Hindsight on Years of Aggressive Mortgage Pre-payment

I have written in depth about my mortgage and my aggressive payoff plans. I really hope that you don’t follow in my example and treat your mortgage like a pants on fire debt emergency like I did because that was a huge mistake. Keep in mind that while aggressively paying down my mortgage, I also maxed out my pre-tax 401(k), my HSA when it was available, and my Roth IRA. I also maintained a healthy six month emergency fund and another six months across liquid stock index funds and bonds.

I regret aggressively paid down a 2.5% mortgage. Over the course of 2.5 years, I made $126,000 in extra payments. At my current expense level including my required mortgage payment, that is 2.6 years of expenses. Instead of hiding $126,000 in my Vanguard taxable investment account in the form of stock index funds or in a cash savings account, I hid it in my mortgage, from which the only ways I can extract equity are by applying for a HELOC currently priced at ~4.25% in advance of when I need the funds or by selling half of the condo to my husband over time.

Doesn’t this chart look motivating? I made such huge strides on eliminating that mortgage debt pretty quickly: within the first 2.5 years, I paid off exactly 50% of the original mortgage balance.

Mortgage Balance Aggressive.png

Why did I do this?

I was scared of my mortgage.

My original mortgage balance was 3x my gross base salary when I bought the condo. I had never had debt before (no student loans or credit card debt) and having 3x my base salary in debt was HUGE.

15 year fixed mortgage rates and 5/1 ARM rates were the same when I bought my condo. A decent portion of my income came in the form of deferred compensation and I didn’t want to lock myself into the payments of a 15 year fixed rate mortgage, so I thought that a 5/1 ARM was the perfect compromise – the rate of a 15 year fixed rate mortgage with a 30 year amortization. I didn’t trust in my then-income level enough to lock in the 15 year fixed rate payments. The difference between the two payments? $1,900/month versus $1,20o0/month when the lower payment caused me to see zero increase in my annual expenses over renting and I was stashing $2,000/month into savings on top of maxing out my pre-tax 401(k) and Roth IRA.

I didn’t understand compound interest.

My parents preached that debt is bad, anyone who carries debt is financially irresponsible, and no one should hold their mortgage or student loans or any other debt any longer than minimally necessary. I’m not really certain of their investing strategy because they think the stock market is too risky and you should invest entirely in bonds, real estate, cash. That’s a debate for another time. I started saving for retirement while I was in college (back in 2007), but all of that was put into certificates, not into the stock market. No one explained compound interest to me until I found the financial blogosphere back in 2011 and despite the number of advanced math classes I took in high school and college, I never figured it out either. You don’t have to save nearly as much for retirement if you frontload it in your twenties and thirties and invest in stocks. The Vanguard S&P 500 Index Fund, for example, has an average annual return of 10.83% since its inception in late August 1976. That’s just over 40 years ago. That is pretty much unheard of in cash returns! At least in my lifetime that I can remember.

I was scared of the stock market.

Yes, I had no comprehension of compound interest, yet somehow I was perfectly happy locking away money in retirement accounts for many decades and investing in stocks there, while being scared of investing in the stock market outside of my retirement accounts. I would rather get a guaranteed 2.5% return than incur the increased risk of the stock market that could possibly get me a 10.83% return. (For the record, Vanguard currently tells me that I have seen a 9.0% return over the last 6.5 years that I’ve had accounts with them or 9.8% over the last 5 years, which is when I started hunting for a condo.) I was so scared of losing money, of seeing my account balances go down, that I took the guaranteed 2.5% return instead.

Why was this a huge mistake?


I’m sitting on a desire to take a sabbatical from my highly paid tech job and I’ve spent much of 2016 setting aside additional liquid funds in order to finance that. Had I not paid down the mortgage so aggressively, I would have already had that fund. Assuming I had invested the exact same amounts I paid extra on the mortgage into Vanguard Total World Stock Index Fund on the exact same days that I made extra mortgage payments, I would have had $148,924.73 in the index fund on 10/1/2016 and I would have been ahead. Now, the stock market has done reasonably well over the past 4.5 years, so in the following chart I also compare aggressively paying down the mortgage to aggressively saving in a 1% interest earning savings account:

Investing vs Aggressive Mortgage Paydown.png

Notice how the green line and the red line are pretty much on top of each other? Cash currently would be worse than aggressively paying the mortgage by a mere 2%. Investing has been at best 19% better than aggressively paying the mortgage and at worst, $215 better, thanks to a rising stock market over the last several years. You look at this second chart and wonder why I paid the mortgage so aggressively when I could have accomplished the same net mortgage balance within $2,000 by just keeping the extra funds in cash.

