, and an article of clothing or two per year.|
|Vacation||$250||Covers airfare, hotels, etc. We take approximately 6 trips a year to visit relatives, another couple to go skiing (often with family), and another 2 or so trips on our own. We use miles and points as much as possible.|
|Gifts, Personal Care, Home, Craft Supplies, Charity, Misc.||$150||Includes ski equipment.|
|Doctor and Pharmacy||$130||Both of us have well-managed but chronic conditions. Oliver had an expensive health scare earlier this year (costing $2,500) but is now fit as a fiddle (phew!).|
|Car & Transportation||$113||Includes gas, car insurance ($300/yr), tolls, parking, and public transit around the Bay Area. We own a 2006 Mazda3 Hatchback, which is paid off. We try to bike as much as we can.|
|Restaurants||$90||We go out for Indian/Vietnamese/Mexican food 3-4 times a month.|
|Utilities||$63||Normally ~$40.00, but we have electric heat and this spikes in the winter.|
|Cell Phone||$50||Kurt and I both have Google’s Project FI.|
|Internet||$40||Teaser rate, so we switch service providers every 12 months. We do not have cable TV or any subscriptions. We stream and use our ChromeCast.|
|Fast Food||$30||Gasp. In-N-Out or Chipotle a couple times a month. (Mostly Kurt.)|
|Baby/kid stuff||$30||Food, diapers, wipes. We’ve received a lot of grandparent gifts and hand-me-downs from friends, so this is low.|
|Entertainment||$20||Museums, mostly; maybe two movie tickets per year. We usually do free things.|
|Clothing||$10||Goodwill here and there and some baby clothing.|
|Taxable Investments||$124,862||Held in a Charles Schwab brokerage account. Targeted allocations:
50% SCHB (S&P500 proxy ETF)
15% SCHA (small cap ETF)
20% SCHF (international ETF)
15% SCHZ (total bond ETF).The expense ratios on these index funds range from 0.04% to 0.13%, the weighted average is about 0.06%.
|401k and 403b||$121,633||Target date type funds, Vanguard 2050 and 2055.|
|Roth IRA and HSA||$114,734||Same target allocation as taxable accounts.|
|Cash||$5,000||We always keep $5K in cash and everything else goes into our investments.|
|College Savings Account (529)||$4,261||Through Wealthfront, free up to $10k.|
|2006 Mazda 3 with 95k miles (paid off)||$4,000.00||We drive maybe 6,000 miles a year. Hopefully this vehicle will last us another 10 years.|
Melanie’s Questions For You:
- Do we bite the bullet and deal with the high cost of living in the Bay Area while our family grows? Or is it more prudent to leave now while our family is still getting started?
- Where should we go to realize the family lifestyle that we seek?
- What are we not thinking about that we should be?
Thank you for reading! We look forward to your feedback!
Mrs. Frugalwoods’ Recommendations
First of all: wow! Melanie and Kurt are doing a fabulous job. They’ve followed a clear path of frugality, planning, wise investing, and consciously spending for years, which is going to pay off for them big time in the future. These two are doing just about everything I recommend to get one’s house in financial order, including:
- Being debt-free
- Having an emergency fund
- Maxing out their retirement accounts (401K, 403B, and IRA)
- Investing in low-fee index funds
- Adhering to a longterm lifestyle of extreme frugality that brings them joy and doesn’t leave them feeling deprived
- Creating clearly articulated, and agreed-upon, longterm life goals (this, after all, is what it’s all about)
This, my friends, is precisely how you reach financial independence and craft the life you WANT to live, not the life you MUST live. I offer a hearty congratulations to these two for following such a straightforward route to achieving their dreams. Well done.
To Move Or Not To Move?
And now, onto Melanie and Kurt’s most pressing question: should they leave San Francisco now or later? In a word: now. I see absolutely no reason for them to remain in a city they know they don’t want to live in, where they don’t own property, and that they want to leave.
