June Square Up (no mortgage payment edition)

Today is my first paycheck day with no mortgage payment.  Woohoo!  I had to pay for two big items though (home insurance and flight tickets), so that slowed things down.  I have $4367 in checking, less $929 in flight costs.  That leave $3438.  First half of June expense is $700 +$250 food money.  About $1000.  In theory that means I should be saving about $2400.  That will leave me with $2700 in savings once I factor in the money already in my savings account.  Roughly 2 months of emergency savings.  June 15 should be much better, b/c I won’t have any of this random $1000 spending bullshit.

US Household Debt

https://www.thepennyhoarder.com/smart-money/us-household-debt-rising/?aff_id=4&utm_source=facebook&utm_medium=paid&aff_sub3=billionsowed_0527conv_D2

First, the news: Total U.S. household debt climbed to $12.73 trillion in early 2017, pushing today’s debt level higher than the $12.68 trillion peak in 2008, according to the Federal Reserve Bank of New York.

Key differences exist between now and 2008, reducing the likelihood of another financial meltdown. The main thing: More of today’s debt is held by older, more creditworthy borrowers compared to 2008, according to the Fed.

“The growing debt level shows that many of the millions of Americans who struggled during the recession have sufficiently repaired their credit to qualify for loans,” The New York Times reports. “It also suggests a rising optimism about economic growth among banks and other lenders.”

While people in 2017 are handling their mortgages and auto loans better — with fewer foreclosures and defaults — the fact is that student loans are fueling the rise in debt.

Relative Rent vs. income

The blue line is the “rent” – lost money I’ve paid into housing over the years.  The red line measures my housing cost as a percentage of the first salary I was ever paid, to show how much is being frugal vs. earning more money.  The yellow line is not a percentage – it just shows the relative change in my salary over the same period of time.

Lessons:  Room mates reduce costs.

relative rent vs income.PNG

Carry Cost

https://en.wikipedia.org/wiki/Carrying_cost

In marketing, carrying cost, carrying cost of inventory or holding cost refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost, and inventory costs related to perishability, shrinkage (theft) and insurance.[1] Holding cost also includes the opportunity cost of reduced responsiveness to customers’ changing requirements, slowed introduction of improved items, and the inventory’s value and direct expenses, since that money could be used for other purposes.

AKA, my yo-yo collection is probably costing me a few hundred dollars a month.

Bad Mortgage Advice

Generally I like BeatTheBush, but this video offers some really bad advice.

He claims:

  1.  People can afford a mortgage that is 500% of their pretax income
  2.  People should take out a 30 year mortgage.
  3.  Affordability is determine by working backwards from income.

Let’s lay out his assumptions.

$50k pretax income

$250k 30 year mortgage

$312.5k home value

Take home pay on $50k is $3008 / month.

At 4%, mortgage payment is $1194.  That alone is 40% of take home pay.  But wait!  Here come taxes and HOA.  My HOA is $320, and the condos sell for much more than $312k, so let’s use that.  The property tax is about 1.25% of value, so about $326.  Then we have insurance at $83.  This gives us a housing cost of $1923.  64% of take home pay!  That is wacky.  I don’t think the bank would even approve that, b/c it would be 46% of pre-tax income, way beyond the 28% they allow.

Dave Ramsey recommends 25% of take home pay on a 15 year.  What would this mean for our $50k guy?  $750 a month for mortgage, taxes, insurance, etc.  Obviously in this case, the bay area is a stupid place to live unless you have some very promising raises in the future and you’re ok w/ living in a small cheap rented room.

I’ve discussed this so often before, but it’s worth repeating yet again:

  1.  The amount you spend on housing may be the single most important factor determining whether you become wealthy/retired/financially independent.
  2. 20% of take home pay is the good life.  10% is the fast track to paradise.
  3. Affordability depends on your net worth goals, not your income.

This is what frustrates me about the personal finance education market.  People spew information but don’t really think about if it’s going to make the listener wealthy.

January 2016

I reviewed some of my early posts about the mortgage payoff.  The goal is to become familiar with the arc of challenge.  At first is daunting, then it is slog, and then! Suddenly, it is over.

The feelings of future challenges can feel more routine, and I can have more emotional separation from the slog period, and feel better about the whole thing.  Some of my strategies worked and some didn’t.  On balance, I hit my target.

I even found an early post from 2015 on the MMM forum about paying off the mortgage.