Reflections on Homeownership: 4.5 Years In

 

Life was so busy this summer that I forgot to write my annual reflections on homeownership post, so here I am at 4.5 years in instead. I cannot believe that I am coming up on my five year anniversary of buying this wonderful condo come this spring! This fall marks 5 years since I started looking for a piece of real estate to buy.

There have been many discussions lately over the fact that in today’s hot real estate markets, you need to decide pretty quickly whether you are committed to spending several hundred thousand dollars on a particular piece of real estate. Yet, every week it seems we discover something new and fascinating about this condo in which we live.

Lately, one question has been “How much did I really think through this neighborhood selection?” Within a mile radius, we have what I thought was pretty much everything one needed: a post office, courier services, multiple grocery stores, a library, a drug store or two, a hair salon, barber shop(s), a gas station, park(s), and multiple restaurants. Yet, whenever we want to go to a restaurant, our first choices are never the local ones, which results in Uber’ing to another neighborhood. There is no takeout in the area that I like. (Is that a good thing or a bad thing? Probably not so bad for the wallet.) Our friend in the nearest proximity is a full mile away. It is pretty easy to get downtown and it’s easy for friends to park near us if they drive to visit. The commute to my job at the time was pretty good, as it is to my husband’s job, but my commute to campus is a bit inconvenient, as was my commute to my last job.

We finally finished the furniture tetris game I mentioned last time we talked about my ideas on homeownership. We now have furniture that we both love and that we chose together. We repainted many rooms. We’ve decorated together. It really solidly feels like our place. It is wonderful. Our home brings us joy again.

A realtor told me that they would list this condo of mine for ~45% more than what I paid for it. Two more years or so and that would run up against the $250,000 single capital gains exemption for home value increases, though we may not need to worry about that as we got married and that increases the exemption to a ludicrous $500,000. (I’m unsure what exactly the requirements are to qualify for the married exemption over the single one, however.)

In 2016, this condo cost a whopping $14,000 in housing expenses (mortgage interest, HOA dues, property taxes, condo insurance, electricity, repairs, interest lost from having the equity locked up, and tax savings).

I was pretty conservative in my calculations when I bought this place, which has now put my husband and I in the situation where our housing costs (including the full required mortgage payment of which only the interest is included in the $14,000 figure) are around 6% of our combined gross income in 2016. If you take out the principal portion of the regular payment, it’s even lower.

Perhaps I skipped the 4 year post back in the summer because we were super busy going to open houses every weekend. We were frustrated with our furniture tetris and unsure that we would ever figure it out, so we became convinced that we might need a larger place. This condo has two bedrooms and is relatively spacious in the lower 1000 sqft range, but we were not utilizing the space particularly well. With our then-existing furnishings, there wasn’t enough room for each of us to feel like we had personal space to pursue our home-based hobbies. The increasing market ranges mean that we would need to spend about 40-50% more than the value of this condo to get a three bedroom townhouse. We developed the mantra “Is this cheaper than moving?” (which is pretty much true for everything when your alternative is to spend several hundred thousand dollars) and we started trying new hypotheses. We hired an interior designer to help us refurnish the living room, who came up with ideas that we never would have. It was expensive, yes, but it sure was cheaper than moving. The designer asked us early in the process “How long do you plan on staying here?” and our answer was “So long as we stay in this city and don’t have children, quite possibly decades.”

Homeownership means that our lives revolve around our central home, rather than our home moving as our lives shift.

Layoffs: one door closes and a window opens

Note: This is more personal than most posts that I write here. It has been multiple months since the layoff happened now and I’m in a pretty reasonable place emotionally at this point, though triggers do still happen sometimes and publishing this post last week was a trigger in the few seconds that it went live, which is why I held off on publishing it for a week.

Layoffs. We think they happen to everyone but us. To no one we know. To no one in our family. Until they do and our world explodes. No matter how much you possibly wanted to leave your job, a layoff still results in far more emotional shock than you would think it does.

I could write a post about how to prepare financially for a layoff, but it’s pretty simple: keep your finances in great shape and you will be okay when you get laid off. That two year liquidity fund I was saving up with so I could take a sabbatical? Super handy when I was unexpectedly laid off this year. As was my severance package.

