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A place for Get Rich Slowly readers to ask questions
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 Post subject: Looking for Advice on How to Save During High Income Years
PostPosted: Mon Dec 10, 2012 11:12 pm 

Joined: Mon Dec 10, 2012 10:52 pm
Posts: 3
Moving on to a board that cares more about finances than judging the size of someone's family...


Last edited by crazygrow on Wed Dec 12, 2012 10:25 am, edited 1 time in total.

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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 8:40 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
I want more money and more time off. Doesn't mean I'll get it.

There are 2 parts to every financial story, the inflow and outflow. You've done an excellent job describing the inflow (as that is what most Americans focus on). But, financial shape is not defined as how much inflow you have, but rather the balance of the two.

If I were you, here's what I would do...

1) Sell the rental (I'm bearish on rental property in the first place). Bring $20k or so to the table and get out of it.
2) Pay off CC, SL, loan from father etc, everything but mortgage
3) Figure out your future saving goals (ahhhhem...retirement? college savings for kids?)
4) Work on the basement. You should be able to do it in 6 months or so just out of regular cash flow, assuming all the other crap is taken care of. 8 people spread across 3 bedrooms is a lot, but I wouldn't take a 6% hit to remedy the situation.
5) Drive 2 cars everywhere you go when the whole fam needs to go one place. Will be cheaper than buying another car. but let's be honest, a family that large doesn't go too many places all together. And when you do, drive two vehicles.
5) Get a vasectomy.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 10:11 am 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1095
Bichon Frise wrote:
5) Get a vasectomy.

I was going to say stop having kids but this works too.


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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 10:50 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5217
I agree with Mr. Frise.

With that kind of income there is no excuse for carrying that much debt. Seriously.

I was where you are a few years ago. I was an executive in a tech startup. We were even partially bought by a large firm. My income was not as high as yours but I did have the whole options, retention bonus, and all that other business. I also worked for a very experienced and savvy CEO who frequently reminded me that 2 years is a long tenure for an executive in a fast-changing company. Most people either move up, move on, or become marginalized. I left when I did not like the direction the company was being pushed by the management of the acquirer. I got out while my options were worth something. The stock price of my company has lost 95% of its value in the several years since I left - not because I left but because I was right about management taking the company in the wrong direction! My fellow executives who stuck around never did get all the money they thought they would. Their options were quickly out of the money and their stock just kept going down.

I'm not saying you're going to get fired or laid off or that your company will falter. But I am saying that your debt has a 100% chance of being there 5 years from now while your 5-year income plan could not possibly have a 100% chance of being realized. Too much can change in 5 years, especially in a fast-growing company, especially in a tech company, especially in a company that is being integrated into an international firm, especially in a company being integrated into a large firm. Put all those things together and, well, you should be using as much cash as possible to eliminate debt. They can hold those retention bonuses like a carrot that is always at the end of a stick.

I can't understand why you can't pay for the basement remodel from cash-flow over the next year even if you don't do it yourself. And you should have all debt but the mortgage paid off as well.

You're earning for 8. $400000/8 is only $50,000 per person yet you are living a $200000 pp lifestyle that you have leveraged. Time to get real. I suggest you post a budget because it boggles my mind trying to figure out where all your cash flow is going.

Something else to consider - while your debt load is high, I would not call it alarming or compromising. But in my situation, when we were bought, there were background checks made on all of us executives including financial situation. The specific reason was to look for security threats or people that might be subject to enticement, bribery, extortion or other stress to get information from us either technical or corporate financial information. I doubt your situation is extreme enough to raise any red flags but you probably want to start taking steps to pretty up your finances just in case. (this check did not happen until a year or so after the acquisition.)

Good luck. Sorry if this sounds harsh but I've seen too many people get crushed in situations like this!


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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 11:04 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5217
A couple more things:

There are firms that will help you minimize taxes on your options exercise. Unless you need the cash there is little reason to exercise. Perhaps you are required to but I think I'd be contacting someone to find out if there is anything that can be done.

Second, upon rereading your message you seem to already be considering most of BF's suggestions. But I still can't account for where your cash is going. Perhaps you are getting a big lump sum at the end of this year and your income has been much lower the rest of this year. If so then I suggest you maintain your standard of living as it is and plow all your extra income into debt repayment for the next year. You will be in great shape after that year with only the mortgage on your primary house and a small mortgage on your rental remaining. I'm all for selling the rental too but that's a choice to make.

