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September Update

October 4, 2017

Money:  

Let’s start here, since this is a personal finance blog!

Spending – The bathroom project has started, so spending was a bit higher in September – but planned.  I started a blog page for this and will convert it a summary post when we are done.  You can see we have a long to do list before we are done!  We have spent ~$600 so far on tools and supplies for the demolition and framing portion of the project, and I sent another $9,000 to “planned spending” for some of the next steps.  (This is one of my accounting quirks – money in the planned spending account is allocated towards something specific and not counted in net worth  – but it is not spent yet. I use this most often for property taxes, but also for other larger expenses that are imminent.)  My total estimate is a bit over $15k.

I also finally got two rugs and a rug gripper/pad.  We have a really long hallway and I was tired of my dog skidding down it like the road runner (meep meep!).  I also replaced our area rug with something softer and more attractive (but a bit harder to clean).

Net Worth / Financial Independence – Net worth is up about a percent this month.  I made a small mortgage prepayment and I sent a bunch of extra cash to my student loan (as discussed here).  We’re about halfway to a 4% SWR, and 30% there for mortgage payoff – and those numbers don’t move much month-to-month.  It also isn’t a singular goal and we are not willing to move or make drastic lifestyle changes to accelerate the timeline, so it is just a metric rather than a plan.

Work: Because this brings in the money!

I don’t feel like saying much this month. Things are busy and good, although I feel a little burnt out at the moment. Some longer term stuff is in worrisome, but there is time before it will be an issue, and there is nothing I can do now that I’m not already doing.

Life:

We had a fun wedding in Tahoe – beautiful venue and a nice intimate crowed.  It was so much fun, and we got to see some old acquaintances from our LA days.

My parents visited!  It was short, but good.  We spent one day up the coast eating fresh oysters and checking out the beach.  The other day we hosted my uncle and cousin and her husband and  cute little girls – so much fun to see family nearby.

Other than that, there was some work travel (good but draining) and some dog training, and the aforementioned house project.  Life is good and busy, but not so exciting to write about.

Looking ahead…

October will be more of the same – work, work travel, house projects, dog, celebrating some birthdays in our usual low key way (dinner out).  We spent so many weekends out-of-town for the summer that I’m having trouble justifying any fun day trips when we have so much to do at home.

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What percentage of your assets are in home equity?

October 2, 2017

For the past few years, we have been balancing mortgage pre-payments with investing for retirement. As a reminder, our goal with the mortgage pre-payments are to reduce payment risk and to eventually have our house paid off. I don’t include our home in our investible assets, nor do I include our mortgage payment when figuring out “our number” to achieve a 4% SWR. (We don’t have a plan for early retirement, but we of course would like to be financially independent.)

As we make these choices, one metric that might be useful for us to track is our home equity as percentage of net worth. I don’t think this can ever be too low, but having too much of my net worth in a single asset is problematic.  There are no prescribed rules-of-thumb for this, but I did find some perspectives out on the internet.

Philosophically, I agree with RetireBy40 and 1% would be a fine number.  Practically, that just doesn’t work for the life we have chosen. We live in a high cost area and chose to purchase a home rather than rent.  We’d have to have an extremely high net worth or limited equity in our house to maintain a very low percentage.  However, I don’t want to tie too much up into our home. I’d probably stop prepayments in favor of investing more at about 33-35%.  If it dropped to 10-15%, I’d evaluate the option of investing less in favor of prepayments, assuming I was still saving at least 20% for retirement. I still might not do it – it would depend on how much mortgage is left, what our payment is, and how our jobs are looking.

Having equity in our primary residence is unavoidable for the lifestyle we have chosen, but I do want to limit this from being too large. To keep an eye on this metric, I have a new graph in my finance spreadsheet!  Ta da!

