Reader Case Study - PFR Young, Married, Debt Free

[Ryan-o]

Reader Case Study - PFR Young, Married, Debt Free

Background
Age: 23
Age SO: 22
Tax filing: married filing jointly
Income: $48,000
Income SO: $10,000
Residency: Florida

Expenses (Monthly):
Food: $400
Gas: $220
Cell phone: $50 total
"Fun $": $150 each
Charitable giving: $300
Storage Unit: $65
Gym: $55 (may be able to eliminate this expense by having my work cover it).


Assets
Emergency Fund: $5000 (both spouse and I have strong financially stable families - rational reason for keeping emergency savings low?)
Checking: $500
Savings: $11300
Taxable Brokerage Account: $1100 (this is currently a mess of individual stocks and etfs- looking to get this in order)
Asset Allocation: (looking to start fresh here and make a sensible plan that is inline with my overall portfolio strategy including my tax advantaged accounts)

Tax Advantaged Account:
Again, not too strategic here on my current holdings (Future advisor basically recommends I sell all of my positions and start fresh!). Follow their recommendation?
Value = $8200


Car: $7000 - paid off (parked for the next two years... May sell and buy a new one later or post it on relay rides to earn some passive income)
Liabilities- $0
Credit Card Debt- $0 (excluding the MS I do on various CCs)
Loans -$0

Goals

I'll need $10k two years from now for franchise fess to start my own business.

We want to have 2-3 kids in about 4-5 years. I would like to establish a college find for each around $60k.

Own a home in 3-5 years. $30-50k as a down payment

Help others in my position with their finances!



Willing to take on risk. Our expenses are low and retirement is a looong way off. In fact I'll probably just keep working as long as I'm able to because I enjoy it.

Final notes:

Obviously my expenses are very low. This is due to the unique nature of my job over the next two years. I'll be traveling with my spouse living in corporate housing with almost all of my living expenses covered by my employer.

After two years, my financial position will hopefully change dramatically. My wife will be working as a teacher and I will be running a business (self employed tax status).

Estimated income:
Me: $90-120k
Wife: $35-45k


Random questions:

How often should I rebalance or even look at my portfolio?

When should I move money from my liquid accounts into my brokerage accounts? Consistently once a month? When I feel the market has taken a dip? How often?

Finally I may have an opportunity to co-own a rental property as an investment. Is this too advanced to dive into at this stage in the game for me? ($150k for the property. Rent out for $1500/month etc... Can provide more details of necessary).

 

[Sesq]

Random questions:

How often should I rebalance or even look at my portfolio?

When should I move money from my liquid accounts into my brokerage accounts? Consistently once a month? When I feel the market has taken a dip? How often?

Finally I may have an opportunity to co-own a rental property as an investment. Is this too advanced to dive into at this stage in the game for me? ($150k for the property. Rent out for $1500/month etc... Can provide more details of necessary).

Its not in your goals, but I'd start saving for retirement now.
Why? Look here.
http://www.mymoneyblog.com/retirement-lever-comparison.html

That also sort of answers your rebalance question - which is don't worry about it much. I'd go 80/20 in total stock market index / bond fund and stay that way for the next 10 or so. And don't bother with the paid advisor (sorry Matt).

You have a bunch of goals (corporate housing employment, franchise plans, etc). I'd save rentals for later. Don't over complicate things.

 

[Matt]

Hi Ryan,

Thanks for sharing your situation with us, I really enjoy getting into these PFRs.

First off -congratulations for being in excellent financial shape at such a young age, and for thinking about things in the right way. Let's be sure to talk again before you fully commit to that Franchise as I'd like to explore it with you in terms of Pros/Cons when the time comes.

To address your plan:

Emergency Fund

Ironically, your Emergency Fund is actually quite substantial, despite you thinking otherwise. The purpose of the fund is to keep you from needing to liquidate assets in the event of a financial emergency. This could be losing your job, or it could be a sudden incurred cost. I guess the key issue for you is the stability of your job, since it comes with the perk of free housing, if it is possible you might lose it and don't have a place to live then you need more in reserve. It sounds from what I can see to be something that might include severance should that be the case... < this is a risk assessment for you to consider.

