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Why I’m paying my mortgage early (but not my student loan)

November 18, 2014

I made a goal to put $25k extra towards our mortgage in 2015

The first reason is because I can do this while still meeting my higher priority financial goals.  This goal isn’t a “must” in my life, but it is an option that we choose to take.

The second reason is because we prioritized retirement savings prior to this year.  While (some of) my friends were investing in their first homes, I was investing only in retirement.  I started out saving 8% (balancing paying off higher interest student loans).  I gradually increased my savings until we moved in together and I was able to save the maximum in both a 401k and a Roth.  I did that for several years.  This is the first year we’ve dropped the Roth’s (not eligible, not interested in “back-door” for now), but we will have added ~$50k this year between us to our retirement accounts.

The third reason is because I’d like to reduce risks.  Despite the fact that we have equity in our home (from down payment) and can afford our mortgage on one salary, I’d like to make more strides to keep our options open.  I’m risk adverse when it comes to finances.  Choosing to settle in an expensive area left me with choosing between competing risks… and I’d like to reduce the one that I chose.

The fourth reason is emotion.  I don’t want to have a mortgage when I’m 60.  I would love to get rid of my biggest bill.  Despite the fact that you can show me the math and the spreadsheets the “prove” I’d be better off investing rather than paying down the mortgage, I would prefer to pay down the mortgage.  It would make my life simpler.

But I’m in no rush to pay off my student loan (approx. $12k)

My student loan, on the other hand, has never bothered me.  The interest rate is higher than my mortgage (still low), but I’m not planning on paying it off quickly.  The difference is that my student loan is low risk to keep on the books.  The monthly payment is low, the balance is low, the interest cost are low, and I could probably put it into deferment for almost no penalty (aside from interest).  It is also an unsecured asset.  If I pay it off, I can’t ever recover the cash I paid.  In contrast, we could sell our home and recover the money we put into it (at least in theory).  For now, I’d rather keep my cash in the bank.

I’ll probably pay it off a little early, but it is just not a priority.  I recently (half-heartedly) increased my auto-payments by about $100 month to accelerate it, but given our cash flow, it is a pretty insignificant amount.

Money Management System and Savings Plans

November 13, 2014

I’ve decided that we need 5 savings accounts.

  1. Emergency Fund – don’t touch, almost ever.
  2. Planned Spending / Bills: This is basically my personal escrow account for property taxes, insurance, and also income taxes for 2015. Hopefully the need to have income taxes in there will drop out.
  3. Home Maintenance fund: I’ll contribute 1% of our house value per a year to start. I am hoping this will cover major things like new roofs, but not decorating and optional remodels. We’ll evaluate as we go.
  4. Short Term Savings: This is basically a slush fund to smooth out irregular spending, like home decor, travel, etc. This is the number we’ll look at when we are wondering “can we afford it?”.
  5. Targeted Savings: This account will only be crated and used as specific major needs arise. I’m assuming it will usually be one thing at a time. For example, once we do decide we want a new car or a bathroom remodel, this will be the place to do it. It doesn’t necessarily have to have a purpose, but it is for mid or longer term savings goals.

These accounts could be virtual (i.e. just in a spreadsheet) and live in one physical account, but I do have actual seperate accounts for each (under one login on Capital One 360). It makes me happier that way.  I basically have this setup right now, with the exception of #5.  It is the missing link to my puzzle! I also have one of these set up with check writing, so we can pay for large bills as needed.  They are all linked together with easy online transfers.

Day-to-day Management

I downloaded Yodlee’s (rather crappy) phone app and am actually using it to view our spending in key categories.  Mint is likely a better solution here due to the better user interface, but I’m not motivated enough to make the transition.

I’m back to just zeroing out my credit cards on a regular basis, either when I get paid or when the balance is annoying me. I’ll attempt to update our spending and net worth monthly.  This will be easy if I occasionally log into Yodlee and fix the categorizations in advance when needed.  But in general, it is a pretty easy process.

I set up almost all of our bills with auto-pay.  My paycheck goes straight to short term savings, T’s goes straight to the mortgage (the remainder in checking). I pay the credit card from my short term savings. I also finally set myself up with a library card and already downloaded a fresh e-book.  Yay!

2015 Financial Goals did figure out what I want to do in 2015 as far as savings go:

  • 15% minimum to pre-tax savings accounts
  • 25k mortgage prepayment
  • Add 8k to emergency fund
  • Ad 10k to targeted savings for tbd / undisclosed purpose
  • End year with property tax funded for following spring
  • contribute 1% of house value to maintenance fund
  • Double my monthly student loan payment
  • Consider getting a dog.  Maybe this is an anti-personal finance goal?

