I Got An Extra $1,000!

I recently have heard folks talking about what they would do with some unexpected additional money. J Money asked his readers “What Would You Do With an Extra $1,000?” I generally don’t spend too much time thinking about these type of hypotheticals, but this week it became my reality. I got a call out of the blue informing me that a $1,000 check was on the way to me!

This clearly isn’t something that happens frequently, and sadly isn’t something I’d recommend anyone try to replicate. There is a story with a lesson that goes along with this check.

Rewind to 2014

In the second half of 2014, we were doing a lot of home renovation projects. We had a large bonus room we were converting to a bedroom and adding a bathroom to it. At the same time, we were also remodeling an existing bathroom. The project started in last August and by early December we were getting close to being done. Normally we’re a bit faster, but my wife had a baby in this window and she’s the handier one in this duo.

Part of the bathroom work involved moving the toilet to a different part of the bathroom. Shortly after the toilet was installed in the new location, we went on a week-long vacation to introduce our new baby to our family. We had a great time on the trip but when we got home, we were greeted by water running out of the garage. Not good.

The brand-new supply line for that newly repositioned toilet sprung a small leak. Normally this wouldn’t be a big deal, but it must have gone on for several days. This was also an upstairs bathroom, right above the kitchen, and when I entered the kitchen the ceiling had fallen to the floor. Welcome back from vacation, right?

The Cleanup

This was a pretty emotionally draining time for us. We had a newborn, and weren’t getting much sleep already. We were so close to having our house put back together and then this. Now we had to rip out carpet and worry about replacing warping wood floors. We had some money saved up, we just didn’t really want to spend it on all these additional projects. I spent that first night and the entire next day ripping out soggy carpet and trying to dry things out.

Submitting an insurance claim wasn’t actually my first thought. After all, I was the one who installed the toilet supply line. What if I did something wrong and they said they wouldn’t cover the damage? I went back and forth for a day or two before a co-worker reminded me that this is exactly why you have insurance. It doesn’t matter whose fault it is, so long as it was an accident. We called our insurance and they stepped in were a huge help.

If you’ve never had to deal with a homeowners insurance claim, here’s how it goes. They first bring in a restoration company. In our case, because the water was clean water and not sewage, the cleanup was mostly just drying things out. This involved several dehumidifiers and fans placed throughout the house running 24/7 for almost a week.

Our kitchen was a pretty much unusable as they tried to salvage the wood floors by sucking out all the water. This was our kitchen for a week or so:

The Repairs

Once our house was completely ‘restored’ and dry, we were ready to start actually fixing things. The adjuster had come through and identified the cause and everything that had been damaged. He ran some fancy software that quickly spit out an estimate of how much it would cost to repair/replace everything.

In pretty short order, we got deposits to our bank account and were able to start putting things back together. We ended up spending a little bit more than our insurance gave us since we upgraded some things from what they were before the damage. For example, we upgraded one room from carpet to hardwood floors, and ended up replacing the majority of our carpet instead of just the section that was damaged. As much as possible, we did work ourselves. Placing rolls of insulation in the floor joists in the crawl space is simple and only took three hours, but I saved $500 doing it myself.

Our insurance policy had a $1,000 deductible, meaning we had to pay $1,000 before the insurance kicked in. I didn’t actually have to pay anyone, the insurance just paid us $1,000 less than what they estimated the damage to be. As part of the adjuster’s research, he also took the faulty braided supply line with him to send to a lab to see what went wrong. At the time, we were told that the insurance company was going to attempt to recover costs from the manufacturer if they found it to be improperly made. If they were successful in getting anything back, the first $1,000 would go to pay us back our deductible.

3 Years Later

I don’t talk to my insurance company often. Whenever I did, I would ask about the status of getting this $1,000 back. A few months after the incident, I was told that it was tied up with lawyers in a class-action suit. Having been involved in other lawsuits at work, I knew this meant it would take a long time.

Maybe 18 months after the event, I was told that the company that made the supply line had gone bankrupt and the odds of recovering anything had gone down substantially. At that point, I mentally wrote it off.

Imagine my surprise then, when my insurance company called me the other day and asks how I wanted to receive the payment. I was like, Cash Please!

Image result for wayne's world cash gif

So Now What?

So, I’ve got an extra $1,000 I wasn’t expecting. Now what? For me, it’s pretty simple. I’m not going to go out and buy anything I wasn’t already planning on getting. If I want something bad enough, I fit it into the budget and I buy it. I don’t need an excuse of having extra ‘found’ money to do so.

In this regard, I like Dave Ramsey’s baby steps, which says that you focus on whatever step you are on in the wealth building process. We are on baby steps 4, 5, and 6 (save 15% towards retirement, save for kids college, and pay off the house early), but are taking a quick breather to beef up our emergency fund (baby step 3). We have enough cash in our emergency fund for any typical emergency but want to make sure we have enough to buy a new car on top of our normal emergency fund amount.

All that to say, this money is just going into our savings account since that’s our area of focus. Once that’s beefed up enough, every extra amount goes straight to the mortgage.

So that’s my recent surprise and my boring plan for what I’m doing with it. I hope you can find some extra money, too, I just don’t recommend this path for finding it.