If you look at other costs, due to your lack of debt and modest lifestyle, your 'needs' seem very low indeed. In a financial emergency you should cut your discretionary spending (fun $, perhaps charity as it is a generous portion - if tithing then a reduction due to hardship) you would be covered for quite some time. The industry standard is 3-6 months of real expenses, so maybe add on a cheap apartment in your area, and run the numbers for 3-6 months x cost.

The Savings Account

Way too much money in here.

I'd like to suggest you start thinking of everything as a virtual account (if I lose you here ask me more, it's perhaps odd). Instead of saying I have:

• $5000 EF
• $500 checking
• $11,300 savings
• $1,100 brokerage
• X tax advantaged

I want you to think Asset Allocation as if it was all in one giant account that allowed you to invest in all of these options.

I have to ignore the tax advantaged as I can't see it. So you have a total of 17.9K here, of which you say the brokerage is a mix of stocks and ETFs. So lets assume 100% equities, no bond ETFs(?) That means your current asset allocation is 6.14% Stocks, 98.6% Cash. Bring back in the Tax advantaged, and maybe the mix jumps to 15-20% stocks, 80-85% cash.

OK think about them like separate accounts again now

The purpose of that exercise was to make sure you are in control of your money. 'Naming' your money into things like EF, Checking, Savings, Brokerage etc is a great idea, but you have to be able to flip it around back and forth so you really understand how exposed you are to both risk, and reward.

Risk Tolerance

Here is a point where you need to consider investment time horizons and your risk tolerance. If we were to assume that your $500 in checking is after monthly expenses, and that your salary generates a monthly surplus of income after expense, you could jump all in to stocks with that $11,300. Doing so exposes you to a risk of losing say, 50% of the value. However, if the market tanks and you maintain an income surplus as you stand today, you could dollar cost those losses away with ease.

Worst case though, you could lose half the value (or more), then lose your job, eat through the EF and need to sell your investments at a loss. If all these occur, your plans for the franchise are impacted.

Goals

10K in 2 years is nothing, but you need to consider that taking on the burden of a startup company will impact cash flows and other goals. You will not be able to comfortably predict being able to invest $10K to a startup, and then be able to also purchase your own home. What are the monthly expenses, projected breakeven, worst case scenarios? During this time you also plan to have babies, which aren't cheap, and will require raising - are you planning to have one parent stay at home (impacts your income projections) or have other options here?

Frankly, if your Franchise is attractive enough to make enough money to support these added expenses, I would guess it would cost 10X the price you mention.

Random Questions

You can't afford the rental property and the franchise. Pick one. You likely can't afford either if your goal is to buy a home. I'd be very careful about getting into the property with a partner, these first time businesses often require a lot of sweat equity, and a lot of partnerships fail as one person does all the work. Even if you are best friends. You'd be better getting into that game at a lower price point, just buy half the property you were considering (look at different areas if need be) and DIY.

Rebalancing - your asset allocation within the investment accounts seems shot - there is no point in rebalancing until you clean it all up and then focus on keeping it aligned to plan. Action items:

• Sell every losing stock/etf in your taxable account today (if you have been actively trading, watch for wash sales) harvest your losses. See what is left over, let the winners run.
• Sell everything in tax advantaged. Unless you are holding a nice low cost ETF in there that we could instead add to.
• Buy back in clean with simple, low cost ETFs. Your allocation needs to meet goals, and until you decide on what you want to prioritize (franchise/house/babies/rentals) it's hard to say how aggressive to be.

Moving Liquid Assets - its a bit hard to say, ties into risk tolerance again, as per earlier, you might want to just go all in, or you might want to sit and wait. Just know if you go all in you could lose money as well as gain it.

Personally, I have very little invested in taxable brokerages - I highly dislike the taxable part of that equation. Instead I aim to put as much as possible into tax advantaged. In good years that means deferred (Traditional/SEP), in bad, free (Roth and rollovers to top up). Again, if you cast your mind into that holistic view of all accounts, you can rebalance through borders even when you hit contribution limits - use a taxable to offset a tax advantaged.

