Our friends Andrew and Michele are your average middle class college educated couple with 2 children. They agreed to let us peek at their finances and do an overview of their situation, what they have done right to date and some areas that could use some improvement. Andrew works in IT and Michele works for the Forest Service, a federal government position. Andrew makes about $120,000/year and Michele makes $52,000. These are good solid middle class salaries, but they do live in a high cost of living area.
They are only in their early 40s and have achieved a $721,000 net worth! We are going to track their net worth every few months to see how it grows. We will provide a detailed list of assets and liabilities. First let’s see how they have achieved such an impressive net worth at such a young age.
1. Always contribute something
They have not been able to ever max out their retirement accounts, but they have always at least contributed 5% to receive an employer match. We are always shocked when we hear people tell us they have not got around to signing up for their companies 401k plan or have not set up an easy withdrawal account into a company like Vanguard. People! In other words, we have to do this now and let it ride. Therefore Andrew and Michele have always contributed at least something each and every paycheck.
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2. Debt sensitive
Andrew and Michele have credit cards, but they religiously pay off the balance each month, no questions and no exceptions. In general, they are “debt sensitive” which means they don’t like it. They do have mortgage debt, but no other besides that.
3. Rental property
In a way they got lucky with timing. During the real estate housing bubble burst they were able to buy a single family house in a solid middle class area. 2 years later as prices were still down they bought another. This was one of their big opportunities in life to make a quantum leap in their financial life. We may or may not have opportunities like this, but many people do every decade. The question you have to ask your self, are you preparing for this unknown opportunity.
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Keep in mind that you do not need to own and manage your own rental properties to gain exposure to this market and sector. I am really enjoying Fundrise, which offers a crowd sourcing opportunity for folks to invest in real estate with an initial investment as low as $1,000. This is a great way to get started and gain exposure to this market.
4. No Budget
One thing we found interesting about Andrew and Michele is their lack of a budget. They have paid high amounts for day care and they don’t cut coupons or keep a close eye on their daily expenses. Because of this they are lacking a bit in the area of emergency funds not tied to an investment. But the point is that they have not had to be overly focused or aggressive about finances to achieve some early success. They basically did the first 3 steps consistently and lived their lives.
Andrew 401k: $257,000
Michele Thrift Savings Plan (Fed Govt 401k): $98,000
Savings & Checking Accounts: $6,300
Rental property single family home: Equity of $240,000, $900/month cash flow
Equity in primary residence: $100,000
Vehicles, personal property, collectibles: $20,000
Bottom Line Net Worth: $721,000
Andrew and Michele are certainly on a great path to financial security. They are creating many options as time goes on. They hope to travel more in the future.
Areas of Improvement
Andrew and Michele will admit they have a few challenge areas. For example, being two working parents they are often tired and strapped for time. Therefore this leads to some convenience meals out and some impulse buys. The good news is that none of this is carried through debt. They also live in a high cost of living area which puts a lot of daily pressure on the budget. They also need to improve their emergency fund. They should continue their good habits and make adjustments as needed. They also lack a living trust/will. With their level of assets and two children, it is definitely time for a living trust.