Basically, you have an extra $200,000 coming in 2013. After taxes that's probably about $120,000. That get's you debt free except the mortgages and pays for the basement without more debt. Stretch to another year and even the rental mortgage is paid off.


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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 12:22 pm 

Joined: Mon Dec 10, 2012 10:52 pm
Posts: 3
Moving on to a board that cares more about finances than judging the size of someone's family...


Last edited by crazygrow on Wed Dec 12, 2012 10:25 am, edited 1 time in total.

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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 12:59 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
crazygrow wrote:
As for stopping to have kids, this is our last, but if I can comfortably support my family, why the hell should you care how many kids that I have? Life is about much more than money.


Just to point out, you're the one spilling your life story to strangers on the internet, seeking advice and approval of your ideas. You came seeking opinions, and you've gotten a few. No reason to get bitter if you don't agree with them.

I certainly wish you luck. Since you seem to have it figured out and are acting like a prick, my random opinion isn't really needed. Hope you get what you are looking for. good luck.

BF

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 1:00 pm 

Joined: Wed May 30, 2012 11:56 am
Posts: 124
I sometimes wonder if my parents stopped at 4 kids because of the car issue. My mom was one of 8 kids and they fit everyone in a station wagon, but that was before seat belts. I do think you should get one large family car where everyone can fit if you want one and can afford it, family road trips just aren't the same without everyone in the same car. Even the trips to restaurants, church, etc were part of family time.

My only observation is that there's a lot of banking on the future. You're planning out 5 years of income, you're getting a HELOC in anticipation of renters, you're holding onto a house to sell it as a tax write off and appear to be assuming it will be rented continuously until then, you had no savings until the exercise of your options... Clearly the gamble to take this job paid off, but without a solid backup plan - ie emergency savings and such - you're taking a lot of risks. If I've read this right, you took a job that didn't pay enough to cover your expenses so you paid with credit cards instead because you didn't have any savings? As I said it clearly paid off, but what would you have done if it didn't, don't you owe it to your family to mitigate your risks a bit more?

And I'm confused... You're estimating income of $390,000 for this year but you don't have the money to pay off the credit card or pay cash for the basement, yet you're still living at the same standard as when you made $80,000...


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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 1:01 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1095
Quote:
As for stopping to have kids, this is our last, but if I can comfortably support my family, why the hell should you care how many kids that I have? Life is about much more than money.

Hey...you asked! Out of curiosity, does your wife work?

And I'm not so sure I'd call your situation "comfortable" since you have 2 mortgages, a student loan, credit card debt, family loan, upcoming car replacement purchase, & a basement remodel. As DH pointed out, too many things can go wrong here that can really bite you.


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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 1:17 pm 

Joined: Mon Dec 10, 2012 10:52 pm
Posts: 3
Moving on to a board that cares more about finances than judging the size of someone's family...


Last edited by crazygrow on Wed Dec 12, 2012 10:26 am, edited 1 time in total.

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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 1:23 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1095
Bichon Frise wrote:
I certainly wish you luck. Since you seem to have it figured out and are acting like a prick, my random opinion isn't really needed. Hope you get what you are looking for. good luck.
BF

I don't know if I would go that far but he needs to understand that most of us on this board will be a person's worst critic when they get it wrong & their biggest cheerleaders when they get it right.


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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 1:31 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5217
crazygrow wrote:
As for stopping to have kids, this is our last, but if I can comfortably support my family, why the hell should you care how many kids that I have? Life is about much more than money.


Let's see - you get a tax deduction for each one and you'll probably send them to schools, right?. All of us are forced to chip in for that. They also use resources. And, haven't you heard, the world is getting saturated. If you work for a tech company I assume you probably have a technical background and can do math. Your wife and you are reproducing at a rate of 300% per couple per generation. If everyone did as you the human population would be over 18.5 billion in 4 generations- less than 100 years. That's more than the planet can support. So, you are indeed using more than your fair share of resources. I think the comment to stop having kids was reasonable. Perhaps a couple of generations ago when people could count on a few of the kids dying before reproducing and they needed them to work on the farm it was reasonable to have lots of kids...not anymore.

But, it's a free country...at least you're free to make us pay for your indulgence.

Financial comments to follow.


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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 1:52 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5217
crazygrow wrote:
A little more background would be helpful. I'm fairly young (33) and prior to this year was making <$100k/year supporting a family of seven. Much of the debt multiplied (1 to 2 houses, etc.) due to moving to this new job in 2010 (which also met the goal of moving close to family).