Nothing, however, can prepare you for the emotions that come along with getting laid off. How it feels to be told your job was eliminated in a room with multiple other people by someone you’ve never talked to before. How it feels to go into work one day and see a mysterious email about a mysterious meeting. How it feels to go into work one day assuming you have a job and leave no longer having one. How it feels to most definitely now be the lower income earner in the household for a bit. How it feels for people to assume your spouse is supporting you financially because you are “unemployed”. How it feels to wonder if you should spend any money at all on joyous things when you spent years teaching yourself how to spend money on yourself. How it feels to not get paid on the last business day of the month for the first time in almost seven years. How it feels to live off of your savings account for an indeterminate amount of time. How it feels to be laid off in an expensive season of your life.

You find sad joy in knowing others who also got laid off that day, friendly faces in a time of uncertainty, making for a shoulder to cry on. You follow your list of self-care, going on long walks in the sunlight every day that week. Somehow your partner is the one more unsure of how to proceed through this, confused that you are simply in checklist mode until you break and then he’s there, holding you steady.

But the finances? It is so wonderful to not worry about those in this strange time.

That checklist that you had ready to go for when you gave your notice? That checklist is so key at keeping your emotions in check while you wade through the last week at a job you didn’t love. In a haze, you call your 401(k) plan provider to request an after-tax 401(k) in-service distribution the afternoon you receive your layoff notice. The check comes in the mail the next week and you deposit it into your Vanguard Roth IRA.

Health insurance? You don’t even think about it. Your checklist already knew based on where your deductible was for the year, that it makes sense to keep COBRA for the remainder of the year even if it costs the insane $500/month versus joining your partner’s plan.

You’re free. After a series of jobs where you didn’t fit or didn’t succeed after a series of jobs where you had flourished, you’re set free to figure out what you want. What will you do next? You’re not yet financially independent, yet you don’t need to immediately find a new job. You can take the time to figure out what to do next, rather than rushing on to a new job that you don’t love either.

Your sense of independence has always been so key in your life. How do you reconcile that with being unemployed for a season? How do you reconcile that with your partner earning more than you ever have while it also being a success for him to be earning so much as it shows how valued they are in their organization?

The layoff took away your decision on when to leave the job. That bandaid was ripped away from you, by someone you don’t even know. The door is shut and gone forever. The job can no longer be fixed or improved or gotten better, no matter what your manager told you the previous week. Which window do you pick?

You try to be cautious about who you tell because everyone else has their own Feelings that they then want to discuss and this isn’t the time for you to manage everyone else’s Feelings. This is a time for you to get support. You shut down the person who offers you a job in their group like five times in a day. You ignore the person who outbursts their emotions about when they got fired. (Not the same thing, buddy.) Your parents try to tell you that having the mortgage paid off would be better than having cash in the bank and you call bull on that – liquidity is far more useful.

Life goes on. That self-care that you had been working on all year when you started to realize you hated your job? It, your partner, and your savings account carry you through this confusing time.

How I Use Stylebook to Manage My Closet

iPhone Screenshot 1 I’ve been using Stylebook since January to track and manage my closet. Last fall, I did an analysis of what I had in my closet and what I would like to have and identified where the gaps were. Not long after that, I got an iPhone and discovered the wonder of iOS apps, including Stylebook. I’m a huge believer of having data on your life and data gives you the power to make informed decisions, so I’m surprised I never really tracked my closet before. I probably had the mistaken impression that that was for “fashion snobs”, which I felt was not me.

Closet Organizing

The key data piece in Stylebook is importing your entire closet. This sounds like a lot of work and it definitely takes some amount of time, though I had recently done a huge closet purge when I started using the app, which made the import go much faster.

