Friday, May 17, 2019

America - We have a problem. And it’s sitting in our driveways

On a recent date with my wife, she commented that she is driving one of the oldest cars in the neighborhood. She didn’t say this from the perspective of wanting an upgrade, more of an observation about the affluence of the area that we live in (or at least the appearance of it).

At 12 years old and 150,000 miles, her Expedition has certainly been around a while, but “old” isn’t the first thing that pops into my mind when I look at it. What I think of is how great it is to have a reliable vehicle with no car payment.

A recent headline shared that the average car payment in the US is now $551 over 69 months. With average household income just over $60k/yr, that means many households have more than 10% of their entire income going towards a car payment. Many people don't even keep their cars for 69 months, resigning themselves to having a car payment as long as they live.

Over the past several years, we've been fortunate to see our net worth grow quite quickly. While a relatively high income has certainly helped, just as important has been the way in which we've controlled our expenses. Behind housing, transportation related expense is often the next largest, but by not having car payments our transportation related costs have been a fairly small percentage of total income.

I've seen some pretty crazy justifications for car loans, but nothing will convince me that it's a good idea for me. Like the friend who couldn't afford a new set of tires, so instead just traded in her vehicle for a brand new one since the monthly payment would be less than 4 new tires. Seriously.

Or how about my coworker who brings in more than $200k per year and complains about still having student loans 12 years after graduation. Might it have something to do with having 3 car loans, and a self-proclaimed inability to keep a car more than 50,000 miles? Hope you like the Mercedes, buddy.

Earlier in our financial journey (2006 and 2007), we borrowed $20k and $14k for vehicles. While we had car payments it seemed that we were only treading water financially, despite having a household income of around $100k. In 2008 we sold the more expensive of the two, opting to be a one car household, and payed off the remaining car in February of 2009. We haven't had a car payment in over 10 years, and in that time have purchased 3 cars, all with cash.

With that background, here are some of the top reasons I love living without a car payment:

1. Lower Monthly Recurring Expenses - seems obvious, but it's freeing to be able to keep more of each of my paychecks and to not be playing catch up for purchases already made. Your income is the fastest way to build wealth, if you're able to actually save/invest it.

2. Option to Pay for Collision Insurance - since no one has a lien on my vehicles, I can choose whether to pay for collision insurance (often a very expensive addition) or not. If I had a loan, I wouldn't have that choice. We keep collision on my Lexus since I drive it more often and I don't want to run the risk of using up our cash to replace it if something happened. My wife's vehicle is only driven ~5,000 miles per year and has a low replacement value, so we save several hundred dollars per year waiving collision insurance.

3. Unlimited Miles - Although my wife doesn't drive much, I drive around 20,000 miles per year. The typical car lease includes only 10,000 to 15,000 annual miles before they charge you more per mile. I have friends who rent cars for road trips since it ends up being cheaper than paying for extra miles on their lease. We used to do a lot of fairly long road trips, and never once had to think about whether we had enough miles.

4. Easier to Budget for Repairs - even though cars tend to be more reliable today than they were 20+ years ago, things still break every once in a while. If you're paying a car payment, it's sometimes difficult to have the extra expense beyond the car payment itself.

5. I'll Never be Upside Down - It's been reported that as many as 1/3 of new car purchases include a trade-in with negative equity rolled into the new purchase. With people not keeping their cars long enough to even get equity in their vehicle they are further committing themselves to having a car payment for their entire lives. If I don't have a car loan, I'll never have to worry whether I'm upside down.

Wednesday, April 17, 2019

March 2019 Net Worth Update - Up to $916k

March was another strong month of net worth gains for the DIY$ household. With the S&P 500 up 1.79% and a hefty mortgage payment, we were able to add $12,578 to our net worth, bringing the total up to $916,553.

CASH

We had a lot of different expensive things come up in March so I was pleasantly surprised to see our cash balance only drop by $360. In addition to our trip to Paris, we bought a new dishwasher after our old started leaking, and a couple new tires for my car. 

Another exciting thing that happened in March is that I received a promotion I've been working towards for some time now. This comes with a pretty hefty pay bump that will help our cash situation once we get through our current #1 financial goal of paying off our house.

INVESTMENTS


Our investment balances continue to be allocated primarily to US stocks and we made no changes in the month. We still haven’t seen all the bills for a hospital visit in February, which will be paid from our HSA that we include in this balance.