I didn’t hear any longing or particular love for the Bay Area in Melanie’s writing and so I don’t recommend they remain in a sinking ship. They have nothing to gain by staying. Bail ASAP! But not actually ASAP… Since it’s the beginning of a new school year, and Melanie’s on contract until the summer, I highly recommend Kurt and Melanie dub this their “year of exploring where to move to” with the intention of making the move this coming summer 2018.
I suggest Melanie and Kurt put all of this year’s vacation time and money into service as home exploration time. They should visit all of the cities they’re considering, make appointments with realtors to tour homes, visit schools, explore neighborhoods, and just generally get a feel for whether or not this is a place they want to live.
A great deal of the leg work can be done online ahead of time and I highly recommend they do extensive research on all of the factors they cited as important before actually visiting a place. Astronomical housing prices or a failing school district alone could rule out an area for the family and these things can be ascertained from afar, thanks to the world wide web. Mr. Frugalwoods and I conducted a years-long, long distance homestead hunt, which is chronicled in this series: Frugal Homestead Series.
Since family expansion is on their brains–and I well understand the desire to carefully space out the births of children–I’d get a move on this move plan NOW. Spend this school year visiting potential locations, make a decision, and move in summer 2018. This, hopefully, will be before Melanie is pregnant (or super duper pregnant) with bebe #2 and will allow the family to settle into their new home before the arrival of Oliver’s sibling.
Where To Move To?
I’m afraid that no one can really answer this question except for Kurt and Melanie themselves. Only they know what they truly want and need in their new hometown. I recommend creating a spreadsheet outlining all of the factors and attributes that are important to them and then figuring out which town best meets their criteria. In addition to all of the variables Melanie mentioned are important to them, I’d include: weather, income/property tax rates, and political/cultural leanings.
The only note I have on specific locations is that many desirable parts of Colorado are now quite expensive with home prices and costs of living that rival their east coast counterparts. I know that there are still some affordable areas in the state, but it might take a bit of research to suss them out.
Melanie and Kurt have the luxury that Mr. FW and I enjoyed of moving to a place solely because they want to live there. This is a wonderful position to be in and I hope they have fun with the search.
I also want to add that Melanie and Kurt might want to consider renting for awhile before buying a home in their new town. Renting would enable them to visit every neighborhood in their town, learn about the school districts, meet friends, and visit lots of open houses in order to ascertain exactly where they want to live. If they do happen to find their dream home before they move, great! But I wouldn’t rush into buying a place before moving just to buy a place–it’s better to wait until you find the right home at the right price, even if it means renting for awhile and moving twice.
Melanie and Kurt’s Cash Position
While Melanie and Kurt are doing FABULOUSLY well with managing their finances, one glaring exception is their low emergency fund. It’s awesome that they have an emergency fund, but in my opinion, it’s not large enough. In general, I recommend having three to six months’ worth of living expenses in cash (in a checking or savings account), which for Melanie and Kurt would be $11,463 to $22,926. An emergency fund is your buffer against the unforeseen, but entirely predictable, disasters and challenges of life. While their index funds can be liquidated, there’s no reassurance like cash in an easily accessible checking or savings account.
Additionally, since moving and potentially buying a home in their new town are on the horizon, Melanie and Kurt need to dramatically increase their cash position over the course of this year. I recommend they stop funneling money into their index funds and instead start saving that money into a checking or savings account.
They want to be ready to put down a down payment as soon as they find their dream home. The reason I don’t recommend holding money you’ll need soon (i.e. for an emergency fund or an upcoming down payment) in index funds is that the market could tank at any moment and you could lose a significant percentage of your net worth. This is not a problem at all when you’re investing for the longterm–in fact, it’s simply what the market does–but, this presents a conundrum if you’re planning on liquidating stock in the near future in order to make a down payment. It’s more conservative and less risky to save up cash for near-term purchases and then begin investing again as soon as the move and house purchase are over and done with.