Categories

Their categories didn’t quite work for me, but you can really define your own categories. I’ve eventually shifted my categories to the following:

  1. Tops
    1. Three-quarter sleeved
    2. Long-sleeved
    3. Short-sleeved
    4. Cardigans/Hoodies
    5. Sweaters
    6. Sleeveless
  2. Bottoms
    1. Pants
    2. Shorts
    3. Tights
    4. Skirts (though I currently have none)
  3. Shoes
    1. Flats
    2. Boots
    3. Sandals
  4. Bags
    1. Cross-Body Bags
    2. Totes
    3. Clutches
  5. Outerwear – three subcategories to match the different types of jackets I wear in my region
  6. Dresses
    1. Fall/winter Casual
    2. Formal Dresses
    3. Spring/summer Casual
  7. Other
    1. Scarves
    2. Belts
    3. Hats
    4. Necklaces
    5. Swimsuits
  8. Athletic clothing
    1. Tops
    2. Pants
    3. Footwear
  9. Items that don’t currently fit – subcategories for each size
  10. Gone Items
    1. Tops

As you can see, I track pretty much all items of clothing in Stylebook except for pyjamas.

Importing Items

I add an item to Stylebook when I decide that it has a place in my closet. Many websites have pictures of their clothing on them and I use those pictures to use as the item’s picture where possible. When that’s not possible, I either take my own picture quickly and take a new picture later when I have some more time or I search for a similar item in Google images and try to find one without a person in it. The background is much easier to clear in Stylebook with its tools when it’s a distinct color from the clothing item and there are no pieces in the background layered over top of the item.

You can add a variety of fields on your items: colors, fabric, size, season, brand, status, price, and notes.

I didn’t use the Season field at first, until I learned how useful it is when I couldn’t figure out why I felt like I had nothing to wear in the summer. I went and added the Season field to all of my clothes and then realized I had about 2 items I would wear in the summer. That helped me be comfortable with going out and buying some new summer clothes.

The Notes field is completely freeform and I use it for a few purposes:

  1. I note when I added the item to my closet, i.e. “January 2016”. (This allows me to then search for “2016”to find all items added in 2016 or for “February 2016” to find all items added in that month – super useful.)
  2. I include the description of the item from the brand’s website.
  3. I include general notes about the item. For outerwear, I indicate a temperature range where I wear the piece. (This has really helped me to think consciously about when I would wear a piece of outerwear before adding it to my closet! One piece I bought this past spring was for a very specific temperature range that I realized I didn’t have a piece for and then it turned out that is a very common temperature range where I live as I have worn it 72 times since I bought it in April.)
  4. If I have multiple of the same item in the same color, I write “Multiple x3” to indicate how many I have.

Style Stats

I love the style stats in the app! You can see:

25 Most Recently Added

This screen shows the items you most recently added to the closet. I like to look at how aged these items are. The least recently added item in this list currently is from August 2016. I didn’t add anything to my closet in October 2016.

Never Used in an Outfit

This screen I don’t really care about. For me, it shows bags and jackets because I don’t usually include those in my outfits.

Never Logged on Calendar

This screen is pretty useful to see what items you added to your closet, but then never worn. If you’re someone who tends to buy items, leave the tags until you wear it, but then never actually wear it, checking in on those items here is really useful.

25 Least Worn

This screen is really motivational to me to make sure I’m wearing the items in my closet! If things stay in here for too long, I like to think about why they’re still here. Why am I not wearing the item? Did I buy it off-season and that’s why it’s staying in here for a long time of low usage? (I am not a fan of off-season buying.) Right now, here’s a selection of my list:

  • 1 day: A pair of hiking shorts that I bought because I was too warm hiking in pants. We didn’t have a lot of time to hike this summer, so I only wore them once.
  • 1 day: A dress I bought in September. The tights I would wear it with ripped, which has been a deterrent to wearing it again. I am replacing those tights though and then I’ll be able to wear the dress again.
  • 2 days: A gorgeous summer formal dress that I for some reason bought last fall that I had no reason to wear or buy and then it didn’t fit when it was summer! I’ll slowly get some wear out of it.
  • 2 days: A top I bought last December that is really cute and looks great on me that simply doesn’t fit into my lifestyle and weather. Plus it’s handwashable and I’m a tad lazy with those.
  • 2 days: Colored tights that are a little too out there in color for my more classic, subdued colored dressing.
  • 2 days: Colored tights that went perfectly with exactly one item in my closet that I sold on Poshmark because I never wore it. Thankfully they also go with something I bought in September, so I will get some wear out of them after all.
  • 2 days: A dress I bought for the many summer weddings we went to this year, but I only wore it to two of them because the other two were in the fall and I wore a different dress.