HOUSE/MORTGAGE 

We knocked $3,200 off of our mortgage balance in March and our home value continues to hover just under $500k. My new paycheck amount went into effect mid-month, so we are waiting until April to bump up our standard payment since any extra income we get is going towards our mortgage. We have now officially paid enough that we have saved 239 payments, nearly 20 years off of our 30-year mortgage!


A house down the street from us just sold for over $550k and for the first time in a while there are no homes for sale in either our neighborhood or some of the other similar neighborhoods nearby. This is good sign and gives me comfort that the estimate from Zillow is in the ballpark.

When we finally pay off the house, we have promised our kids that they will get to go on a cruise with us (our last few cruises they were left with other family members). We keep a jar of 'gems' in the living room where each gem represents $1,000 of outstanding mortgage balance. As we make payments, the kids get the help move 'gems' from one jar to the next, and we've now reached the point where there aren't a lot of gems left to move. Naturally, the kids have begun to ask about a cruise, so we've started looking into options.

Barely any gems left...




Wednesday, April 3, 2019

Paris for under $1,000

One thing to know about the DIY$ household, is that we love to travel and see new places and things. Each year we try to have at least one big trip with the whole family and one trip without kids. This past month, we were lucky to be able to take a trip without kids to visit Paris.




After the trip as we began reviewing our expenses, I was surprised to see how inexpensive the trip was. Take a look at the details:




That's right - our trip to Paris was less than $1,000. Obviously one glaring omission is the cost of flights (we didn't swim there).  I'm excluding though since we travel-hacked the flights and didn't have any direct cash costs. Were it not for that, our costs for the trip would have been much more (and we may have felt the need to stay longer than the 3 nights we did). The point is though, that traveling abroad really doesn't have to be that expensive. We've spent just as much or more on trips within the U.S. that weren't nearly as memorable.

HOTEL

I originally wanted to use Hotel points for this trip, but we had to use the last of our hotel points over Christmas. This ended up being better though since any of the Marriott properties we could have redeemed at had high redemption costs and weren’t located near where we wanted to be. We ended up staying at a hotel we found on Booking.com for the 3 nights we were there. The hotel was only ~$150 per night and was nicer than places I've paid >$200/night for in the U.S.

Our flight landed in the morning and we were able to drop off our things at the hotel before heading out to explore the city. The location was great (1 block from the Louvre, 1 block from bus/train station, and right near several bakeries/restaurants), allowing us to have a home base for days where we needed a break from all the walking.

FOOD

I was surprised to see how little we spent on food, but it’s also not surprising since food isn’t the highlight of a trip for us. It helps that I really enjoy bakeries and street vendor food, both of which are pretty cheap (Nutella Crepes...mmm). We also like trying hole-in-the-wall places that appear popular with locals and even found a really good Indian restaurant. 

The fancy, expensive restaurants that take 3 hours to eat a meal that doesn’t even sound very good just aren’t my thing so we went with options that were more to our liking. It was nice that I never really thought about what food cost, we just ate what we wanted, when we wanted, and it ended up being pretty cheap. 

MUSEUMS

This is the real reason we went to Paris. We love seeing old buildings and art and Paris has a lot of that to offer. On this trip, we paid for admission to pretty much everywhere we could except for going up the Eiffel Tower (the timing didn’t work out and I don’t care for heights) and still only spent $134. In addition to the Eiffel tower, we were able to see Versaille, the Louvre, Sainte Chapelle, Notre Dame, and Palais Garnier

Of all the places we paid to get into the most expensive entry fee was around 20 Euro, which is pretty incredible considering that there are elevator rides in NYC that cost twice that. We packed about as much as we could have in the short time we had, but will definitely have to go back again since we only had time for the main attractions.


TRANSPORTATION

When we travel internationally, I love being able to use the City Mapper app. Paris has great public transit, and the app helped make sure we didn't take a wrong turn or get on the wrong train. Our most expensive train ride was from the airport, but once we got into the city we were able to walk or take the bus most anywhere we wanted to go. 


My passport is about to expire and I took a little pride in seeing the customs agent having to search for a blank spot. Some places we've visited in Europe have been over-rated, but Paris I think is fairly-rated. It lives up to the hype and I'm sure we'll be there again. It's worth always remembering that with some careful planning, visiting Europe doesn't have to be all that expensive.

