Em is a single mother by choice living in Iowa with her two-year-old daughter and 14-year-old basset hound. Em has crafted her ideal lifestyle and made excellent financial decisions to get to this point. Now, at age 38, she wants our help mapping out the next 40+ years to ensure she makes the best choices for her future and her daughter’s future.
What’s a Reader Case Study?
Case Studies address financial and life dilemmas that readers of Frugalwoods send to me requesting advice. Then, we (that’d be me and YOU, dear reader) read through their situation and provide advice, encouragement, insight, and feedback in the comments section. For an example, check out last month’s case study. Case Studies are updated by participants (at the end of the post) several months after the Case is featured. Visit this page for links to all updated Case Studies.
I probably don’t need to say the following because you folks 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 condemn.
And a disclaimer that I am not a trained financial professional and I encourage people not to make serious financial decisions based solely on what one person on the internet advises. I encourage everyone to do their own research to determine the best course of action for their finances. I am not a financial advisor and I am not your financial advisor.
With that I’ll let Em, this month’s Case Study subject, take it from here!
Hello! My name is Em, I’m 38 and I have one daughter, age 2, and one basset hound, age 14. When I turned 35, and was single, I knew I wanted a family and so decided to have a baby on my own. I could not be happier with this decision! Being a single parent is (very) hard, but I have financial resources, a great support network and a lot of help from my parents, who live around the corner. I work full-time as a Strategic Sourcing Consultant at a bank.
I’m originally from the Midwest; I moved to Iowa in 2004 to attend law school and have lived here ever since. I graduated from college without loans (yay!—also, privilege), and chose to attend law school in Iowa since I got a partial scholarship. I worked throughout law school and was frugal, but I graduated with around $75,000 in loans (gulp). My primary focus from graduation through 2016 was paying those off as aggressively as possible.
I was hired in my current position in 2015. Since paying off my loans in December 2016, and having my baby in March 2018, I’ve been somewhat aimless. I don’t spend frivolously, but my “Target” and “clothing” monthly line items were eye-opening. I think relatively early retirement is a possibility for me and I’d like to get on track for that. I’m also haphazard in my charitable donations and want to make that more of a focused priority. Basically at this point, I feel like I’ve checked off all of the obvious financial boxes and am trying to orient myself for the next 40+ years.
I love that I have a flexible work schedule and get to work from home one day per week (currently working from home full-time due to Covid). I have lots of time with my daughter and daily involvement with my parents. I love my house, my neighborhood, and my friends. I’m an introvert and love to read, work on small house projects, go for walks and listen to podcasts, do crossword puzzles, play Scrabble… Most of my hobbies are very inexpensive or free.
The downside is that I don’t love my job, and I especially don’t love working full-time. I have a lot of hobbies that I don’t pursue as much as I’d like to because after working, parenting, and trying to keep my house a non-hovel, there just isn’t much leftover.
|Em’s net income||$4,508||Em’s net salary, minus the following deductions: health and dental insurance for Em and daughter; vision & life insurance for Em; 401K contributions (8%), health FSA, childcare FSA, and taxes.|
|Annual bonus||$916||Approximate; it’s usually around $11K after taxes.|
|Mortgage (including home owner’s insurance & property taxes)||$1,758||Re-financed to a 15-year; this raised my monthly amount considerably but it’ll be paid off by 5/1/2034.|
|Childcare||$400||I pay a nanny for one day per week; my mom takes care of my daughter the rest of the time and I pay my mom directly from my daycare FSA.|
|Target (including household, personal care, some additional grocery items, etc.)||$228||This is what I averaged on my Target Redcard in 2019; a lot of this is necessities but there’s definitely room to cut down.|
|Vacation||$188||Averaged over 12 months; I took two trips in 2019.|
|Clothing||$145||WHOA! This was a shocker to me. This seems like enough to revoke my frugal membership card. It’s probably 2/3 my daughter, 1/3 me, but STILL!|
|Vehicle||$115||Gas and usually one repair per year.|
|Restaurants||$55||Take-out pizza once per month ($20) and the occasional meal with friends.|
|Car Insurance (Allstate)||$50||This exercise made me realize I need to drop collision coverage; after that, this amount should go down.|
|Gifts||$50||Birthday and Christmas gifts, averaged out.|
