8 March 2017
In my last Marvelous Money post, I shared our current Big Goal: paying off our mortgage early, in the next five years. I’ve had some questions about how and why we are doing that, so I thought we could chat about it today!
Why we are paying off our mortgage early:
Though paying off our mortgage early seems like a slam-dunk choice to us, there are pros and cons. Here are a few:
To expand a bit on these reasons:
— Save (probably many) thousands of dollars in interest payments: By paying off our mortgage more than 20 years early, John and I will save roughly $120,000 (!!!!!) That is a LOT of vacations and dance lessons and flights to see loved ones and delicious dinners out over a lifetime. That excites us!
— Reduce your nut: Megan McArdle describes your financial “nut” as “the amount of money that you absolutely have to pay every month if you don’t want scary-looking men to start repossessing your possessions.” Think: fixed expenses like car loans, student loans, mortgages, and the electric bill.
— Increase your freedom: The smaller your nut – the fewer obligations you have per month – the more freedom you have. If your nut is tiny, you can quit your job for one you love with a lower salary, or start your own business, or stay home with your kids. You can travel, or support charities that matter to you, or buy the most delicious-looking food at Whole Foods every week.
— Increase your share of ownership in an asset: As you pay off your mortgage, you’re buying more and more of your house from the bank and building equity (money in your pocket if you choose to sell one day!).
— Earn a guaranteed rate of return: You can think of eliminating a future payment as earning a guaranteed rate of return. For example, if your mortgage has a 4% interest rate, you’re effectively earning 4% interest on the money you use to pay off your loan.
On the other hand…
— It requires sacrifice and tradeoffs: This is the hard part, as we already discussed! For us, paying off our mortgage early means forgoing vacations, reducing our grocery budget, delaying clothing purchases, cooking at home, (almost) never going to the movies, not purchasing alcohol, and more.
— You potentially miss out on higher returns: The most common argument against paying off your mortgage early is that if you instead invested those extra payments in the stock market, you could earn a higher rate of return (since the stock market averages 9ish% per year over the long term). While this is true, it’s also true that most people don’t have the willpower to actually set aside that money and watch it build without dipping into it.
— You’ll eventually lose the mortgage deduction when you pay off your mortgage: This is true, but it’s still not a good reason to keep your mortgage, because the math doesn’t work out. Dave Ramsey explains more here, but the upshot is you’d always be paying more in interest than you’d save in taxes.
For us, the freedom and peace of mind we will gain from having no mortgage before June enters school far outweighs the sacrifices we’re making now and the potentially higher returns we’re missing out on.
Photo by Anna Routh – see more of our home here.
So that’s our why! Let’s talk about our how.
Very simply, we’re paying a set amount per month over and above our normal payment. Since we live and die by our budget, we’ve found that budgeting for that expense just like everything else has been the most helpful instead of waiting for “extra” funds to pop up.
When we first started attacking our mortgage three years ago (after we paid off our student loans and car loans), we did the simplest thing: we put the extra money directly toward our mortgage. (Our mortgage lender allowed us to make manual online payments, which we did every month.)
A year and a half ago, however, we decided to take things up one more notch by aiming for the best of both worlds. Since the main critique of paying off a mortgage early is that it doesn’t make sense to pay off a low interest rate mortgage when you could be earning higher rates of return by investing, we decided to invest the extra money we had been paying toward our mortgage.
So, instead of directly applying the money to our mortgage, we now transfer our extra payment (the same amount as before) to a brokerage account every month, where it is invested in a mutual fund. When we reach the full amount we need to pay off our mortgage, we’ll pay it in one lump sum. That will be a sad day for our bank account, but a happy day for our assets :)
A word of caution: I would only consider doing our “next level” system if you have a long track record of steely willpower with your money. It is so tempting to just take a little here or there as we watch that fund grow and other needs come up, but for this plan to work, you have to consider it absolutely untouchable!
Also, this approach requires a willingness to take the risk that the money you’re saving for paying off your mortgage could actually lose value.
If you’re nervous you’d be tempted or don’t want to stomach the risk, just apply the extra payments straight to your mortgage – done and done. Also a fantastic option.
Our master bedroom – photo by Callie Davis
We’ve still got a few years to go, but once we get under $100k owed, I think we’ll make a visual countdown somewhere in our home! I remember watching the Rays $90k chalkboard countdown dwindle month after month whenever we went over for dinner. SO exciting, and such a great teaching opportunity for kids!
One caveat and one piece of encouragement before I sign off of this exceedingly lost post.
Caveat: Paying off your mortgage early may not be the right money goal for you right now. Dave Ramsey considers it baby step 6 of 7, after paying off all other debt, building an emergency fund, and saving for retirement and college. It is an awesome goal, but one you should probably tackle after everything else is squared away.
Encouragement: Just because most Americans have a mortgage doesn’t mean you have to!! When you live like no one else, you get to live like no one else – free from worry about money, and at peace with whatever the future holds. If paying off your mortgage is important to you, I truly believe you can do it! I’ll be cheering you on!!