And so forth. If I can’t come up with a good explanation for when I’ll wear an item again, I add “Poshmark” to its description and try to sell it eventually.

25 Most Worn

This one is super fun. For me, it is full of bags, shoes, outerwear, cardigans, and scarves, since those are the items that are mixed and matched more often with multiple other pieces.

25 Worst Cost-per-Wear

I take a similar approach to the “25 Least Worn” items here. I have an ongoing project of wearing the items in this screen to get them out of here! It is really rewarding when they get out of here. Adding new items to my closet is horrible for this screen’s progress, which helps to not shop when I don’t need something.

25 Best Cost-per-Wear

This screen is so helpful for showing me just how much those expensive shoes, bags, or jackets really cost on a per use basis. I acquired a purse for $217 about two years ago now and despite not tracking its usage in Stylebook for most of its first year, it’s just about down to $1/wear, which is pretty good. It doesn’t show any signs of use and I will have it for a long time. It’s also shown me that the flats that I thought were “expensive” turned out to have far better cost per use statistics than some of the tops I bought that were way cheaper.

Archiving Items

Stylebook unfortunately doesn’t allow you to “archive” items, so I’ve developed a way to do this manually. When I think I should sell an item, but haven’t quite gotten around to doing so yet, I add “Poshmark” to the Notes field. I have three strategies here:

An item no longer fits

I have a category for when items no longer fit and I move the item there. I also update its status to “In Storage” and move the price from the Price field to the Notes field. (So that I still have the data easily accessible if it turns out to fit again.) This means that the “Value of my closet” field Stylebook tells me is the sum value of all of the items that currently fit in my closet. If I would wear the item if it fit again, then I keep it. Otherwise, I consider donating it or selling it and follow the other two strategies described below. This section is really helpful for when an item then fits again later and I can reverse the steps I described here to bring it back into my closet! It’s great for tracking items that are in storage somewhere else in your house/apartment too.

Deleting entirely

If an item that I’ve removed from my closet by donating or selling shows up in the Most Worn or Least Worn stats screens, then I delete the item entirely from the app. Before deleting it, I save its info into the iOS Notes app. I save the item’s picture, the picture of any looks, the price, brand, and notes fields, and indicate which days I wore it. I also delete the item from the looks that it was in, so that the other items will still show that they were worn that day.

Moving to another clothing category, e.g. “Gone items”

If the item doesn’t show up in the Most Worn or Least Worn stats screens, then I leave it in Stylebook and simply move it to another clothing category labelled “Gone items”. Like for when the item no longer fits, I mark the item’s status as “In Storage” and move the price to the Notes field.

Outfits Organizing

iPhone Screenshot 2

This is where you store all of the possible ways that you have worn or could wear the items in your closet! It is so useful to be able to see all of the different ways that you have worn an item before and then how often you wore it that way.

My lifestyle is so different from the default way the app was set up that it took me a while to figure out how to use this section. Initially I didn’t use it and just logged each item on the calendar every day I wore it. That was a lot of work so eventually I organized things into outfits. My categories here are always evolving and I rearrange them depending on the current season. This feature is really neat because then I can go back to an item’s page in the app and see all of the outfits I’ve made with it.

Categories

At the moment, the list looks like:

  1. Long-sleeved
  2. T-shirts
  3. Athletic
  4. Dresses, Fall
  5. Dresses, winter/dressy
  6. [Jeans] Size X
  7. Long-sleeved Cords
  8. T-shirt Cords
  9. Looks with Missing Items
  10. Dresses, summer
  11. [Jeans] Size Y
  12. Sleeveless
  13. Shorts

The [Jeans] Size X/Y categories are because I have the same pair of jeans in two different sizes and that’s my way of keeping the looks separate.

What goes in an outfit?

