November Mortgage Update: And hypotheticals

Last month (October):
Balance:$40,306.31
Years left: 3
P =$1,042.82, I =$171.58, Escrow =$788.73

This month (November):
Balance:$37,254.58
Years left: 2.75
P =$1,054.86, I =$159.55, Escrow =$788.73

One month’s prepayment savings: $7.90

Man, it sure is nice to be getting paid again.  Beautiful beautiful paycheck.  Bank account numbers are going up instead of down again.  :)

I won’t find out whether or not I’m getting a half-paid sabbatical next year for several months.  However, I may take the year off unpaid *anyway*.  We have an awfully large savings buffer and DH’s company swears they have enough money to stay in business for the next two years even if they earn no more money during that time (and they’ve got grants out and products being made, so hopefully they’ll get more money).  And DH is one of their valued employees.  And he should be able to find new employment even if he loses his job depending on where we do the sabbatical.

There’s a lot of questions about where to go too, but I’ll defer that for a later post.  All of the places, however, have a higher cost of living than where we are right now (which isn’t difficult!)  Think double the cost of daycare, 1.5 to 2x the cost of housing for something much less nice than our current mortgage (even without the prepayment).

The hypotheticals I want to address right now involve the house.

We currently have 3 cats, one of whom still occasionally pees on a comforter or pile of laundry if we leave it out when she’s out and about.

Our house is also a superficial mess.  Yes, the carpet in the kids’ bathroom is gone and the vertical blinds that were in the worst shape have been replaced, but that’s only the tip of the home-repair ice berg.  The kittens literally shredded the master bathroom when they were still kittens.  It will need to have the wallpaper completely removed, patching done, and paint.  The entire house needs to be painted– it’s grungy and chipping in places and occasionally sports two year old art.  There’s a sizable black ink stain in the carpet in DC1’s room that won’t go away with steam cleaning (it, in fact, just gets bigger every time we try).  The deck needs painting.  The screens need to be replaced or patched.  The guest toilet is getting rusty.  And on and on and on.

We are not allowed to rent to students by HOA rules.  (Though we’re fairly sure there’s a group of students living down the street from us, but the HOA board is currently weak.  When strong it has brought lawsuits to such houses and won against them.)

Our house, in theory, if it were in good shape, would rent unfurnished for $2000/mo.  Though one year rentals may drop as low as say, $1600/mo.  (Note, our required mortgage is $2003/mo, though as you can see the escrow and interest are under $1000/mo.)  Storage for our furniture would cost something like $300-500/mo, give or take.

In bad shape, any house in town will rent for $1200/mo, possibly even $1500/mo.  Our house would be a bargain at that price, even with stained carpet.  Though we’d still have to repaint, I think.

We’re not sure if anyplace we go will allow 3 cats.  Two, yes.  We might be able to leave one of the cats at a relative’s place for the year (though the two black kittens are very attached to each other, and we’d be breaking that attachment– it is unlikely that a relative would take the incontinent kitten).

Our utilities range from $50/mo to $800/mo depending on time of year.  Lawn mowing costs $35/mo, plus weeding $50/mo, but only during the growing season.  Our lawn has to meet a certain standard or we get nasty letters from the HOA  threatening to take our house.

Obviously we’ll stop mortgage pre-payment for next year if I go on leave.

So our choices:

1.  Fix everything up, try to get market rate for the house.

2.  Fix some stuff up (painting, but patch instead of replace screens, put a rug over the ink spot etc.), put the house on the market for cheap.  Potentially offer a discount for renting it furnished rather than unfurnished.

3.  Hire someone to house sit.  Here we could either ask that they pay utilities and take care of the lawn or we could pay utilities and pay them to take care of the house and the two kittens.  If we pay them, then we could get the house fixed up while we’re gone rather than this year when we’re both living here and busy.  With infinite money we could even have the kitchen redone (except we don’t have infinite money).

So I don’t know.  We have quite a bit of extra money in savings right now earmarked for home improvement (we’ve only spent ~$3K so far), though some of that may end up going for rent next year depending on what we end up doing.  If we had a lot more money we’d pick option #3 no contest.  But while we could afford that option (without the kitchen remodel), it would potentially drain our non-retirement/non-529 savings (when combined with our living expenses for next year).  

What are your thoughts on the options?  What should we be considering to make the decision?

