Many of our reader case studies have profiled people who are earning an average income, and looking for ways to make the most of it. They want to pay off debts, support a family, and save for eventual financial independence.Hi MMM,
Your column has truly changed my life. Before I started reading it, I thought I was doing well by putting about 15% of my income into a savings or brokerage account. Now, I know better. But I need (want?) some advice. I am a recent law school grad. I am currently working in a “Biglaw” (tall buildings and large clients). My current firm has some nice benefits. But, I do not see my wife or kids nearly as much as I would like to. So, here’s my question. Should I stick it out in Biglaw for a couple more years until I am FI (or at least debt free), or strike out on my own and gain some flexibility in my schedule? I love the idea of early retirement, but not at the expense of my relationship with my family. (My wife and I are 28, our kids are 6 and 3). Here’s the financial picture:
Salary: $210,000
Assets:
Home- $380,000 (with a $311,000 mortage at 4.5%)
2 cars- $32,000 (with $21,000 in loans at 1.9%)
A bunch of other crap- about $1Liabilities:
Student loan debt- $240,000 (interest rate 6 – 6.5%) (ouch!)Monthly Expenses:
Mortgage/HOA/taxes- $2,800
Student Loans- $3,000 (my law school will pay these for me if I start my own firm and don’t do well)
Utilities- $200
Cable- None!
Internet- $55
Cars (auto loans, insurance, gas, maintenance)- $1,200
Cell phone- $25
Entertainment (e.g. eating out, movies)- $200
Misc (food, clothing, everything else.)- $600Total: $5080 of living expenses
Plus $3000 in student loan principal+interest repayment.More Details:
We live in a high-cost-of-living area right now. The $380,000 home is a 1300 square foot condo (in a great school district).
I started at Harvard Law already in the hole from college. When I started, tuition alone was north of $40K/year. After I graduated, My total student loans (college plus law school plus principal due to deferred interest) was around $250K. HLS was a great experience, but I sometimes wonder whether I should have gone somewhere on scholarship.
We live in the DC area. I bike to work when it’s not raining/snowing/below 40 degrees (I know I’m a wussypants!). It’s about 6 miles each way. My wife is now getting her own law degree at a local university, so we can’t easily move out of the area.
Starting my own firm would take away the student loans (unless I do really well), and would drop my car expenses from $1,100 to $300/month. It would also mean giving up the high salary and benefits. My projections are that I could earn between $40,000 and $60,000 in profit in the first year, and probably stabilize around $100,000 after 3-4 years. So the pay cut would be significant.
So, here’s the big issue. I could obviously reach FI far faster by staying in the firm. But, that means giving up on seeing my wife and kids in a meaningful way until I get there. Alternatively, I can start my own firm where I would work really hard but have a more flexible schedule. This would push off FI, but allow me to see my family. What do you think?
– Dave in DC
To me, this seems like an interesting story to publish here, because it directly addresses the tradeoff of Time vs. Money that all of us will have to make as we advance further along in the process of becoming wealthy.
When you have a severe shortage of cash, the needle usually points to “Money”. But what about this guy, has a choice between earning a Whole Lot or just a Lot, but also has high debts? And all of this is set against the backdrop of a ticking clock that cannot be stopped. Those kids are on their way to growing up – do we miss their childhoods in search of a higher income?
When it comes to work/life balance when kids are involved, Mr. Money Mustache stands clearly on the side of “Life”. Not everyone feels that way. But I think you could have predicted that I would say it, because Mrs. M. and I retired from work specifically to start a family, and we regularly turn down moneymaking opportunities to stick to that ideal. From what Dave has told me – in this summary and in another private email, I know that time with his kids is very important to him.
So our goal in crafting the advice is this: make him work in the high-paying job only long enough to ensure financial stability, then let him come home to his family, set up a law office in the spare bedroom, and start living life his own way.
This means that the standard Upper Class East Coast lifestyle for this salary range has already been ruled out: upgrade the cars and house, enroll the kids in ivy-league private schools, take a liking to $50 bottles of wine, and be locked in to working forever.
But right now, I still see some trouble. Those monthly costs are enormous, requiring a $60,000 take-home pay just to cover them – and that’s even after the nifty feature of the law school temporarily taking over the student loan payments. To get out of your situation, you need to cut your monthly expenses to a level where you can easily afford them even while starting your own business.
