About My Credit Card Debt
If you’re a new reader, let me first explain my high levels of credit card debt. I’m actually taking money from 0% APR balance transfer offers and instead of spending it, I am placing it in high-yield savings accounts that actually earn me 4% interest or more, and keeping the difference as profit! 
Along with other deals that I blog about, this helps me earn extra side income of thousands of dollars a year. Recently I put together a series of step-by-step posts on how I do this. Please check it out first if you have any questions. This is why, although I have the ability to pay the balances off, I choose not to.
Cash Savings and Emergency Funds
As stated last month, our immediate goal is to replenish our cash savings in order to have at least a 6-month emergency fund. (9-months would be better.) It feels a bit scary not to have a big pile o’ cash right with such a big mortgage to pay. I’m even holding off on my Solo 401k contributions for the time being. However, we decided that we will start funding her 403b plan through a regular monthly withdrawal to reach the max of $15,500 for 2008 (about $1,500 per month). Currently, we are about halfway to this goal.
After the e-fund is created, we plan to start paying down our 2nd “piggyback” mortgage which is at nearly 8% interest. I feel that at 8% interest even with an interest itemized deduction that the payoff is worth it. With US Treasury bond yields so low right now, this also works well into the concept of treating additional mortgage payments as increasing your bonds allocation. Where else can I find a low-risk bond are paying a 8% coupon.
Lazy Home Equity
Previously, I considered a few different ways to track home equity, one of which was using the formula of Home value – Loan balance. My home value is subjective and probably going to decrease. My loan balance will inch up a small bit after each mortgage payment. I’m not too excited about tracking either one, so I’m only going to estimate this once every six months or so. So no change this month. Sound reasonable?
Retirement and Brokerage accounts
Not much action here, I’m boring. Market prices are still slightly down. I need to put together another portfolio update soon.
You can see our previous net worth updates here.
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I find it interesting that you did not even pay off your AOR credit card debt before applying for your mortgage. Did you have your wife apply for the mortgage as an individual, or did you have a good enough score even with the debt?
You’re not counting that 0% loan from the credit cards as “cash savings”, right?
Hey Jon,
Are you still doing the credit card debt? With such low interest rates and the credit market, I haven’t found any of the deals worth it.
You claim 120,000 for your home equity, but you don’t include your mortgage liability? We’re still renting. I’m not sure how to account for home equity / mortgage in net worth either, I’ll probably read up about that later this week.
I’m much more risky with my investments (non-margin), but when it comes to buying a house, the leverage potential scares me. With the market as it is now, I’m tempted to say increase the 401k contributions. It’s what have done already, except I don’t have the weight of a house on my shoulders. 😐
Black Hammer – as you said, he’s listed his “home equity”, i.e. the value of the house minus his mortgage amount.
Jonathan – on the credit card 0% transfer front, are you still seeing good offers for this? I was up to $50-60,000 on this at one point, but now we’ve had to pay most of them off (free money period expired) and I haven’t been seeing any reasonable offers. We still get offers, but pretty much all of them have 3% fees, which in the current environment isn’t worth doing.
I think it’s strange that you “hide” your biggest asset and liability, your house and your mortgage, from your Assets and Liabilities summary. Yes, your estimated home value may not be accurate, but it’s probably pretty good. And what’s so hard about tracking your mortgage balance?! Don’t you get a statement from your bank every month? … 😉
I think it’s important to know your “loan-to-value” ratio (or perhaps your “debt-to-net worth” ratio). These ratios are good ways to measure the health of your personal balance sheet. Plus, these ratios give you an idea of your borrowing power if you ever have to tap into your credit. For example, perhaps you want to start your own business and need some additional start-up capital. How much home equity are you comfortable tapping into?
ttfitz – I’m in the same position as you with the credit carrd arbitrage. With rates the way they are, and the 3% fee it’s just not worth it.
Thanks for the post. I am amazed and inspired by the amount that you’re networth is increasing every month!!