With that in mind, I would consider looking at how much you are putting into your retirement accounts - do you have matching? This could be a great option even though you are cash flow heavy now, remember you can pull out $10K for your first time home purchase, and also for tuition expenses. Doing so at your current income levels would open up tax savings, and also credits, which would make a notable impact.

College funds - you need $180K in 20 years? Tough but doable. You mentioned well off family backgrounds - do you think they have plans to help fund? This is not uncommon in such situations. You can run the math pretty easily, but you won't be able to cover the cash flows if you take on everything as mentioned earlier.

Overall- currently in good shape, invested too conservatively. I think that you have too many plans for the future - but that is awesome! You just need to start prioritizing, as one can bootstrap the next, or else you will need to take on a lot of debt. I'd be careful with the rental property and franchise options and at the very least be prepared to be the boss of either for a while without the stress of also setting up a home purchase and making lots of little ones.. you might find that it is too much, and you need to get things flowing before tackling the next task.

Let me know if I missed anything, or if you have further questions.

 

[Ryan-o]

@Sesq @Matt

Thanks for the input with the rental property. I too felt like it was a bit ambitious given my current state. I hate to leave a good opportunity, but I certainly don't want to overextend myself.

Also I forgot to mention that my Roth account is worth about $8k (made the edits). Thanks!

 

[Matt]

And don't bother with the paid advisor (sorry Matt).

I mentioned to Ryan via PM that a paid advisor would be a bad idea, and that a PFR might be a better idea.

 

[Ryan-o]

Hi Ryan,

Thanks for sharing your situation with us, I really enjoy getting into these PFRs.

First off -congratulations for being in excellent financial shape at such a young age, and for thinking about things in the right way. Let's be sure to talk again before you fully commit to that Franchise as I'd like to explore it with you in terms of Pros/Cons when the time comes.

To address your plan:

Emergency Fund

Ironically, your Emergency Fund is actually quite substantial, despite you thinking otherwise. The purpose of the fund is to keep you from needing to liquidate assets in the event of a financial emergency. This could be losing your job, or it could be a sudden incurred cost. I guess the key issue for you is the stability of your job, since it comes with the perk of free housing, if it is possible you might lose it and don't have a place to live then you need more in reserve. It sounds from what I can see to be something that might include severance should that be the case... < this is a risk assessment for you to consider.

If you look at other costs, due to your lack of debt and modest lifestyle, your 'needs' seem very low indeed. In a financial emergency you should cut your discretionary spending (fun $, perhaps charity as it is a generous portion - if tithing then a reduction due to hardship) you would be covered for quite some time. The industry standard is 3-6 months of real expenses, so maybe add on a cheap apartment in your area, and run the numbers for 3-6 months x cost.

The Savings Account

Way too much money in here.

I'd like to suggest you start thinking of everything as a virtual account (if I lose you here ask me more, it's perhaps odd). Instead of saying I have:

• $5000 EF
• $500 checking
• $11,300 savings
• $1,100 brokerage
• X tax advantaged

I want you to think Asset Allocation as if it was all in one giant account that allowed you to invest in all of these options.

I have to ignore the tax advantaged as I can't see it. So you have a total of 17.9K here, of which you say the brokerage is a mix of stocks and ETFs. So lets assume 100% equities, no bond ETFs(?) That means your current asset allocation is 6.14% Stocks, 98.6% Cash. Bring back in the Tax advantaged, and maybe the mix jumps to 15-20% stocks, 80-85% cash.

OK think about them like separate accounts again now

The purpose of that exercise was to make sure you are in control of your money. 'Naming' your money into things like EF, Checking, Savings, Brokerage etc is a great idea, but you have to be able to flip it around back and forth so you really understand how exposed you are to both risk, and reward.

Risk Tolerance

Here is a point where you need to consider investment time horizons and your risk tolerance. If we were to assume that your $500 in checking is after monthly expenses, and that your salary generates a monthly surplus of income after expense, you could jump all in to stocks with that $11,300. Doing so exposes you to a risk of losing say, 50% of the value. However, if the market tanks and you maintain an income surplus as you stand today, you could dollar cost those losses away with ease.

Worst case though, you could lose half the value (or more), then lose your job, eat through the EF and need to sell your investments at a loss. If all these occur, your plans for the franchise are impacted.

