August’s mortgage payment and rejiggering the emergency fund

Last month (July):
Balance:$8,661.89
Years left: 0.666666666667
P =$1,175.46, I =$38.94, Escrow =$812.79

This month (August):
Balance:$7,481.78
Years left: 0.5833333333333333
P =$1,180.12, I =$34.29, Escrow =$812.79

This is the first time in a long while that we’re not saving up for something big.  DH may lose his job, because jobs aren’t guaranteed, but he’s not planning on leaving his job any time soon.  I’m not eligible for leave for another 5+ years.  There’s not really any reason to hold onto large amounts of cash.  Certainly not the 84K that we ended up having in savings before we left for Paradise.

DH’s salary is also substantive enough and year round enough that we don’t really have a long unpaid summer like we used to.  I think we will be spending more than his take-home pay in the summer, especially since that’s when a bunch of our big annual bills come due (mostly insurance), but there’s a big difference between being a little short and having literally no summer income.  We don’t have to have quite as big a chunk come May as we used to.

On top of that, we were paying a year’s tuition of daycare and/or salary in September, about a month before we got paid so we needed money for that as well.  We’re no longer doing that because DC1 is going to public school and we no longer trust daycares to not go out of business.

Previously I mentally partitioned our savings account into “summer expenses” for the 3 summer months without income, “DC1 tuition”, “DC1 summer camp”, “DC2 daycare”, and “emergency fund”.

This year I’m going to try something different.  I’m going to try to maintain 21K in savings all year round and call it the “emergency fund”.  I won’t save extra from each paycheck for summer expenses leading to a gradually increasing savings amount.  I’m just going to have 21K in there.  I will allow it to dip below that during the summer, but I’ll try to keep it above, say 14K.  If DH loses his job or something, then we’ll sell some stocks, but otherwise 21K should get us through until the next paycheck(s).

It occurs to me that if I weren’t lazy and if rates weren’t so low, it would make a lot of sense to put that 21K into a 9mo CD or into a three month ladder of CDs that come due.

Where did I get the number 21K?  Well, mostly I just pulled it out of my posterior region, but IIRC, it’s about 3 months of expenses (when we’re not living in Paradise) when we’re living large and then some.  It is also enough to cover pretty much any major emergency other than a car purchase.

What will we do with the rest of our income?  No idea!  Maybe we’ll figure something out next month after everything has settled down.  Right now I’m leaning towards lumps to a taxable Vanguard account, but first I will need to drive my car for a month to see if it needs to be replaced.

What are you all doing for an emergency fund these days?  Does how much cash you have in savings change over time?

July Mortgage Payment and what to do with ~40K, give or take

Last month (June):
Balance:$9,837.36
Years left: 0.75
P =$1,170.83, I =$43.57, Escrow =$812.79

This month (July):
Balance:$8,661.89
Years left: 0.666666666667
P =$1,175.46, I =$38.94, Escrow =$812.79

Amount saved from prepayment:  $0

Before going on leave we saved up $84K in the slush fund so that we could live in Paradise (where everything is at least 2x as expensive as where we normally live) on a lower income without worrying about money.  It looks like we will have about 40K leftover (give or take) after subtracting out our summer emergency fund and moving back expenses.

We have been doing quite nicely since DH quit academia and got an industry job.  I still can’t believe our good fortune.  (Though I am not sure how long it will last!)  Definitely a different world than the one we were inhabiting even 3 years ago.  For the first time in a long time there aren’t obvious places to stash more money.

Last time we had ~25K extra, we threw it into the mortgage.  Before that when we had large chunks of extra untargeted money, we saved them in retirement vehicles.

So, for people who aren’t long-term readers, here’s where our monthly nut after bills has been going since DH got his industry job:

  1. We max out all of my retirement options
  2. We pay up to the match with DH’s retirement (it has bad fees)
  3. We are no longer eligible for tax advantaged IRAs unless we do a backdoor conversion.  So we don’t do IRAs anymore.  If we were eligible we’d totally to this.
  4. $500/mo in each child’s 529 (This is not enough for 4 year private schools without financial aid, but DC1’s is getting too big for 4 year public or even a 4 year private should our income fall and we become eligible for financial aid.  I debate on whether or not to stop contributing, but figure we can stop DC2’s contributions later if DC1 has too much.)
  5. Previously we had been saving for a year in paradise with me at half salary, but we won’t be doing that anymore.
  6. Mortgage.  You will note that the mortgage runs out in 8 months and there’s not much point to prepaying at this juncture.

We have a LOT of money put away for retirement and for college.  Most of our money is in retirement savings, and most of that money is in the most difficult to tap form of retirement saving (the 403b).  That makes maxing out DH’s retirement account with the high fees potentially less attractive than saving the money outside of retirement accounts (in case we move to Paradise someday and want to buy a house), or you know, just spending it.