What does this math show?

If I could have been convinced to not blow all of the money I threw at the mortgage over the last 4.5 years, I would have been better off leaving it in a 1% savings account than throwing it at the mortgage quite so aggressively. That would have left me with significantly more liquidity.

In late 2011, I wrote a post entitled “What to do with extra monthly and bonus cash flow?” in which I explained several ideas I was tossing around:

  1. Split the money up three ways into investments, pre-paying the mortgage, and saving for a 20% down payment on a house
  2. Split the money up 50/50 into investments and pre-paying the mortgage
  3. Split the money up 50/50 into pre-paying the mortgage and saving for a 20% down payment on a house
  4. Invest all of the money
  5. Use all of the money to pre-pay the mortgage and pay it off really quickly

My conclusion? “Right now, I prefer the first option since it still allows the extra funds to be diverted back to mortgage pre-payments or investments at any point. The fifth option isn’t very flexible and the fourth option is the riskiest.” Yet, that is not at all what I did. I went with the fifth option.

But then, once I bought a place, I picked a 5/1 ARMset out to pay it off before the rate reset, which was absolutely a side effect of the fear of the rate resetting, and got addicted to the high of paying down the mortgage. It was so much higher than any high I have ever experienced from saving. I was really convinced that the mortgage would be paid off before the rate reset, before life happened in the form of my now-husband moving ina job change that unexpectedly reduced my income, starting grad school, and getting married. I’ll talk later about how we plan to handle the mortgage going forward in our marriage.

Back in July 2012, I thought “I’m not the sort of person who would *not* take out a loan to invest. I’m the sort of person who would have more job security if I lowered my yearly fixed expenses by $14,469.48 than by having a larger amount of money in the bank.” I no longer believe that to be true and I can’t take back the large payments I made on the mortgage without doing a cash-out refinance or opening up and drawing down a HELOC. I was addicted to the fact that early on in the mortgage, I could pay $X in an extra payment, which was about Y normal monthly payments and shave off 2*Y regular monthly payments off the end. I got addicted to paying down my mortgage.

It’s all incredibly irrational. Personal finance is all so personal. But that chart doesn’t lie – I would have been better off keeping my mortgage payoff fund in cash.

Aggressively paying down my mortgage being my biggest financial mistake shows how much financial privilege I have. If you hate debt as much as I do, I am absolutely on board with paying extra on your mortgage, but not this all or nothing approach for several years like I did. That said, buying this condo is quite probably the best financial decision that I have ever made – by a stroke of luck, it has appreciated an average of 11% annually since I purchased the property. I didn’t even need to pay the mortgage any extra to get the benefit of that appreciation.

Cash could have been turned into extra mortgage payments later.

Liquidity is king.

Early retirement is a LIE

You’re probably reading the title and thinking “Early retirement is a lie” – she is so right! No one can retire early because it’s simply not possible. Well, I firmly believe it is financially possible, but calling it “early retirement” is a lie. You might call me the “Early Retirement Police” for saying this, but I don’t care.

Early retirement gets such great hype because everyone in America is burnt out from working too many hours at jobs they don’t like and not having enough of a gap between their earnings and their spending for them to be able to career change, so they start searching “How do I retire early”. Their goal isn’t to do nothing for the rest of their lives – their general goal is to do something else without needing to worry about money.

Why do I say early retirement is a lie then? If you had a larger gap between your spending and your earnings for many years at the point where you decided you wanted to change careers, what would you be doing? Well, if you have a healthy mindset around money where it is meant to be spent at some point and not hoarded forever, then you’d probably use some of your savings to allow yourself time to figure out what to do next and change careers.

People love saving for early retirement because you only have to save for N years and then you’re done! You can run away from your career that you hate so badly! We love time limits on anything. How often does the instructor at a fitness class say “You can do anything for 10 seconds, just 10 more seconds!” That’s exactly what saving for early retirement is – waiting on N more years to be able to live the life you want forever. It sure sounds pretty shiny. There’s a catch though – you need to be able to stick it out in a job you don’t like for those N years. You know who gets the best raises? The best bonuses? The highest performers. I don’t know about you, but if I hate my job, I’m pretty terrible at it.

