June mortgage update and Big lumps vs. drips and drabs

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

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

One month’s prepayment savings: $7.90

So one of the things I’ve been noticing as we spend down our extra cash stock-pile is how irritating it is to see the balance go down every month instead of up.  Part of this decrease is because we’re prepaying the mortgage more than we can afford to on our monthly income alone.  Some of that money is coming from savings instead of a paycheck.

Instead of paying an extra 2K each month, we could instead pay a big lump at one point and then not do any more prepayment.  We’d see a one time hit to our cash savings, but then they would start growing every month again, at least during the school year.  (Of course, our monthly mortgage update would be super impressive one month, and not as impressive each month going forward, though more of each regular payment would still be going to principal because of how amortization works.)

Getting rid of extra money in a big lump all at once instead of in drips and drabs every month means you can enjoy watching a money account growing instead of shrinking.

In the past, this has been what we’ve done when we’ve had more money than we needed.  It went straight into the stock market or to the mortgage in one fell swoop and I could just forget about it and go back to managing our money using cash flow instead of factoring in savings.  I’ve always liked that, sort of like skimming the cream off the top of our savings account and putting it someplace it will do good stuff while we drink the milk left behind.

But getting rid of money in a big lump all at once is still risky because you can’t stop it in the middle and it’s harder to reverse course.  Which is, of course, why we haven’t made a big lump payment to the mortgage and have instead been slowly bleeding out.

It would be nice to get all that excess spending done in one fell swoop (bathroom carpeting…), but as we’ve noted before, figuring out what to buy takes time and effort.  So we’ve been dribbling that too.  And putting things off.  (“What are your plans for the weekend?” “Mow the lawn” “Why not call the guy to set up mowing instead?” “I’d have to talk to him on the phone and I don’t want to.” “Want me to call instead?” “No.”  [update:  we finally did set up with the lawn person… the xeriscaping people never called back, but we did get a lawn cleanup done and they’ll be mowing our lawn and doing light weeding once a week for $$])

Laura Vanderkam notes that a lot of people could buy a lot of lattes and housecleaning with the amount they spent on a wedding or a fancy engagement ring.  But maybe it’s easier to spend a large targeted cash stock-pile in one action rather than to spend it down slowly to zero over a longer period of time.  (If only we all had enough money to invest and spend off the dividends!)

And I suppose one could set up a separate savings account for the big lump and have it automatically transfer money to the regular account each month for the planned additional spending.  (Heck, one could even buy an annuity for right now.)  But eventually that account will run dry.  And you have to worry about it shrinking, because the only way to make it grow again is by putting in more money and then you’re in the same situation as if you didn’t have a separate account at all, just with more complications.

When you have a windfall or a bunch of savings, do you prefer to spend it/invest it all at once or to dole it out on a regular basis over a long time period?  Why?

32 Responses to “June mortgage update and Big lumps vs. drips and drabs”

  1. plantingourpennies Says:

    Hmm, guess it depends. We saved up a bunch to pay off our loan from Mr PoP’s parents all at once. But every thing else we tend to “zero out” at the end of the month and send excess to our savings/investment accounts. It helps that much of those these days are reversible – so if we really want the money we can get it back out without much trouble.

    • nicoleandmaggie Says:

      We were doing that back when out monthly take-home pay was higher compared to our fixed expenditures (and online savings rates were high enough that it felt like an investment!)– we figured anything could just come out of next month’s paycheck plus whatever credit card float we had before the following cycle. But now with a kid in daycare and one in preschool, and more to the point, me discovering 403(b) AND 457… We don’t have that monthly slush anymore.

  2. E Says:

    I stash it in savings (money market) and earmark it . So our savings has a running total for (1) rainy day, (2) vacations, (3) taxes, and (4) house stuff. (Taxes because in my prior life I had no withholding.) I transfer out and reduce the running total when I need something. I feel more secure knowing it’s there.

  3. Bardiac Says:

    I figure, what I’m putting in savings I’ve got a purpose for, even if I don’t know it quite yet. So, I put into savings, and when the house needed a new roof, that’s what I’d been saving for.

    I tended to view prepayment on mortgages as a sort of savings, because (prior to the crash), I thought you could use an equity loan to cover in an emergency. Now I’m less confident about that, and so tend to try to save a bit more in more traditional ways, and don’t prepay. (Though that decision was also influenced by refinancing to a far lower interest rate and higher monthly payments.)