Goals

10K in 2 years is nothing, but you need to consider that taking on the burden of a startup company will impact cash flows and other goals. You will not be able to comfortably predict being able to invest $10K to a startup, and then be able to also purchase your own home. What are the monthly expenses, projected breakeven, worst case scenarios? During this time you also plan to have babies, which aren't cheap, and will require raising - are you planning to have one parent stay at home (impacts your income projections) or have other options here?

Frankly, if your Franchise is attractive enough to make enough money to support these added expenses, I would guess it would cost 10X the price you mention.

Random Questions

You can't afford the rental property and the franchise. Pick one. You likely can't afford either if your goal is to buy a home. I'd be very careful about getting into the property with a partner, these first time businesses often require a lot of sweat equity, and a lot of partnerships fail as one person does all the work. Even if you are best friends. You'd be better getting into that game at a lower price point, just buy half the property you were considering (look at different areas if need be) and DIY.

Rebalancing - your asset allocation within the investment accounts seems shot - there is no point in rebalancing until you clean it all up and then focus on keeping it aligned to plan. Action items:

• Sell every losing stock/etf in your taxable account today (if you have been actively trading, watch for wash sales) harvest your losses. See what is left over, let the winners run.
• Sell everything in tax advantaged. Unless you are holding a nice low cost ETF in there that we could instead add to.
• Buy back in clean with simple, low cost ETFs. Your allocation needs to meet goals, and until you decide on what you want to prioritize (franchise/house/babies/rentals) it's hard to say how aggressive to be.

Moving Liquid Assets - its a bit hard to say, ties into risk tolerance again, as per earlier, you might want to just go all in, or you might want to sit and wait. Just know if you go all in you could lose money as well as gain it.

Personally, I have very little invested in taxable brokerages - I highly dislike the taxable part of that equation. Instead I aim to put as much as possible into tax advantaged. In good years that means deferred (Traditional/SEP), in bad, free (Roth and rollovers to top up). Again, if you cast your mind into that holistic view of all accounts, you can rebalance through borders even when you hit contribution limits - use a taxable to offset a tax advantaged.

With that in mind, I would consider looking at how much you are putting into your retirement accounts - do you have matching? This could be a great option even though you are cash flow heavy now, remember you can pull out $10K for your first time home purchase, and also for tuition expenses. Doing so at your current income levels would open up tax savings, and also credits, which would make a notable impact.

College funds - you need $180K in 20 years? Tough but doable. You mentioned well off family backgrounds - do you think they have plans to help fund? This is not uncommon in such situations. You can run the math pretty easily, but you won't be able to cover the cash flows if you take on everything as mentioned earlier.

Overall- currently in good shape, invested too conservatively. I think that you have too many plans for the future - but that is awesome! You just need to start prioritizing, as one can bootstrap the next, or else you will need to take on a lot of debt. I'd be careful with the rental property and franchise options and at the very least be prepared to be the boss of either for a while without the stress of also setting up a home purchase and making lots of little ones.. you might find that it is too much, and you need to get things flowing before tackling the next task.

Let me know if I missed anything, or if you have further questions.

Thanks so much for your time and the detailed response!

Here is what I am thinking:

I totally understand where you are going about having distinct accounts, but also seeing them as an entire portfolio and allocating your assets accordingly.

Savings Account:
Yes, that $11k that is sitting in my savings is not necessary, since I am highly cash positive with my current job position and corporate housing. Most people that are in my position at work are able to save between $25-50k over the course of two years. (My personal goal is to save $40k in addition to what I already have saved).

My current YTD Roth contribution is $3000. If I max out my wife's and my account with my current savings, I will have about $3k left in savings... Put that money in a taxable investment account?


Goals:

1. Franchise - need $10k for the opportunity to run a restaurant. (I do not own the property or the equipment). I split the net profits with corporate (after they take 15% off the top line).

2. House - I am willing to wait and continue renting, but it pains me to lose that money month after month. When you own a home, at least some of the money is paying off the principle and you are incrementally working your way towards owning an asset.