In terms of taxable stocks, we have around 125K in an account we could just tap.  We have about $300K in home equity.  Sadly, this is not enough money to buy a house in paradise with 20% down in a good school district, and it would be pretty risky to try.  We do, however, think this makes a pretty reasonable secondary emergency fund.  Combined with our primary emergency fund in savings, we figure that if DH loses his job we’ll be ok just living on my salary where we normally live until we figure what else to do.

So that leads us to this money we saved for Paradise but didn’t spend.  Here are our options (in no particular order):

  1. Start maxing out DH’s retirement even though it has crappy fees (~15K/year over what he’s already contributing).  We may do this anyway as we’ll probably be generating a surplus with both our salaries next year.  [update:  I miscalculated, it’s actually only 5K more than what he’s currently contributing– we put in the request to max out today.]
  2. Figure out how to do a backdoor IRA ~11K
  3. New car (if my 2005 Hyundai Accent that I love continues to have check engine problems once we get back) ~$30K
  4. Kitchen Renovation ~$30K.  The triangle just isn’t quite right and our countertops suck and the sink is chipped.  The problem with this is that it will take our time which will be in short supply when we get back and there’s been a small construction boom in our town meaning that construction costs are higher and take longer than usual.  We don’t know how long the boom is going to last.
  5. Bathroom renovation ~$10K.  We don’t really need this, but we’d kind of like to replace the plastic shower with a tile one and maybe get rid of the gold accents in the bathroom.  Totally cosmetic and unnecessary.  This would be unlike us since we don’t normally replace things until they need to be replaced.
  6. Xeriscape the lawn ~$?? We have no idea.  Problem:  Bermuda grass may make Xeriscaping an expensive failed dream unless we can get more trees to stay alive (an endeavor we’ve already lost quite a bit of money on).
  7. Solar panels ~$20K.  There’s basically nobody in our town with solar and we’re wondering if there’s a reason for that.  Lots of people do, however, have the black shades over the outside of their windows.
  8. Charity– I don’t think we’re going to direct this money to that.  We usually do charitable giving in December.
  9. Looking through old “things we wish we had money to do” posts, I notice that we wanted to replace carpet with hardwood in our dining room.  We probably still want to do that, though it’s not a high priority.  I think that would cost under $5K, though I’m not sure how much under.

Also… since we’re not saving for Paradise and we’re not putting extra to the mortgage and DC1 is trying out public school… we’re probably going to have extra untargeted money once school starts and I start getting paid again.  I don’t yet know how much that is going to be.  Or what to do with it.  I’m thinking DH’s retirement (even though it has ridiculous fees) or backdoor IRA Roths (the lower fees may make the hassle factor worthwhile) and then more taxable stocks. But I dunno.  It’s like, we would need so much more saved to be able to buy a house in Paradise, but we don’t need that much to live in our small town.  But might as well save until there’s a good reason to spend, you know?

What would you do with a 40K windfall (of money you’d saved but didn’t need in the end)?  If you’d save it, how would you save it?  If you’d spend it, what would you spend it on?

June mortgage payment and musings on interest saved near the end of the loan

Last month (May):
Balance:$11,008.18
Years left: 0.833333333
P =$1,166.21, I =$48.19, Escrow =$812.79

This month (June):
Balance:$9,837.36
Years left: 0.75
P =$1,170.83, I =$43.57, Escrow =$812.79

Amount saved from prepayment:  $0

Three quarters of a year left on the mortgage.  That’s 9 months.  There’s less than 10K remaining.

We could pay it off pretty easily at this point even as we enter the unpaid summer and the end of our expensive year in paradise.  (Watch the savings account drain with living and moving expenses!)

But if we paid if off, do you know how much we would save in interest?  $180.20.  One hundred eighty dollars and twenty cents.

That’s not much.

Paying down 10K at the beginning of a mortgage can save huge amounts in interest, even with inflation taken into account.  But near the end, it’s the price of a pair of European shoes.  Or the reward you might get for opening a new bank account.  Or a fancy dinner out.

So even though it would be easy to pay off the mortgage right now, there’s really no point other than saving the hassle of writing checks, which isn’t a hassle that particularly bothers me.  But putting lump sums towards the newly refinanced mortgage 5 years ago made a lot more sense in terms of interest savings.

Would you pay off a 10k debt in a lump instead of over 9mo in order to save $200?

May mortgage update and would you prepay or increase your monthly payments when the escrow increases?

Last month (April):
Balance:$12,174.40
Years left: 0.91666666667
P =$1,161.61, I =$52.79, Escrow =$809.48

This month (May):
Balance:$11,008.18
Years left: 0.833333333
P =$1,166.21, I =$48.19, Escrow =$812.79

Amount saved from prepayment:  $0

Our escrow went up as it does almost every year.  When this happens, Wells Fargo gives us the option to pay the difference upfront to keep our payments the same or smaller.