    That said, I’m so impressed by how quickly your mortgage is dropping. Is there a point where you plan to just jump and pay it all off, because you can? (My hope is to do that at about 10K, but that’s a LONG ways off for me.)

    • nicoleandmaggie Says:

      Even though you may not be able to take out equity, you can reduce your monthly payments in an emergency through re-casting if you’ve pre-paid. So it’s not completely dangerous.

      The closer we get to payoff, the less it makes sense to pay it off– the amount we’re paying in interest each month is starting to become more and more negligible and the amount we’d save by paying off the whole thing becomes less and less. Plus we’d have to redo our banking since savings with our big bank account would no longer be free for us, and we’d have to figure out our escrow both of which sound like a hassle.

  4. Leigh Says:

    When I get a bonus, I allocate it immediately and don’t let it sit around in checking/savings/brokerage cash. I love making my mortgage drop by huge amounts all at once – that’s far more rewarding than the $1.8k/month I’ve been throwing at it. In the past, bonuses have gone to my general savings buffer (i.e. when I first started working), my car fund, my down payment fund, to my Roth IRA, to my taxable investments, and a bit to charity.

    It’s not like I have any plans for needing a large chunk of money at this point as I have no plans to get married, buy a new car, buy more real estate, or have (a) kid(s). And if I did want to get married or buy a new car, I do have enough liquid to be able to cover either of those (or probably both) if necessary. And if I did want to buy more real estate, things would have to be a bit more serious with my boyfriend to do that AND we would both have to have the money and I’m okay with a year waiting period on something like that too. Most medical emergencies should be covered by my health insurance and I have enough in my HSA to cover the full out of pocket maximum (well less $100).

    • nicoleandmaggie Says:

      We used to do those big mortgage lump payments. If only it wasn’t such a hassle to get that home improvement spending done and over with, then we’d know how much could just go straight to mortgage or into the market.

      I did recently price new Hyundai Accents, not because we need one but because I was curious how much a replacement car would cost as type of costly emergency, and it’s not so bad. Most months we’d be able to buy it outright without getting a loan (because most months we’ve got some summer savings in the bank that would have to be rebuilt) even if I did get rid of the “excess” savings that’s in there now.

      • Leigh Says:

        I think my home improvement projects are much smaller than yours :) The worst thing that could really happen is all of my appliances breaking at once and that might cost $10k to fix.

        If my car was totaled, I could make do with car sharing services and buses for a long while in an emergency. I’m not really using my car enough anymore to warrant buying a new one, but I don’t think it makes sense to sell it either.

      • nicoleandmaggie Says:

        We have had the house for a long time! And carpet in a children’s bathroom is just bad news all around.

      • Leah Says:

        Every time you mention the carpeted bathroom, I am sad for you. I hope you find time this summer to get that fixed! Go check out local flooring/tile places — they will have installers that can do this for you. If you just do the floor, it won’t take much time. We (read: the school) had our bathroom floor redone in our last apartment. The subfloor was sinking, so fixing that took a few days with drying time. But laying the actual floor and being able to use it? That was a one day job.

      • nicoleandmaggie Says:

        It’s that “check out the” that is what takes the most time. Well, that and the “call and set up an appointment to” Very easy to put off.

        But we are enjoying not spending lots of time on the lawn each week even if it’s a pretty sizable recurring expense.

  5. OMDG Says:

    All at once. It’s hard enough for me to part with the cash, but to have to see it go away slowly — heart wrenching! But also, don’t you get more of a benefit from an interest standpoint if you do it all up front?

    • nicoleandmaggie Says:

      inorite? totally heart wrenching!

      Yes, there’s more of a benefit from an interest standpoint, but there’s also more of a risk if you need to get some of that money back. And in our case what’s really dragging things is that we know we want to, for example, get the carpet in the jack and jill bathroom replaced but it’s going to take a while to get around to finding someone to do that. And we’re not quite at spending equilibrium yet with the transition of DH being employed (and there’s a concern that he won’t always have his job given it’s an excellent tech job with a small company that lets him telecommute).

  6. Flavia Says:

    All at once! But that’s because I don’t have an especially healthy emotional relationship with money. If I get a chunk of cash, I feel I have to do something with it immediately. That used to mean going out and buying something, but as I grow older it often means putting it toward my IRA or paying off debt. Still, as when I was younger, I tend to be overly optimistic about what I can afford to “spend”: Oooh, I just got a travel reimbursement for $1500! all of that is going to credit card debt right now! (Then the next week I remember that I had some unexpected additional bills for the month that I should have saved a few hundred for.)

