Are we living above our means now that my spouse is staying home with the baby?

[aballa]

Here is our obligatory Sankey: https://i.redd.it/6p6iwwniqtkc1.png

Background:

My wife and I just had our first baby, and she is planning to stay home with him until he goes to school - so probably for the next five years. I am obviously so grateful that we are fortunate enough to be in the financial situation to be able to do this. The linked Sankey is our monthly budget before losing her monthly income, so no expenses have been adjusted to account for the new financial reality of her not working.

Basically what I want to know is are we now living above our means? If so, what are red flags about our spending that can be cut? Should I dial back my 401(k) contribution for the next 5 years? My primary concern is the lack of monthly savings and inability to re-populate our emergency fund (see below) in the event of an emergency. Prior to her leaving to stay at home with the baby, we were saving probably $4K per month (her entire salary). Now, as you can see in the diagram, it's only about $500, which is not enough buffer to make me comfortable month-to-month.

Some caveats about what's pictured, as well as other missing info about our financial situation:

• Bi-weekly pay is shoehorned into a monthly budget, so in theory there are two "extra" paychecks per year, which would mean the total net pay amount ($7902) being saved yearly in addition to the $500 per month
• I get a yearly bonus of 25% of my salary (guaranteed), which comes out to about $30K after taxes
• I have RSUs vesting throughout the year, which equate to about $30-40K assuming a very pessimistic outlook on the company stock price
• We have a fully-funded emergency fund for 6 months
• Together we have about $400K in investments and retirement savings (401k/etc)
• We own our primary residence (mortgage w/ $330K equity), as well as an investment property (mortgage w/ $150 equity) which we rent out clearing ~$200/month (we're mainly doing it to build equity, not to profit month-to-month)

 

[resjudicata]

@aballa If you own your home, what is the $3,112 for housing?

 

[aballa]

@resjudicata Sorry, I thought the ($330K equity) parenthetical was clear. We have a mortgage, and have $330K equity in the house. So the 3112 is mortgage + HOA fees.

I've edited the original post to be more clear.

 

[piccadilly]

@aballa I wouldn’t worry too much about the savings if you’re getting a 30k bonus that I assume you will save. But what about unexpected house repairs I’m guessing there’s a savings account that’s not the emergency fund? Also will you continue to find her retirement for the next five years as well because that’s important
Also I personally would cut the cleaning service but on the other hand she’s probably exhausted with a newborn and the last thing she wants to do is cook and clean. Maybe in a year cut that.

 

[aballa]

@piccadilly So we have the $200/month for home improvement that rolls over month-to-month, but primarily that's what the emergency fund is for. It typically holds 6-9 months of expenses, and we dip into it as needed for big-ticket items like a new HVAC system, etc. Is that not an appropriate use of an emergency fund? Perhaps that's why I'm concerned about our inability to quickly replenish that fund.

RE retirement, we are not planning to continue to fund her accounts, but:

• My 401k contribution of 10%, when you include the fact that 10% also gets withheld from my bonus, adds up to more-or-less the $23K max the IRS allows.
• We also contribute to a backdoor Roth IRA the yearly max

 

[piccadilly]

@aballa Ok if you have over 6 months I’d say you’re doing just fine with the emergency fund. It’s honestly so much more than most people have and even at a rate of only 500 you are still adding to it plus the bonuses. Though I am thinking some if that bonus money will be vacation money since that’s another category I didn’t see. I think it’s great you’re on top of this and I know it’s scary but you will be fine! It’s a gift for your wife to be home during these years.

 

[aballa]

@piccadilly Thank you! Yes, I am happy/grateful to be able to provide for her and my son during these years.

 

[helpme1508]

@aballa

1. Is the healthcare you have only premiums for health insurance or something additional post-tax? Are you including any HSA contributions in that total?
2. What do you include in household essentials?
3. Cleaning service would be where I'd look to cut something if you wanted to dial back a little bit. Having $~500 budgeted for home improvement with $300 of that being cleaning and not actual modifications for improvement/maintenance seemed a little off to me. I would roll the cleaning off into a non-essential "extra." Plus, not to try to apply stereotypes here, but if your wife is staying home, you could both consider that an activity she can do if it was previously a burden for you time-wise while both were working.
4. What's your remaining mortgage on primary residence? Just wondering what things would look like if you considered selling your rental and rolling equity into your primary home to free up cash-flow if it paid it off?

EDIT: Additional thought regarding the ~$500 savings not being enough margin.. if you take out the cleaning, you'd be at ~$800 margin. Add this to $725 of fun money you have allocated and you're sitting at $1500 "cash flowable," margin if things were to get rough. You already have a separate well-funded emergency fund, which rarely is going to be fully depleted. If you skimmed off the top of it 5k-10k, you'd be able to swing the savings back and replenish it in probably just 6 months to a year pretty easily.

 

[aballa]

@helpme1508

1. Healthcare includes premiums plus $160 per month to an FSA (which we've already exhausted this year due to baby's birth).
2. Essential bills include: electric, gas, water, internet and phone. More than half is for electric and gas.
3. Certainly an area to consider, since a bunch of others have mentioned it.
4. Unfortunately most of our equity is due to price inflation since we bought in late 2019 just before the recent bubble. So remaining mortgage principal far exceeds the 150 equity on the rental property. However, I'd be very hesitant to sell that property anyway since at this point it's essentially "free" real-estate (as long as we can rent it, which is very likely due to its location), which we are hoping can be a sizable nest egg once it's paid off given the trend for real estate to appreciate significantly over long durations (20-30 years).

Good point about the "flowable" cash. You're correct the extras could be cut completely if needed to replenish in case of an emergency. So even without cutting the cleaning service, it'd be $1225 per month.

 

[helpme1508]

@aballa When you day you clear $200 on the rental, is that post-maintenance costs, or only after subtracting the mortgage principal and interest and property tax? The $200 margin seemed pretty low to address maintenance items on the rental when they arise. You said you weren't as concerned making as much money month to month and cared more about equity. Why is that?

 

[aballa]

@helpme1508 The 200 is just the difference between rent and the monthly fixed costs (mortgage/etc), not including maintenance. I mentioned this in another comment but we already have a buffer of about $10K dedicated to handling maintenance costs for the property. It's a one-bedroom condo, so costs are fairly low. We are not concerned about profiting on the rent as a business, only in having the rent cover our costs and provide "free" real estate for us over time.