Could you possibly add how much you are saving each month or rather what percentage of your income you save? From the chart it looks like you are saving about $7000 a month! Either you’re making a ton of money or saving a very high percentage of your monthly income. I am currently saving 2% of my monthly income with a tight budget and a big mortgage.
Congrats on a good diversified portfolio. I thought I had a pretty diversifed portfolio but my I’ve seen negative returns every month this year. It good to see that you haven’t had an investment loss this month.
It sounds like if you continue to bank away this kind of cash for another few years with a growth rate of say 8% over the next 8-10 years, you’ll easily be able to retire before you’re 40. Perhaps you’ll have a few kids by then which could throw a monkey wrench into the charts, but you will have attained the kind of wealth that no money can buy ! Did you ever post a breakdown of your expenses ?
Let’s see here…
Joe – Yup, the loan was obtained solely on the merits of my wonderful wife, I did not submit any financial documentation. She has a sky-high credit score and does not have any 0% balances on her credit cards because she has no desire to do so and it’s a pain for me to manage it for her with a male voice. 🙂
However, I did get pre-qualified for both us to make sure they couldn’t give us a better deal, and they said my credit score was lower but still fine. We just went this route for simplicity.
42 – I subtract assets minus liabilities for net worth. If I borrow $5, and put $5 in “cash savings”, then it doesn’t change my net worth. So my net cash savings is what I consider my emergency fund.
Matt, ttfitz – It is true that the 0% deals are less abundant, and the interest rates are lower. I have been relatively quiet on this front as well to keep my credit score good. I might do one last “hurrah” before they disappear completely now that I have my mortgage set, but after I get my HELoC. The 0% loans are still great for those with higher interest debt, though.
Black Hammer – Currently, home equity is simply purchase price minus loan balance. It’s good that you recognize mortgages as leverage (both good and bad), it is apparent many others did not.
Art – I’m not really hiding it, I just don’t wish to make a wild guess as to my home value each month. So I figure if the formula is A-B and I don’t know A, what does B matter?
I have little intention of ever taking any money out of it, and I already have 80% LTV for a HELoC. Maybe it is better I put $600,000 in assets and $480,000 in liabilities.
Goks – For a while we were saving about 80-90% of our net income. But we were also renting below-market at a relative’s rental unit. Now, we are probably around 60-70%. We want to keep it above 50% so we don’t both have to work when kids start rolling in.
I think I had a slight investment loss this month, the numbers are probably positive because of contributions.
Ruby – Early retirement is definitely something we are talking about more often now. We need to maintain focus!
“Maybe it is better I put $600,000 in assets and $$480,000 in liabilities.”
Jon — Yeah, that’s the right way to go since you’re basically creating a balance sheet for your family (Assets == Liabilities + Net Worth). The next step would be to link this to your family’s income statement (showing income and expenses), and then you could create a cash flow statement to see where the money is coming and going (your sources and uses of cash)!
Hey Jonathan, great post as always. do you think you could do on on amt? i recently bought a home, and i’m wondering if there will ever be a situation where i cannot count my interest deduction because of amt. also, if you have time, if you could comment on incentive and the normal stock options, that’ll be great too. thanks!
Its not necessarily worth [what you paid – what you owe] so how can you think thats very accurate? More reasonably, its value is [reasonable sales price today – what you owe].
dpjax – Exactly, home value varies. But I don’t want to run comps every month to figure out home value. I’m done poring through the MLS listings 🙂 I’ll do it twice a year or something.
As of now, our house purchase price is still below comps, even with recents solds within the last month.
Jonathan, what’s the breakdown of your cash savings. Sacking away $7,000 a month seems outrageous to someone with my salary. I realize this is probably split between you and your wife, but even putting away $3,500 a month is simply more than most people can afford to do.
Jonathan,
Congrats on your new home! One question, why did you need a 2nd loan when putting down 20%?
Interest on mortages to purchase your house is always tax deductible even under AMT.