Step 1 – costs:
The Cars: You have duly apologized to your fellow Mustachians for financing two brand new cars while simultaneously owing money on your education and your house. That’s a good start. You pointed out that your car costs will drop once you stop commuting to work, but guess what? We can drop ’em right now instead!
First of all, both financed cars need to go – you can’t afford such expensive cars when you’re in debt, although you will be able to in the future. Since you live only six miles from work, you can easily drive a very old car and still not run into frequent maintenance issues. With low annual mileage, you don’t need to carry a lot of vehicle inventory. Similarly, your wife can choose a second affordable car if needed that suits her own requirements. These steps should drop your car ownership costs to the $300 range right away, with no car loans.
The House: You have listed $2800 in monthly housing costs, yet the mortgage payment on a $310k mortgage is only $1570/month. I find it amazing that the taxes, HOA, and insurance on a condo add up to $1230 per month. But if it’s true, you might want to look around at the rental market in your area. Can you get a similar house at a lower monthly cost by renting? If so, you should consider it! There is no shame in renting in a high-cost market like yours if rentals are a better deal than housing. This would also free up most of the $70,000 in equity you currently have in the house, to eventually be used to pay down debt.
The Other Costs: the rest of your budget looks pretty reasonable for a busy family. You could always tweak your entertainment and restaurant budgets to give yourself more breathing room (remembering that even though I am typing calmly to you to avoid making you spill your coffee, you are actually in the middle of a DEBT EMERGENCY!!!). Although you’ll maintain the composure of a calm husband and father, there should be a constant Red Alert Siren playing at least somewhere in the distant background of your head at all times. So let’s assume we can get your $5080 in living expenses down to $4000 per month.
Step 2 – the Job
Now that your budget is streamlined, how can we leverage that kickass job you have acquired for yourself? This is the happier part of the story.
With an income of $210,000, you are theoretically taking home about $140,000 after federal and state taxes, social security, medicare, etc. This will further get sucked into:
$48,000 living expenses
$36,000 student loan payments
Total: $84,000
This leaves a net savings of at least $56,000 per year. Plus $20,400 of your student loan payments are actually principal, as well as $5,000 of the mortgage payments. Adding in some allowance for the tax deductibility of your 401(k) plan, and the home and student loan interest, your net worth while working will increase by about $100,000 per year.
With a current net worth (after ditching the borrowed cars) of about -170,000, you’ll be wiping out more than half of your your negative value after one year, and if you work two years, you’ll be at the breakeven point. There will still be a mortgage and a student loan, but the combination of home equity and retirement savings minus debt would add to roughly zero.
All this is good to understand, but it’s still not a plan of action. So how about this one:
Get a digital countdown clock, set it to one year in the future, and stick it on your fridge. Tell your family that’s the countdown until Dad comes home. Cut your budget in whatever way you can – including moving to a rental house if that is practical. Continue to work like crazy as you currently are, and put all your surplus monthly cash into the mortgage (or into a somewhat liquid investment if you decide to rent).
Near the end of the one-year period, visit a high-quality lender and set up a home equity line of credit for your house. Since the balance will be lower by then, and you’ll be further along in your career, this will maximize the size of loan you will qualify for.
When you’re all ready for it, make the jump and start your own law practice. If you can get things started on the side even before quitting your real job, that’s even better. You’ll have $4,000 per month of outlays to cover, which you’ll have to meet with a combination of your new income, and your home equity line of credit as needed. Things will be exciting at first, but I have faith in your ability to get this done. Compared to graduating from Harvard Law, making $4,000 a month will be a piece of cake. As your practice grows and thrives, you’ll be phased back into making student loan payments, but that’s all in a day’s work for a Mustachian.
This advice may sound a little crazy to those who love high incomes, but for some of us, things just change when you have kids. If Dave has a chance to control his own schedule to make more time to be a Dad, and do something he loves more than working a high-demand office schedule, he should take that chance. It will take him a few years longer to reach financial independence, but he’ll have a chance to more than double the amount of time he spends with his kids while they grow up.
Also, funny things happen when you start to do your own thing. The business may take off. His wife will graduate with her own law degree and there may be opportunities to collaborate for the ultimate flexible family practice – two workers, part-time. This will speed up the saving process and work will become completely be optional long before those kids finish high school.
So I wish you all the best! In one year’s time, I’ll be standing next to your fridge counting down alongside your family, so please ensure you have it stocked with beer for my arrival.
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