First mortgage prepayment! I sent in my first mortgage prepayment this month! It was $4,000, and it shortened our mortgage by 3 months and reduced the interest we’ll pay by nearly $6000. Yay! We most likely won’t do our next big prepayment until summer, so I’m going to have to make this excitement last.
Taxes I spent some time yesterday on tax optimization / planning for our 2014 tax bill. We had a significant amount of one time income this year, so shifting tax burdens into 2015 could help a lot.
- Idea #1: Make sure the mortgage payment due hit 1/1/2015 is paid 12/31/14 so we can claim the interest in 2014. This was a failure for uninteresting reasons. T pointed out it wasn’t as though we were losing out on the deduction – we just had to wait until next year to get MOST of it (less, as our marginal rate will be lower next year.)
- Idea #2: Prepay the property tax bill due February 1st. Since our tax bill is about $6,000, I thought this idea was BRILLIANT and was really excited about it for about 7 minutes. However, my calculations show we’ll be hit for a small portion by the AMT, and property taxes aren’t deductible under the AMT. All this tactic would do would be increase the difference between our “regular” projected taxes and our taxes under the AMT. Boo.
- Realization: T won’t get paid for December until 1/2 instead of 12/31 as I had assumed. This was completely predictable (payroll schedules), but I never thought to check. This means FAIL at maxing out his retirement (although we still did set aside >$30k for him so I’m not too upset). It also means we won’t have to pay taxes on that month of income.
- Hope: I can hope my last paycheck won’t be issued until the start of the year, but that is pretty unlikely. My 401k is already maxed, so there is no benefit to getting it in 2014.
Anyway, I didn’t really accomplish much with the above excercise, other than learning a bit more about the tax code. I expect we will still owe about $3k (to CA) come tax time. I have a spreadsheet that can estimate my tax liability, but doesn’t consider the AMT. I found TurboTax’s free TaxCaster app/website to be really handy for doing these calculations. I also plugged in our 2015 info (with the knowledge that the code will change slightly) to see how close we are to the AMT in a normal year. The good news is, we won’t be close at all.
House The recent rain storm made us consider plans to improve the drainage at our house. We knew it should be done eventually, but we finally got to see how well (or not) everything worked. The house is fairly old, and did completely fine with no drainage for decades, so this isn’t a must. The previous owners put in rudimentary drainage within the last few years. We’ll get a quote, but we are hoping that we can pull this off as a DIY project. T is amazingly meticulous, good at planning, and good at fixing things. And I know how to dig holes and stuff too. I think. I mean, I’m willing to learn.
We also installed 2 bathroom vent fans! No more showering with the windows open! The project probably cost ~$400 in supplies (each fan was $100, then there was other stuff). My dad did the wiring as a late birthday gift while they were visiting, and T did most of the other work. We checked out the tools we needed (hole saw, industrial drill) from the library for FREE. This is the best service I’ve every heard of a local library having (you know, aside from free books). Because how often does one need a hole saw? Not often enough to pay $50+ for one! The new furnace is also in, and we are waiting on a rebate for about $2000.
Our next furnishing plan will be in the office. We need a bigger desk. The desk in there is too small, and T is constantly working out at our dining room table. This will likely wait until January, but I’m planning 8″ ikea countertop desk (or two 6″, mostly because they will fit in our car) + legs and probably a set of drawers.
How much money we need – update OK, I realized the numbers I shared yesterday are not accurate. Since we rented for part of the year and then switched to a mortgage, I screwed up the estimations. I need to take longer than 15 minutes and redo the analysis. Just FYI. I’m going to wait 6 months to do this. I just wanted to note that our post-mortgage spending will be more than whatever I claimed it would.
I don’t find net worth to be that helpful of a metric. Without a target, is just an abstract number. I like to see it grow, but what does it mean to me? In order for it to be more meaningful, I need to have a rough idea of what I’m trying to get my net worth to be.
But net worth isn’t the whole story. How much of that is income generating, and how much of that is in assets (e.g. home equity)? In order to add meaning to my balance sheet, I’m calculating how much we would need in order to be financially independent.