|Toddler Tumbling||$42||I’d cut this if my financial situation changed, but my daughter LOVES it and I think it’s good socialization for her.|
|Charitable donations||$41||This needs to be better/more strategic.|
|Cell Phone (Verizon)||$38||I’m on a family plan with my parents and sister; I know this could be lower.|
|Internet||$35||I’ve shopped around; this is as good as it gets.|
|Pet Expenses||$35||Includes two pain prescriptions, food, as well as a generous treat budget :).|
|Mid-Iowa Fertility-Storage Fee||$28||Planning to keep this until 2022 when I turn 40; that’s my deadline for making the decision about baby #2.|
|Gym||$15||Through work; I attend at least 12 times per month so this is worth it to me.|
|Hulu||$13||These are obvious places I *could* cut; but I really enjoy them.|
|Netflix||$9||These are obvious places I *could* cut; but I really enjoy them.|
|People Magazine||$9||These are obvious places I *could* cut; but I really enjoy them.|
|Item||Outstanding loan balance||Interest Rate||Loan Period and Terms||Equity||Purchase Price and Year|
|Mortgage on primary residence||$172,135||3.75%||15-year fixed-rate mortgage||$53,000||Purchased in 2018 for $222,500. I re-financed in 2019 to take advantage of a lower interest rate and converted to a 15-year at that time. Pay-off date is 5/1/2034.|
|Vehicle make, model, year||Valued at||Mileage||Paid off?|
|2009 Toyota Matrix||$4,000||110,000||Yes|
|Item||Amount||Notes||Interest rate/securities held||Name of bank/brokerage|
|Roth IRA||$49,623||I max this out every year.||Vanguard|
|401K (through work)||$48,245||I put in 8%, work matches 6%|
|Rollover IRA||$43,465||401K rolled over from previous employment||Vanguard|
|Taxable Investments Account||$27,850||Taxable investments||Vanguard|
|Savings Account||$12,000||This is my emergency fund; probably a little on the low side since it covers only ~3 months at my current spending level, but I would definitely curb my spending in the event of an emergency.||Capital One 360|
|Checking Account||$2,000||My primary checking; the amount fluctuates frequently.||US Bank|
Credit Card Strategy
I have an American Airlines Mastercard that I pay off every month. It has a $90 annual fee, but I earn at least one free ticket per year and a free checked bag.
Em’s Questions For You:
- How much money should I put towards saving for my daughter’s college vs retirement vs paying off my house? I have some leaks that I’m aware of (ahem, ice cream…) but my only debt is my mortgage. My budget is not “bare bones” by any means and I know this.
What should I do with any windfalls? I’m very fortunate in that every year I get a significant bonus. While I still had debt, the target of that bonus was obvious. The past few years, I’ve had life expenses (getting pregnant, 20% down on a new house, etc.) and the bonus has been directed towards those. Now I’m not sure where it should go for maximum efficacy. Investments? Retirement? College? This year, I fully funded my Roth IRA with it and purchased new energy efficient windows.
- I definitely want to retire before age 65. Mid-50s feel possible. Without a specific target in mind, though, it’s harder to be aggressive with savings. I’m participating in the case study in part to get a handle on this/set a goal/get back on track with spending.
- I don’t have a 529 plan set up for my daughter and I have guilt about this. I anticipate having my home paid off by the time she’s in college as well as significant retirement savings. But should I set up a 529? And how much per month?
- My wish list item is to hire a cleaning person, which would cost about $200/month. I know this would bring me peace of mind as I feel like I’m constantly battling to keep the house running, but it also feels incredibly frivolous. What would this do to my retirement deadline? I think it might be worth working an extra year to not feel constantly stressed about the dirt on the floor, dust, etc. but it’s so indulgent…
- I want/need to get better about charitable donations. Right now, it depends on who asks and what my checking account balance is at the moment. That’s not a sound financial approach.
Where Em Wants To Be In 10 Years:
- Very close to mortgage-free (pay off date is May 1, 2034).
- Able to afford 2-3 trips annually with my daughter.
- Focused on a clear retirement date (I don’t think I’m ready to make the significant lifestyle changes that would be necessary to retire by 48, but maybe… ).
- I plan to be in the same house in the same city.
- I don’t see myself getting married, but I’m open to dating or a relationship.
- I’m reasonably confident I’ll just have the one child, although a second is not entirely off the table.
- My career is very much a job to me. It has some perks: I like my co-workers, and I rarely exceed a low/medium level of stress. But I would welcome cutting back from 40 hours/week and there are many other areas of life I’d like to explore if I had the time.
- When I think about not working and having a small child, the list of things I want to do and places I want to go is a long one.
