My cash flow and investment choices are about to take a major swing. Purchasing a home will ultimately mean less money wasted each month but will also result in a smaller liquid, investable monthly cash flow. I define money wasted by spent money that returns a neutral or negative ROI (i.e. a depreciating asset or pure expense).
Rent is a pure expense. When you send in the check you immediately lose 100% of your money — it is not an investment in any way. Similarly, when buying a home mortgage interest and property taxes are mostly wasted — but not 100% due to tax deductions. The effect of the tax deductions will vary based upon the individual’s tax rate and how much house you are buying (because you can only account deductions above and beyond what you would have gotten by taking the standard deduction in any renting vs. buying debate), but I’ll summarize it as approximately an 80% waste for my situation. PMI and hazard insurance are also pure expenses.
Here is my new expected total cash flow:
|Misc. (toiletries, cleaning supplies)||$10|
|Net other income||$935|
|Total Net Income||$4,636.43|
|Investible income (left over after bills/contributions)||$1702.93|
The trash pickup is the only utility that I have an exact quote for; the others are estimates. I have already arranged a 3 person car pool with 2 of my coworkers which explains the lower than expected commuting costs. I am also expecting to trade in my Acura for a used Prius which further explains the savings. I am going to pay for approximately two tolls per week in the carpool lane which comes out to 2*$2.50*4.33 = $21.75/month. I’ll be driving about 58 miles for 2 days per week, 20 miles another 2 days a week and working from home one day per week which comes out to $63.52/month. Once again, both of these numbers are conservative over-estimates as I will actually be driving the full distance only 1.67 days/week.
Many of my expenses are much lower than average because of buying durable items, treating them well and DIY ethics. My house is relatively new and has recently been fully remodeled with virtually no problems popping up on my home inspection. I also plan on buying a very reliable used Prius which doesn’t require as much habitual maintenance costs because of the hybrid engine and my careful driving. And when something does pop up, I’ll fix it myself rather than outsourcing. Also noticeably absent from my expenses is a cell phone bill. I am on my family’s plan, but I’ve decided that I hardly use my cell phone as is, so if they weren’t paying for it, I’d just use Skype and Google voice. I could even keep my iPhone as a portable wifi phone. In the worst case I could follow MMM’s plan for $10/month cell phones. Finally, I don’t have any budget for healthcare costs because I get to stay on my family’s plan for 2 more years for free. Eventually this will be $50/month or so after tax deductions if I decide to participate in my employer’s plan. However, I believe in living a healthy lifestyle and practicing prevention rather than expensive treatment of lifestyle diseases.
The salary number is an estimate derived after taking maximum 401k contributions, employer matching, and maximum Roth IRA contributions into account. I arrived at the number by the following: $85,650 base salary * 0.04 = $3,426 employer contribution. $17,000 maximum 401k contribution – $3,426 = $13,574 pre-tax contribution. $13,574/$85,650 = 15.85% pre-tax contribution. Plugging that into the California Paycheck Calculator produces a monthly net income estimate of $4,118.10. $4,118.10 – $416.67 = $3,701.43 post-401k, post-Roth salary.
It is important to note that this is a very conservative cash flow estimate for 2 reasons:
- It doesn’t take into account any of the benefits of homeownership deductions (I will be getting a decent tax refund check each year as I file single and 1)
- It doesn’t take into account my expected bonus of 15%
Now the amazing thing about this cash flow is that even in the extremely conservative stance I took, my total monthly savings will be GREATER THAN my take-home pay or total net income. I effectively have a $4,802.69/$4,636.43 = 103.59% savings rate! Of course this is possible by the magic of employer matching + tax deduction of 401k contributions. So max those 401ks! Now the catch is that I am technically not financially independent because my net expenses exceed my other passive income by $1667.08 – $935 = $732.08. So if I became extremely hardcore by stopping retirement contributions and refinancing both mortgages to interest-only, I would only need $732.08/month in additional passive income to become financially independent. At the 4% safe withdrawal rate (SFW), this would require ($732.08*12)/0.04 = $201,624 more savings. For simplicity, if we assume no early withdrawal penalty on retirement savings and balance it with no investment return on the savings, this would take $219,624/$4,802.69 = 45.73 months or bit over 3.5 years to financial independence; theoretically I could retire before my 28th birthday.