It kind of blows my mind that I think we’ll really be able to do all of that, without even considering raises and bonuses.  Although it assumes some consulting income for T that may or may not materialize (he has an optional contract, but may not have the time).  It does make me want to push more to pre-tax retirement, but we can always adjust that later in the year.  Cash maybe isn’t the best investment, but it certainly isn’t a BAD thing to have.

I have one long term goal defined, which is to reduce the balance of our mortgage to 20% of its original value by August 2019 (5 years).  Maybe we’ll knock that out of the park, maybe we won’t, but i think it is an achievable goal.

I probably should come up with some retirement account balance goals, but I just feel like we are really on track there.   Maybe a net worth goal would be inspiring too.  We’re definitely on track for $1M in some time frame, but… not a close enough time frame that I feel comfortable putting a goal out there.

It feels good to have a plan.  We have been winging it, but I’m finally feeling comfortable with where we are at and where we need to be.

The library isn’t free

November 5, 2014

One of many things I was reminded of as part of becoming a home (mortgage) owner:  The public library is not free!  In fact, it is the 2nd largest line item on my property tax bill, beat out only by school programs!  The monthly cost is 3x the cost of Netflix!  (Of course, while public library is probably not the best value for ME personally, it benefits a lot of people.  But it isn’t free.)

Also not free:  The parks, firemen, paramedics, mosquito control ($2 year), and some other line items that appear to have been voted on by various measures over the years.

——

This year, I actually did some tax planning.  The past few years, we’ve each just claimed 0 exemptions and crossed our fingers that we’d get a refund.  This has failed two years in a row, so I decided that maybe it was a bad strategy.   I’m a bit late to the game, but it was a weird year and any early calculations would have just been wrong anyway, so better late than never?

Here’s what I learned:

  • Hey, we are due a federal refund.  Wooo!
  • For the first time ever… we will itemize!
  • Aside from itemizing, our tax bill should be straightforward.  No out of state pay, no confusing grad student stipend that doesn’t always align with tuition pay, nothing odd.  We’ll see though.
  • We’re saving in the ballpark of $5k due to itemizing, some of that due to paying property taxes and mortgage interest.  But we actually would itemize this year anyway based on state taxes alone.
  • On that note… WE ARE PAYING CALIFORNIA SO MUCH MONEY this year.
  • We will definitely owe California money.
  • Our net bill (federal & state) is likely about $4k, but I’m not sure.
  • I’m not sure because my bonus amount has not been revealed, and I’m not 100% sure how they withhold taxes.  Likely they withhold 40%, but we’ll see.
  • We are probably going to owe the AMT this year.  This was a surprise, as I kind of forgot the AMT existed.  The impact will be $1k or so.  Also, scratch that previous statement about simple taxes.

I also did some 2015 planning, because next year is more predictable.  Here’s what I learned there.

  • Owning a home will save us on the order of $11k.  I get that this is because we are paying taxes and mortgage interest, but it makes a big difference when you are calculation the cost of ownership vs. the cost of renting.
  • State taxes alone should no longer be enough to make us itemize.  But we’ll itemize.
  • I don’t think we’ll be hit with the AMT again.
  • We’re definitely going to have our withholdings properly set up in 2015.  We have avoided owing a penalty on our tax bill in the past due to the “is this more than you’ve owed in taxes, ever?” exception.  I don’t think that will be available to us after 2014’s tax bills.

I feel a lot better knowing what is coming, and having the ability to plan for it.  I’ll set aside the tax money next month.  At that point, we can rest assured… knowing that all we have left is to  spend an entire weekend struggling with the official tax forms, and sending  the state of California a boatload of money.

What should we be saving in 2015?

November 2, 2014

First, let’s talk about 2014.

Our strategy for 2014 was to get as much money into our tax deferred retirement accounts as possible.  We had a significant amount of  one-time income as part of T starting his job, so we wanted to minimize our taxable income.  Also, T’s a bit behind on retirement savings, and we wanted to take advantage of the windfall to give him a boost.  But this year was a unique year, and we need to figure out what our plan is for a more normal year.  How much should we put into retirement, and what else do we need to worry about.

2015 Considerations

We can’t afford to keep saving at this level of retirement savings.  At least, it really feels that way right now due to cash flow this time of year.

