Last month (March):
P =$962.48, I =$251.92, Escrow = 613.58
This month (April):
P =$970.93, I =$243.47, Escrow = 613.58
One month’s prepayment savings: $8.60
So we still haven’t really adjusted to DH going from 0 salary to 2 times his previous salary (this is a great problem to have). I’m (mostly) not letting those $200/week grocery bills get to me (though to be honest, grocery spending was still down at the beginning of March– oddly, spending money on cheap stuff last month meant our pantry was stuffed by the time the challenge finished… and we’ve got prepared leftover soups in the freezer and plenty more lentils), but as was noted last month, I still feel a twinge of guilt for a $73 restaurant bill.
On top of that, now that DH has an industry job instead of a state government job, his ability to save for retirement in a tax-advantaged fashion has been dramatically reduced. He no longer has access to a 457, and his 401(k) access is only worth contributing to up to the employer match (and the match is only 50% instead of 100%). Still, with my 457 and 403(b) and mandatory retirement, we’re socking quite a bit away. And the 529 plans are growing at a nice clip.
What these two factors together mean is that our savings account is starting to accumulate. Before DH got his job, we had to have a big emergency fund for emergencies and we had to have enough money to cover the unpaid summer. We didn’t spend that lump down before DH’s new revenue source started coming in. In fact, there is now enough in savings to almost exactly cover the mortgage. Now, if we paid off the mortgage, there would be no emergency money left or extra summer money and we wouldn’t be able to pay DC1′s tuition for next year, so obviously we’re not going to do that (plus, what would we post on the first of every month if the mortgage suddenly disappeared?).
But, that is a ridiculous amount of money to have just sitting in savings. In fact, if DH lost his job tomorrow (which we hope he doesn’t!) we’d still have more money than we needed to get us through the unpaid summer + tuition + emergency fund. (Though I’d have to go back to being mindful about expenditures again.)
I have opted not to put 11K away in the IRA this year. We’d have to do a back-door Roth and even though it wouldn’t cost extra for us to convert it (we only have ~$33.00 in our traditional IRAs because something spit out a cash dividend into the traditional account instead of DRIPping into the new Roths during the conversion process and I didn’t bother to ask them to fix it). It is true that we could draw contributions out of the Roth whenever, so maybe I should reconsider (in the remaining 15 days), I dunno.
DH is leaning towards putting more into the mortgage. I’m not ready to commit yet to putting 10s of Ks in there, but I did up the pre-payment this month another 1K. We’ll see what happens going forward.
I think we should make some of those expenditures we’ve been putting off. We’re going to replace the a/c for $5K [update: 3.5K], and buy DC1 a digital piano for something under $1.5K. But calling the a/c people takes time and effort, and shopping even more so. DH wants to get a yard person to take care of mowing and mulching and weeding and bush trimming. I agree. Also I really want to take a sabbatical, something that will cut into my pay and increase our expenses because I’ll want to sabbatical in a different state.
Of course, DH might not keep this job forever. It’s not an enormous company and it may someday go out of business or be bought and changed or they may give up on the telecommuting aspect. That means we may not have his big income forever. I haven’t been getting even cost of living raises every year that I’ve been here, and although the current administration seems committed to trying to get my salary up to that of our assistant professor hires, that doesn’t mean that future administrators will feel the same way. We’ve tried living on just my income with the two kids and it kind of sucks. It’ll suck more when my income is worth even less. Tenure is nice, but it doesn’t guarantee even keeping the same real income over time, much less increasing income over time.
When thinking about what to do with extra income, it is important to think about the long term consequences of those decisions. Some decisions are really obvious. Putting money towards debt is going to make life much better off later even if something terrible happens. Having a smaller required bill makes life easier down the road if inflation erodes your earning power or you suffer a job loss.
Similarly, putting money into investments, while more risky, also has the potential to ease things down the road. Either you won’t have to save as much for your retirement, or you may even be able to turn those investments into an income stream, such as with dividends.
Spending money can go three ways.
There’s spending that decreases your expenses down the road. We’re hoping that replacing the a/c will decrease our needs for a/c repairs, and lower our monthly energy costs in the long term.
There’s spending that increases it. Switching to smart phones (something we haven’t done yet) would potentially increase our spending over time, unless we found Ting or a similar company to be a good match for us. It would be difficult to go back to flip phone plans after getting used to having a smart phone. Our colleagues, faced with similar situations post-tenure, have opted to buy new houses and fancier cars– when these are financed, they can trap you into needing your higher income (and higher insurance and/or tax expenses even if not financed). Some of our colleagues who have done this complain about not being able to afford to pay college tuition for their kids, or say that their kids have to go to state schools. Different priorities.
There’s also one-time spending that isn’t going to make much of a difference (except, of course, through lost opportunity costs). For example, one-time spending on things like vacations or the piano is unlikely to either increase or decrease our future expenses. They just happen. And you can always stop paying for housecleaning or yard-work if times get tough.
A goal then for the risk averse is to turn the kinds of expenditures that will be liabilities if your income drops into the kinds where your future expenditures aren’t increased. Paying in-full helps reduce future monthly drag, but it doesn’t work completely because there’s usually still higher operating costs –you might have to buy more expensive insurance or your property taxes might increase. That’s where that first kind of money placement comes in–putting as much as feasible into debt pay-down and investments can make those lifestyle inflation increases less risky because it offers a cushion in case of a job loss or other emergency.
So you can’t do too much of the liability increasing spending without a bunch of the liability decreasing kind to off-set. If you’re going to do some of column B, you really ought to do some of column A too. And if there’s money leftover, maybe some column C.
How do you decide if you can put money into something that’s going to cost you more later? How do you allocate between investment expenditures, extra-cost expenditures, and ephemeral expenditures? Do you think about the future costs of a purchase?