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Honestly, the chart turned out to be less exciting than I expected and would be really boring if plotted on a 0% to 100% scale!  As in many areas of life, boring is a good thing, and the range I’m in is comfortable.  Right now, we are at 28%.  If stocks take a huge hit and real estate doesn’t, it could jump to 33%.  If I hit my prepayment and retirement savings goals for 2018 and stocks stay flat, we’ll be around 29%.  They are skewed a bit low since I’m using only the tax assessed value (purchase price + prop 13 limited value), but this seems fine since we only have to pay for the purchase price. Growth is kind of irrelevant unless we choose to move.  At any rate, these are all fine numbers for me. I do expect this to drop over the very long term, but I’m comfortable increasing it slightly in the near term.

How about you?  How much of your wealth is in your home? Does it seem like an acceptable number for your lifestyle? Do you have a number you’d be less comfortable with?

Family financial planning

September 18, 2017

I have been saying for quite some time that we would like to have kids, but we aren’t quite ready.  We’ve finally reached a point where we are ready to start trying – which means we could expect to have a child as early as late next year, or much later, or not at all if things don’t go well.  My few readers all seem to be conscientious people who wouldn’t think about asking inappropriate questions, but I will still add that I’d appreciate not getting questions or advice related to whether and when to have children. I don’t intend to discuss that here, or detail any struggles or successes. Money questions/advice is allowed!

From a financial stand point, here’s what I’m doing to improve our financial position for this possible huge change.

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1. Income replacement fund: While I will have sick leave and disability insurance, the USA has no paid family leave, so we’re mostly on our own for maternity leave. (I don’t get  California’s paid family leave.) While the idea is that we can live on T’s salary, I still have about 4.5 months of take home pay set aside for this time. I don’t intend a long maternity leave, but I don’t have any real plans yet. My goal is for finances to not be the limiting factor.  I actually had this as a 2016 goal, and completed it then.

2. Cash flow improvement: I decided to finally kill the last bit of my student loans. The math hasn’t changed, so this still is an emotional decision rather than a mathematical one. The interest rate is still extremely low and the required monthly payment is in the noise of our spending… Still, the balance is small enough that I can pay it off incredibly easily and I like the idea of eliminating a monthly bill.  I refinanced with Earnest a while back, which got the rate even LOWER.  Let me know if you want a referral link for $200!  I’ll likely do this somewhat gradually and have it done within the next 6 months or so.

I’m tempted to pay off our 0% interest car loan, since that has a non-negliglbe impact on our monthly spending. (We could have paid in cash, but opted not to.)  Since this is literally 0% interest, it is unlikely we’ll take this step.  It just doesn’t make sense.

To reduce our housing costs, which are our biggest monthly costs, I plan to complete this year’s mortgage pre-payments (just sent in another $5k, and want to do $5k more).  Next year, I’d like to pre-pay another $35k, and my preliminary budgets show this is possible. With a recast, we will take advantage of the reduced payment obligation all this pre-paying has bought us.  Ideally, we would have had a 30-40% downpayment when we bought our house (because housing here is SO EXPENSIVE), but it just wasn’t possible on the timeline we were looking. Making big prepayments and recasting allows us to retroactively increase our downpayment.  (Not literally, but the end result is similar.)  That does mean we are back on a 30 year timeline nominally.  I fully expect we will pay it off sooner, but it will cease to be a priority.  A total of 15-20 years is likely, but anything less than that is not likely to be possible in this high cost area.

3. Take care of imminent home projects and have a healthy home maintenance fund:  We have to finish our bathroom remodel and the patio project.  Next year, I’d like to paint the exterior of the house and do some basic landscaping in the front.  (The back can continue to be a jungle disaster.)  The landscaping could be put off if we get busy or don’t want to spend money, but we are in the bottom 5% of our neighborhood in terms of appealing landscaping.  We aren’t the absolute worst, but it’s pretty bad. We just can’t compete with retired folks who have time and money for these things!

We plan to put in some sweat equity on these projects, but it depends on how crazy the estimates are.  I really don’t want to paint our house ourselves, but if I can’t find someone to do it for less than ~$8k, then we’ll figure out how to do it ourselves.  I fully expect it to be less, but you never know until you start getting quotes! To give you an idea of labor costs around here, we’ve been quoted $25k – $48k to have a general contractor in charge of our relatively simple bathroom project.  This is absolutely NUTS.  I interpret these quotes as a polite way of saying “we don’t want to do such a small job, please go away unless you want to add a skylight and increase the floor plan.”  When we finish the project, I will share our actual costs!