But…  I did the math, and we actually can maintain this level of retirement savings.  Our taxes will be a lot less next year, which helps.  We would have to take advantage of T’s summer salary (he gets over 2x his usual pay for ~3 months) and use it to fund ourselves in the rest of the year, but it is completely possible. .  Or we could ignore our property tax and home maintenance fund until summer salary comes around, and just always fund those fully in the summer.   We’d even be able to save a fair amount of cash (excluding planned short term spending like the home maintenance fund)

But even if we can, does that mean we should?  Should we shift a more focus to cash savings or mortgage pre-payment?  The minimum retirement savings rate I’m comfortable with right now is 15% of gross.  I think we are allowed to save at least 26% if we maxed out all of the options.  Maybe more.  So, how do we choose?  I’ve always made it a goal to max out retirement accounts, because we could, and because we didn’t have anything more pressing to spend the money on.  But have things changed?  Do we have upcoming needs that are pressing?  Here are some thoughts:

  • Mortgage pre-payment: This is definitely something I want to do, for a variety of reasons.
  • New car in 7 years:  Our car is now 3 years old.  I think?  We might keep it longer than 7 years, but it makes sense to think about now.  Ideally, we’d be setting aside about $250 a month for a car.  (Wow, cars are expensive.  Another reminder to stay a one-car family!)
  • Home projects?  We are planning on saving 1% per a year for home maintenance.  But does that cover, say, a new bathroom?  Probably not.  I don’t know.  I don’t have any big projects planned aside from the earthquake retrofitting, and we’ve already set the money aside for that.  We’ll need  a roof in 5 – 7 years, and a retaining wall in 15 or 20.  Those should be part of the maintenance cost though.
  • Increased emergency fund?  I think T and are the type of people who are most comfortable with lots of cash on hand.  We certainly could increase this a little bit.  We’re still at about $25k here, which is feeling smaller and smaller these days.

The Plan

This is still unanswered.  I’d like to improve our cash flow right off the bat in 2015, so we’ll start the year at 15% retirement and go from there.  I’ll determine how much we want to put into mortgage pre-payment, then we’ll consider increasing our savings rates in the summer.

Money Lately: Pension, Taxes, House Projects, Bonuses

October 24, 2014

Retirement Options

I got an offer from an old employer to exchange my pension benefit (vested, as I no longer work there) for approximately $20k to rollover to an IRA, or $75/month starting in January lasting until I die.  The second option just seems odd!  I think the offers generally were for people much closer to retirement.

I did some math, and will probably be keeping the pension benefit as it stands.  It is a better deal by at least 20%, and with the majority of my retirement funds being invested in defined contribution plans, maybe having a fixed benefit is something to keep.  Still, it’s really tempting to try to get it in my control RIGHT NOW.  Who knows what might happen in ~30 years?

2015 Planning

I want to revamp my accounting system for 2015.  One thing that bothers me about most budget templates I’ve seen is that they work completely off of your take home pay and neglect taxes.  For day-to-day money management, that makes total sense.  However, I don’t do a lot of day-by-day budgeting, I am focused on the big picture.  Understanding what percentage of our income we are really paying in taxes would be interesting, if not super useful.  I can also see the tax implications of owning a home more clearly.

House Projects

We are getting a new furnace, and it is completely not exciting.  It was a planned expense.  Yay, efficient heat?  We are removing the asbestos that is surrounding the old duct work, and getting new ducts.  It’s all really expensive, but the alternative was to have them build some special adapter to fit the new furnace to the old duct work, which was hardly cheaper.  There are some rebates right now, and I’m kind of excited to have new clean heat, given my allergies to dust.

I just hate spending the money.

I also want to build / create a little mudroom / entryway  We need a bench with storage for shoes, coat hangers, and shelves, sort of like this in function (not in style):

T is against hooks because he doesn’t like coats visible.  I agree in theory, but they need to go somewhere, and the coat closet is not right by the door.  They end up all over right now.  On  a hook is better than on the couch, the bar stool, etc.  This will be an exciting project, but it is going really really really slowly.  Meaning, we have nothing except ideas so far!

Bonuses

The bonus process at my company is annoyingly black-box-esque, so I have no idea what to expect. But I should get something!  Bonuses were sold as a big part of our compensation package, but it isn’t clear what that means in terms of dollars.  I was only there for 3/4 of the fiscal year, but I was consistently staffed to projects.  I didn’t get “most amazing ever” reviews, but they were solid.  My current guess is that it will be $17k, but it could be significantly less or a bit more.  (For the record, I do not like “black box” compensation methods.)

At any rate, I plan to save most of it, maybe put some towards the mortgage principal, some in our home maintenance fund, and some in short term savings for future travel.  I don’t even have anything on my wish list right now to splurge on.

House Spending

October 5, 2014

If this blog is to be useful (even just to me!), there are a few details I would like to share.  Here is a long / housekeeping post to capture all of this.