9 Things We’ve Done to Save Money (Some crazier than others)

We’ve done some crazy things in our day to save money. Some were done out of necessity at a specific time and others have become ingrained into our lifestyle. It’s easy for me to downplay those that are a part of our firmly established routine and to think of them as nothing special. Yet, as I interact with and see the behaviors my neighbors, co-workers, or family members I am reminded that some of the things we do aren’t ‘normal’.

These habits have helped us grow our net worth. An even greater benefit is that they have greatly contributed toward our overall sense of contentment. Some of these we don’t do anymore, but some we do. So in no particular order, here are 9 things we do (or have done) to save or spend less money.

Garage Sales

We recently hit up a nearby garage sale where there had to have been $10,000 worth of kids clothes. Everything was a high-end brand name and a lot of things had never been worn. By garage sale standards, the prices were a little high, but for $50 we got what would have cost >$250 in stores and everything is basically brand new. If only my feet were a little smaller, I could have got some handmade Italian leather shoes for just a few dollars. Our entire neighborhood isn’t so flashy, but having neighbors with expensive clothes and flashy cars is a natural byproduct of living in a neighborhood like the one we do. Their waste is our gain.

On the other side, we try to be really selective about what we bring into our home and to shy away from short lived “trendy” items as to not be having the need to have garage sales of our own.

Get Multiple Quotes

In our house, we do a lot of home improvement projects. Lately, it seems that we’re about 50/50 in terms of doing the work ourselves or hiring it out. (Rules of thumb: We always hire out drywall – it sucks. We never hire out painting – it’s easy to do ourselves and my wife can spend the time to get it to her exacting standards. She’s not been impressed with many “professionals” work).

Sadly, there are some real boneheads out there amongst residential subcontractors. Take, for example, the guy we had come to our last house for a drywall estimate. We were finishing our basement and had done all the work ourselves up to the point of drywall. He walked around the basement, saw what needed to be done, leaned back with his thumbs in his belt loops, and after taking a deep breath pronounced “Yup, I’ll get ‘er done for $3,500”. No measurements were made, nothing was written down, just 3-minute walk through and a 30-second mental estimate. The contractor who got that job actually did some math and did it for just under $2,400. Always get multiple quotes.

Thrift Stores

To this day, we have spent very little on brand-new clothes for our four children. We only really buy clothes for our oldest son and daughter and the other kids get hand-me-downs. Most of the clothes we buy for them come from consignment stores or thrift stores.

(Side note – in our town we actually only have donation centers for Goodwill. We have to go to the next town over to be able to buy stuff from Goodwill. Our town is definitely the demographic of Goodwill donors, not shoppers).

Nowadays it seems that most families don’t have more than two children, so there are often plenty of perfectly good clothes that kids outgrow where there isn’t a sibling to hand them down to. Most of what we buy at thrift/consignment stores is for the kids, but one of my favorite ties is a Brooks Brothers tie I got for $1 at Goodwill.

Packing Lunch

When we were getting out of debt and paying our way through graduate school, I think I probably went several years without going out to eat for lunch at work. Not only that, but the lunches I did eat were pretty pathetic. I think I’ve eaten enough Michelina’s frozen lunches for a lifetime. We’ve also packed meals for road trips and flights to avoid the need to purchase food on the go.

Even now that I’m no longer paying for grad school I continue to pack my lunch, but now I eat a lot healthier. I do eat out at work on occasion now, but when I do I try to make it a networking lunch and use it as an opportunity to maintain relationships with people I don’t work with every day. Making this sacrifice early in my career had a compounding effect on our net worth and ability to save, but now has become a money saving habit.

Carpooling

When we were both working, my wife and I carpooled to work for over two years. We had sold our second vehicle and worked close enough to each other that we didn’t have to get a second vehicle or pay >$1,000/yr for a parking pass at her job.

Currently, I have a couple of co-workers who live nearby and have carpooled with them, but it’s not a regular occurrence and it’s more a convenience thing than a cost savings thing when it does happen.

Takeout vs. Dining In

For years, we almost never ate out to ensure having enough money to pay for grad school. Now, we still don’t eat out much, but it’s because we have four kids and taking them all to a restaurant just sounds like it’s own special form of hell. But we still want to eat good food without making it ourselves every once in a while. Our latest tradition is that I will pick up take-out on my way home each Friday.

This isn’t really an area of saving money, but I have learned that at most restaurants the folks that handle take out orders get paid a little bit more to compensate for not getting tips. Knowing that, I have no problem skipping the tip on a takeout order. Boom – 15% savings. My kids are picky eaters too. Unless we’re going to a pizza place, any restaurant food we buy for them is a waste of money.

Avoid Tolls

There are certain cities where toll roads are just a part of life. Just driving into Manhattan or crossing the Golden Gate Bridge will cost you a decent chunk of change. This can come as a surprise to folks visiting from smaller parts of the country where all roads and bridges are free, but to locals it’s just part of living in a big city.

One city that I’ve found particularly egregious for tolls is Orlando. The worst is the one toll booth that you HAVE to go through to get in/out of the airport. Or do you? On your favorite navigation app, you can simply turn on the ‘Avoid tolls’ option and find ways around those pesky tolls. Note that this isn’t always recommended since your time is worth something too. One time we were driving from Orlando to South Florida and decided we wanted to save the ~$12 toll and avoid the Turnpike. We made it, but it probably tacked on 90 minutes to our trip. Next time we’ll just pay the toll.