October Mortgage Update and Window Treatments

Last month (September):
Balance:$43,346.00
Years left: 3.25
P =$1,030.84, I =$183.56, Escrow =$788.73

This month (October):
Balance:$40,306.31
Years left: 3
P =$1,042.82, I =$171.58, Escrow =$788.73

One month’s prepayment savings: $7.90

Recall some of our windows.  We have two sets of these.:

So the first thing we wanted to do is get some of that professional reflective stuff put on on the outside.  One of the rooms gets really hot and no amount of crepe myrtle outside seems to be able to block the heat in the middle of the day.  Of course, that requires actually contacting someone and we’re still waiting for our bathroom flooring to show up. [update: they came, see last Monday’s post]  Redoing the indoors doesn’t require talking to anybody or waiting for anything, so that’s what we started with instead.

We tried going without anything on the top half circles for a few days.  It was hot and occasionally blinding.  Other viable options we explored were Faux stained glass film and plantation shutters.  We’ve looked into less expensive options like paper fans and turning regular paper blinds into half circle blinds… but none of them seemed worth it to us.  (The more crafty among you may disagree!)   Here’s a pinterest page with all sorts of stuff.

In the end, we chose Bali half circle faux wood blinds in coconut, with matching 2 in horizontal blinds.  Cost:  $108 for each small half circle and $160 for each small one.  Total cost:  $752.  Then there was a 20% discount (down to $602) and tax and stuff.  The blinds were:  $67 each for the 4 little ones and $96 for the 2 big ones, $460 total.  DH decided he liked the smooth finish better than the fake wood-grain finish.  I’m good with that.  Total cost including everything:  $1050.

After: 019_crop

So a lot less expensive than roman blinds would have been, and I think roman blinds are kinda going out of style, so dodged that bullet.  Laziness for the win!

We still have the great room, and for that I really want to do something I recently saw at an upscale hotel, but I haven’t been able to find pictures of what I’m thinking of– perhaps it isn’t trendy enough yet.  Basically they had a rich grey thick outer curtain, a satiny translucent inner curtain, and a third white blackout curtain.  There was a nice grey rectangular valence over the top.  All curtains were openable with their own chains.  I can’t for the life of me figure out how to go about buying that kind of set-up without hiring someone or picking and choosing the separate parts through several different stores.  That kind of set up, especially with being able to open the curtains via chain, seems not to be available as a set anywhere, even though I would like to be able to just press a “buy this look” button and put in my particulars.

I think we’ll also replace the vertical blinds in the guest bedroom with a blackout curtain one of these years.  We’ll see.  My MIL got curtains to replace the blinds, but we didn’t take the blinds down because they didn’t block enough light even if they do look nice.

Something we noted when buying– the cheapest options on almost any site have a ton of reviews but some of the reviews say things like “blinds melted after two weeks.”  The more expensive options don’t have as many reviews and some don’t have any reviews, but they often tend not to have any negative reviews if they have reviews at all.  We rely pretty heavily on online reviews, which we believe have increased our quality of life in many areas (allowing us to pay extra for quality and to avoid hassle with returns).  So even if the most expensive options might be perfect and we might be willing to pay that amount if the quality is higher, if we have no information on the quality, we’ll go with the option that has 60-odd 5 and 4 star reviews over the option with 12 (or 2) 5 star reviews.  (And we’ll pick that over the 900 reviews where 5%, all from the South and Southwest, note that the blinds melt in direct sunlight.)  One of the online places we looked at didn’t have any negative reviews for even their cheapest blinds, so we really didn’t trust them.

Boy do we hate this sort of thing.  Why can’t stuff just last forever?  Or why can’t we have someone who loves to do interior design as a hobby pick stuff out for us?  I kept going, “You know, DH, we could just hire this blinds company to pick everything out for us.”  But… we still have to *pick* a company, and if we’re going to do that, we might as well just pick the blinds instead.  So we did.

How do you figure out these kinds of large home improvement purchases?  It’s easy to compare when it’s a water heater or what have you– but these kinds of aesthetic choices are so difficult for us.  Do you use online reviews (and what do you do when there aren’t any) or hire an interior decorator (and how do you find one)?  Do you just “buy this look”?  (And from where?)

September Mortgage update and long-distance landlording

Last month (August):
Balance: $46,373.71
Years left: 3.5
P =$1,018.90, I =$195.50, Escrow =788.73

This month (September):
Balance:$43,346.00
Years left: 3.25
P =$1,030.84, I =$183.56, Escrow =788.73

One month’s prepayment savings: $7.90

Disclaimer: We have ZERO desire to get into the landlording business. None. But #1 is tired of talking about her personal finances (as they relate to mortgages) for the nonce so you’re getting a post about housing instead. For newer readers, these housing posts on Mortgage day used to be more common before DH decided to quit his TT job, be unemployed, and get a new job. There will probably be more in the future as things get boring and settled again monetarily in the #1 household. But we’ll see, maybe we’ll actually do some home improvements some day (maybe by the time this posts, Home Depot will have found the vinyl flooring they ordered for us and it will actually get installed update:nope).