I also want to retain a significant chunk of savings future roof replacement.  We don’t plan to replace  the roof until we get T’s tenure decision.  I’d like to get quotes to replace our 1950s windows – especially some large sliding doors – but that is a post-tenure project as well.  If we end up deciding to move, the next people can deal with those projects. The projects we are doing this year are more likely to increase a sale value – curb appeal and a bathroom upgrade.  While an older roof makes a house a bit less attractive, it is unlikely to be a deal breaker unless the market cools significantly. Which it might, but still.

4. Continue retirement savings:  Not much to say here, but we’ll keep building on the foundation we created in our 20s.  I will max out my 401k in the early portion of the year, which is what I usually do. If stocks go on sale (i.e. the market crashes), we may increase T’s allocation since he has access to a 403b and a 457b and we generally only max out one of those (he also has a pension and one other plan that kicks in when he has summer salary). We’d probably have to reduce the mortgage prepayment to accomplish an increase, which is why I don’t want to do it unless the market goes down.

So, that is it. For the parents  (or parents-to-be) out there, did you do anything special to prepare your finances for kids?  Did finances play into any decisions about when to have kids?  For us, I’m glad we have had this extra time to improve our finances, but it wasn’t the driving decision behind waiting.

Am I emotionally prepared for a bear market?

September 12, 2017

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I’ve done most of my investing from 2006 until today, and consider myself a buy-and-hold investor who is appropriately invested in the right risk pool for my age. Looking at the S&P 500 yearly returns (source) since I started investing, I can see why I’ve had so few struggles being buy-and-hold investor.

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Look at that 2008!  Yet, at the beginning of 2008, my net worth was less than $25k, and I had less than $30k invested in my retirement accounts in the market! That -37% felt terrible and scary at the time – but my net worth still increased a bit in 2008 since it was driven mostly by what I could save out of my salary.

If the stock market were to drop -37% in 2018, our net worth would take a big hit.  There is no way we’d have a yearly increase.  We’re not fully invested in the market, so we wouldn’t drop 37%, but we’d drop a lot.  In the case of a Great Recession like situation, our home value probably would also drop simultaneously.  It is less and less likely it will drop below the tax-assessed value (since in California these are not really related to the market value) – but not impossible.

While 2018 may not be the year, it is certain that there will be a market downturn in my adult life that will affect my finances much more drastically than the 2008 crash. Mentally thinking through how that will look and not getting too attached to overheated stock returns gives me a more realistic view of where we are at financially.

August update

September 6, 2017

Net Worth:

Our net worth keeps ticking up, another 2% this month and over 25% for the year.  I think we’ll eventually get a dip as we execute the bathroom project, but it is the time of the year when social security is paid up on T’s salary and my 401k contributions are done.  We should have decent cash flow for the next few months.  I will probably get a tiny raise.

I have some money set aside for a mortgage prepayment, but I’m waiting until we’ve finalized the scope of our bathroom project (see below).

Spending:

House – We paid for a plumber and a termite inspection in August.  We also rented a compactor and got  more fill sand to put the flagstone back down on the patio.  This project is in the home stretch!  The next few weekends are busy and it is nearly impossible to get this done in the evening, but I’m confident we’ll be able to get this done before rainy season.

Pet – We spent some money on some vet bills this month.  He is fine now, no worries, but I was hoping he’d finally have a cheap year!

Travel:

We had our last vacation of the summer in August – a short road trip for some hiking and outdoors.

We spent 3 nights at one of the fire lookout towers in California, and it was just lovely.  It combines the best of backpacking (nice views, seclusion from people) with the best of car camping (drive up to your site, bring as much crap as you want including a cooler).  The lodgings themselves are pretty rustic, but amazing if you are a fan of camping.  You should absolutely look to see if there is one near you!  Also, be prepared to book 6 months in advance!