The Orlando airport toll takes just a couple of minutes to avoid and doing so gives me a sense of accomplishment, even though it only saves $0.50. Note that this isn’t always recommended since your time is worth something too. One time we were driving from Orlando to South Florida and decided we wanted to save the ~$12 toll and avoid the Turnpike. We made it, but it probably tacked on 90 minutes to our trip. Next time we’ll just pay the toll.

Learn to Sew

This is an area where all the credit goes to my wife. I’m not talking about making your own clothes. I know people who do that, but the cost/benefit doesn’t make sense for us. For me, I regularly will need buttons reattached, hems to be redone, or even holes patched in my pants. My wife has taught herself how to sew and now I don’t need to go anywhere to get clothes repaired.

It blows me away that I meet people who won’t even attempt to repair clothes. It’s just seen as easier to replace something that only needs a simple fix. We draw the line at socks. If my socks get holes, they go in the trash.

Wal-Mart Parking Lots vs. Hotels

Here’s one that I haven’t seen anyone talk about before. Now, it’s been a few years since I’ve done this, but I’ve taken a few cross country road trips with only me in the car. When I’m by myself, I hate spending ANY money on hotels. All I really just need a place to lie my head down for a couple of hours before getting back on the road. Enter the Wal-Mart parking lot.

Did you know that most Wal-Mart parking lots allow for overnight RV and Semi-Truck parking? Regular cars are allowed too. It isn’t often the best nights sleep as the semi trucks leave their engines running and the flood lights stay on all night, but it’s completely free. I’d compare it to sleeping on a plane, which I’ve done more times than I can remember. My favorite part is that I can walk in at any time of the night if I need to brush my teeth or use the bathroom. In the morning, I grab a donut, a banana, and am back on the road before the crowd.

I’ve even met some cool people doing this. The most memorable time was driving through South Dakota and sleeping at the Wal-Mart closest to Mount Rushmore. This was near the time of the huge Harley Davidson rally in Sturgis and there was a caravan of RV’s and motorcycles that had formed a circle in the parking lot and they were up all night having a good time.

Note: this would never fly if I was with my wife and kids. I’m not sure I’d suggest my kids do it either, but I’d probably do it again.

 

There are a lot of other things we do that didn’t make this list. At the end of the day, I think it all comes down to being deliberate in your spending. You’ll be served well if you find ways to do things yourself rather than automatically hiring someone.

Overreaction leads to Underperformace

Have you ever heard of the Dalbar study? This company does an annual study that looks at the impact of investor behavior on returns. What they’ve found is that over time not only do mutual fund investors underperform the market, but they also underperform the underperforming mutual funds. Wow…that’s a lot of underperforming.

This underperformance is attributed to picking the wrong mutual funds and getting in and out of the market at the wrong times. Since it is impossible to time the market, I would argue that it is always the wrong time to be getting out of the market.

Here’s an example of a chart Vanguard put together using data from the Dalbar study:

source: Vanguard

What do YOU do when the market gets scary?

The answer to this question should be “nothing” or “buy more”. Sadly, research shows that many people do exactly the opposite. Selling everything when things are scary can feel good and provide a sense of safety in the short term. These same people will buy back in ‘when the coast is clear’, which typically means prices are much higher than when they sold in the first place.

For your long-term investment strategy, sitting out of the market is the one big mistake that you can’t afford to make. With craziness looming in North Korea and other parts of the world, it would be easy to self-justify getting out of the market right now. But when do you get back in?

Do you remember how Greece’s economy was going to destroy global markets? How about the fiscal cliff and government shutdown? Oh, and let’s not forget about the debt ceiling or the flash crash. For eight years the market has continued to rise, quickly recovering from any number of fear-inducing events. Over longer periods of time, short-term declines aren’t even noticeable.

It can best be summed up by a chart I have framed on my desk at work from Behavior Gap.

The Value of a Financial Advisor

I am a Do-It-Yourself investor. I think most anyone can successfully manage their investments without a financial advisor. Financial advisors will point to the chart above and argue that you need to have your accounts professionally managed to protect you from yourself. While there may be some truth to that, I think all you need is someone who can talk you off the ledge.

Even though I am a DIY investor, I have a financial advisor. He is someone I used to work with and trust his judgment and integrity. He doesn’t manage my accounts, but I get free dedicated access to him because of the size of my accounts. We talk a few times a year and he helps validate that I’m still on track to reach my goals.

If I ever were considering selling everything, he would (hopefully) be able to talk some sense into me and prevent me from making that huge mistake. The real value of a financial advisor is when they can remind you of your long-term goals in times of short-term uncertainty.

Kids and Money

Over the past several months, we’ve been working on teaching our 5-year-old more about money and work and it has been fun to see him grow and to have him pitch in more around the house. Much of our approach is based on principles taught in Smart Money Smart Kids by Dave Ramsey and Rachel Cruze, the main one being the give/save/spend approach. Just like we do as adults, we encourage our children that every time they earn money, some of it should be given away, some saved for the future, and some spent.

