Reader Profile: EC

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader EC. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am a married 41-year-old. My wife and I have been married for 12 years and are childless by choice. We are both professionals; I work for an Internet company, while she is a counselor.
 
When I was in my twenties and single, my financial life was a mess: I had a lot of credit card debt, leased a sports car, and wasted a lot of money on CDs, among other stupid decisions. I ended up on credit counseling and paid a lot in interest. Thanks in great part to my wife’s discipline, I’ve come very far in terms of my financial discipline, to a point where now I’m almost a miser in certain areas.
 
We bought our home right at the top of the housing bubble, spring of 2007, and can say that we regret the timing of the purchase (though I was skeptical of the whole home ownership thing to begin with). We bought our home for $450K and is now worth $310K.
 
We are both minimalists in terms of possessions, and thus do not have much of the more common expenses that most folks have, such as cable, furniture, cell phones, clothes, books, etc. Most of our entertainment comes free from the library or the internet. The one car we have is an older 2001 model which is fully paid off, and we barely drive it, as both of our jobs are convenient to bus commuting. Our only vice, if you will, is traveling. We go on two to three international and domestic trips per year.
 
Describe your financial situation.

Our gross combined annual income is little more than $138,000, which comes to about a $9,000 net income per month (after my 401k). Our monthly expenses break out as follows:

• Mortgage: $2,300 (incl prop taxes, insurance)
• Car insurance (old, ugly, but dependable car): $28
• Utilities/gasoline: $200
• Food (eating out, coffee, & groceries): $700
• Parents: $500
• Other Expenses (travel, clothes, entertainment, etc): $1,000. This average masks the skewed distribution of this line item. That is, we can go months without such expenses, and then take a big trip and/or buy a few clothes, etc.

Total Monthly Expenses: $4,728

Total Monthly Savings:  $4,272
 
So, we are able to save close to half of our net income.
 
On the asset front, our liquid savings total $55,000 (split evenly between a total stock market fund and a money fund). My 401k balance is $72,000 and my Roth IRA is $33,000 (my wife doesn’t contribute to any retirement plans). I save only 4% to my 401K since that’s the level at which my company will match. I save the max in my Roth IRA.
 
The only debt we have is our mortgage, with a balance of $222K @ 5.375%.
 
What are the current financial issues you’re facing?
 
I am currently OBSESSED with getting rid of our mortgage, seeing that half of our savings is not making much money sitting in a money market fund. In fact, once a year or so, I am in the habit of sending a big lump sum payment to our mortgage principal. That’s why our savings balance may not reflect our high savings rate. I’m not too crazy about increasing our exposure to the stock market, it’s high enough as it is, including retirement accounts. Plus I figure I’m getting 5.375% back by paying down the mortgage, instead of the measly 1% from the money market fund (if that!).
 
A second issue that’s come up in the past few years is taxes. Besides increasing the 401K contribution rates and perhaps having my wife start contributing to her organization’s 403b, I just can’t think of any good ways of lowering our tax bill. The past couple of years we’ve ended up paying taxes at time of filing, when we used to get a small refund. We don’t pay a whole lot, but the trend is a bit worrisome.
 
Lastly, I do admit that most of our food expenses are from eating out, and it’s something we need to control.
 
What are your plans for the future?
 
We currently live a relatively high cost of living area. We’re both in our early forties and by our early fifties would like to bring our savings to a level that allows us to downgrade our salaries a bit. I honestly hate my job but love the pay. We envision moving to a cheaper area, where we’ll be able to find jobs that are more interesting to us, even if they pay considerably less. One possibility we’ve also talked about is serving in the Peace Corps.
 
My obsession with paying down the mortgage is precisely so that we won’t have a mortgage to worry about in 5-6 years and which will open more options for us. I have to admit I was never sold on this home ownership “dream” that is so prevalent. I may be naïve, but I’m just waiting for our home value to go up to what we paid for it (or close), and sell it to get some of the money we’ve sunk into it, and add it back to our savings.
 
Given we’ve traveled quite a bit, beginning this year we’re talking about paring down our traveling in order to save more that moment when we can downgrade our lives.
 
What’s your best piece of financial advice?
 
My financial motto could be summarized as “save where you don't want, so you can spend where you want”.  I have to admit the phrasing is not original, I’ve seen it in other financial blogs, but it’s the way I’ve lived since my mid-thirties. I suggest folks question everything they spend money on, and decide what they can truly live without. For example, question whether you need that second car, or that new jacket, or a cell phone, or cable, etc. I’m talking about big monthly expenses. At the need of that decision tree, you won’t have to waste time couponing, tracking down this-or-that deal, or switching credit cards to get a few more miles. Focus and spend money on those few things that matter more to you, that represent the most satisfaction, and that you don’t mind splurging on from time to time: You’re saving money in the long run.