Used to be when this happened I’d pay the difference so I could prepay more each month when I rounded the number up to a round number when writing the checks.  Also I like paying stuff early so I don’t have to worry about it later when I might have less money than I was expecting.

But we’re not currently doing any prepayment (since Paradise is expensive and I’m at half pay), not even the little rounding up prepayments that we did when we were just starting the mortgage.  It bothers my OCD a little bit not to write a round number on the check, but I’m getting used to it.

And because we’re spending more money than we’re taking in (not counting retirement savings) and because we have less than a year on the mortgage and there’s not even a full year left for the escrow, I decided to let them increase our monthly payment for the second time this year.

(Note also that that $812 or more will be the minimum average monthly cost of home ownership once we’re done with the mortgage not including utilities or repairs– home ownership isn’t free!)

Would you prefer to pay increases upfront or to amortize payment increases?

April mortgage update: Living in a 1200 sq foot 2br/2ba for a year as a family of 4

Last month (March):
Balance:$13,336.01
Years left: 1
P =$1,157.03, I =$57.37, Escrow =$809.48

Last month (April):
Balance:$12,174.40
Years left: 0.91666666667
P =$1,161.61, I =$52.79, Escrow =$809.48

Amount saved from prepayment:  $0

… instead of our usual 3000 sq ft ~5br/3ba.

Honestly, it hasn’t been so bad.  At some point, the kids may need to stop sharing a room or may need more space for their clothes, but not yet.

We use every part of the house instead of just a third of it.  I spend more time in our bedroom hiding out from everyone (DH spends about the same amount of time in our bathroom hiding).  I pretty much only use our bedroom at home for sleep (and activities involving the removal and/or putting on of clothing), even though it is comparatively ginormous.

Having people visit has been difficult.  If it’s my sister visiting, DC1 sleeps on the couch and she sleeps on the top bunk.  If it’s a parent, DC2 sleeps with us and the grandparent sleeps in hir bed.  We cannot accommodate couples unless a pair of people sleeps in the living room.  In our usual home place, visitors get an entire guest bedroom suite to themselves.  But… hardly anybody wants to visit us back home.

As with our graduate school days, it has been difficult to spend money accumulating stuff.  The first question is again not, “how much does this cost?” but “where would we put it?”  Only after we decide there’s room can we think about whether something is worth buying.  (Though DH and DC1 have been testing this proposition with their growing board game collection.)  But since the library system is so great and a short walk away, I don’t need so many books at home.

All in all, it’s been much easier to live here than I had expected.  (1200 sq ft is bigger than our grad school apartments, but there were only two of us then!)

Now, we’re not going to sell our monstrous house and move into a smaller place when we get back.  Why not?  Well, part of the reason it’s so easy to deal with a small space here is because everything is in walking distance.  A big park with playground, restaurants, the library.  And the weather is generally nice.  We don’t need to spend as much of our free time inside the house.  Back home, there’s really none of that, especially not near smaller houses; home owners associations are much more likely to have amenities like parks and playgrounds.

Another reason is that the neighborhood here is relatively safe and entirely free from college students.  Smaller places back where we usually live are either rural and away from everything, in high crime/bad school areas, and/or surrounded by students.  Home owners associations, though horrible, seem to be a way to get away from students.  We could downsize to probably 2200 sq ft and still be away from college students and coyotes and snakes, but the price differential doesn’t seem worth the hassle.  We can afford what we’ve got (as you can see from our mortgage update!).

And, I can’t lie– it is a bit easier to live in a small place that’s not in the best shape when everybody else is also living in small places that aren’t in the best shape.  Our standards are a lot higher where the housing is cheaper.  We wouldn’t put up with a lot of stuff in the small town that just doesn’t seem like a big deal here in the city.  The same was true when we moved from graduate school– peeling paint and uncovered radiators aren’t a big deal when you’re in an amazing location, but the new rural house has to be perfect and move-in ready.

How small a place are you comfortable living?  Is bigger always better?

March mortgage update: Why we bought a huge house and why we shouldn’t have

Last month (February):
Balance:$14,493.05
Years left: 1.083333333
P =$1,152.47, I =$61.93, Escrow =$809.48

This month (March):
Balance:$13,336.01 (actually it is 13,336.21 because wells fargo occasionally steals pennies)
Years left: 1
P =$1,157.03, I =$57.37, Escrow =$809.48

Amount saved from prepayment:  $0

Hey, look at that, only one year left!

About 10 years ago we bought a 3000 sq ft house.  Why?