EARNING

Throughout the week, our kids can do a variety of chores that they know will result in various amounts of income. We try to keep the chores age appropriate but our younger daughter has surprised me by stepping up and doing chores that I intended to be for our older son. It’s been a learning experience for us all. Some of the chores include:

  • Emptying the dishwasher
  • Folding/putting away clean clothes
  • Filling up a toy box in the play room
  • Filling up a bucket with pine cones to burn in the fire pit
  • Taking out trash / recycling
  • Get good behavior reports for a whole week at school

This list isn’t an exhaustive list of everything our kids are expected to do around the house. As they get older, more difficult chores with more earning potential will be added (when is a kid too young to use a riding lawnmower?). As of now our 5-year-old has been averaging $2 in weekly earnings.

GIVING

For us, the principle of tithing is something we strongly believe in and each week when we pay our kids it is an opportunity to teach about it. I make sure that when they are paid, we have sufficient change to carve out 10% (and for convenience sake all of the chores they can do are paid in amounts that divide by 10 evenly – no $0.75 chores around here!). One of the great conveniences of the internet is that we actually make most of our donations online and have done so since before our kids were born. The downside to this is that our kids never see us physically giving a donation at church and we wanted to be able to teach by example. Now that our kids have their own money this allows them to be the ones taking that action at church.

SAVING

Once money has been set aside for tithing, we split the rest in half and put the first half in savings. I actually keep the money in the ‘Bank of Dad’, and we review a spreadsheet that I use to keep track of how much money they have in savings and how much they are adding to the total. I worried that it would be too abstract for them, but they seem to be just fine with knowing that they have money in savings somewhere. Plus, there’s no way they can do better than the interest rates we pay.

In an effort to teach about interest, and for it to actually be something worthwhile, we pay them 1% interest per month (12% per year). On the first of each month, we’ll pull out the spreadsheet and make a big deal about adding 1% interest to the month-ending balance. Some books I’ve read recommend lending your kids money at a similar interest rate to teach about debt but we have no plans to loan our kids money. I’d rather our kids learn to hear no and to tell themselves no than to go into debt. They already know that mommy and daddy don’t borrow money and I don’t want them to start thinking that it’s ok for them to do so.

We haven’t quite figured out what he is saving for yet, but the only rule I’ve made is that it has to be something that costs more than $20 since anything cheaper than that can be saved for relatively quickly. The topic of saving for college and cars will come up soon enough but 5 years old feels too young for that to sink in and we are saving to help with college separately.

SPENDING

After giving and saving are done, the remaining 45% of earnings can be spent however and whenever he wants. So far, most of the spending money has been spent at his school on ice cream. This isn’t my first choice of how I would spend money but there haven’t been any issues with him not having money for other small things he also wants so it’s worked for now. I’ve been reminding myself that his preferences don’t necessarily need to be the same as mine and so long as he’s not spending money on something I actively oppose then there’s no need for me to step in. For now his preferences are somewhat simple and he’s been easy to please, but we’re laying the groundwork to respond to desires for more and more expensive tastes.

*Contains affiliate link

Lots of DIY fixes going on

There always seems to be something around the house that needs fixing. Thanks again to YouTube, I was able to fix some more things at a fraction of the cost of hiring someone to do the work. I actually don’t consider myself to be very handy. There are many things that I would prefer to hire out, but I know that the more things I outsource in my life the more money I will need to support my lifestyle. I could easily have a lawn guy, a tax guy, a handyman, etc, but I purposely choose to do most of these things myself when time permits. A piece of advice that was given to me once was to limit yourself to one ‘guy’ per $50k of income. There isn’t anything magical about $50k increments, but it illustrates the fact that as your income goes up, your time becomes more and more valuable and the cost of doing things yourself goes up.

I’m not really big into camping, but recently had the need to dust off my gear for a trip with some friends. Before going out, I set up my tent to make sure everything was in order and found that one of the joints to my tent poles was busted (I learned that they’re actually called ferrules). Clearly the tent pole is a critical part and I wasn’t about to sleep outside.

 

I did some searching and found that to get a whole new tent pole, I might as well just buy a new tent! Thankfully, YouTube came to the rescue with a few videos on how to fix my part. For only about $5, I got a repair kit from Amazon and was able to take apart the pole and swap the busted ferrule for a new one and it is as good as new.

 

We also had a DIY opportunity recently with one of our A/C units that had been acting up. Neither of us had ever done any HVAC repairs and struck out trying to diagnose it ourselves. We ended up having to call a professional to come out and took a look. As it always happens, the A/C decided to work perfectly while he was here, but he was able to tell us what part might be failing based on our description of what had been happening (it’s called a relay in case you’re interested). $89 later, he was on his way and gave our A/C a clean bill of health…which lasted until that very evening when it started acting up again.

Armed with the information I thought necessary to fix the unit ourselves, we embarked on a journey to find a replacement part. I quickly learned that HVAC is not like other home repairs. Your typical home improvement store is much more interested in selling you a completely new system and doesn’t even have replacement parts in stock. I found some smaller shops that had parts like what I needed but couldn’t tell me with certainty whether what they had was compatible. Even YouTube couldn’t give me much information about what to be looking for or how to swap a part. After reading up on things, I walked away with the impression that there are likely A/C units that are fully replaced when the actual need may be something much smaller. This works because this industry has a lot more information assymetry than others and most people don’t seek out multiple opinions and simply go with the sure solution of a complete replacement.

