Hi. Mr. SixFiguresUnder here. Stephanie will be back later this week, but it seemed appropriate for me to cover this topic.
This month marks a major change in our family finances. I have changed jobs. Twice actually. Those of you who have been following for a while know that for the last three years, I’ve worked at a small firm where I earned a commission on actual fees received from my clients each month. It was enjoyable work with good people, and until recently, I even had income-stabilizing draw system to temper the ups and downs of commission work. I also had the potential to earn quite a lot as my monthly revenue trended upward. In the last several months, we’ve seen the amount of revenue increase, and the next few months were going to see several large jobs finally begin to pay out.
Even so, for a number of reasons, it was time to move. So I did. As of September, I’m working as an attorney with the state of California. That’s one change.
Over the last two years, many people have urged in comments or emails, for me to get a second job, delivering pizzas, cleaning buildings, something to increase our family income. Because I enjoy private practice, and some of my clients didn’t want to say goodbye, I also opened my own part-time law office. I’m working with a small number of estate planning, real estate, and business clients, and will likely take a few more in the future. That’s the second change.
This isn’t something we stepped into lightly. In addition to making sure it was both legal and ethical for me to work for myself while working at the state, it takes a substantial amount of time and money to get this started.
It’s an exciting time though. At the state, we’ll be able to rely on higher consistent income at a job where I won’t spend much more than 40 hours a week. At the same time, we can enjoy some of the upsides of my being a solo private practice attorney – choosing my clients, doing work I love and am good at, and paying myself a larger portion of the office’s income than I could ever make at a larger firm.
These are big changes and will have some dramatic effects on our finances and in our family.
Changes in Income
The most apparent change will be the size and regularity of monthly paychecks. At a new salary of $70,000 per year, the checks from the state will be larger than my draw amount at the old firm, although not as large as some of my higher-revenue months I’ve had recently. They will, however, be consistent every month. They will also be, I’d like to repeat, based on about 40 hours of work (and 15 hours of driving) each week.
In addition, I’ll receive income on the side. I’m finishing a few items up for the old firm, and will have some income trickle in there. Other than that, my own office will generate income based on how well I do at taking care of the clients I have. This side income will be wildly inconsistent each month, depending on what kind of work I’m doing and when I get paid for it. We are excited to see exactly what those income numbers look like over the next few months.
Changes in Expenses
These changes will come with some substantial expenses.
1. Health Insurance. While the state offers health insurance, the percentage of premium it pays for the first year is low, leaving us with a much larger insurance bill than we’ve had in the past. For the last nine months we’ve been on a private plan purchased through the California insurance exchange, receiving a substantial subsidy on our premiums.
Sadly, even on the insurance plans through the state that almost exactly mirror our current private plan, the premium is almost $700 higher than our current premium. I don’t really understand that, except that maybe our young, healthy family, is less risk to the insurance company than the aggregate families of all state employees, and so it costs more to buy the same coverage as part of the state employee group.
After the first year, and then again after the second, the percentage of premium paid by the state goes up, so eventually, our premium payments through the state-offered insurance will be closer to those we pay now.
2. Travel Costs. Because the job is a little further away, and in a direction with more traffic, I’ll spend more time on the road each day and our gas bill will increase. In addition, for the first time in my life, I’ll be paying for parking. Even though the state has a program allowing me to pay parking fees with pre-tax dollars, it’s a bitter pill to swallow.
3. Business Expenses. Opening a law firm has some costs of its own. I am very fortunate to have a no-cost venue for an office, so I will pay no rent. I’m also able to pay a portion of the cost of a shared photocopier/printer/scanner, which will keep that expense down.
Even so, malpractice insurance, liability insurance, continuing legal education, banking fees, software, postage, paper, binders, and other office supplies add up to a substantial expense profile. Some of these, like insurance, will be fixed no matter how much work I do at my own office in a month. Others, like postage, paper, and office supplies, will more closely track the amount of work I’m actually doing, so they should be lower in months where my income is lower.
4. Forced Retirement Contributions. While we maximized (or nearly maximized) contributions to our IRAs and my 401(k) for the first few years of our marriage, since going back to school and beginning to incur, then pay off, student loans, we’ve made no further contributions. We are now breaking that seven-year fast. As a state employee, nine percent of each paycheck is taken out automatically and contributed to the employee pension fund. This will reduce our take-home pay each month, but will also force us into retirement savings again.
It’s actually kind of a relief. I’ve been very uncomfortable going this long without adding to our retirement funds, and now, since we don’t have a choice, we’ll be contributing again.
Changes in Taxes
With Stephanie’s blog and Etsy income, and my own firm income, the amount we earn outside of my W2 will be going up. Our total tax liability will grow substantially, at least, I hope so. I don’t really like paying taxes any more than you, but I appreciate that a larger tax bill means, at least in part, that we’re earning more.
To avoid having to make quarterly estimated payments, we’ll need to set withholding from the state’s monthly paycheck at an amount calculated so that our actual withholdings over the year roughly match our actual taxes due for the year. Self-employment income, which is heavily taxed, will make this a challenge.
It’s further complicated by the fact that we’ve been receiving insurance subsidies for most of 2015 based on one prospective annual income amount, but in April 2016 we’ll report that we actually earned a substantially higher amount. (I hope!) Some of those subsidies may need to be repaid. That could leave us with a hefty bill in April instead of a refund. We’ll be holding some funds aside for that purpose.
Changes in Time
On Friday of last week, I made it home about 7:30. It was still light outside, and the kids were still up. My three-year old tromped down the stairs from visiting my parents and saw me. His eyes went wide, and he jumped down the last two stairs to climb into a hug, with a “Dad! How did you get home so early?!”
As some of the start-up work on my own firm gets finished, I hope to spend more time at home than I did even when working just one job at my prior firm. I’ll certainly be spending less time at the state than I did at the old firm. Carefully choosing which work I take, and how much of it, will help me keep my time at my own firm to a reasonable level. Thankfully, I have Stephanie and four adorable kids to remind me if I start losing sight of our goal for me to be home a little more.
And that’s that.
This should make our next few monthly reports more interesting. I’m looking forward to getting to the end of the next few months to see how real life finances stack up to our expectations. I’m also looking forward to being home for dinner more than occasionally.