If I love my job, I’m going to be the most badass rockstar you will ever meet.

I want to live a life where I am the most badass rockstar you will ever meet. I don’t want to stay in a job I don’t like just so I can save tons of money and retire early.

I live in a place I love. I have an amazing husband. We live in a condo that we love. We have an amazing community here in this place that we live. We have great options for exercising in ways that we both enjoy. We cook and eat delicious food.

What’s missing? The intellectual stimulation from a career I love. I know I’m not going to get that from retiring early and being outdoorsy all the time. We need balance in our lives and unfortunately our North American high-powered careers suck at that.

The reality of early retirement is that it is a career shift with a large nest egg so that you have the freedom to pursue a lower income lifestyle.

If you’re a white collar career driven person in today’s world, you are not going to want to give up the mental stimulation that your career brings you. You are going to find some other way to get that mental stimulation. Some people in the ER blogging community derive that new mental stimulation from writing and other creative pursuits. Have you noticed though that only high income people pursue hardcore early retirement while lower income people gasp change careers?

Maybe the people who were in lower income careers are on to something.

Why are we holding onto the notion that we need to have the higher income in order to be happy? Shooting for early retirement means that you’re still holding onto that notion. Why not take a lower paying job that will bring you more joy in life?

Life is not about money – it’s about joy. Sometimes money is a tool to get you there, a dangerous tool that you can wield beyond its good.

Married Finances: Donor Advised Fund

The Why of Donor Advised Funds

I’ve always been intrigued by Donor Advised Funds. Now that we’re married, we will no longer itemize by default, so Donor Advised Funds seem a great way to itemize sometimes. By my initial calculations, we will be able to itemize $12,320 in 2016 before any further charitable donations and not counting my husband’s charitable donations thus far this year. That’s $280 short of the married standard deduction. If we take each of our separate charitable savings accounts, as well as our separate desired charitable donation rates of our expected gross incomes for this year and next and contribute that to a Donor Advised Fund, then we should be able to itemize closer to $20,000 in 2016, which is a reasonable additional tax savings.

We would then make our 2016 and 2017 donations out of the Donor Advised Fund and in 2018, group contributions to the Donor Advised Fund to cover 2018 and 2019 income. This will become even more key going forward as the mortgage interest paid gets lower and lower each year as the mortgage amortizes and we will likely lose that deduction entirely in the next few years.

It’s even better to do this this year as I expect we could drop a tax bracket in 2017 and it’s better to take more deductions when you’re in a higher tax bracket.

Another benefit is that we can take appreciated shares from our taxable accounts to contribute to the Donor Advised Fund, rather than donating to charities with cash. My taxable account is aged enough at this point that about three quarters of its shares have long-term capital gains, so I would use those shares to contribute to the Donor Advised Fund and then avoid paying capital gains taxes on the shares.

Where to open one?

Vanguard, Fidelity, Schwab all offer them, with a variety of minimums and fees.

We both have all of our non-workplace investments at Vanguard, so that seems like a great place to start. Unfortunately for us, their minimums are far higher than what we are prepared for at the moment: you need $25,000 to open a new account, each additional contribution must be at least $5,000 and each charity grant must be $500.

Currently, we both tend to donate $50-100 to charities on occasion and would prefer to be able to continue doing that for the near future.

Fidelity and Schwab, on the other hand only require a $5,000 commitment to open a new account and allow you to grant as little as $50 at a time to a charity. Schwab’s minimum additional contribution is $500. According to Bogleheads, Fidelity’s is $1,000, but I can’t find that on their website. They both have a minimum administrative fee of $100, which seems reasonable to me for the tax savings.

We both have checking accounts at Schwab because they offer unlimited international ATM fee reimbursements. Those accounts might be a good one to combine in our combining of accounts considering that we usually travel internationally together and even before we were married, we never tracked cash separately – whoever had the right denomination of cash was the one who paid and I always got to keep the coins. This worked out great for me when we would travel to countries with bills no smaller than a five. Thus, Schwab is a reasonable contender for our Donor Advised Fund.