Mrs. Frugalwoods’ Recommendations
Em is doing a fabulous job! She’s made superb financial choices over the years, which enable her to consider different options for her future. I’m impressed by her determination to make things happen and create the life she wants. She wanted to be a mom? She made it happen on her own. She wanted to pay off her debt? She made it happen on her own. I appreciate and applaud Em’s acknowledgment of the privileges that enabled her to do these things, but I also want to congratulate her for her wise choices over the years and recognize the excellent position she’s created for herself.
Em’s Financial Situation
Em has already done all the basic steps of creating a healthy financial life:
- She paid off all of her non-mortgage debt
- She saved up an emergency fund
- She contributes to her retirement accounts
- She has a taxable investment account
All very well done! Let’s turn to Em’s specific questions for us today:
Question #1: How much money should I put towards saving for my daughter’s college vs. retirement vs. paying off my house?
If it were me, I would prioritize retirement all day, every day for the following reasons:
Em is already on a fairly aggressive mortgage pay-off plan with her 15-year mortgage. I wouldn’t accelerate payments any more than that because a mortgage represents a diversification of assets. Yes, it’s debt, but it’s debt you’re consciously choosing to hold in order to free up your cash for other purposes.
- A mortgage enables you to diversify what you do with your money. If all of your money is sitting in a paid-off house and you have no emergency fund, no savings, and no retirement/taxable investments, what are you going to do if you lose your job?
- There are opportunity costs to paying off a mortgage. Namely, you’re missing out on the potential investment returns you’d enjoy if your money was instead invested in the stock market. Mathematically–if you have a fixed, low interest rate mortgage–money is better deployed in the stock market thanks to the average annual rate of return (7%) after many decades of remaining invested. Essentially, money is better leveraged in the stock market than in a paid-off house.
- A paid-off house isn’t actionable money unless and until you sell the house, at which point you’ll need to pay for another place to live.
- A mortgage is an excellent hedge against inflation. Inflation is when money becomes less valuable and the neat thing about a mortgage is that it’s denominated in the dollars you originally paid for the house and so, over time, as inflation increases (which generally happens), the money you’re using to pay off your mortgage is “cheaper.”
- I’m not anti-mortgage pay-off, but I encourage people to consider the limitations of putting all your money in one illiquid asset. It’s an “all the eggs in one basket” proposal for many folks and, things will not be good if you trip and drop the basket.
- Em’s daughter can take out loans for college; Em cannot take out loans for retirement. This is the “put your own oxygen mask on first” rationale. Saving for college is awesome, but it shouldn’t come at the expense of your own retirement investments.
- Think of it this way: your kid would probably rather take out student loans than have you come live with them when you retire because you don’t have enough in retirement savings. Additionally, it seems possible Em’s daughter will qualify for financial aid since Em’s household has one income.
- In many instances, financial aid doesn’t take into account a family’s assets (such as the equity in your primary residence or your tax-advantaged retirement savings), so Em’s daughter’s eligibility would be based on her one parent’s income. In light of that, it seems likely financial aid would be a possibility for her.
- That being said, if Em wants to open a 529 for her daughter, there’s really no harm in doing so–in many states, the minimum amount to open an account is very low (like $25) and there’s no imperative to contribute a ton to it.
- Having a 529 can be a nice way to encourage relatives and friends to contribute to your child’s future on birthdays and holidays as opposed to giving them yet another toy.
- Here’s my full write-up on why I have 529 accounts for my children and how they work: How We Use 529 Plans To Save For College
- Investing for retirement is a double bonus: it’s a tax savings now AND money in the bank for your future.
- The money that Em contributes to her employer’s 401k is pre-tax, meaning she’s reducing the amount of income she pays taxes on.
- You do pay taxes when you withdraw this money in retirement, but in general, this works in your favor because at that time, your income is low (or non-existent) and so the tax rate is much lower.
- Em’s employer is matching her 401k contributions, which means she’s getting free money! More about that here.
- Em also has a Roth IRA (Individual Retirement Account), which is a retirement account that’s post taxes (in the tax sense, it’s the opposite of her 401k):
- You pay taxes on the money you put into a Roth IRA, but you don’t pay taxes when you withdraw the money in retirement.
- A Roth IRA grows tax free.
- You need to be age 59.5 before you can withdraw money penalty-free (although there are exceptions).
- Your eligibility to contribute to a Roth IRA (versus a traditional IRA) depends on your income and your particular tax situation. I like this Nerd Wallet article on Roth IRAs if you want to read more.