3. Children- I plan to wait until after the business is up and running for a few years. My wife will also be working full time (until we have our first - then stay at home). Yes, grandparents may end up pitching in for college. Personally, my parents, grandparents and myself worked together to pay for my tuition (allowing me to graduate debt free). I want to give my children the same opportunity. Obliviously it is still a long way off. When should I start thinking about this? Once I actually have a child or before?

4. Retirement - I currently have $8k in a Roth account. After 401k employee matching (I should be receiving this benefit with my new job), should maxing out these accounts be my first priority every year?


Ultimately, I am really trying to figure out what to do with my assets currently and the assets I will be earning over the course of the next two years.

To recap:

I currently have $11k in savings that I need to put to work.
I am starting a new job (that will set me on track to be a franchisee). My expenses will be very low for the next two years. I am budgeting to save an additional $40k over the next 24 months.
Upon completion of 2 years, Ill need $10k for franchisee rights. I will also need about 3 months worth of expenses to buffer against business fluctuations in the early stages. (I would estimate about $12-15k).
If everything goes according to plan, I will have the opportunity to own a franchised business and will be earning anywhere between $80-150k/year.
My wife will also be working (elementary education teacher) until we decide to have children.
Despite all this, I don't want to neglect retirement savings and am unsure how much I should be putting away for this.


Side note:
I am working on coming up with a properly balanced and simple investment strategy. I've been looking closely at motif investing... any thoughts or suggestions on this?

 

[Matt]

I guess just a quick couple of questions for this:

1. Your franchise saving amount- it just increased in cost from $10K to 25K - that's good, better now than later.

2. What happens to your inflow when starting up? If you are supporting the business, do you take a salary? If not do you have enough income to cover your expenses? Is your wife employed at this time in the future? Do you now need a home (even a rental?) this means you might need more saved (though perhaps still do-able within your $40K goal)

The next thing to look at is the $40K saved - that will require you to look at cash flows. If you really need to get to 40-50K saved in cash then you need to decide if the Roths are the best choice, I like to fund them personally, but I do wonder if you have the scope in your budget for that. The 401k match is very attractive and should be taken almost every time, but again, how aggressive is your savings goal, and is it viable?

Probably the best way to go about this is to reverse engineer. Let's set a proper (conservative) saving goal for the time where you launch the franchise- what would it need to be to cover you? $40k? More? Less? Then we just forecast the payments required to get there against different risk levels. EG if you go 100% stocks you would need X per month, and you would have Y chance to achieve your goal.

For motif - tell me more - I know it well, so I'd be keen to hear why you think it could work for you... it could work for you, but I want to know what you are thinking with it for a strategy.

 

[Trevor]

I worked in the restaurant business for 10+ years as a manager. Feel free to PM me and is be happy to discuss my experience and help provide some input on if the numbers you plan to do are realistic.

 

[Ryan-o]

I guess just a quick couple of questions for this:

1. Your franchise saving amount- it just increased in cost from $10K to 25K - that's good, better now than later.

2. What happens to your inflow when starting up? If you are supporting the business, do you take a salary? If not do you have enough income to cover your expenses? Is your wife employed at this time in the future? Do you now need a home (even a rental?) this means you might need more saved (though perhaps still do-able within your $40K goal)

The next thing to look at is the $40K saved - that will require you to look at cash flows. If you really need to get to 40-50K saved in cash then you need to decide if the Roths are the best choice, I like to fund them personally, but I do wonder if you have the scope in your budget for that. The 401k match is very attractive and should be taken almost every time, but again, how aggressive is your savings goal, and is it viable?

Probably the best way to go about this is to reverse engineer. Let's set a proper (conservative) saving goal for the time where you launch the franchise- what would it need to be to cover you? $40k? More? Less? Then we just forecast the payments required to get there against different risk levels. EG if you go 100% stocks you would need X per month, and you would have Y chance to achieve your goal.

For motif - tell me more - I know it well, so I'd be keen to hear why you think it could work for you... it could work for you, but I want to know what you are thinking with it for a strategy.

I am afraid I am being a bit too vague here so I will try and lay out the specifics as it pertains to the franchise business (since a lot of my financial decisions over the next few years hinge on this).