One of us has some workplace accounts at Fidelity and I have the Fidelity Visa, so that could also be a reasonable place to open our Donor Advised Fund.

It does appear that if we changed our minds on how much we donate to charities at a time and wanted to switch over to Vanguard later, we could do so by submitting a grant proposal to our new donor advised fund at Vanguard, so we’re not long-term committed to whichever provider we choose.

I did all of this research, presented it to my husband, and he cut me off while explaining why I would pick Schwab to explain which one he would pick, which turned out to be Schwab. So it looks like we are going with Schwab!

What does it take to open one at Schwab?

You need to provide all of the normal information you do when opening an account: name, SSN, date of birth, home and mailing addresses, employment status and occupation. You provide a primary account holder and secondary account holders, which both have full and equal privileges. You can designate successors and/or beneficiaries. You indicate the investment options you prefer, which can be as simple as Schwab’s Total Market Equity Index fund or a Money Market fund if you don’t plan to keep assets in the Donor Advised Fund for too long before granting them to charities.

Your initial contribution needs to be at least $5,000. It looks like the simplest way to transfer money into the Donor Advised Fund is to have the assets already in a Schwab brokerage account, to write a cash check, or to do an ACH transfer from another bank account. You can, however, also transfer shares from another institution. Our plan is to transfer shares from our separate Vanguard taxable accounts that have long-term capital gains as Schwab Charitable can pull from two separate Vanguard accounts.

What to name it?

My vote is for either “The HerLast HisLast Charitable Fund” or “The HisLast HerLast Charitable Fund”. We are still discussing which ordering sounds better and our discussions are proving inconclusive. Someone on Twitter suggested “The FewerSyllables MoreSyllables Charitable Fund”. We’re both relatively indifferent to the names ordering.


Next up: follow up on these action items and get our initial contributions in before 12/31/2016…

Married Finances: Life Insurance Isn’t Always Necessary

I joked to my husband that we should get life insurance on me when I leave my job, but that was only a joke because it is pretty much entirely unnecessary. (The questionnaire from my lawyer for our postnuptial agreement asked if we have any life insurance and my husband joked “We decided we didn’t need any on her life because she’s too loaded/baller for that.”) If anything happened to me, he could never need to work again. I sure hope I’m worth more to him alive though! :) If anything happened to him, I would never need to work again.

People try to sell you on buying life insurance when you’re young and healthy and have no dependents because it will be cheaper. I realize that we are a strange case and you the reader may need life insurance more than we do, but this should at the very least be an example of a critical thinking exercise.

Kathleen wrote a smart article evaluating how much life insurance her and her husband needed last year and I plugged in our numbers to the tool she linked:

I used their default final expenses cost of $15,000, the outstanding mortgage balance of $127,000, and our zero children.

I told the calculator my husband’s current expenses without mine, how much we have in savings and investments outside of retirement accounts, how much we currently have in retirement savings, my husband’s current income and marginal tax rate. It told me that I need negative $1.65M in life insurance on me. If I take out my husband’s income, the calculator then told me I need negative $200,000 in life insurance on me. When I swapped the numbers around to my current expenses without my husband’s (including the current mortgage payment), included the amount of life insurance that my husband has through his work (he has the minimum), and put that I have $0 of income, it told me that I need negative $500,000 in life insurance on him.

Now you might be saying “well what about when you have kids in the future, so shouldn’t you buy life insurance now to cover that future hypothetical?” And if you know me and my future planning at all, you’d be a bit surprised that I am not planning for that possibility, unless you also know that I don’t want kids. If you truly plan on having kids, it seems smart to me to buy life insurance before you get pregnant. The naysayers will tell you that you should buy life insurance in your twenties because it’s cheap and then you lock in low rates without worrying about any health issues. That may be the case for a lot of people, but my husband and I really truly believe that we have self-insured and don’t plan to buy life insurance. We may even manage to avoid buying it even if we change our minds and end up having children – that all depends on where our net worth stands when that happens. Mr. Money Mustache and his wife famously don’t have any life insurance either.

I’m writing this from a perspective of not yet being financially independent enough to support our joint lifestyle forever with our current net worth, but from being far enough along that our current net worth could almost support one of us forever.