Comments

[Kathryn C]

I couldn't agree more on the “save where you don't want, so you can spend where you want”. I just got rid of my bmw and got a prius for that exact reason. I was spending way too much money on my car, and I just didn't really want to fork so much over to something that I was kind of eh about. I'm so happy, now I can buy an extra latte each day (or five).
I'm not really "saving" the money...just now spending it where I want to. I guess it's that 'mindful spending" that everyone talks about.
Sounds like you are guys are in a great situation (minus the hating your job part). But, sometimes it's worth it of for the great money as you say. (I can hear the lifestyle bloggers yelling at me as I write that)

[jim]

You're saving a lot of money so thats great. And its good that you resolved your previous financial / credit problems.

Can you refinance the mortgage? 15 year rates are around 3.3% so you could feasibly cut 2% off the rate and save ~4k a year in interest.

I would say it seems your retirement savings is a bit light. 4% + a Roth isn't quite what you'd want given your income levels. You might want to beef up your 401k savings. I am not sure why you're doing a Roth now. You're in the 25% bracket (i assume ) which is middle rates. And you may be moving to lower income in the future with moving and career change plans. If your tax bracket is going down in the future then paying taxes today isn't best. Defer the tax bills into the future if you know your income is going to go down.

On the other hand as far as retirement savings it depends on what your plans are really. If a semi retirement or early retirement are the plans then you may want to keep the money more easily liquid rather than lock it into a 401k until youre 60. But you can still do a 401k and avoid penalties with early retirement if you do 72t withdrawals.

[Evan H.]

I agree with jim, your retirement savings need to be increased. Take full advantage of those tax advantaged spaces! Your tax situation will take care of itself with the 401k/403b contributions.

Your priority in funding your retirement accounts is correct. Contribute the minimum to 401k and 403b to get the company match first then fully fund the Roth. The next step is to continue to fill up the 401k and 403b to the max (if possible).

[JimL]

I think you are doing great. With your savings rate, you could knock out the mortgage in 3 years and be totally debt free and that would put you in a great position.

[brooklyn money]

It's nice to read about another childless city-dweller in a high cost of living area who loves to travel and still manages to save a lot of income. See, FMF, you can live in a high cost of living area and still be frugal and save!

[FMF]

brooklyn money --

;-)

[texashaze]

@EC - Regarding reducing your tax burden, have you thought about charitable giving? Besides goodwill towards others, it's a great deduction.

[Dee]

Why doesn't your wife have any retirement accounts?

[EC]

EC here, thanks for all your comments.

@jim - I could refinance, yes, but I figure the velocity at which I'm paying down the mortgage comes out to a much lower effective rate than whatever I'm likely to get. I agree I've been skimping on retirement. The Roth is simply a converted tradition IRA I had a few years ago, it was kind of a mindless move.

@texashaze - We could certainly donate more to charity, besides the item donations to Goodwill we already do. If you see our expense itemization, you'll see 'parents'. I help my mom, who often feels like a charity, but I know what you mean.

@Dee - Part of the reason my wife doesn't have a retirement account is because we want to pay down the mortgage, though I'm aware it contradicts my desire to lower taxes.

thanks again.

[JMS]

Before you put any money in the 403b deeply review the fee structure and product offering. A lot of the 403b plans offered to public employees are high fee variable annuities.

[Leigh]

You could also consider contributing more to the retirement plan (yours or your wife's) that has better funds. If hers sucks, max out yours. If yours sucks, max out hers, while getting the match in the other one. Have you done any numbers on how much more money you would need to be able to retire?

I like hearing from childless city dwellers who have a decade or two on me - it's interesting to see what your finances can look like if you don't have kids since I'm not sure if I will end up going that route.

I would figure out how much more money you need in retirement and how much you need to save to accomplish that and work on paying down the mortgage in parallel.

[John @ Frugal Gearhead]

If I were you I'd be concerned with funding my retirement accounts, especially if you and your wife do not have any sort of pension. This also makes extra sense now if you are considering downgrading your lifestyle and salaries. Take advantage of the tax advantage contributions now while you have the higher tax liability.

[Rick Francis]

> I could refinance, yes, but I figure the velocity at >which I'm paying down the mortgage comes out to a much >lower effective rate than whatever I'm likely to get.

Yes, but you could refinance AND pay down the mortgage faster because less money goes toward interest too.

-Rick Francis

[MonkeyMonk]

As long as you've got at least 20% equity in your house I would think refinancing would be a no-brainer. Paying off your mortgage early is a worthwhile endeavor but not at the expense of properly funding your retirement as you can sacrifice a lot of of the potential your money has for compounding.