Thuy – I recently also did a piggyback + primary mortgage , which did two things for us:
1) Reduced our primary mortgage amount to <80% to avoid PMI
2) Reduced our primary mortgage below $417,000, which has been the limit for a non-jumbo loan, which Fannie Mae and Freddie Mac couldn’t buy at regular rates (fuzzy goverment-ish stuff). I haven’t kept abreast of developments since then, but with the new economic stimulus package, that was supposed to be/will be raised to somewhere in the $700k’s in certain high-cost urban areas, like CA cities, Hawaii, etc.
I still don’t understand why you don’t create a standard balance sheet like a normal business. Assets = Liabilities + Equity. With your retained earnings really being your net worth. All liabilities (mortgage) and all assets (house) recorded. In the accounting world the historical cost is what you should record for your asset (house). Therefore there really is no point in upgrading/downgrading the value of your house.. you really won’t know that to you sell it… this will also remove your “equity” headheache…
I just wanted a little clarification on your mid-term goal of an emergency fund. What is the amount you are aiming for? The graphic shows you are 53% there, but it seems like the number you should be using for it is the cash savings, but should subtract out the credit card debt? I understand *why* you have the credit card debt, the whole interest rate arbitrage game, but it seems like for emergency savings purposes, you’d want to plan on having enough to cover the balance.
Oh, I didn’t say that part? I estimated our monthly expenses to be $5,000. This is probably high but then there is the possibility of COBRA health insurance payments, so I wanted to be conservative. Times six months, is $30,000.
Willy j – So you’re saying just list “book value” instead of essentially trying to “mark-to-market”? Interesting.
Makes sense, thanks for the clarification. You keep blowing through your goals, making it all look easy 🙂
This doesn’t have to do with your update, but it’s something I keep meaning to put in the comments and always forget. A little after we had kids, my husband got permission to work from home full-time. For us, that has been at least as beneficial as a cut in hours, since there’s no commute and he can join us for lunch every day. I think if both of us could work from home and have a nanny here at the house, that would be an ideal situation. So, that might be something to consider thinking about for when you have kids.
Yea, just list your house at cost as an asset and your remaining mortgage balance as a liability. If, when, you sell your house, you’ll pay off your mortgage and your liability will go away and if you sell your house for a gain you report that amount on your income statement as a gain on sale of your house and that goes in your cash balance or whatever you put that gain in (maybe a new home?) And speculating on the value of your house is something you could put as a note to your balance sheet or financial statements. this the Generally accepted accounting principle (GAAP) way to go about things. But, the way you have it is fine by me for your purposes if the current value is accurate and you disclose that the 600K is the current market value of your home and not the cost. although i’d prefer to see it as 600k as an asset and 480k as a liability for further clarification on your balance sheet.
Why not use http://www.zillow.com to estimate the market value of your house? I have found the price estimates to be reasonably accurate. The site also provides information like historical price trends for the property and neighborhood.
Zillow’s Zestimate for my house is $100,000 higher than what I paid for it (!). I suppose I should be happy, but I don’t think it’s a good idea to use for a conservative estimate.
Thanks for talking about percentages of savings of net income. We’re been saving 30% of net income (not taking into account the 11% we save in the 401 (k) plan) and I thought we were doing well! We are a one income family now, while my husband stays home with our son. But I want to get that percentage higher!
I don’t understand why you would try to re-estimate your house value on any consitent basis. Until you sell it, you have no realized any gains, and if you try to estimate market value for net worth, you would have to account for the 6% commission to get to that money and the associated costs with selling.
So, I would recommend leaving the house as an asset at the purchase price and carrying the loan as a liability. The difference goals to your net worth. And assume any appreciation (short-term) would go toward paying closing costs when selling.
The only time I would adjust the House Value is if you made improvements that you can determine what the recognizable market value would be from them (e.g. 80% return on Kitchen improvements). Even then, that might be a pain to track. But tracking appreciation on a hard property, does seem to create more problems without creating more visibility into net worth.