This little thing does something to control the air handler blower to switch on and off…a good thing to have working in August.

I ended up finding a manual online for the part of the A/C unit in question and learned how to decode the part number and how to tell whether a different part number might also be compatible. This time, eBay was the winner. I got the part I needed for $13 after shipping and after only about 10 minutes the old part had been swapped out and we were back in business. We still had to pay $89 for the first guy to come out, but I’m sure it would have been a lot more than $13 for him to have swapped out the part.

In this day and age, we could literally hire out every aspect of our lives if we wanted to. I don’t begrudge people for trying to earn a living, but individually we all need to decide what’s the right level of outsourcing for us. I can’t always figure things out on my own but enjoy the sense of satisfaction and boost to self-confidence that comes with doing something myself when I can.

 

 

Thank you, YouTube

I’m a big advocate of do-it-yourself solutions and do most things myself around the house and with money management. Between my wife and I, there aren’t many things we can’t do or figure out how to do around the house. One skill that isn’t in my wheelhouse though is fixing cars. Growing up, I never got much experience working on cars and we didn’t really have any motorized toys on which I could have learned about engines. In recent years, I’ve had to accumulate a lot more motorized yard equipment and tools (riding lawnmower, push mower, leaf blower, weed-eater, chainsaw, pressure washer, etc), most of which have needed some type of maintenance or repair.

Whenever something has needed to be fixed, I’ve learned that I can find out how to fix pretty much anything on YouTube. I found the knowhow there to take apart my riding lawnmower and change some pulleys and belts, repair the carburetor of my push mower, and more. When it comes to fixing cars, I’ve always been reluctant to do anything serious myself since the risk/reward doesn’t seem to be worth it. If my lawnmower doesn’t get fixed quickly, my grass gets long. Not too big of a thing in the big picture.

If my car breaks down though, I need it fixed pretty quickly to not disrupt my work schedule. If it isn’t done properly, I could put myself or other drivers in danger. Add to equation that I live 25 miles from work and you can see how I rely on my vehicles much more than anything else I own with a motor.

As I pulled my wife’s car into the garage tonight, the engine mysteriously died just before I could turn the ignition off. It seemed odd, so I tried to start it back up, but it wouldn’t start. Luckily I was already home when this happened, but it was still troublesome. Then when I opened the door I smelled gas. Not good. To be safe, I put it in neutral and pushed it back out into the driveway (surprisingly easy for a truck that weighs around 6,000 pounds). When I tried to start it again with the door open, I heard fuel dripping onto the driveway as soon as I turned the key. Again, not good. At this time, I started to go through my options. I figured I could get it towed to a nearby mechanic, where I’d pay ~$90 for diagnostics and then at least $50 for a repair if it was as simple as reconnecting something that had come loose, but potentially a lot more if the problem were larger. Option two was to do a little bit of my own investigating to see if it was something I could fix myself and only go to a mechanic as a last resort. Naturally, I went with option 2.

With just a few minutes of Google and YouTube searching, I found a few possible solutions and went back out to look underneath the car to see where the leak was coming from. Sure enough, the fuel line connection to the fuel filter had come loose (see the following picture) and in just a few minutes I was able to reconnect everything and we were back in business. I’ll want to keep my eye on it and, if it starts to reoccur, look into replacing the part since it’s not acceptable for it to come loose, but from what I’ve researched we should be good to go.

I love that we’re in a spot financially that if I did need to take the car to the shop it wouldn’t be a financial burden, but really didn’t want to deal with the hassle of getting it to the shop, picking it up, etc. We definitely live in an incredible day and age with so much information at our fingertips, thanks to YouTube and some random people posting videos of themselves fixing their vehicles.

June 2016 Net Worth Update – $547,669

This month, our net worth went down by $3,900, but not for the reasons you would think if you’ve been watching the news.

Even with the panic related to ‘Brexit’, our investment accounts ended up about where they started at the beginning of the month. The day after the Brexit vote, I checked our accounts and think it may have been the worst one day drop we’ve ever seen in our investments (a loss of more than $7,500). Thankfully, I sat tight and the market has now recovered almost everything that was lost. I didn’t get the chance to buy more stocks during the decline, but I was able to convert some money from a traditional IRA to Roth while values were slightly lower. So far this year, I’ve converted about $7,500 to Roth, and that’s probably as much as I’ll do this year.

I’m not sure what to think about the values of our cars going up, but I did change the oil and air filters on both this month, so there’s that.

We made another extra-large mortgage payment in June, paying nearly $1,300 more than our minimum payment. We’ve got some large expenses planned for July that may make it hard to pay quite as much extra, but we will continue to pay more than the minimum. I spoke this month to a mortgage banker who was trying to get me to re-finance our mortgage. We currently have a 30-year mortgage at 3.75% and he offered a 15-year at 3.25% and very low fees. It sounded good, but when I plugged it into our projected payoff amounts, it only saved us one month and we decided it wasn’t worth messing with. Either way, we should be done around 2022.

As for our cash, the big reason for the decline is that we pre-paid some expenses for a big vacation we’re planning. Our cash will likely go down again in July related to that vacation as well as some work we’re doing around the house.