- Em is maxing out her Roth IRA, which means she’s contributing the maximum amount allowed every year. This amount is calculated based on your income and how you file your taxes: see this helpful chart from the IRS.
Question #2: What should I do with any windfalls?
This is mostly answered above and, if I were Em, I would consider putting this money towards maxing out 401k contributions every year, which is $19,500 for 2020 (more helpful info from the IRS).
Additionally, I’d put some of this money towards increasing her emergency fund, which has $12,000 in it and would cover roughly three months of her spending.
Three months of expenses is fabulous, but it’s on the lower end of what’s considered a stable emergency fund (the standard advice is three to six month’s worth). Since her household is dependent upon just one income, her risk exposure is higher than a dual-income household, which is another reason to have a bigger emergency fund.
In addition to the above reasons for prioritizing retirement, Em is a bit behind on retirement savings given her age. To give Em a general sense on how much she should have saved for retirement at this stage, Fidelity has a helpful rule of thumb:
Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.
Since Em is 38, we’ll go with the age 40 metric for simplicity: 3 x $65,088 = $195,264. Em currently has $141,333 (see chart below), so she’s not terribly far off, but could stand to catch up a bit.
|Roth IRA||$49,623||I max this out every year.|
|401K (through work)||$48,245||I put in 8%, work matches 6%|
|Rollover IRA||$43,465||401K rolled over from previous employment|
Question #3: I definitely want to retire before age 65. Mid-50s feel possible.
I put Em’s numbers through a FIRE (financial independence retire early) calculator to help us visualize how she might achieve an early retirement. Here’s the result, courtesy of the site Engaging Data:
Em can access this calculator and amend her variables as needed here.
As this graph shows, it should be possible for Em to retire in 16.8 years at age 54 IF all the following happens:
- Em continues to save circa $25K per year
- Em’s salary increases by 1% every year
- Em invests all of the money she saves every year (this plan is predicated upon investment returns and in order to get investment returns, you have to put your money into the market).
This calculation assumes:
- That Em will continue to spend circa $45K annually after she retires
- That Em’s annual withdrawal rate from her investments will be 3.6%
- Based on all of that, her target FIRE portfolio amount is $1,337,500. It’s important to note that this doesn’t allow for inflated spending in retirement. In other words, this is essentially the bare bones amount to sustain her lifestyle in retirement. This dollar amount is inclusive of her taxable investments and retirement investments (her 401k and IRAs)
- This calculation is done based on historical returns of the stock market, but ultimately, there’s no way of knowing if the market will continue along historical trend lines.
At the end of the day, no one can predict the future and there’s no way to create a bullet proof early retirement number because we don’t know what the stock market will do. What I like about the above calculation is that it projects what would happen if the market is really good OR if it’s really terrible. Were the market to do incredibly well, Em might be able to retire in just 13 years at age 51. Conversely, if the market does terribly, Em’s retirement date might be pushed 23 years to age 61.
The Major Missing Component: Social Security
This calculator doesn’t take social security into account, which means it generates a very conservative estimate. Em should figure out her anticipated social security earnings, which she can do by following these instructions on how to retrieve her earnings tables from ssa.gov (the government Social Security website).
Once she knows her social security estimates, Em might be able to retire even earlier and draw down on her investments more aggressively before her social security kicks in. There’s a FIRE calculator that incorporates social security, which Em can check out here. With the addition of social security, Em’s early retirement prospects are even rosier.
How To Increase The Chances Of Early Retirement
You can do all the fancy math you want, but ultimately, the way to shore up the likelihood of retiring early is to influence the inputs in this equation that YOU CAN CONTROL: your spending and your income. You cannot control the stock market, you cannot control time or inflation. What you can control is how much you spend and how much you earn. The reason I talk about spending so often is that it’s the only variable that YOU and YOU ALONE can control and change, starting right this very minute. Yes, it’s ideal to increase your income, but that’s not always possible and it’s dependent upon someone else (your employer paying you more/a new employer hiring you). Your spending, on the other hand, is entirely within your control. I’m not telling Em anything new and I’m not saying she needs to slash her spending.
Bottom line: it boils down to how much of a priority early retirement is for Em…. and how early she wants to retire.
If Em asserts that early retirement is her #1 goal, then my advice would be the following:
- Reduce spending and increase savings.
- Explore finding a higher-paying position. Given that Em has a law degree, it seems to me she could likely command a higher salary if she were working in a more legally-oriented field. This could perhaps be at her current company, as I imagine there’s a legal department. Or, it could entail pursuing work at a more traditional law firm. That being said, I understand the importance of good work/life balance and so Em might be happier with the hours and expectations of a legal department within a company as opposed to a law firm.