Bathroom:

Our bathroom project won’t just be a simple retile of the shower.  We knew the 60+ year old bathrooms should eventually be updated, but planned to wait until something prompted it.  We found some water damage, so now is the time.  This wasn’t really a surprise (we stopped using the shower months go under suspicion), but it was also one of those things that we hoped we were wrong about.

So, it looks like this will be our first remodel project! We got the first quote from a contractor, and it was lots.  We have the money available, but it is more than I want to spend on the small space.  This contractor was expected to be the most expensive, so I’m hoping he is just WILDLY more expensive than the norm.  We’re getting a few more quotes and also debating how much we can take on ourselves.  We’d hire out for expertise, but may try to go without general contractor. It will take more time and effort, but the project scope is small enough that it should be possible (example 1, 2, 3).  We’ll see.  We could simplify the project slightly, but we want to do a few minor things will make a big difference.

The useful thing about getting the detailed quote was that it clarified the steps needed to accomplish the project. With the demolition itself listed at nearly $2k (after fees/profit were added), we went to work the demo of the mortar and mesh tile stall shower ourselves. No matter what we do, we don’t need to pay anyone for that.

Anyway, it is going to look so much better when it is done, but we have quite the road ahead of us!

July Updates

August 29, 2017

[This post was sitting in drafts, but I’m posting it now since August is ending soon!]

July was less crazy than June, but still very busy!

Travel:

We took a short weekend trip to Carmel, but for a variety of boring reasons, the weekend turned out not to be very good at all.  I spent a really nice weekend in Michigan lake country with T’s family, and he stayed for nearly a week.  That was beautiful, and I’m grateful that his parents organized the week.

Moneys:

As of July, our net worth is up over 20% for the year.  I find it hard to believe. It took so long to reach my first $100k in net worth, but the markets have cooperated nicely for the last many years.  The only real dip in the stock markets was before I had much invested. Rationally, I don’t expect this up-up-up to last, but it is hard not to get used to it.

I don’t take credit for the market value of our house in our net worth, but I do increase it with our yearly tax assessment. Due to Prop 13, our tax assessed value is pegged to the purchase price plus inflation, so this is conservative. Our net worth got a bit of a bump this month due to the updated assessment (and taxes will go up slightly..  Yay for non-liquid  wealth tied up in my primary residence!!!

I track our investible assets (excluding home equity) to compute predicted monthly cashflow, assuming a 4% yearly safe withdrawal rate. I exclude the mortgage from our average monthly spending, and compare the two numbers.  Financial independence will be achieved when our investible assets covers our non-mortgage spending, AND the house is paid off.  We’re about 50% there on the assets side, but we have not reached 50% on the house payoff.  This further backs up my decision to continue pre-payments.

I don’t put a lot of weight on making sure I calculate the number correctly, because early retirement is not the plan.  Freedom is.  If financial independence / early retirement was our primary goal, it would not be wise to plan to retire in this area and have so much tied up in a house.  Still, tracking these things helps me have a clear picture of our two goals: savings to live on in retirement and a place to live in retirement.

I have a small pension from my LA job that I don’t consider in our net worth, and T is contributing to a pension system right now.  He’s not vested yet, and I do count it in our net worth in a rough way (his contributions are considered because we get them back no matter what, the rest is ignored).  Similarly, I expect we’d get some social security, but I ignore it. I like to keep the picture conservative, but I also like to remind myself where the conservatism lives.

Work:

All of it is really fun and challenging stuff that I enjoy doing, with people I like.  The long term anxiety about security never really goes away, but it isn’t bothering me right now. I wonder if this is the nature of this job, or if I would have this worry anyway?

I have been a little burnt out on the travel and intentionally minimized it this summer.  The travel is fine when I don’t add personal/fun travel on top of it, but I don’t like being away from home too much.

House: 

Celebrating 3 years!  Nothing to report in July since I just did a big post on this.