In my individual outfits, I include: dresses, tops, cardigans/hoodies, pants/shorts/tights/skirts, shoes, and scarves. I include vests in outfits and outerwear in athletic outfits, but otherwise, I don’t include outerwear in an outfit because it isn’t key to the outfit for me. Everyone is different on that. For me, outerwear is more dependent on weather than on the other items I’m wearing.

Calendar

iPhone Screenshot 3This is the meat and butter of the app really as it powers all of the statistics. This is where you log what you actually wore every day. I log everything that I wear outside of the house, with the first item being the primary outfit I wore. You can log clothing items or looks/outfits.

It’s really fun looking back on a previous month – you can really tell what the overall weather theme just by looking at my Stylebook calendar! It does show you your Most Worn and Best Value for each month. Most Worn is usually a bag or a piece of outerwear for me, so those are not particularly interesting. Best Value is usually the cheapest item I wore that month, so also not particularly interesting. I’m more interested in the long-term patterns.

You can add notes for each item you add to the calendar. I use this for a few purposes:

  1. I indicate if I wore an outfit to the gym so that I can easily search for all outfits I wore to the gym
  2. I indicate the names of the bride and groom for the wedding I wore an outfit to. This makes it easy to search “wedding” and find all outfits I wore to a wedding in my Stylebook history.
  3. I occasionally use other indicators like “dinner”, “hiking”, “walk” etc.

I occasionally will plan my entire week of outfits at once by consulting the weather and what clean items I have in my closet.

Packing

My system for packing clothes on trips used to be pretty lazy for how great I am at organizing so many other things. Now I use Stylebook to manage my clothing packing. I make a new packing list for a trip and add the expected weather, how many flights, and anything else to note (e.g. wedding(s)) in the notes field. You can add multiple outfits at once to your packing list and then once you’re done selecting outfits, it asks you if you want to add the missing items to the clothing section of the packing list. They have a packing list of all the items once you’re ready to pack that is organized by subcategory! I especially love being able to use Stylebook to figure out what is in my suitcase because I can never find anything. We’ll see if it manages to solve my overpacking problem though…

What is it missing for me?

  • Goals of number of items across the following categories: (1) summer dresses/tops and (2) fall dresses/tops.
  • Dates an item left and entered my closet so that I can search on these more easily.
  • Closet holes in list form – the app has an “inspiration” section, but I tend to make lists of things and then search later for “black flats” for example.

What have I learned?

  1. How to buy clothes that fit into my closet, rather than buying clothes that seem interesting
  2. I will never be the person who buys ten items of the same shirt in the same color and is happy wearing those every day.
  3. I do, however, like finding a shirt or dress I love and then buying it in multiple colors.
  4. 1-2 pairs of jeans really are sufficient. There is no reason to have any more. 1 pair of athletic pants per style and size is sufficient too (hiking shorts, hiking pants, and yoga crops).
  5. It’s okay to only use a particular bag in the summer or another in the fall – the long-term view is useful.
  6. There is a huge range between “being a fashionista” and “not caring about fashion at all” and I fall somewhere in the middle.
  7. If I don’t have enough clothes to wear in a particular season between laundry days, life is very stressful for me.
  8. I like clothes.
  9. I like having enough clothes to be able to not worry about whether I have clothes to wear that day.
  10. By being more conscious about my closet, my closet is much smaller than it used to be, while wearing a far higher percentage of the items in it.
  11. Stylebook is so great at helping me shop my closet and organize things in a way I never could by just staring at my closet.
  12. I really don’t need that cute dress unless it will fill a closet hole.
  13. Unless I have key accessories to wear an item (re: tights that I would wear with a particular dress), I simply won’t wear it.
  14. Based on my lifestyle, I really only need one formal dress per season and if I wanted more, I should use Rent the Runway over buying dresses because my cost per wear would be better that way.
  15. Women should stop making excuses for why they buy more clothes and instead, use the Stylebook app to manage their closet.
  16. More expensive clothes don’t always have a better Cost Per Wear than cheaper clothes and vice versa.
  17. Clothing is something I am willing to spend a reasonable amount of my discretionary income on, so long as it is conscious.

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?

Liquidity.

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?