A caveat here though: you really need to do research and calculations for your own situation. If you have children and you don’t have enough assets for your spouse to continue your joint lifestyle as is without your income or vice versa, then I cannot stress enough that you should very likely have at least a small bit of life insurance. What I am saying though is to not blindly buy life insurance and to think critically through your situation.

Readers, at what point would you self-insure on life insurance? How much life insurance do you have in your twenties?

Married Finances: Where to hold our joint accounts?

I’m starting a series on what our married finances look like that will run until I run out of inspiration :)

My husband and I opened up a joint checking account back when he moved in at the credit union where we both had accounts. We also both had online savings accounts at Ally Bank. At the beginning of 2016, I moved my accounts to Alliant Credit Union because I was tired of meeting the rewards checking account requirements and Alliant has the same savings account interest rate as Ally Bank.

Back when we were both at the same credit union, we would transfer money to each other to pay each other back. As things became more serious, we started using a lazy spreadsheet to keep track of who paid for what rather than paying each other back for each individual item, so that wasn’t nearly as annoying as it would have been at the beginning. Plus, Square Cash is incredibly useful and easy to use, so that made the separate credit unions transition easier.

Managing the joint checking account became far more annoying though because then in order for me to get money into it, I needed to first transfer the money to my checking account at our shared credit union and then transfer that sum to the joint checking account OR send my half of the money to my husband via Square Cash and he transfer the whole amount into the joint checking account. We hadn’t used the joint checking account in a year until we went to the first wedding of the year and paid our interior designer via check out of the joint account and then this turned into a huge hassle when we then wrote about 10 checks off the account this year. We also pay our biweekly house cleaner with a check.

And then we got married, which prompted the joint accounts debate again. Like good engineers, we’ve been developing requirements for a joint account. Our two top contenders are Ally Bank and Alliant Credit Union. We ruled out our current shared credit union as they don’t have good interest rates and the ATM fee rebates require a certain number of debit card transactions per month. We ruled out major banks as they have terrible interest rates, though we will likely keep a brick and mortar joint account as well at least for now for ease of depositing the wedding present checks that we have been getting.

  1. All of our checking and savings accounts should be at the same financial institution: her personal checking, his personal checking, her personal savings accounts, his personal savings accounts, joint checking, and joint savings accounts. Neither of us is convinced into spending money that is in savings, so this is a great convenience fee.
  2. We should be able to transfer immediately and freely between all of the accounts listed in 1.
  3. We should be able to ACH transfer quickly (ish) for free to accounts at other institutions.
  4. The checking account should refund at least 2 ATM fees per month, for free with no requirements. [Alliant does this immediately and has a $20 maximum. Ally Bank has a $10 maximum and I’m not sure how quickly they do this.]
  5. Easy to acquire free checks on the checking account because apparently we write a lot of checks off the joint account.
  6. Free bill pay, but that seems to be a given these days.
  7. A clean and friendly user interface on their website (ahem current shared credit union does not meet this!)
  8. An easy to use mobile app [Ally is currently winning this one, but Alliant’s Twitter account says they’ll have a new app out in November]
  9. Ability to deposit cash at ATMs
  10. Two-factor authentication [Neither Ally nor Alliant seem to have this…]
  11. The savings account should have a reasonable interest rate, e.g. at least 1% today.

This has been a fun decision to make! Generally I make more of our organizing personal finance decisions since I’m the planner, but my husband took to /r/personalfinance and Bogleheads to research these two options before we give one a try.

I’ll report back in a few months on how we’re enjoying the one we picked! It will, after all, take a little while to get things rearranged.

Readers, how did your banking setups change when you got married?

A Millionaire’s Elopement

We’re both on the introverted side and neither of us saw marriage as a shiny penny, but as something we were already living day and in and day out at the time that we chose to marry. Eloping thus turned out to be the perfect solution – it meant that we weren’t focusing on a big party, but on choosing to marry each other.

We had been talking about marriage for a while now off and on, so it didn’t surprise anyone that we decided pretty quickly to get married. A note to anyone else planning a wedding: all you really need is about 48 hours or whatever your local jurisdiction’s waiting period is. People were surprisingly shocked though that we didn’t have an official proposal or an engagement ring, though the latter was mostly my decision as I’m still on the fence as to whether I want to wear one. My now-husband (!) has said we could buy me one if I really wanted it, though I’d kind of rather have a tablet I think.