Work around the house is never-ending, but satisfying. We’ve started painting the outside of the house and should have all the materials we need to get that job done. We picked up 13 gallons of paint at Sherwin Williams when they had their recent 40% off sale and still ended up spending around $500. My boss recently hired someone to paint his house, and paid nearly $10,000(!), so I won’t complain. I’ve cut down several trees since we bought this house, but we’ve reached the point where the ones we now need to take out are bigger than my chainsaw can handle and close enough to the house that they could cause some serious damage if I mess something up. We’re biting the bullet and hiring someone to come take out 12 trees for about $3,500. Our last big house project for the year will be to install a backyard fence. We don’t have the materials yet, but estimate this will be around $2,500.

Some of the work we’re doing around the house is upgrades but a lot of it is just plain maintenance. It certainly can add up, but the way I think about maintenance is that it is necessary if I want our house to actually be worth what any of the online estimates (Zillow, Trulia, Redfin, etc) say its worth. If we neglect home maintenance, small problems can become large problems, and eventually become a reason for a buyer to negotiate a lower price from us if/when we ever sell this house.

All in all, we’ve got a lot going on and continue to plug away at our goals. Looking at our net worth on a monthly basis is helpful to make sure we’re staying on course, but the real motivation comes from seeing how far we’ve come.

Here’s the breakdown of where we’re at:

 

And here’s where we’ve come from:

The Joys(?) of Homeownership – Part 2a

Blank Slate

In the early part of 2008, we sold our first home and narrowly escaped being one of the millions of Americans who couldn’t afford to sell their underwater house. We found ourselves living in a crappy apartment across the country with a completely blank slate. Our plan from the outset of our move was to rent as cheaply as we could to reduce the financial burden of paying rent and a mortgage and to buy another house as soon as we sold our first home, which ended up being just about three months after the cross-country move. I was planning to start my MBA part-time later that year and we anticipated being in the area for 5 years or so.

Looking back, I find it almost comical that even though we barely avoided losing tens of thousands of dollars in value on our first home we still had a mild case of house fever. In our new city, housing was much less expensive and even though my wife hadn’t yet found a new job to fully replace her previous income, we found that we could still qualify for way more house than we really felt we needed.

We began looking at housing in the $150-200k range and found several homes in our price range, but most of them had long laundry lists of things to fix to get the house to be what we wanted.

Along those lines, am I the only one who hates watching people on HGTV shows walk through houses making crazy comments like ‘oh, that whole kitchen just has to go’, or ‘blech, this is a complete teardown’ even though the house they are looking at is already at the top of their max budget? I hope that we weren’t that obnoxious when we were going through houses, but what differentiated us from most other people is that we had a budget where our max price included the purchase price plus desired upgrades. Also, unlike most people, we were willing and able to do home improvement projects ourselves. I’ve seen many instances where people buy houses with the intention of doing all sorts of projects but end up just settling for what they originally purchased because of the expense and difficulty of dealing with renovations. Not here.

We quickly realized that, for about the same price as many of the houses we were looking at, we could build a brand new house exactly the way we wanted. We came across a neighborhood that was mostly developed but still had a few lots left and within the next few days signed a contract to have a new home built. The entire process would take about 6 months, time that we needed in order to build up a down payment since we didn’t have much to show from the last house we had sold. Some of the mistakes we made in buying our first home were not repeated, but we still made mistakes.

Lessons Learned

Know the Neighborhood

When we decided to build our house, we had only lived in the state for a few short months and naturally didn’t know the area extremely well. I’m not sure it would have changed our decision to build where we did, but there were a few things about the neighborhood I felt dumb for not considering. Since we didn’t have kids yet, we didn’t consider school districts. Only after we had lived in the house for a while did we realize how bad the schools were that our neighborhood was assigned to (I’m talking really bad – the school actually lost their accreditation). Again, it didn’t affect us immediately, but certainly had an impact on the property value and may have made it slightly harder to sell. I also would have liked to have noticed how close we were to another neighborhood that had high crime rates (the road leading to the neighborhood entrance we used was beautifully rural, not so on the other side).

Know what you can afford

We ended up paying $168,000 for this house and had saved up enough for a 10% down payment by the time we closed. Our household income wasn’t quite as high as it was before we moved, but our mortgage payment was easily manageable at between 15-20% of our take home pay. This was especially important because the whole reason for the move was for me to go back to grad school. We had developed a plan to go through school without any student loans, something that would have been impossible had we borrowed as much as banks told us we could ‘afford’ on a new home. It’s been said that you can afford anything, but you can’t afford everything. This was just one of several instances where we had to prioritize and chose to spend less on housing to avoid debt for education.

Know what your neighbors can afford

How do you know what your neighbors can afford? A friend once told me that his rule of thumb is that in any neighborhood, 1/3 of the residents can easily afford their home, 1/3 of the residents are treading water, and the last 1/3 truly can’t afford their homes. In our neighborhood, I think the numbers were more like 10%, 50%, and 40%.

I haven’t come up with a surefire way to tell how a neighborhood rates on this metric, but one of my hypotheses is that when it’s easy for basically anyone with a pulse to qualify for a mortgage, neighborhoods with a higher percentage of first-time home buyers are more likely to have homeowners that are in over their heads. When too many homeowners are in over their heads, HOA dues don’t get paid, more houses get foreclosed, and more short-sales occur. Since people don’t have as much money to upkeep and upgrade their homes, the entire neighborhood can lose its ‘curb appeal’.