First, our home purchase / mortgage are not gold standard PF choices. They are not high risk options, but I tend to be ultra conservative and would prefer to have bought in all cash if possible.  I won’t go into a lot of details for privacy reasons, but ‘ll share a little known fact:  many academic jobs in pricey cities have perks related to housing as part of their recruitment packages. My husband’s job came with some of these perks, and we are using them. (The academic job market is like it’s own planet. Or maybe several planets, depending specifically at where in academia you end up falling.)

So, we did not put 20% of our own money down, but we do not have to pay expensive PMI. There are some other benefits and risks that are specific to our situation, and trust me when I say we spent a long time considering the pros and cons.  It came down to the fact that 1) we need to live somewhere 2) not buying yet is also a risk and 3) we could afford to do this.  Buying wins over renting in a relatively short time frame. Buying is expensive, but so is renting.

Our primary risk reduction strategy was to ensure we could afford this on one salary.  We have this covered, albeit it would require more care with our finances. The other important risk reduction plan is to reduce our mortgage balance to the equivalent of 20% down (or more) – I’m working to define our timeline and tactics for that goal.

Second, we have/had $15 – $20k set aside after for repairs and furnishings.  (We also have our $27k emergency fund and money for property tax bill set aside.)  Here is what we are doing with it.

We bought some furniture:

  • We spent $2k on a chair and side table.  Yes, this is a huge LOT of money. We bought used (on ebay, local pick up), and it is a classic style we could sell tomorrow (or 5 years from now) and recover our cost.   (It is in the MOMA!)
  • We bought a sleeper sofa for the guest room, used off craigslist.  I was going to buy a second bed (new), but we may turn the room into a nursery within a few years.  A sleeper sofa could be moved to the office when time comes.
  • We found an area rug for the bedroom for $100, and need one for the living room.
  • I bought some crappy bar stools for about $60 for two.  They are functional, and for some reason, bar stools are expense.
  • We’re in the process of putting up UV window film on several windows.  We don’t need blinds for privacy, so the film will protect our floors and belongings while preserving the view.
  • I want some new lighting in the living area – the fixtures are ugly.  This is a low priority and may not happen.
  • We’re on the craigslist lookout for a bench for the entry way and patio furniture on the cheap.  I might make my own bench, but this doesn’t actually save all that much money – it is just awesome.

And we scheduled some repairs:

  • Furnace / duct work: This is expensive because we have some asbestos on the outside of the duct work.  My research says this actually is not a big deal and we could just leave it – but the furnace can’t be worked on.  The furnace is approaching the end of its life, and there are some tax incentives for getting a more efficient furnace.  Due to climate, we won’t save much on our bill, but I want to get this done anyway.
  • Painting:  Mostly just the ceilings, because everything else was painted for the staging in colors we are OK with.
  • Earthquake retrofitting:  We have earthquake safety measures in place already, but we’d like to modernize a few things.  We will be doing this within a year.  There is a pretty major tax incentive to help with this one.  We may wait until May or June to do this one.

In short, there has been a lot going on in our finances in the past two months!  Things should be back to normal this month!

Net Worth & Finance Updates

September 1, 2014

In the weeks we were preparing to buy our house, it felt like money was flying around everywhere. From one account to another, a cashier’s check, wire transfers, checks to inspectors, escrow refunds, insurance premiums, ikea, home depot, target… Finally, we got our August paychecks, and everything is more settled financially.

Here are some tidbits about the net worth of the SP household:

  • I added a new category to our net worth: home equity.  I’m going to use Purchase Price – Mortgage balance, unless there becomes a reason to believe that the market value has fallen below the purchase price. 
  • About 70% of our net worth is in our retirement accounts.  
  • My retirement accounts are quite a bit larger than T’s, but he’s catching up.  
  • Sort of.  He’s contributing about 2x the amount I am, but our balances have increased almost the same amount.  Thank you, investment gains!
  • We’ve had a 30% increase in our net worth so far this year.  Yay!
  • I don’t expect major net worth growth for the rest of the year due to: property taxes (not impounded), a few home maintenance projects (boring stuff like furnace, seismic, drainage – not redoing the bathrooms), and reduced cash flow.

My near term financial goals are:

  • Continue retirement savings at this pace through end of 2014.  Then, we’ll likely reduce T’s a bit to support the 3rd bullet below.
  • Complete the house projects listed above.
  • Reduce mortgage balance.  I want to put at least $5k extra within the first year, but maybe more.  I don’t like throwing out numbers without doing the calculations, but $5k is a number I’m comfortable just throwing.  :) 
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