  1.  We had been living in small urban apartments and were dying to have more space.  Our master bathroom is literally the size of our first efficiency.  We had no concept of say, how 2000 sq ft would be.  We only knew small and that large sounded great.
  2. We were sick of moving and didn’t want to move again unless we were leaving the town for new jobs (in which case we wanted to be able to unload the house quickly).
  3. We thought we wanted a 5 br house so that there would be one bedroom for each of us and we’d also each have a study.  (We actually have a 4br plus study.)  We did not realize that we miss each other when we’re working in separate rooms and thus do not need our own studies.  (And DH has plenty of room in one of the walk-in closets to keep his boardgame collection, so he doesn’t need a separate storage room like his father has for hunting equipment.)
  4. We had 55K saved for a downpayment (enabling us to get a 265K house using the 20% down rule plus fees).
  5. I had a salary that would enable us to buy a 300K house (give or take) according to online calculators, which we knew was probably too expensive, but 265K seemed pretty reasonable.
  6. The monthly payment on a 30 year 6.5% mortgage was less than what we were paying in rent in the city.
  7. We told the real estate agent that the most we could afford was 265K, so he had incentive to make the nicest house we saw a little more than 265K.  Then the other real estate agent was informed that we could only afford 265K (I imagine, I’m not actually sure).  So we offered less than that and they countered with 265K and we said ok and didn’t move on to our second choice somewhat smaller 250K house.

3000 sq ft is too much.  It is expensive to air condition and clean and keep the lawn mowed.  We just don’t use about a third of our house because living in nowhere, nobody really visits us now that DC1 is no longer the only grandkid (oddly, we had plenty of visitors on the couch of our small apartments in grad school city!)

If we had to do it again, we would look for something more in the 2200sq ft range.  1200 sq ft, which is what we’re living in right now, is a bit small for the four of us.  If we’d gotten a starter home we probably would have ended up staying in it.  But we didn’t realize.

Why don’t we sell and buy a smaller one now?  Mostly because the amount we would save by cutting out say 800 sq ft doesn’t seem worth it to us with the hassle of moving and transaction costs.  And we do like the neighborhood, although the elementary school zone changed on us and now sucks (we’re hoping DC2 will get into the dual language program if zie doesn’t start K early). It’s also now a seller’s market instead of a buyer’s market so while it would be easy to sell the place, it would be much harder to find a new place than when we first moved out here.

So, the moral:  Just because you can afford a big house doesn’t mean that you should buy one.  More isn’t always better.

How did you decide what size house to buy/rent?  Do you always get the best and biggest that you can afford?

February Mortgage Update: Mortgage misconceptions or why you should not get your financial advice from the MMM forum

Last month (January):
Balance:$15,645.52
Years left: 1.166667
P =$1,147.93, I =$66.47, Escrow =$809.48

This month (February):
Balance:$14,493.05
Years left: 1.083333333
P =$1,152.47, I =$61.93, Escrow =$809.48

Amount saved from prepayment:  $0

Because of my addictive personality, I’m not allowed to join any forums.  That doesn’t mean though that I don’t occasionally read fora even though I can’t participate.  Occasionally I have to say something, and since I’m not allowed to join, the something gets to spill over onto the blog.

In this case the forum in question is Mr. Money Moustache’s, and the “someone is wrong” thing is a few misconceptions about mortgages.  I know we’ve written about them before, but they obviously bear repeating!

  1. Mortgages work differently than student loans or credit card debt because they keep the payment the same each month and just remove months off the end with pre-payments.  That means that payments early in your mortgage are worth more than payments later in your mortgage because the mortgage, unlike other investments, doesn’t reamortize each month.  That means the amount you’re saving from pre-paying is different depending at what point you’re at in the mortgage.  You can see this by looking at an amortization spreadsheet, like this one from GRS.
  2. A common misconception is that you are increasing your risk pre-paying the mortgage because you can’t get the money back in an emergency unless and until you pay the entire thing off (and thus finish your mortgage payments).  That’s not actually true.  If you prepay your mortgage, you can, in an emergency, re-cast/re-amortize for a small fee (usually ~$250) and get lower monthly payments by lengthening the amount of time that you continue paying on the mortgage.  For example, right now my mortgage payment is a little over $2000/mo with 1.08333 years left.  If I re-amortized, my payment would be just a little bit more than what I’m paying for escrow, but I would be paying that sum over 13.4 years instead.  (And I have to pay for escrow even if the mortgage is gone!)  All that pre-payment means that in an emergency I can cut my monthly required payment, even though there’s still time left on the mortgage.  You don’t end up with quite as much ready cash so if you’re expecting an emergency you should keep it, but if the emergency is a low-probability event that may happen after years of pre-payment, you can likely recoup enough in lowered payments to get you through for quite a while.  [note that if you have a nonstandard mortgage, the rules may be different — you may not be able to as easily reamortize an adjustable rate mortgage.  Check with your lender if this is a concern. ]

Are there any money misconceptions that bother you?  What do you do when someone is wrong on the internet?  Do you belong to any fora?

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