 

Homeownership, 3 years in

August 2, 2017

Financially, home ownership has been mostly a win for us.  Despite our relatively large mortgage payments (compared to lower cost areas), it really is affordable for us, and we are even able to throw relatively large prepayments at it.  We can’t pay our house off in ~5 years or anything aspirational like that- but we don’t have trouble paying for a place to live.  Comparing to renting, it seems to be working in our favor in this relatively short time horizon.  We sometimes daydream about a  life where we cash out move somewhere significantly cheaper.  We could buy a good house in many places in the country, especially if we use the market price (minus selling costs).  Even if we use our appraised price (which is the purchase price + inflation), we are coming out well.  The prepayments will continue until we decide we have other priorities for the money – but I’m already happy with the reduction in the balance and reduced interest costs.

Owning a home is more of a hassle than renting, and I really am not the type of person who gets a lot of joy in “customizing” my home. Still, we’ve slowly make progress on home improvement and furnishing.

Projects in the last year:

We did a variety of somewhat major maintenance projects and tasks in the first two years. This year, we didn’t do anything major.

  • DIY patio drainage fixing (still not done!).  Total cost < $1,000, mostly for fill rock, sand, and hauling away of bad clay dirt.
  • More curtains / blinds: blackout cheap pulldown blinds to augment the more sheer bedroom curtains on hot days, light filtering blinds on two small living room windows.  I don’t have the cost in front of me, but likely < $400 or something.
  • Modest DIY attempts to tame the landscaping. We could use professional help, but are doing what we can until we are ready for that. For example, we probably need to pull out some overgrown front hedges and start over. Yet, I’m not ready to invest the money to do that.  I’m also not ready to invest energy to decide what we want,  then find someone to do it for us.  The cost of this is just time.
  • Pest inspection (for termites). They are a big problem here and it is best to monitor every several years to prevent issues.  This was $300, with only very minor DIY remediation needed.

I learned that we should not overestimate our DIY capabilities. T is really handy, but also really busy.  Undertaking a moderately sized patio project was probably not a good use of our limited free time.  By the time we realized this, we had put in too much “sunk work” to give up.  Also, T wasn’t really a good project manager, and I didn’t want to take over the project management.  The manual labor part was executed relatively well (although it was grueling and time consuming), but anything that requires more logistics (tool rental, hauling in rocks) would go weeks with no progress.  We tend to spend more time on our front deck, so the not-so-temporary loss of use of the patio hasn’t concerned me.   I’m pretty chill about the progress here… but it does need to get done.

Upcoming projects and maintenance tasks:

  • Bathroom retiling,  planned for the next few months. The scope of the project is not yet defined.
  • Repaint the exterior.  I’m not sure when this will happen and how much it will cost, but I think within the year.

New furnishings / appliances:

We save money by ignoring consumerist pressure to have an impeccably decorated home! The need for good/professional interior design could come into play if we start to feel like our house doesn’t meet our needs in terms of size. For now, there is no need. We accumulate things very slowly, both because we are picky AND because we are lazy shoppers. This it keeps overall home furnishing spending down.

  • We purchased a large evaporative cooler fan.  It is fantastic on the hottest days of summer, but it is a beast.  I had never heard of such things in the midwest, but the climate/humidity levels here make them a low-energy alternative to air conditioning.
  • We never did find that perfect kitchen table, but we found a good-enough inexpensive table from IKEA.  I’m happy to not have a bar height table anymore.  Someday we can search for a forever-table,

Things that are on my wish list:

  • Curtains for the slider doors. We plan to just go the IKEA route here, but haven’t done it yet.
  • I am dying to purchase a Roomba, but afraid of being disappointed.
  • More/better rugs (same as last year, no progress).  The one in our living room is blah and we still need a hallway runner and a rug in the spare room.
  • Entryway project (same as last year).  It is usable, but lots of room for improvement
  • Shading for the deck (same as last year). Umbrella or other.
  • Some sort of built in cabinet IKEA hack for our wine fridge.  Our old wine fridge died and we got a new/used one on Craigslist that is slightly wider.  Now there is not a good place for it.  This is mostly a pipe dream, but in theory it could be done.