Our total spending will be around $75,000 this year. We had a lot of spending in the home category (>$20k) as we moved into a new apartment then a house. We bought some furniture and did some home projects. I obviously excluded our down payment. I’ll let that stand for now, then revisit this calculation some time in 2015.
In order to achieve financial independence, we would need $2.5 million in investible assets (assuming 3% return, $75,000 / 0.03 = $2,500,000) in today’s dollars.
However, we are planning on some of our extra income into owning our house. Ideally, we’ll have the house paid off in ~15 years. With a paid off home, this number drops to about 37,000 per a year, or $1.2 million. Property tax & maintenance are included in that number, but I will need to revisit the number once we’ve been here a bit longer.
How far do we have to go? Right now, we have $330k in investable assets, not including our various cash funds, not including home equity. We have a long way to go! Assuming a very conservative 3% return on investment and $36k per a year, our savings can grow to 1.2 million in 15 years (calculator). This coincides nicely with my rough goal to have our mortgage paid off in approximately 15 years!
This calculation is pretty rough. First, I don’t think this year’s spending is very representative. Also, I ignored income taxes (the majority of our savings is tax deferred, but some is post-tax ROTH). To top it off, we both have pensions (his growing, mine not). I turned down a cashout of ~$20k for mine this year, as I calculated the value was about $33k Yet, it isn’t going to generate an income stream until I’m older And what about inflation? Anyway, I think a fair compromise would be to track progress towards 2 million, and use that as a benchmark until I make a more detailed calculation. That would be closer to 25 years, so we have to up our game or check our spending!
Doing even this rough calculation does give me some intuition about how I want to allocate my money towards my goals. I’m not making any changes just yet.
PS – I do very much like the “PF Score” as a usable and useful metric, and have been tracking mine this year.
It’s official now, I’ve accepted a new job!
You’ll note that I previously said the offer was better than I anticipated. I expected to have to negotiate to get it up, but was thrilled that they came out with a reasonable offer out of the gate. I almost took it as a reason to let myself off the hook for negotiating. After all, they say the effect of a commute is worth a 40% raise, so why ask for more?!
Still, I wanted to help buck statistics. I can’t find data that I’m confident in, but at least one source stated women negotiate less often: 26% of women, 36% of men. (Actually, both of those numbers are surprisingly low, and I found conflicting data.) The hardest part about negotiating was deciding to do it. To ease your mind, remember:
- It is extremely unlikely they will rescind an offer. It is totally normal and expected to negotiate.
- Often, the person you are negotiating with is NOT an experienced negotiator either.
- Sometimes the hiring manager is prepared to give you more and just needs you to ask so they can go to HR with your case. They might even be (slightly) on your side.
- The worst thing that will happen is that they say no.
- If they did rescind your offer over a reasonable counter, they are crazy and you don’t want to work with them.
The job had posted a salary range over $40k wide, and offered me 95% of the top number. I asked for the other 5%.
I came up with a “script”, practiced it with T, wrote it down, and used it during the call. Here is an excerpt of the notes I used:
This is the most efficeint negotiating tactic ever – very easy, very effective. Ask for what you want succinctly, then stop talking. Never negotiate with yourself!
The script I used was brief and largely lifted from this article. “I appreciate the offer, and I understand your pay structure [suffers from XYZ limitations], but I was hoping for something a little more competitive. Given that my experience is such a good match for the position, could we look at going to the top of the posted salary range, at X?
Then I followed my own advice and stopped talking. You can be prepared with reasons for why you deserve more, but you may not even need to share. Plus, then you have something new to say if they counter. The position was essentially opened FOR ME so it was obvious we both agreed I was a good match. The comment about their pay structure was to prevent them from having an easy reason to deny my request. I wanted to note I had taken that into consideration.
For the next 4 hours, I was pretty happy and proud of myself for negotiating. Then, I devolved into irrational anxiety. Haha. I got an e-mail early the next morning that said they could indeed meet my request, and raised the offer by 5%.
The result is that my compensation will be essentially flat compared to 2014 earnings, and a 5% or so cut to 2015 projections. However, the benefits/retirement are better and all of my compensation is in the form of salary (rather than 20%+ of it being bonus). And did I mention the commute is < 2 miles? Salary growth will likely be more flat, but work/life balance and job satisfaction should more than make up to it.