A recent working paper by Alex Chinco and Christopher Mayer suggests that investing in the market you live in is more profitable than swooping in from out of town to pick up “bargains” in another market.

Misinformed Speculators and Mispricing in the Housing Market

Abstract:  This paper uses transactions-level deeds records to examine how out-of-town second house buyers contributed to mispricing in the housing market. We document that out-of-town second house buyers behaved like misinformed speculators and drove up both house price and implied-to-actual rent ratio (IAR) appreciation rates in cities like Phoenix, Las Vegas, and Miami in the mid 2000s. Our analysis has 3 parts. First, we give evidence that out-of-town second house buyers behaved like misinformed speculators. Compared to local second house buyers, out- of-town second house buyers had worse exit timing (i.e., were likely misinformed) and were also less able to consume the dividend from their purchase (i.e., were likely speculators). Second, we show that increases in out-of-town second house buyer demand predict increases in future house price appreciation rates and IAR appreciation rates. A 10%pt increase in the fraction of sales made to out-of-town second house buyers is associated with a 6%pt increase in house price appreciation rates and a 9%pt increase in IAR appreciation rates over the course of the next year in that city. Third, we address the issue of reverse causality using a novel econometric strategy. The key insight is that an increase in the fundamental value of owning a second house in Phoenix is a common shock to the investment opportunity set of all potential second house buyers. If changes to fundamentals were driving both price dynamics as well as out-of-town second house buyer demand, we would expect to see large jumps in house price and IAR appreciation rates preceded by increases in out-of-town second house buyer demand from across the country. The data do not display this symmetric response, and are thus inconsistent with reverse causality. We conclude by discussing both the economic magnitudes of out-of-town second house buyer flows and the broader applicability of our econometric approach.

In short:  Out of town investors don’t know the market, so they make mistakes in purchasing and selling.  Additionally, out-of-town investors drive up prices within a town.  Bottom line– even though there’s diversification risk in one market, there are benefits to sticking with what you know.

What do you think about landlording/flipping houses locally vs. long-distance?

 

August Mortgage Update and what to do with the 30K in the home maintenance fund

Last month (July):
Balance: $49,389.48
Years left: 3.75
P =$1,007.01, I =$207.39, Escrow =788.73

This month (August):
Balance: $46,373.71
Years left: 3.5
P =$1,018.90, I =$195.50, Escrow =788.73

One month’s prepayment savings: $7.90

As I hinted at last month, with DH employed, we have accumulated a lot of money in our savings account just sitting there (or, more accurately, we didn’t completely de-cumulate our savings from saving up for him leaving his job before he got a new one).  Some of it is tagged for specific things, like tuition and the emergency fund… I guess that’s really it.  So in addition to the amount that’s legitimately in savings, we have more than 30K that’s loosely been earmarked for home maintenance repairs.

Now, before you go and say, “30K?  You should invest in stocks/pay off the mortgage with that are you crazy?”  Note that we have owned this house for almost 10 years and we didn’t change a thing when we moved in.  The only maintenance we’ve done has been completely reactionary:  fixing leaky pipes and faucets, fixing a leaky skylight on the patio, replacing the water heaters when they died, repairing and then replacing the dishwasher when it gave up the ghost and then fixing the new one, replacing the microwave multiple times, replacing the a/c in stages as it died, replacing broken fence pieces, replacing a broken board in the deck, and a whole ton of yard work usually when the HOA sends us a nasty letter.  We also touched up paint in the kitchen once.  And we always seem to be replacing the innards of two of the toilets (DH thinks this may be a waterflow issue).  You know, standard everything that breaks when you’re a homeowner stuff.

During that time we’ve had two kids potty train, and at least 6 cats coming and going.  We have carpet in two of our bathrooms.  We have aging vertical blinds.  We have peeling wall paper.  The paint is coming off in the kitchen.  We have an electric stove.  The kitchen triangle is messed up and the countertops are the cheap kind that turn yellow when you use bleach and, although we have gas hookups in the kitchen, everything is electric.  The kittens have destroyed the master bath, though really the cabinets in there have water damage anyway so it’s not all their doing.  There’s stains on the carpeting and drawings on the walls.  And many more things I haven’t mentioned.  At this point you may be thinking, “Only 30K?  Are you crazy?”

So we’re obviously not going to do everything.

DH has identified as priorities replacing the bathroom carpet with something that isn’t carpet and window treatments.