Savings Accounts Side Note
One of the easiest ways to optimize your money is to keep it in a high-interest savings account. With these accounts, interest works in YOUR favor (as opposed to the interest rates on debt, which work against you). Having money in a no (or low) interest savings account is a waste of resources because your money is sitting there doing nothing. Don’t let your money be lazy! Make it work for you! And now, enjoy some explanatory math:
- Let’s say you have $5,000 in a savings account that earns 0% interest. In a year’s time, your $5,000 will still be… $5,000.
- Let’s say you instead put that $5,000 into an American Express Personal Savings account that–as of this writing–earns 1.70% in interest. In one year, your $5,000 will have increased to $5,085.67. That means you earned $85.67 just by having your money in a high-interest account.
And you didn’t have to do anything! I’m a big fan of earning money while doing nothing. I mean, is anybody not a fan of that? Apparently so, because anyone who uses a low (or no) interest savings account is NOT making money while doing nothing. Don’t be that person. Be the person who earns money while sleeping. Rack up the interest and prosper. More about high-interest savings accounts, as well as the ones I recommend, here: The Best High Interest Rate Online Savings Accounts.
A Note On Jobs
Something that surprised me is that Kurt would take a pay cut if he began to work remotely for his company. I don’t know all the details of his position, but in general, software engineers are in high demand and I would imagine he could find another company that would happily allow him to work remotely with no pay cut. I consulted with Mr. Frugalwoods (who is a software engineer who works remotely) and he concurred that if Kurt’s skills are in demand, he should be able to both work remotely and possibly command a higher salary.
Another variable is that it sounds like Kurt is working at a pre-IPO company and so perhaps his stock will pay out big some day. However, if that’s not the case, and if Kurt doesn’t love his current company, I’d recommend at least looking around for a better paying position that wouldn’t entail any salary reduction for remote work.
There could be many reasons why Kurt prefers to remain with his current company, but I think it’s at least worth a perusal of job listings to see if there might be a more advantageous arrangement. Plenty of tech companies hire folks to work remotely from the start and so he might be able to finagle a better situation.
No Frugalwoods Case Study would be complete without a run through of expenses! Melanie and Kurt are already quite frugal and, if they weren’t gunning for financial independence and didn’t need to increase their cash position so dramatically, I wouldn’t recommend they change much. However, since these are two goals of theirs, they do have a bit of room to trim. It’s also true that the decision to spend less should be balanced with how quickly Melanie and Kurt want to reach financial independence. The more they save, the faster they’ll get there. On the other hand, it doesn’t sound like either of them hate their jobs, so they may prefer to remain on their current timeline and savings rate.
If they do want to save more and get to financial independence more quickly, here’s what I recommend:
- Gifts, Personal Care, Home, Craft Supplies, Charity, Misc.: I’d do an in-depth analysis of what all is included in this $150 line item to determine if there’s any slack to cut.
- Restaurants: You can guess what I’m going to say here. Cutting this out entirely would give Kurt and Melanie another $1,080 per year to work with. And if deleting this line item in total is too painful, perhaps pare it down to one dinner out per month?
- Cell phones: I’d look for something even cheaper. I use BOOM mobile for $19.99 per month and other services, such as Ting, are even cheaper (I’ve heard in the range of $14/month). I highly recommend shopping around for an even lower rate here.
- Fast food: This is another one I’d cut out entirely, if possible. That’s another $30 per month saved.
Overall, Melanie and Kurt already have a super frugal budget, but, with a few tweaks they could save even more every month, which would help them boost up their down payment fund even faster.
Another topic I want to touch on is their plan to move into a two-bedroom apartment and increase their rent from $1,785 per month to $2,550 per month. I’m sure they’ve already thought about this long and hard; but, if they commit to moving to a new state next summer, I wonder if they would be open to toughing it out in their one bedroom until they move?