Shop for Insurance

I’ll never know if we had a good rate or not for our homeowners insurance because we simply went with the insurance provider the homebuilder partnered with. I had never heard of the company before or since having a policy with them, and because they were paid from our escrow account I never had to write them a check. If nothing else, I’m sure we missed out on some savings by not bundling our homeowners insurance with auto insurance. Insurance companies tend to get more policies renewed when they are automatically paid, and I am proof of this. We have since learned and now shop around for insurance periodically to make sure our rate is competitive.

Negotiate and Investigate

A mistake we made with our first house was that we didn’t negotiate on price very hard at all. When building a new house, it felt like buying something at a store where there is a price tag. I’m not the type to haggle at Wal-Mart or Home Depot, and adopted a similar approach with the home builder. Strike 2.

Even though we may not have been master hagglers on the total price, we did recognize that where builders really make their money is on options and upgrades. Since we know how to do most things around the house, we were able to analyze and evaluate each option we were considering and only have the builder include the ones we wanted that we couldn’t do ourselves for cheaper. For example, our house came with a fireplace but if we wanted a nicer (still mediocre) mantle the builder wanted an extra $800. Instead we took the basic fireplace built into the price and spent $100 on trim and a few hours later had an even nicer mantle than what the builder would have done. Other things saved us even more, like building our own deck and putting in our own yard. Things we did have them do were things like electrical upgrades, sub-plumbing for a basement bathroom, and a higher efficiency heater.

Home sweet home, for a time.

Looking back, I think we can all agree that buying our first house was a mistake. We knew we weren’t going to be there for a while, and we really weren’t ready for it financially. As for our second house, I’m still undecided. We learned a lot and enjoyed it while we were there, but it wasn’t exactly a stellar investment. I’ll discuss later selling this house and buying our next (and current) home and you can judge for yourself. We’ve learned from our successes and failures, and hopefully you can too.

The Joys(?) of Homeownership – Part 1

J Money over at www.budgetsaresexy.com recently blogged about selling his home that he considers the biggest financial mistake he’s ever made. I’ve been thinking about this lately and it’s caused me to think back on our real estate purchases and share some things I’ve learned that will hopefully help others.

In roughly ten years since graduating college and getting married, we’ve lived in three different houses in three states. Each time we’ve moved, we’ve avoided making the same mistakes we made with previous moves but still haven’t made the perfect purchase and continue to learn ways to do it better. Given that we are big into DIY projects, we’ve also had our share of experience learning from home improvement projects. We actually enjoy doing projects around the house, though, so living in a rental where we’d have to ask permission to do little things like paint walls, re-do trim, or tear down walls would be stifling, don’t you agree? Ok, maybe we’re in the minority on this one.

Over the next couple of posts, I’ll detail things we’ve learned from buying and selling our houses.

Buying Our First Home

Back in 2006, shortly after graduating college and starting our first ‘real’ jobs, and when housing prices seemed to be going nowhere but up-up-up, we were renting a small one bedroom apartment. The apartment was certainly adequate and we were saving more than we ever had been able to while we were in school, but weren’t really focused on any specific financial goals or targets. I knew that I wanted to go back to school for an MBA in the next 3-5 years, likely in another part of the country, but at the same time we had caught a case of ‘house-fever’. On evenings and weekends we would spend time driving around neighborhoods looking for things we liked, things we didn’t like, and basically narrowing down the areas where we felt we wanted to live. Looking back, I even remember telling myself something to the effect of “we really should buy something while we can still afford to.” Another way we rationalized buying a house is that we felt we’d be in the house long enough that appreciation would cover all of our selling costs down the road.

In January 2007, we closed on our first home, a cute but older 3br/2ba house on a cul-de-sac. We paid $225,000 and had to borrow $224,000 for it. We thought we were being SOOOO smart. Based on our income, we were ‘pre-approved’ for a $450,000 mortgage and we were spending only half of that! However, there were several things that should have tipped us off that we were making a bad move. For example:

  • We offered the full asking price for a house that was listed ‘for sale by owner’ and had already been on the market for a few weeks. Who does that? 2006 me with a raging case of house fever. That’s who.
  • We didn’t use a real-estate agent. As a buyer, there really is no reason to not have an experienced agent on your side. The reason we didn’t use one was because the seller of this particular home was selling by owner and would have increased the price by 3% to cover our agents’ commission.
  • During the due diligence period, the bank appraisal came in $5k lower than our offer and rather than try to re-negotiate the purchase price, we just came up with another $5k for the down-payment. Doh. Having an agent probably would have saved us this $5k.
  • Although it wasn’t called this at the time, we definitely got a subprime mortgage. It was a 5/1 ARM at 6.75% interest. We figured we’d sell the house in less than 5 years so the fact that the rate could adjust after 5 years seemed irrelevant. Even though we could afford the payments (they were only about 30% of our take home pay), never once in the process were we asked to show any proof of our incomes. Because it was so easy to get this type of mortgage, we would not have even tried to get a non-subprime loan since the paperwork and documentation would have been more difficult, but at the same cost.
  • Our mortgage provider didn’t require that we include taxes and insurance in our normal payment, so we were surprised with a tax bill shortly after moving in. Thankfully, it was less than a single mortgage payment and we could easily pay it. Clearly our budget wasn’t as comprehensive as it is now.
  • After moving in, we also realized that there was a lot more stuff we had to buy that you don’t need as a renter. These were things like a lawnmower, yard tools, hoses, appliances, etc. I knew that there were going to be things we needed, but something always seemed to pop up that we hadn’t thought of.
  • When getting ready for closing, we learned about this thing called ‘odd-days interest‘, which at the time only meant that we opted to have a closing date closer to the end of the month to reduce how much cash we had to bring to closing (if we were worried about paying less than one month’s worth of interest just once…what were we thinking signing up to pay even more interest EVERY SINGLE MONTH?)