There’s about a million more things I could add to this post, but I’ll leave it there for now! If you’d like to read more about paying down debt in general (including info about how we freed up enough money in our budget to make our extra payments), click here.
I’d love to hear: Are you hoping to pay off your mortgage early? What financial goal are you working on right now? What’s holding you back from getting ahead with your finances, or where do you feel you need the most help?
23 January 2017
Two years ago, I wrote a Marvelous Money post about preparing financially for a baby. I did not, in fact, have a baby at the time, and so I took great pains to tell you to take my advice with a grain of salt. I also promised to revisit the topic at some point in the future. Today I wanted to touch on one aspect of our financial life post-baby, and I hope there will be more to come in the future. And good news! Whether or not you have kids (or ever plan to), I think you’ll find this post helpful, because it centers around what I feel is one of the most important personal finance topics to truly take to heart: trade-offs.
In preparing our 2017 budget, we decided to cancel the trip we’d planned to take to the Southwest this year.
Here’s the thing: we have the money to take this trip. It’s sitting in our bank account. But, because we also have the Very Big Goal of paying off our mortgage in the next five years, we are choosing not to take it.
(Why am I connecting these extra mortgage payments to our foregone vacation instead of, say, our extremely expensive childcare? Because we were able to take more expensive vacations and still make extra payments before we had June, it might seem to make more sense to “blame” our childcare costs for this trip cancellation. But, because childcare is a must-do, and the extra payments are something we’re choosing to do, to me it seems like the payments are squeezing out the vacation.)
Were we disappointed when we decided to postpone this trip? Yes. But, it’s hard to feel disappointed when I think about all of the marvelous adventures we’re still going to have this year. We’re going to spend ten days on an Island in Maine with my family. We’re going to use the week we would have been in the Southwest to travel to Michigan with John’s family, a trip that will cost less than $1,000 compared to the $4,500 we were estimating for the Southwest. We’re going to take two long weekend 30th birthday trips (more about those soon!). And, as I shared in my 2017 goals, we’re going to have lots of fun right where we are, having everyday adventures close to home that cost next to nothing.
I think it’s very important to carefully consider your trade offs, and make them ones you can live with. We are sacrificing a lot in the hopes of paying off our mortgage more than 20 years early – fancier vacations, new cars, clothing, going out to eat, home purchases, etc. We know that the freedom we’ll have when we own our home outright – and the cash flow we’ll have in our budget once we’re not making a monthly mortgage payment plus more every month – will be more than worth the sacrifices we’re making now.
But we also knew the trade off wouldn’t be worth it if we were miserable for eight years, living in a holding pattern, eating peanut butter and jelly every night, and never spending anything but the absolute minimum. So, we still go on vacation. We still eat out. Though compared to some of our peers we might be scrimping and saving, by many people’s measure we are living high on the hog — and that’s how we choose to see it. We feel immensely lucky to do all the fun things we get to do while still being able to save so much for our Big Goal.
Do you have a big goal, too? Paying off your student loans? Building an emergency fund? Buying a car? Saving for a down payment or an adoption? Maybe you want to pay off your mortgage, too? I’d encourage you to look at the trade offs you’re currently making, and see whether you can make any changes to both save more money AND have more fun. I truly think it’s possible, but it might take a mindset shift even more than a change in behavior. As Tony Robbins said, start rich.
I’m cheering you on!! And I’d love to hear – what big financial goal are you working toward now? What trade-offs are you making to get there?
28 November 2016
Around this time every year, I start to feel a little anxious about the coming year — specifically the finances of the coming year. By November, we’ve usually started talking about things like vacations we’d like to take, purchases we want to make, and savings goals we’d like to hit. We’ve submitted our pledge to our church. We know what our childcare expenses are going to be. But I don’t yet have a map of how it’s all going to fit together, and so I start worrying: will we be able to pay for everything we want to do? Will we have the money to take these vacations we’re talking about? Will we need to trim our budget, or will we get to expand it?
I hate that anxious feeling. And I think that’s how I’d feel every month if I didn’t have a budget, because a budget is a plan. It reassures me that I’ve taken care of everything that I need to, and that if I stick to the budget, I am free to spend money without guilt, I don’t need to worry about paying bills, and I can rest assured that I’m making progress on all of my savings goals.
I LOVE feeling like that. So this weekend, John and I sat down and made a plan for 2017. We do this every year, and I’d encourage y’all to try it, too! Here’s what we did.
We started by setting aside about two hours, after June was in bed so we wouldn’t be interrupted. We opened up a fresh Google doc and copied and pasted the structure of our budget (formulas, categories, etc. – you can read more about that here). Then we started adding in numbers:
First, we entered in any fixed amounts: numbers that we can’t change or don’t plan to change, on both the income and expense side. A few examples: our salaries, 401k contributions, taxes, and our mortgage.