My income just three years ago was only about $80k/year, then went to $100k, then down as I moved to this job and took a paycut to about $80k last year again. So to make it sound like I have been living high on the hog is incorrect.

To walkthrough BF's comments:
1. The rental is breakeven for us currently (or slightly positive). I understand the desire to get rid of it (and take the tax benefit), but I'd prefer to hold my cash for now. If I could have sold it this year, I probably would have for the tax benefit (would make up some of the cash loss), but at this point I'd wait until 2014 when I am again in the high tax brackets.
2. We expect to pay off the CC by March. I'm not planning on accelerating the student loan payments.
3. Future savings goal - as I said, walk away at the end of 2014 with >$300k+ in savings and the CC/HELOC paid off. That $300k is primarily retirement savings so by 35 years old I'll have $300k+ stashed away, which considering I had very little prior to this year, seems pretty good.
4. Something I forgot - we are planning for year 1 to rent out the finished basement and already have renters ($1200/month). This will pay off more than half of the HELOC.

The options exercise was not optional. The $120k in savings was what was left over after options exercise, taxes and charitable contributions. Prior to that, we had almost no savings.

As for our budget, we have the aforementioned debts, but otherwise our spending habits have not changed substantially with the increasing income.


Ok, I have a better picture of your finances now. But I think I'd stick by most of my previous comments. But I'll make a few more which are meant to be constructive:

Having $300000 in savings by age 35 is good, but not great. We had quite a bit more than that even before my stock option jackpot (which wasn't as big as yours) and we also had paid our house off so had no mortgage. And we have no kids to put through college. So, congratulations, but don't pat yourself on the back too long.

If you were happy on $80k, I suggest living on that level of income as long as you can, at least after taxes. With a wife and 6 kids wanting everything that you can now afford, it will be very easy to inflate your lifestyle substantially.

You are a prime candidate to open a donor-advised fund before December 31. This will allow you to make a huge tax deductible donation this year into your fund to shelter much of the hit from the stock options then distribute that donation to charities over the next several years. You mention that you make big charity deductions already so this is no change to your budget - simply a tax maneuver. You can do this through Vanguard or T. Rowe Price. You need to do it this year for two reasons - first because you have unusually high income from the options in 2012 to protect and there is a good chance the charity deduction will be limited after this year. The first is a certainty. The second is speculation. But this move will save you thousands in taxes, possibly enough to pay off your credit cards!

I still can't figure out why you would borrow money to renovate your basement. You don't need to borrow. You can fund it out of your monthly income. There is also clearly more to this story since you first said you need it for the kids then suddenly you're not even going to use it for the kids but will instead rent it out.

Honestly, I really do congratulate you on your success. But you are not thinking clearly about your new situation. You've got some good ideas you want to pursue but you are also making some very costly mistakes that you don't even seem to realize. I also think you have a somewhat "immature" view on what constitutes being in good financial shape.

I personally don't have as big an issue with debt as many here do if it is producing a measurable benefit. Not paying off a rental that is breaking even, probably producing a tax benefit (depreciation and passive losses) and also building equity is a reasonable decision. Taking out a new HELOC to finish a basement you don't need to produce rent income you don't need is dumb.

You are in better shape than many people your age. But if you want to stay ahead of the curve you need to make good decisions with your money. Some of your plan is good but you should think through it more. You didn't like BF's comment but his advice was good.


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 Post subject: Re: Looking for Advice on How to Save During High Income Yea
PostPosted: Tue Dec 11, 2012 2:38 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
Tightwad wrote:
Bichon Frise wrote:
I certainly wish you luck. Since you seem to have it figured out and are acting like a prick, my random opinion isn't really needed. Hope you get what you are looking for. good luck.
BF

I don't know if I would go that far but he needs to understand that most of us on this board will be a person's worst critic when they get it wrong & their biggest cheerleaders when they get it right.


perhaps my comment was a bit harsh, but certainly has some truth. But, since I, like many people here, choose to post more in anonymity rather than laying all my cards out on the table, I loose some clout there. Perhaps I have more clout as I could be a broke college student studying ancient southern african cultures for my major. Or, perhaps, I have the same number of children as the OP, but somehow, by the time he wants to be out of consumer debt and have $300k, I had already bagged my first million and had my childrens' college funds pretty much summed up. But, like the tootsie pop, the world will never know (including my extended family).

either way, the OP will proceed with the plan they came in here with - I am sure he will be OK as people have screwed up worse and survived - without any of my cheerleading or criticisms.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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