Warning:  the next few visuals are NOT PRETTY.  Look away now…if you can.

Bathroom carpet + potty training is not a pretty sight.

 

Even if you're in the minority of those who like vertical blinds, these are starting to get ratty.

Even if you’re in the minority of those who like vertical blinds, these are starting to get ratty.  See the watermarks from leaving the window open when it’s raining?  Oops!

And then there’s the tops of our window treatments. We have two sets of these lovely windows. Those half circles at the top are a pain to cover.

Here you see the needlework skills of the previous owner.  Even if you love these top things, they're kind of dirty and we have no idea how to go about cleaning them.  We suspect the fabric will disintegrate if we try.

Here you see the needlework skills of the previous owner. Even if you love these top things, they’re kind of dirty and we have no idea how to go about cleaning them. We suspect the fabric will disintegrate if we try.

I’m going to save you the master bathroom pictures (aka “kitten island”) to present another day.  They’re pretty stunning, but we’re doing baby steps here.  And we don’t want to overwhelm you with awfulness all at once.  We’re thinking of your health here.

So, our first order of business is the kids’ bathroom.  We spent a few weekends looking at sheet vinyl while getting completely ignored by sales people at three different flooring stores in town.  At the first store it sounded like this was going to be a $600 project and we were all, why does anybody do this themselves (as in, why save $300 at most, though DH points out that $300 is a lot for a lot of people and the work isn’t as daunting for people who know what they’re doing better than we do).  But then we gave up on the local flooring places and just went to Home Depot, where the guy was incompetent, but the contractors he sent to the house weren’t.  After the measurement, the estimated cost is $900.  (So according to the home depot invoice, we’d actually save $500 in labor doing it ourselves.  But we’re not gonna, not this time.)

DC1 picked out this tile, or, to be technically correct, ze picked out this sheet vinyl.  It looks a lot nicer in the picture than it does in the sample, but having mosaic actual tile (like DC1 really wanted) is not a good idea for a children’s bathroom because it’s hard to clean and gets slippery.  Vinyl tiles look better, but they only look better with bigger squares and DC1 really likes the pattern of little squares.  Plus sheet vinyl, is again, much easier to clean.  It’s also the least expensive option.

And they’re going to destroy our beautiful baseboards and replace them with ugly quarter-round.  I think this is why people do everything in their bathrooms at once.  DH thinks he can handle getting, painting, and putting in nicer baseboards so he’s going to ask them to omit the quarter-round moulding.

While they’re doing this, we’re also getting a new toilet.  Not only is the current toilet kind of gross, but it has been nothing but a graveyard for new toilet innards.  I swear, the thing breaks every 3 months or so.  So after some research, we picked out this Toto toilet, complete with the stain guard (because DC2 is still potty training).  That’s $300.

So the jack and jill bathroom flooring + toilet is going to cost something like $1500, depending on how much the fancy moulding costs.  We probably should have done it years ago, but $1500 is a lot of money!  Still, not as much as we thought it would cost.  Sometime in the next month or so, we should no longer have carpet in the kids’ bathroom.

As for the window treatments… we’re not sure what we’re going to be doing there, so any suggestions you make now could influence what we do!  There are a lot of options out there, and some of them are better than others.  But that’ll probably be the topic of another post.

What are your thoughts on our home improvement plans?  Any suggestions?

July Mortgage update and playing with numbers (or: another post on why we don’t just pay it off)

Last month (June):
Balance: $52,393.37
Years left: 4
P =$995.17, I =$219.23, Escrow =788.73

This month (July):
Balance: $49,389.48
Years left: 3.75
P =$1,007.01, I =$207.39, Escrow =788.73

One month’s prepayment savings: $7.90

Some fun tiny milestones this month. We’re under 50K in our mortgage balance. We’re over $1,000 in the amount of our regular payment that goes to principal. Next month we’ll be under $200 in the amount of monthly payment that goes to interest. That’s pretty cheap rent! (Our utility bills are far higher than that, at least in the summer.  And I guess technically the escrow part is also rent, making it a bit more expensive.)

At this point there’s two warring feelings going on. On the one hand, wow, we could just pay that sucker off. It is totally manageable at this point. If we applied our extra money sitting in savings (waiting far too patiently to be turned into bathroom linoleum, to fix the damage the kittens did to the master bath, and to finally do *something* about the kitchen) and our emergency fund and our summer money it would be gone. And we’d still even have DC1’s school tuition left.  (We’d have to re-save up for all those various funds, cutting spending under DH’s income, but it’s not like we’ve been in a hurry to fix things because man we’re lazy.)