Once we moved in, the house fever transitioned to home renovation fever. Pretty much every weekend and spare moment we had was spent working on some type of upgrade to the house. Here’s an example of some of the projects we did:

  • Painted most rooms.
  • Replaced wood veneer doors with white six-panel doors.
  • Replaced baseboards throughout house.
  • Installed built-in bookshelves in guest bedroom.
  • Installed crown molding in one bedroom.
  • Replaced old railroad ties with concrete blocks in a backyard retaining wall.
  • Planted several trees.

The list exhausts me just looking at it. The craziest part is that these projects all happened in less than 6 months. The list would be longer, but that same summer we came to the decision that rather than wait three more years to go to back to school, we wanted to start in one year. The only problem was, the school I had my heart set on was across the country. I had never visited the campus or even the state the school was in, I only knew that it was very highly rated, a mentor of mine had gone there, and there was the possibility that I could get a job with my same employer in the city the school was located and go through a part-time MBA program in the evenings.

In around October 2007, I reached out to the manager in the city where I was looking to go to school and let him know I was looking to transfer if a position ever became available so I could also pursue an MBA at the local University. I figured that this would be the first step in developing a relationship and dialogue that could allow me to transfer in a year or two, so imagine my surprise when, in our FIRST conversation, he told me he actually had a position opening up in the next few weeks that would be ideal for me. Before I knew it, I had received and accepted an offer to transfer across the country and start a new job.

So, less than 1 year after buying our first house, we needed to sell it. November 2007, we put the house up for sale, optimistically (and naïvely) asking $250,000. The only smart thing we had done financially to this point was that we had paid down the mortgage balance by $12k in that first year. I moved and started my new job in January and my wife joined in February. We ended up not selling the house until April 2008, and sold it for $225,000, exactly what we had paid the previous year. Realtor fees and closing costs consumed any equity that we had, but thankfully we were not underwater.

Some mistakes we made during the selling process:

  • We originally tried to sell the house ourselves, without the help of a real estate agent. We ended up listing with a real estate agent when we moved out of state, and should have listed with a professional much earlier. Had we done so, we probably would have had a more realistic asking price and would have sold much sooner.
  • When we were doing our house projects, some of the colors we chose for bedrooms were bolder than your average homeowner would want. Even though paint is the easiest thing to change in a house, I now know that buyers have a hard time seeing a space differently than it is presented. Not to say that it wasn’t well done (definitely not cringe worthy like some of the neon pink/glow can be seen down the hall stories that you hear of), but deep blue or red can be polarizing.
  • We expected all of the price negotiations to have happened before going under contract, but our buyer was a more savvy buyer than we had been and some additional price reduction happened after a home inspection was conducted.

What were we thinking with that wall color…?

A few things we did right:

  • My wife worked in an industry where some of the company owners had frequent dealings with real estate agents, and when we did list with an agent we solicited their advice and got a good one. There are many agents out there, and, similar to the financial advisor industry, a great many of them are not fantastic at their jobs, and those new to the process generally don’t know how to tell the difference.
  • Even though we packed up and shipped most of our household to our new state, we didn’t leave the house bare. We left window treatments, art, etc., and that made a huge difference in how it looked to potential buyers.
  • We didn’t attempt to be long-distance landlords. Even though we had ties to the area and still visit frequently, the thought never really crossed our minds to attempt to rent out the house.

Some things we lucked out on (through no skill or good decisions on our part):

  • We sold right before the housing market really tanked in that area. I still tremble to think of how much worse this story could have been.
  • The buyers came to the table with a large down payment so we didn’t have any bank appraisal issues.

In the end, our first home was a huge learning experience. Even though we bought and sold the house for the same amount, we actually lost around $20,000 when considering realtor fees, closing costs, and cost of home projects. We were fortunate enough to be able to absorb the losses, but avoiding those losses would have made the next few months transitioning to a new state a lot easier. Having paid some tuition in the school of hard knocks, we approached our next home purchase with more experience and better expectations.

DIY Within a month

within a month

 

I recently came across this gem of a quote and had to share.

“There is nothing in ordinary gardening, carpentering, or work about a house that any intelligent man cannot learn in a month by giving his mind to it.” William J. Dawson, The Quest of the Simple Life

Personal finance isn’t all that different from home improvement projects in this sense. This is not to say that you can master something in one month, but if you truly dedicated every spare moment to it, it’s amazing what you can learn in a relatively short amount of time.