I am deeply impressed that they’ve lasted so long already in their tiny space and, if they could grit their teeth a little longer, they’d save $6,120. On the other hand, it’s also very true that Melanie and Kurt can afford to take on this higher rent. They’ve lived frugally for years and so they can easily afford more expensive rent. It’s just a question of building up that down payment and their timeline to financial independence. Thus, there’s no right or wrong answer here, just a weighing of variables and a consideration of their timeline.
Investments and Retirement Accounts
Melanie and Kurt get a gold star for maxing out their retirement accounts and contributing to low-fee index funds. Hooray! One note I do want to make is that they’re paying slightly higher fees through Charles Schwab than they would through Vanguard or Fidelity. Vanguard’s low-fee index funds (VTSAX) have an expense ratio of 0.04% and Fidelity’s (FSTVX) are at 0.035% (I happen to use Fidelity for my investments, but either is a great option). This isn’t a huge deal, but, as their net worth and investments increase over the years, every little bit of fee can add up. They might consider transferring over to Vanguard or Fidelity to take advantage of these lower fees.
Additionally, since they’re on the path to financial independence, I want to be sure Melanie and Kurt are aware of the Roth IRA conversion ladder, which my friend the Mad Fientist outlines here.
I can’t emphasize enough how fantastically Melanie and Kurt are doing with their finances and I hope that this Case Study serves as useful inspiration and guidance for other folks interested in pursuing financial independence. My advice for them, in summary, is as follows:
- Spend this school year hunting for their new hometown. Conduct extensive internet research and narrow the list of possible towns down to those that merit an in-person visit. Then, visit those potential towns and tour homes, schools, etc. Start today with the intention of moving during the summer of 2018. Don’t invest any more time or money in a place (San Francisco) where they no longer want to live.
- Increase their cash position, both from the perspective of needing a larger emergency fund and from the angle of planning for a down payment on a house (as well as moving expenses) in the coming year.
- Research potential other employers for Kurt that would: a) pay a higher salary, and b) not penalize him for working remotely. This might not pan out or be a possibility, but it seems worth the research at least.
- Move next summer and, after those expenses are paid for, begin funneling money back into their low-fee index funds and coast to financial independence.
Ok Frugalwoods nation, what advice would you give to Melanie? She and I will both reply to comments, so please feel free to ask any clarifying questions!
Would you like your own case study to appear here on Frugalwoods? Email me (email@example.com) your brief story and we’ll talk.
Updated April 15, 2017 with Melanie & Kurt’s Decisions:
Hello, Frugalwoodsfolks! Thank you for all of your advice (both Ms. Frugalwoods and the comments were very helpful). We’ve experienced some changes since writing our case study… namely that we’re expecting a baby brother for Oliver this summer! In preparation for baby, we’ve agreed to delay our potential move date.
The school calendar (combined with my two months of saved time off and teacher tenure) make the decision to stay another year pretty easy. In the meantime, we’ve moved to a bigger place in the Bay Area while we prepare for baby’s arrival. With that said, we’ve taken the rest of your advice to heart:
- We have boosted cash reserves to a rolling average of $15,000 for emergencies.
- Kurt was promoted and received a hefty pay increase (more than canceling out our temporary rent increase)!!! Yay, Kurt!
- We are taking trips around the US to scope out where we would like to end up. The comments on the case study were awesome! There are some places we love that we had not considered before.
- We completely slashed our restaurant budget, and we honestly don’t miss it. I’m more interested in cooking (in our bigger kitchen with a dishwasher! Oh, the luxury!), and we now prefer a home-cooked meal. I’ve even started experimenting with my own sourdough. Anyone with advice, please get in touch. Sourdough is funky stuff.
We haven’t decided on our destination yet, but we plan to move the summer of 2019, in time for that school year.
Thanks again for helping us on our journey!
-Melanie & Kurt
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