Saturday, March 23, 2019

February 2019 Net Worth Update - Up over $900k

February was a great month for us financially. We got our taxes filed and refund received, and also received an annual bonus that was a bit larger than the previous year. Combine that with good stock market performance, and our net worth jumped up by over $45k to $903,975. This is the best monthly increase we’ve seen since we started trying monthly, and a close 2nd for highest income month ever. My first years salary after college was less than $40k and now we’ve made more than that in a single month. Compounding sure is a beautiful thing.

CASH

Thanks to an annual bonus and our tax refund coming quickly, we had a lot of cash come in the door this month. Rather than using this to boost our cash reserves we chose to keep our cash balance relatively flat to where it has been for a while now. It’s only up a little bit since we also had a trip to Paris planned for early March so needed some extra cash for parts of the trip that hadn’t already been paid for.

INVESTMENTS

The S&P 500 earned nearly 3% in February. Add that to our larger than normal 401k contributions in February because of my annual bonus and our investment accounts grew by 5% for the month. 

Also included in this total is our HSA account, which will be tapped in March for some withdrawals as we had one of our kids visit the ER in February and haven’t yet seen all the bills. Everyone is healthy now and the plan is to pay for the visit from funds in the HSA. We keep enough in the HSA to cover our annual out-of-pocket maximum, but will need to replenish the account for next year.

HOUSE/MORTGAGE

Nearly all of our cash flow went towards paying down our mortgage and we’re down to just $60k. We won’t be able to make any huge payments like that again this year, but we will be able to get very close to paying it off by the end of the year since we are paying down at least $3k per month in normal months. No major home repairs or projects in February, but I expect we will have a few as we get into spring. Our major (expensive) projects are on hold until the house is paid off, but that milestone is within sight.

Thursday, February 28, 2019

January 2019 Net Worth Update - Up to $858k

January was a great start to the new year for the DIY$ household net worth. The market recovered from the slump it took in 4Q and we ended up growing out net worth by $35k up to $858,726. This isn't our best month ever from a monthly increase or total net worth, but it's close for both.

CASH

Our cash balance stayed relatively flat, but still is in the range that we're comfortable with. As much as I'd like to see this higher, it's high enough that I don't worry, and I'd much rather have extra cash going towards our mortgage. 

INVESTMENTS

Just like anyone who remained invested throughout January, our investments performed really well. Our allocation is still nearly 100% equities with an approximate 80/20 domestic/international split. Our gain of 8.7% was primarily market driven as we only added our normal monthly amount from 401k contributions. 

HOUSE / MORTGAGE

Our mortgage payment is around $1,800/mo but we are currently making payments of $4,000. After interest, taxes, and insurance this allowed us to knock another $3k off of our mortgage balance and get the balance down to just $85k. We paid off about $100k in 2018 but sadly won't be able to make the same level of reduction in 2019. We do expect to be able to get it fully paid off in 2020 and I find myself day-dreaming about making that final payment.

Tuesday, February 19, 2019

Reader Question - Pay off debt by refinancing mortgage?

I was recently asked the following question:

Over the past two years with a $120k income, I’ve paid off $40k in debt and still have $90k in credit card, student loan, and car loans left to pay off. I’ve recently gotten more serious about debt payoff and should be able to pay off the remaining $90k in the next 12-18 months as I get married and combine finances with my fiancĂ©. I also have $120k in home equity that I’m considered cashing out through a refinance to just be done with debt. Should I refinance my home to pay off debt?

Here was my response:

Short answer: No, I don’t think you should do this.

First off, great job buckling down and getting serious about paying off debt. Your previous rate of paying off $20k/yr was pretty slow considering your income. Paying off debt in one fell swoop feels nice, but in this instance all you’d be doing is moving the debt not actually paying it off. Given your lack of debt payoff intensity to this point, I’m also not sure you won’t go back into debt again once you feel like you’re debt free (even though you’re not).

Another reason I don’t like this idea is that you’re putting your house at a greater risk of foreclosure by increasing your payment, and reducing your equity. I’m not saying that will happen, but if you default on your credit cards, there is no collateral for the banks to go after. Likewise, if your car got repossessed that’s better than not having a place to sleep. Student loans have an advantage too in that if you die, the outstanding balance is forgiven. If your student loans shifted to your mortgage, that’s like giving away a free life insurance policy.

12-18 months really isn’t that long of a time to be completely debt free, I would just make sure that you have good discussions with your fiancĂ© to make sure you’re on the same page with this financial plan. This has the potential for a lot of backfiring if not properly communicated. After paying off debts, you’ll be shocked at how quickly you’re able to build wealth with such a high joint income and no payments. Having financial goals to work towards together makes for a great foundation in a new marriage.