    So, short version: I’ve been trying to train myself to chisel away slowly and steadily, and most the time it does in fact feel more satisfying and responsible.

    • nicoleandmaggie Says:

      Ugh, those delayed reimbursements. I’m waiting on some of those. Another good reason to have extra money in the buffer– having to pay up-front for travel and wait for the reimbursements is less of a PITA when there’s extra in savings.

      There are some arguments that paying off cc debt right now and then adding to it when you have additional bills is better than paying the additional bills with cash, but there’s also arguments the other way too.

  7. Debbie M Says:

    First of all, I already think this month’s mortgage statement is super impressive, since the difference is almost twice my monthly take-home salary. (Admittedly, there is only one of me and I am working only 30 hours/week these days, so I am easily impressed.)

    But for your question–if I have a windfall and an obvious goal (like house prepayment or retirement investing), I generally like to pay all at once for the benefits of interest. Normally, there is something I’m saving up for and so I just add to that fund (these days it’s retirement funds and a renovation fund.)

    An exception would be where a windfall is correlated with a big loss of money–like I get all my accumulated vacation pay–after I just quit my job without having another one lined up. In that case, I dole it out to make up for the lost salary. The same would be true if you got a big inheritance … because the person who’s been supporting you just died.

    Another exception would be for things like if a Roth IRA were maxed, then I couldn’t add any more. Nowadays, I also pay attention to tax things–I’m holding off on some things this year (charitable contributions, property taxes) so I can take the standard deduction and then almost double up on the deduction next year, when I’ll be richer. Finance is one of the parts of my life where I can be almost completely rational.

    Now, say, a windfall of cookies, where the rational thing would be to spread out eating them–well, I’m not so great at that, but I’m getting better.

  8. Miser Mom Says:

    I think there’s a psychological difference between what you’re thinking about — a huge lump sum that still doesn’t pay off the entire account — with paying a huge bill all at once and being completely and forever done with it. When we were paying a mortgage, we did what you did; that is, throw a bunch of extra money at it in small, manageable pieces in a way that we still had wiggle room.

    But this summer, I’ll be paying our kids’ tuition bill. We don’t have the money in savings right now ( –> someone wisely convinced me to move a bunch of it to a Roth IRA, and thank you for that <– ). But we'll have the money in a month or two, thanks to the generosity of the NSF. So instead of paying tuition in annoying little payments all year long, I'm going briefly into debt to pay it all at once now.

    Optimal? I'm sure a purely rational being would say no. But given my family's impulse control issues, being in debt briefly has a strong downward influence on their spending, so I think that for us this is better.

    • nicoleandmaggie Says:

      Yeah, I pay DC1’s tuition in a big lump sum too (due August 1!) and that’s sitting in savings and I’m itching to write a check to get it out of the account, but I will wait because the school also does better when it gets the money when it needs it rather than before it needs it (if I prepay they won’t work so hard for donations so they’ll spend it on the remaining month of teacher salaries rather than next year’s expenses).

      We don’t do DC2’s preschool in one lump anymore because it isn’t a non-profit so if the school goes under or we decide to leave, we can’t even convert the lost money to a donation. (Because we lost 4.5K when DC2’s first preschool went out of business.)

      Yay IRAs and Yay NSF! I’m gonna be working on an NSF proposal this summer. Which isn’t as good as getting paid out of one…

  9. Rosa Says:

    if I let my husband put money into the savings account, he’ll never let it get out again. And it’s not earning enough there, plus we’ve hit our mutually agreed “rainy day savings fund” upper limit (because we keep covering our rainy days from other sources).

    But if I put it into the stock account, he counts that as “spending” in his head – it’s gone already. He really has no emotionally different response to me going out and buying new clothes or investing in stock index funds. So then when I want to convert it into a new roof or plane tickets, it doesn’t bother him as much. And (most of the time) it’s earned more than it would have in the savings account.

    So that’s what I do with windfalls – shunt them into the stock account as fast as possible, all at once. And then take it back out again in dribs and drabs.

  10. Leah Says:

    I prefer to save up the money and pay off one lump sum, but I’ve never done anything as big as a mortgage. This started with paying off my car — the account was at a different bank, so I’d transfer over money in big chunks to pay the monthly amount due, and I’d find enough to make an extra 1k payment every couple of months.