We made the decision to get married so quickly that we didn’t have time to draw up a pre-nuptial agreement, so we’ll be drawing up a post-nuptial agreement soon and I’ll be talking about that when we figure out what it looks like. At this time it appears that it will likely cost about what we spent flying the key people in to the wedding location. We’re both really excited to combine as much as makes sense. After all, we do already have the same Investment Policy Statement and we both hate even low-interest mortgage debt. This event has created plenty of inspiration for future blog posts!

Why do I say it was a millionaire’s elopement? Now that we’re married, we sort of have a combined net worth even if some of it will stay separate and combined, our net worth was over a million dollars as of our wedding date.

What did our wedding spending look like?

Total cost: $3,500

$2,300 Flying some key people here (2/3 of the cost of the wedding)

$800 two wedding bands

$140 Attire – I bought a dress off the rack and my husband wore a suit he already owned

$100 buying up some domain names

$84 Ubers around

Marriage license fee (I google’d “our county marriage license” to research this – I know it varies from county to county whether there is a waiting period so be careful of that!)

Fee for two certified copies of the marriage license

$6 buying some birthday cards and stamps for a few birthdays we missed because we eloped

$0 Photographer – our witnesses and officiant are hobbyist photographers

$0 Officiant – a friend officiated and was included in the post-wedding food

$0 Venue – we got married at a park

$0 Food – Dinners and lunches were paid for by either our grocery budget or our parents as a gift (I’m guessing this was about $600-800)

$0 Flowers – no time for such things

$0 Music – we were in a park! Natural noise from that

$0 Decor/rentals/lighting

Being financially stable doesn’t make you better

While I was procrastinating something the other day, I read through a thread on an internet forums wherein forum members shame their coworkers/friends/relatives for not being as good with money as them. These forum members also have tales of being ridiculed for being so cheap/frugal. And yet, they’re ridiculing their friends/coworkers/relatives in this anonymous, but very heavily search engine indexed forum. Say what?

This whole world would be better if we could learn to not judge others for their choices. This is something I’ve been working on the last few years, but at this point, I have my financial judging down to one: complaining about something that you could fix, but aren’t.

For the longest time, I judged a spendy friend for spending in different ways than I value. I also judged my boyfriend for spending in different ways than I value. But both of those two people have solid reserves and spend less than they earn – just in different ways than I would. To my friend, I probably spend more on security (savings) than they consider necessary. I think they spent more on housing than probably necessary, but you know what I can comment on? They have a really lovely house. And I absolutely love really lovely houses even if I don’t value spending my money on them. (Okay, I do, but in smaller doses of money spent.)

What does judging others for their different financial ideas get you? All it gets you is a negative attitude towards them. You don’t have to share every single possible interest with someone in order to be friends. I have friends who I work out with, friends who I work with, friends who I discuss money with, friends who I travel with, etc. Unless someone told you exactly the decision process that led them to do X where X is something you don’t agree with, you quite possibly don’t even know where they’re coming from. I’ve had people judge me for buying a brand-new car, without knowing that my plan was to hold it for 10-15 years. People judged me for pre-ordering an iPhone 6S when it was announced, without considering that perhaps I am frugal in other ways and that is a way in which I choose to spend my money, or realizing that I spend $35/month on my cell phone plan.

If you’re financially stable, that’s probably one of your values. I know it’s one of mine. I value being financially stable and secure, living in a home I love, having a closet of clothes that fit and make me feel good wearing them, getting plenty of time outdoors, and staying active.

Instead of spending time judging others for their so-called terrible decisions, instead try to remain positive. You might even end up educating them or learning something yourself. For example, when a coworker judged me for buying the new phone, I told them that I paid cash for it and have a cheap cell phone plan, which they hadn’t even realized was an option. They then bought their next cell phone in cash as well and have a cheaper cell phone plan as well now. I will say I was surprised at the person who was incredulous that I would pay $800 in one go for a phone. Yet it’s a device that they too use all the time and get a ton of enjoyment and use out of it for an $800 thing that will cost me about $1/day. I would almost say I get more use out of my phone these days than out of a personal computer.

That said, the guy boasting about having only two dollars and thirty seven cents in his checking account? Definitely not going on a date with him, no matter how cute he might be. I am allowed to reserve some judgment for potential romantic pursuits. After all, you want to find a life partner who shares many of your core values.