Monday, January 21, 2019

December 2018 Net Worth Update - Rough Ending to a Good Year

December was an ugly month in the market, and our portfolio (primarily comprised of index funds) was not immune. We lost all of Novembers gains and more, ending the year with a net worth of $823,046.

Looking back to the overall change for the year, things were pretty good. Our net worth grew by nearly $80k, primarily due to aggressive principal reductions on our mortgage and moderate appreciation in home value. 


CASH

Our cash balance crept up again in December. We had a relatively simple Christmas, including a trip to visit family and attend a wedding. We were able to use up the last of our Marriott rewards points for a free 4 night hotel stay, so the travel part was pretty inexpensive. 

Excluding travel, we spent less than $1,000 on Christmas gifts and everyone was very pleased. I didn’t realize until after we had put all the gifts together but most of the kids gifts were books and Legos, mutual favorites of parents and kids in our home. 

INVESTMENTS

Our investments were down quite a bit in December and slightly negative for the year. We withdrew ~$50k towards the end of the year to put towards our mortgage and added ~$25k throughout the year which is roughly what we lost. Our investments are still >90% in equity index funds, with a mix of US and International.  

HOUSE / MORTGAGE

Nothing too outside of the ordinary in December. We crossed below the $90k threshold on our mortgage balance and continue to be aggressive on future payment plans. We have a lot of big DIY home projects we’d like to do but are put on hold for the next year or two while we knock out the last of the remaining mortgage. 

In 2018, our home repairs included 2 HVAC blower replacements (different units), 1 new microwave, 3 pallets of sod, a new garage door system, and a new garbage disposal. In total we spent just under $5k on home repair/maintenance, which was actually down $5k from the previous year. For 2019, it won’t be $0, but there are definitely some big projects planned for 2020 and beyond. 

Tuesday, January 8, 2019

Damage from poor maintenance isn't your insurance's fault

If your car engine dies because you didn't change the oil, should your car insurance step in a fix your engine? Of course not. Then why would homeowners insurance be any different?

Like many neighborhoods these days, ours has a neighborhood Facebook page. The most common uses are for announcing activities, alerting neighbors of suspicious activity, giving away things, or recommendations for various services. 


A recent thread started out right up my alley, with someone asking for help on how to handle a simple home repair and a picture. In this case, a couple of small tiles fall off the wall in their shower and it looked like they had a little bit of mold under where the tiles were. Nothing too serious, and to be expected in a ~20-year-old home, especially without proper maintenance. 


We have a similar shower and it was pretty clear that this and any further damage could be avoided by simply installing a bead of 100% silicone at the base of the shower pan where it meets the tile instead of relying on grout. Whenever anyone steps into the shower pan, it bounces imperceptibly. This slight movement is absorbed by silicone, but grout will crack and allow openings for water to seep in, causing damage over time. 


We shared some quick tips on how to repair (both quick fix or more thorough instructions) and felt good about helping someone out. What blew me away were the other comments that came after. No fewer than 5 other commenters saw the picture and immediately said to call their insurance to submit a claim. Really?!? 

A DIY repair for this issue would be under $100 and complete in just a few hours. Even if you hired it out, it's cheaper than your typical $1,000 deductible on homeowners insurance. This also begs the question -- "If your home is damaged due to poor maintenance, should that really be part of your insurance coverage?


I think this scenario speaks to a few things that are concerning to me: 



  1. Personal responsibility. Part of the job of being a homeowner is to take care of your property. If you don't, guess what? Stuff breaks, and it’s your fault. 

  2. Financial responsibility. You've probably read that most Americans couldn't handle an unplanned $400 expense, or that 25% of all households making over $150,000/yr are still living paycheck to paycheck. Despite being a slightly more expensive neighborhood that I thought would price out folks that couldn't afford small repairs, we're clearly not immune to this same behavior. If we have that many people saying they would call their insurance for a minor home repair, there’s a possibility that some of them would do so because they don't have the cash for a repair.

  3. It blows me away how little people are willing to even attempt to do themselves. Sure, its easy to just have ‘your guy’ take care of things like home repairs, yard work, housecleaning, etc. but this reliance on others really adds up. I once read a rule of thumb that for each major task you outsource from your life, you should have $75,000 in annual income for it to make sense. I’m not sure if this is exactly the right way to think about it, but it rings true that outsourcing comes at a cost.