Upon graduating I decided to pursue a career with Chick-fil-A in hopes of being a franchised restaurant owner/operator. I have just been offered a job to be in the "feeder program" to become an operator. For the next two years, Ill be traveling constantly, opening new restaurants across the country (racking up those travel points!). \

Being a Chick-fil-A owner/operator is a highly competitive opportunity. The payoff is high and the barriers to entry are low. Around 20,000 people apply and 80 are offered the opportunity. The odds are in my favor however since 90% of employees in the feeder program are given a franchise.

The buy in to own/operate a restaurant is $10k. It is recommended that I have about 3 months expenses saved up when a restaurant opens - it can sometimes be difficult to turn a good profit in the first 1-2 months. I plan to be conservative and live frugally during this time anyways (estimating my expenses to be somewhere between 3-4k which is why I figured I needed $12-15k + franchise fees of $10k in 2 years).

Rarely do Chick-fil-A's not turn a profit. Even if one doesn't, I am guaranteed a salary of $30k/year. My wife will also be working during this time. We plan to save as much as possible between me getting a restaurant and having children. According to my colleges that have gone before me, it is safe to assume I will personally be earning between $80-150k from my business even from the first year.

The average restaurant does $3.3m in volume. After fees and business expenses, the average operator profit draw is about 5-9% (depends on how well the month goes in terms of sales/profitability). The average operator earns $240,000/year. 10% of all owners have the opportunity to own 2 locations- doubling income possibility (hopefully I will have this opportunity in 10-15 years).

I hope this PFR isn't becoming to specialized or specific. There are a good amount of friends and colleagues in my position and I plan to share this info with them as well!

I plan to dig more into motifs in the next 2-3 days and will report back.

 

[Sesq]

Looking in, seeing Chik give me more confidence about your plan.

I would fund the 401(k) to the match as first priority. I would then fund the Roth's with the understanding that they can be raided in a pure emergency (the contributions, not the earnings). The rest I would save as cash since you have start up costs coming soon. I wouldn't buy the rental since you don't need the distraction. Think about that after you got your franchise up and running.

I'd stay as lean as possible. Do not consider paying rent as throwing money away. Think of it as paying shelter and keeping your fixed costs fixed, and scaled to the now. In other words, once you get your own place in two years you can get a place for you, childless young couple who are launching careers and businesses. Later, when you are ready you can buy the place in the right school district, with the right number of bedrooms, etc. A bit after that may be the time to consider the rental IMHO.

Good job so far.

 

[Ryan-o]

Thanks for the input! Are withdrawals on an Roth subject to any taxes (even if it's just the contributions?). If I remember correctly there are some exceptions (first time home buyer, medical emergency)... Correct?

 

[Jennifer]

Thanks for the input! Are withdrawals on an Roth subject to any taxes (even if it's just the contributions?). If I remember correctly there are some exceptions (first time home buyer, medical emergency)... Correct?

Not an expert by any means but my understanding is that you can always withdraw the money you put in (not interest earned). No taxes as money was already taxed before contribution.

 

[Sesq]

You can withdraw your contributions anytime. The earnings can only be pulled penalty free if you have a qualifying exception (e.g. first time home buyers, medical, educational) or are age 59.5.

Since you get $5.5K per year its nice to put what you can in, when you can. If you don't need it later then its where you want it to be (in a tax-free account).

 

[Mel]

Sell the car! I've traveled for work and your car is just a asset that you are paying insurance on. Get rid of it. It will degrade and depreciate while it is sitting for 2 years and you will still have maintenance costs. If you need to come home without your corporate vehicle, then get a rental car. It will still be cheaper in the long run.

We have always used our savings and EF as double duty. The savings can be used in an emergency fund, then you will go back to saving.

Max out your retirement funds now and keep doing it for the rest of your life. Retirement is only a long way off if you choose to look at it that way. Otherwise, you aim to retire at 20 years or possibly 10-15 given where you are starting from. Retirement is also how you view it. I picture retirement as leaving the corporate world and taking a job in the non-profit sector.

Are you gaming your corporate expenses enough? Do you need a phone? Do you need a gym membership? Not sure if food is covered but can you shop at the grocery store or go to Starbucks and buy gift cards but get them covered? Think outside the box with what is available to you. You are young enough to keep living like you are still in college and squeeze every last penny out to meet all of your financial goals.