On the other hand, the way that mortgages work, paying a huge chunk of money down now doesn’t save anywhere near as much money as paying the same chunk early in the mortgage. If we paid off our mortgage tomorrow we would save about $4,372.91 (possibly a little less because we’d have to pay a day or two of interest before the transaction went completely through) assuming the alternative is to stop pre-payments entirely and let the mortgage take its course. $4,372.91 just isn’t a whole lot of money over a 3.75 year period. If we continue pre-paying the $1,996.87 that we’re pre-paying each month, we’ll only pay an additional $1,473.20 in interest over the course of the mortgage, meaning that by paying it off tomorrow instead of as we’ve been doing it, we would only save $1,473.20 (and we’ll be done in 1.25 years). That’s even less savings!

Having the money and the option of stopping pre-payments allows us a lot of freedom. If DH’s company goes under, or I want to take a sabbatical, we could do that more easily by just stopping pre-payments. Paying off the mortgage entirely would free up less than 2K/month because >1/3 of our regular payment goes to escrow. It would stop the pre-payments too, but we wouldn’t have that pre-payment money anymore anyway because it would have gone to the mortgage. (We wouldn’t have our emergency fund either, for that matter, and we’d have to cut way back on spending.) Stopping pre-payments while still having the money we were using to pre-pay in the bank saves a full almost 2K/month.  That’s kind of fuzzy math there, but liquidity is what’s important in those measurements.  Not paying off the mortgage provides more liquidity in the case of an emergency or other desired expenditure.

And we’re willing to pay $1.5K – $4.5K over the course of almost four years for that freedom.  In fact, it’s tempting to stop the prepayments entirely and just wait out the 3.75 years… but if we did that I’d feel even more guilty about the extra money building up savings (the next risk-free option) earning next to no interest.  Keeping on with the current course doesn’t require any thinking and slowly depletes the extra amount in savings rather than increasing it thus forcing me to figure out where else to put the money while it waits for us to call home repair people to take it.

When you get/got close enough to the end of your mortgage that you could see it, would/did you pay it all off or drag it out?

May Mortgage Update and Escrow Musings

Last month (April):
Balance: $58,365.65
Years left:4.5
P =$970.93, I =$243.47, Escrow = 613.58

This month (May):
Balance: $55,385.40
Years left:4.25
P =$983.37, I =$231.03, Escrow =788.73

One month’s prepayment savings: $7.91

As with much of the country, housing prices in our little town are starting to recover.  That means that property taxes are going up again.  Yay.  (Not really yay.)

Our mortgage provider tells us we have an escrow shortfall of $1260.93.  If we send in an extra check for that amount, our monthly nut will only go up by $70.05.  If we don’t, they’ll prorate for us and our monthly nut will go up $175.13.

So which should we do?  Here’s my thought process.

Pro (cutting a check):  Ugh, it’s just over a round number now, and if I prepay it’ll still be under a round number and my OCD will feel better.

Con:  Why should they be getting interest on our money?

Pro:  What interest?  Besides, if I really feel that way, I should ask them to stop escrowing for us and just pay it myself.

Ok, let’s double check that they’re not charging us extra to prorate… doing the math, there’s a 3 cents difference between the two.

Con:  Which is completely and totally negated by the cost of the stamp on the check, by an order of magnitude and then some.

Pro:  This is a good way of hiding money so we’re not tempted to overspend.  I’ve got too much in savings as it is, and this money is going to have to be spent sometime.  Why not now instead of when a negative shock hits us?

Con:  It’s only an additional $175.15/month.  Even if DH loses his job tomorrow we’ll be fine, and it’s better that money stay in the emergency fund.

*end conversation with self

So… which of these arguments were most important to me?  The one about the OCD and the one about the cost of the stamp.  Funny how the irrational stuff is what’s important.  Yes I have a PhD in economics.  Don’t judge me.  Irrational stuff matters when the decision isn’t really that important.

In the end, the cost of the stamp won out because I think we’ll either be significantly prepaying the mortgage for a while (meaning the fact that we’re $3 over a round number isn’t such a big deal since the checks will still be round numbers), the number will change again with the next escrow cycle, or DH will lose his job and we’ll re-amortize and get a completely different number.

Do you like to pre-pay escrow shortages?  Or do you do your own escrow?  Or have you decided to opt out of the whole mortgage thing entirely?

April Mortgage update: And more musings on where to put extra money

Last month (March):
Balance: $61,508.58
Years left:4.75
P =$962.48, I =$251.92, Escrow = 613.58

This month (April):
Balance: $58,365.65
Years left:4.5
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?

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