Then, we moved to the “slightly flexible” categories: ones where we could make changes, but there’s not a ton of wiggle room and it would require a lot of effort. A few examples: childcare, cable and internet, charitable giving, and groceries.
Finally, we enter in what we’d like to spend in the flexible categories. A few examples: vacation, dining out, gifts, and clothing.
Depending on whether or not you’ve kept a budget in the past, it will be more or less challenging to pull these numbers. Since we have a lot of data to look back on, we were able to simply plug in a lot of numbers from 2016. Still, we do talk through each category to see if any adjustments are needed for the upcoming year: Are we due for new tires? Will we be flying more than usual? Will we be buying lots of wedding gifts? If you haven’t kept a budget in the past, look back on a month or two of receipts or credit card statements to help you estimate.
Now it’s time to look at the bottom line: With all of your projected income and expenses taken into account, is your budget for the year in the black or in the red?
If it’s in the black: great! When we have a less than $1,000 surplus, we leave our budget as-is, because that’s a small enough amount to us. However, if the surplus were more than $1,000, I’d want to assign that money somewhere (savings, giving, or an expense category), because the goal is for every dollar to have a job.
This year, when we first did the math, our projection was in the red. But no need to panic! This is why we forecast a budget, so we’re not realizing this next October, or whenever our bank accounts run dry.
If you’re in the red, too, it’s time to go back over all of those flexible and semi-flexible categories with a fine-tooth comb, and talk through any options for cutting your expenses. For us, we talked about reducing our vacation, home, clothing, personal care, and childcare expenses. We also decided to forgo one month of extra payment on our mortgage in order to make room for the additional money we want to give to our church’s building campaign next year. These are tough decisions, but I firmly believe it’s better to make them now, when you’re in control, rather than when you’re scrambling and your options are limited. Cut, cut, cut until your budget is balanced.
Once your numbers come out even, congratulations! You have a financial road map for 2017, and it’s going to be an awesome year!!
Your next step is to set up a system to track your budget every day, week, or month, like through a Google doc, an online system like Mint or YNAB, or the envelope system.
You’ll also want to make plans to check in periodically to see how you’re pacing – we do that every two months. After all, a budget is a plan, but plans can change. We adjust our budget throughout the year if our circumstances change or if we decide we want to prioritize one category over another. That’s totally fine to do, as long as the income and expenses balance out in the end!
I’d love to hear, friends: do you do any budget planning before a new year begins? How do you track your budget? Does talking about a budget give you the heebie-jeebies? Are there any money topics I can help you with in upcoming posts? I have a few brainstormed, but I would LOVE to hear what might be most helpful to you!!
P.S. More marvelous money posts: paying off debt, preparing financially for a baby, and paying for a car in cash.
3 December 2015
When you follow a budget, it’s safe to say that you’re always on the hunt for ways to reduce your costs (and thus free up money for the budget categories that you’d like a little extra wiggle room in!). We recently chatted about shopping consignment sales, and today I’m sharing another way our family has recently maximized our budget!
Up until a few months ago, we had a cable and internet package from Time Warner Cable. We got the fewest possible channels (your standard NBC, ABC, etc.) for the lowest possible amount ($22). While this was fine, we were sad to miss out on a few favorites: namely AMC (The Walking Dead!), ESPN (Duke basketball!), and HGTV (Fixer Upper!). But, we weren’t willing to pay any more money to get them.
THEN. One of John’s colleagues told him about Sling TV, and the angels sang. Have you heard of it? After doing our own research, we canceled cable (though kept the internet!), signed up with Sling, and haven’t looked back.
Sling dubs itself “the best of live TV for $20 a month.” With an account, you can watch TV over the internet anytime, anywhere, on your television, tablet, phone, or computer. (You also sign up online and can cancel online at any time!) Our $20 a month package includes all of the favorites listed above, but if you want even more variety, they do have add-on packages for HBO, kids, and more sports. We also received a Roku streaming stick for pre-paying three months, which means we can now watch Netflix on our television, too!! (We always watched it on our laptop before!)
The channels that Sling does not provide? Local broadcast ones like ABC, NBC, and CBS. To bridge that gap, we installed an antenna (this one – boy, have they come a long way in recent years!).
Even though we’re really only saving $2 per month, I consider this a major budget win, as we’re getting more WHILE paying less money. Hooray!! We’ve been singing the Mohu and Sling praises to anyone who will listen for the last few months, but I did want to mention a few potential downsides if you’re considering making a similar move:
— Our antenna generally works perfectly. We did have an issue with spotty reception one night during a bad rainstorm, but it hasn’t happened since we moved the antenna further up our wall.
— Depending on where you live and how close you are to broadcast signals, the Mohu antenna might not be an option for you. (For example, my parents would have to get one with a much longer receiving distance, if they could make it work at all.) You can check your location compared to the signals here.
And that’s it! Have I convinced you?? Honestly, the worst part is calling to cancel your cable, because they WILL put the hard sell on you — but just keep saying “no thank you” :)