Compared to my 2013 compensation (doing similar work in L.A. area), my salary is up about 25%. Granted, this area is a little bit higher cost of living- still, good moves!
We’ve been in northern California a year now.
I don’t know how much I talked about details on the blog, but I was not excited about our decision to move from where we were (southern California) to here (northern California). I tried to put on a brave face, and I was crazy happy that we stayed in this beautiful state. But I did not want to leave.
I was happy. We’d made it a home. I had a job I loved, where I was valued, with reasonable hours, and I could see how having a family would work. Our apartment was small but awesome, right by the beach path, right by restaurants, right by the ocean. I had a running buddy next door.
Things were good, except the pesky fact that T had finished school and was now working part time out of town. That was not good.
I read The Life Of Pi around that time this quote resonated: “Why do people move? What makes them uproot and leave everything they’ve known for a great unknown beyond the horizon? Why climb this Mount Everest of formalities that makes you feel like a beggar? Why enter this jungle of foreignness where everything is new, strange and difficult? The Answer is the same the world over: people move in the hope of a better life”
Simply put, I couldn’t have possibly hoped for a better life.
We moved not explicitly for money, but moving definitely gave T a more prestigious job than our other options. I challenged it at the time, asking if he’d truly be happier at one place versus another. One of his current coworkers, trying to recruit him, said “Yeah, but you can’t just base your decisions on having a happy life in an apartment by the beach!” “Why not?” I said (maybe just in my head).
We’ve been here almost a year, and I can say that I’m not as happy, not yet. I hope this comes as matter-of-fact and not complaining. I own the decision. I own my own happiness. I’m not unhappy, by any means. I’m just still creating this new life.
There are a lot of things that I love. I didn’t expect to enjoy living in a house as much as I do. That was never a priority for me in the past, but knowing that this is (sort of) ours and we’re staying here is surprisingly wonderful. Being closer to nature, getting a bit more seasons (but not real winter)… it’s all good.
I would like to end the post with “but I know it was the right decision,” because that is how posts like this are supposed to end. We’ve talked about it quite a bit, and we don’t know if it was the right decision. We don’t get to know how all of the alternate choices would have played out, so it is impossible to say. Really, it doesn’t matter if it was the most optimal choice or not. I do know two things: It is the choice we made, and it was a good choice.
Some people adapt more quickly than others, and I think I’m slow with change. How long has it taken you to adapt to big life changes? And do you think it gets harder as you get older?
2014 was quite a year.
There was good: We explored a new area, got used to new jobs, and bought a house. And since this is a personal finance blog (I won’t be adding this around the thanksgiving table), I’ll add that we made more money than we have EVER made. I just got a raise (effective 11/1) and a bonus, and T got a raise (effective next June??!).
On the flip side, there were some struggles, at least on my part. My mom had heart surgery (and is fine now, thank goodness). I still haven’t figured out a solid running routine. I love the energy of the city, and going into it every day, but don’t love the commute. We are still getting established up here as far as friends go – it always takes me some time. My new job is challenging, but ways I didn’t expect. (Expected challenges were long hours, steep learning curve, possible travel. The real challenges to be discussed elsewhere, or perhaps nowhere.)
Last month, someone I’d talked to in my initial job search (a year ago) reached out to me about a potential position.
It is closer to what I was doing before, but maybe a little more awesome. It is less than 2 miles from our house. The work environment is known to be challenging work, but generally without demanding hours. The role won’t require much travel: perhaps 0 – 2 international trips per a year to somewhere I’m interested in visiting. A few more conversations, an interview that wasn’t really an interview, and finally, an offer. Then the icing on the cake – the offer was better than I anticipated.
I’m so thankful. I often wonder what we did to deserve this life, but I know the answer. Nothing. We did nothing.
We’re spending the holiday with my sister-in-law and mother-in-law. I hope you enjoy your holiday too! Happy Thanksgiving!
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.
I’ve decided that we need 5 savings accounts.
- Emergency Fund – don’t touch, almost ever.
- 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.
- 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.
- 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?”.
- 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.
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.