    I did this in a big way with my one student loan from grad school; that was 13k of subsidized loan, so I saved money throughout grad school and paid that off the month before it was due. Yay for no interest, but a chunk that big was a huge gut hit. Still, I’d rather that than be having to think of the loan every month. Instead, I was able to think of repaying my savings account each month, so I saw the value in savings continually rise.

    Right now, we have no debt, so I’m shoveling money into savings. I’m not doing as well as I’d like, but I save more than 50% of my paycheck, so my husband says I shouldn’t worry. I do have to draw down savings on occasion to fund my Roth, and I usually end up funding my Roth in just one or two big chunks.

    I’m interested to see how daycare will affect our bottom line next year. It’s a big expense, but we also did both get raises (mine modest, his much nicer). Hoping we can absorb that and continue to save well for retirement. We’re also saving for an eventual new car, as our one car is 10 years old.

  11. Laura Vanderkam (@lvanderkam) Says:

    I suspect one reason my husband will never actually transition to a different career or take time off — which he has talked about since I met him 10-plus years ago — is this same desire: to see the pile of money growing rather than shrinking. It doesn’t actually matter how big the pile is. The goal posts move.

    • Rosa Says:

      Yep. As long as it’s always growing.

      My mom was the same way (there’s a reason she loves my husband so much) and after decades of scrimping and saving, her friends finally had a come-to-jesus meeting with her about it – IS there a number you’d feel safe with so you could retire? Nope, no specific number. So just go ahead and take the risk!

      Of course right after that the stock market crashed so she worked another 2 years anyway. But after those two years she went ahead and jumped ship and is really enjoying spending some of the pile of cash.

  12. chacha1 Says:

    Most of my savings are in my 401(k) and don’t/won’t get spent till retirement so I kind of don’t think of it as Money. :-) Bank savings vehicles are such a joke these days with the .005% interest rates. I saved up in a bank account specifically for a down-payment, and when we found our lot I was happy to write a big check and send a bigger wire for that.

    It was a money-market account with a slightly less insulting interest rate than my regular savings, but I have closed it in favor of having the money available if needed to deal with my MIL’s financial issues (FIL just died and left a hell of a mess). The bank charged $9 each time the balance fell below $3K even for a day … that’s not the account to have money in if you might actually NEED the money.

    At the moment I don’t really even have an “emergency fund” except for the plastic thing marked Capital One. If it turns out MIL is less shaky than we fear, I’ll be able to build one back up pretty quickly.

    When I was doing my big debt repayment project it was a matter of nibbling away at it. I didn’t want extra interest to build up by making minimum payments while I saved enough for an all-at-once payoff. I took the highest-interest-rate-first route in terms of which debt got the biggest monthly payment, but paid more than minimum continually on everything.

  13. Sandyl FirstgenAmerican Says:

    Having no Mortgage was like being on vacation from adult responsibilities for a while. When most of your expenses (with the exception of taxes) are of the variable variety, it almost feels like you’re living with your parents again and all you have to worry about is what you need to spend to have a happy life. I’d like to see you do it for a while, just to see if it changes your perspective at all. I’d also like to know if tenure has changed your attitudes on spending at all.

    • nicoleandmaggie Says:

      Tenure hasn’t really– the big changes in my money attitudes are all being driven by DH’s income changes. With an economics PhD from a top school I’ve never really thought I’d have difficulty finding work (rightly or wrongly), so tenure hasn’t been that big a deal to me. Plus they generally only fire people at 3rd year review and the year after not getting tenure so there’s lots of warning to get a new job compared to a standard two weeks notice. Not that I’d give tenure up or anything, but I always have this thought in the back of my mind that if things get too bad I can always leave.

      Our escrow is such a high percentage of our mortgage that I don’t think paying the mortgage off will provide such a big feeling of freedom. But we’ll see (after all, it will happen sometime in the next 4+ years even if we just pay the minimum). With the extra principal payment it’s a pretty big check each month, but our required payment isn’t so high. And we still have that daycare check each month to make us feel grown-up and responsible.

      • Sandyl FirstgenAmerican Says:

        Even though daycare was my biggest expense for a while, I still had this “I can quit at anytime” feeling with that expense. I guess I just like to pretend I have freedom from responsibilities sometimes.

  14. Alyssa Says:

    I hate the feeling of seeing the savings go down, no matter how much is in there. It makes it hard when we’re making big purchases. We usually just do it like a bandaid – RIGHT OFF in one swoop. It seems to be less painful.

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