Em is already pretty frugal and her budget is quite lean. If early retirement weren’t a goal, I wouldn’t even mention her spending. But as noted above, if Em wants to increase the likelihood of her ability to retire in her mid-50s (or earlier), then I suggest she decrease her spending (and increase her income).
Question #4: I don’t have a 529 plan set up for my daughter and I have guilt about this.
Answered above under Question #1.
Question #5: My wish list item is to hire a cleaning person, which would cost about $200/month. What would this do to my retirement deadline? I think it might be worth working an extra year to not feel constantly stressed about the dirt on the floor, dust, etc. but it’s so indulgent…
I don’t think this is indulgent, I think it’s Em being honest about what she wants and needs in order to not feel stressed out all the time. Peace of mind is usually worth every penny. This decision is ultimately a question of priorities. Since Em noted that it might be worth it to her to work an extra year in order to hire a cleaning person, I think she has her answer right there. The great thing about the FIRE calculator I linked to is that Em can input different savings rates and see how they impact her timeline.
The other way for Em to approach this is to reduce spending elsewhere in her budget to make room for $200/month for a cleaning person. This is, again, all about prioritization and identifying where it’s most meaningful for Em to spend.
Em noted that the obvious places to cut are her Hulu, Netflix, and People Magazine subscriptions, but I disagree. Those three things only cost Em $31 per month. $31 per month is a REALLY frugal entertainment budget! If it were me, I’d focus on the higher end of Em’s monthly spending and go where there’s the most room to cut and the biggest opportunities to move the needle. Here’s where I’d focus:
- Target purchases: $228
- Vacations: $188
- Clothing: $145
- TOTAL: $561
I’d put a lot more attention on the line items tallying $561 than I would on the bottom three equally a measly $31. Em wouldn’t need to eliminate these three categories entirely, but in reducing them, she’d easily have enough to cover a cleaning service. And of course if she chose to save even more, she could accelerate/ensure her early retirement goal.
Question #6: I want/need to get better about charitable donations.
I appreciate the thought that Em wants to bring to this aspect of her finances. While a Donor Advised Fund likely won’t make sense for Em from a tax perspective, the mentality of a DAF might be helpful as she maps out her philanthropy. I have several articles about how my husband and I approach charitable giving strategically, which I hope Em finds useful as she crafts her own philanthropic plan:
- How We Donate To Charities Like Billionaires
- How We Make Meaningful And Tax Efficient Charitable Donations
Here are the things I would do if I were in Em’s position:
- Start maxing out 401k contributions ($19,500 for 2020) and beef up the emergency fund.
- Determine how important retiring early is and run different numbers to see when retirement would be possible based on different rates of savings and income (with the inclusion of social security).
- Explore finding a higher-paying job, possibly in a more legally-focused field to leverage her law degree.
- Make a decision about the priority of hiring a cleaning service and either make budget cuts or extend the early retirement date in order to make it possible.
- Hire the cleaning person, Em. It’s clear this is a priority for you and you have the financial capacity to swing it.
- Create a giving strategy and plan for charitable donations based on Em’s priorities and philanthropic goals.
Ok Frugalwoods nation, what advice would you give to Em? We’ll 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.
P.S. Due to the uncertainty surrounding the pandemic, I’ve had quite a few scheduled Case Study participants reschedule for later in the year, so the Case Study calendar is unexpectedly free right now! If you’ve always wanted to be a Case Study, now is definitely the time to get in touch. If you’ve emailed me in the past regarding being a Case Study and I never responded (because I’m a horrible human being who cannot handle her email) now’s the time to email again!
Update from Em on 9/30/20:
Thank you so much for featuring me; the comments were immensely helpful! My dog passed away peacefully in June, so her expenses have (regrettably) ceased. I hope to have another dog eventually, but not in the near future. Because of that and other savings, my emergency fund is up to $15,000 and I am hoping to get to $20,000 before the end of the year. Other actions I’ve taken:
*Refinanced my house to 2.6%, saving a few hundred per month
*Dropped collision coverage on my car for a savings of $180 per year
*Upped my 401(K) contribution to 10%
*Started a car savings account with the money I’m saving on my mortgage
*Set up monthly recurring donations to the Food Bank of Iowa and Planned Parenthood
Thank you again for featuring me and I really appreciate all of the feedback.