A few months ago I refinanced into a 100% no-cost 15-year fixed rate loan at 2.75%. It literally took about 2-3 hours off my time to complete and that was it. By continuing to pay 5.375% you're just throwing easy money away.

I could pay of my mortgage in about 5 years but I'm currently planning to ride it out for the full 15. At such a low rate I'm fairly confident I can do better with my money elsewhere and although the thought of a paid off mortgage is tempting it's not the best use of my money right now (I may change my mind before the term is up).

[Luis]

@ JimL How can EC knock out his mortgage in 3 years? At 48k per year (savings rate) times 3 equals only 144K, 78K (plus interest) SHORT of payoff.

EC,

I would normally advise you to contribute more to retirement (100K+ in your 40's is too low) similar to what Evan H. recommended but I understand you are averse to the stock market.

Therefore, I'd recommend you follow Rick Francis' advice to refinance and continue to pay down your mortgage at the same rate. I would recommend ING's 5 Year Easy Orange Mortgage at a current rate of 2.75%. They spread the amortization over 30 years so your monthly payments will go down tremendously, not to mention your interest cost too. You can then use the extra cash flow savings to pay down the principal balance. This brings my second piece of advice....

You are losing money by sending in one lump sum payment to your principal every year. Instead, send in the payments regularly. You will save a bundle on interest costs by doing it this way!

[Carol]

You're wife (and you) need to fully fund your retirement accounts. Refinance your mortgage to 15 years, and stopped being OBSESSED as you put it. You're obsession with paying off the mortgage is blocking your common sense. You're in your 40's and you're childless. You and your wife are truly in a position to retire early if you play your hand well.

[RichUncle EL]

I agree with Luis by sending payments regularly you will save a lot in the long run. If you can refinance I would do it sooner than later and def. go with a 15 term year mortgage. You can clearly afford a higher monthly payment, but I doubt it will be higher since you will knock down the apr by at least 2 percentage points. Once you have that done then you can see what the new budget would be and increase your 401K and 403B accounts so that you can pay less in taxes.

[EC]

EC here again,
What I hear over and over again is basically that I should refinance to a 15-yr. What kept me from doing that is the prospect of closing costs. This 5.375% mortgage is already a refinance from back in 2009, which basically close to $10K added onto the balance. I will look into a no-cost refinance, assuming that's something available to mortals like me and no just some marketing gimmick.
Thanks again for all of your feedback, it's helped me gain a new perspective.

[Luis]

The ING Easy Orange loan comes with really low refinance costs. It is at least worth checking out. It is also not a gimmick, I personally have this loan.

There is no such thing as a no-cost refinance, you must have meant a 0 point refinance?

[jim]

yes I'd shop around for companies to find true no-closing loans. Just make sure they aren't simply rolling the closing costs into the principal. There ARE lenders who offer true no cost closing. Your rate may be higher sometimes with no-cost closing but still cheaper than your 5.3%.

Also check with your current lender to see if they have a no cost refinance option. They may do it on the cheap to retain your business.

Sometimes 'no cost' refinance means the lender waives or pays for closing costs. Sometimes it means you're working with 'negative points' which means you get a higher interest rate and they pay you points which then covers closing. Sometimes its just your own current lender refinancing with no costs since they already own the loan.

However, make sure theres really 'no cost' instead of the lender just adding the closing fees into the loan balance.

Even if you DO pay closing costs then you could easily come out ahead. If you put an extra $50k into that loan it will still take ~4 years to repay. Save 2% interest annually and you'd end up saving around $8k in interest in 4 years which is worth paying a little closing to refi.

[MonkeyMonk]

There is no such thing as a no-cost refinance, you must have meant a 0 point refinance?

Not true at all. I refinanced a few month ago and was offered a bunch of no-cost refinances -- one of which I accepted. Basically, the lender is willing to pay the various closing costs (appraisal, recording fees, etc.) in exchange for you getting the loan through them. Other than pre-payment items like interest and escrow (which you would have to pay anyway) the close didn't cost me a cent.

Isn't the ING Easy Orange essentially a 5-1 ARM? I think the OP would be better served by a 15-year fixed personally.

[Luis]

I did not know that, thanks MonkeyMonk.

To answer your question, the ING is like an ARM but it is unique in other respects too. After an agent comes to your home to refinance (little paperwork and low costs), all further transactions are performed over the internet, saving the loaner and loanee money. You should, like an ARM, be prepared to pay the ARM by the end of 5 years. Having large investments and an emergency fund like EC has should alleviate any concerns about that. Rate renewals with ING loans will be fixed for another five years at the current going rate versus every year on a 5-1 ARM.