Finally a bit of green!
Credit Card Debt
For newer readers, don’t worry. In the past, I have been taking money from credit cards at 0% APR and immediately placing it into high-yield savings accounts or similar safe investments that earn 5% interest or more, and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards this way. However, given the current lack of good no fee 0% APR balance transfer offers, I am just waiting to pay off my existing balances.
Retirement and Brokerage accounts
March was a rebound month for the stock market, and our balances went up accordingly. We contributed $10,000 into IRAs, and $12,969 in 401(k) salary deferral and company match. A chunk of that was a true-up contribution from 2008. Score! See my 2009 Q1 portfolio update for more details.
Cash Savings and Emergency Funds
Our cash savings did drop due to the IRA contributions, but we still have over a years worth of expenses set aside. I want to keep one year of expenses for our emergency fund, and start looking for places to invest the rest.
Home Equity
I used the same internet valuation tools as before – Zillow, Cyberhomes, Coldwell Banker, and Bank of America (old version). The magical elves have decided that my home is worth a tiny bit more this month. The number shown is after another 11% reduction to be more conservative.
It’s been about a year that I’ve had this mortgage, and I am wondering if I should commit some cash towards paying down the mortgage principal too. If I make an extra mortgage payment each year, I replicate a biweekly accelerated payment plan, and can shave around 5 years off my 30-year mortgage.
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Everything looks fantastic. Do you have an idea of what a year of expenses are for you? Also, do you have a plan to pay down the mortgage or are you holding off on that?
@the weakonomist –
He’s done this before. Including housing, he says that he spends about $4500-$5000 per month, and they make close to ~$225-250,000 a year.
I am also wondering if I should make extra mortgage payments as well. How do you make the analysis to reach a decision like that? Since we are hit with AMT, I don’t think I am getting much tax deduction with the mortgage interest tht I am paying.
I’m also wondering about the decision to pre-pay the mortgage. Sure, you can cut several years off the loan by pre-paying only one more payment a year.
My question is (given my situation): I’m 23 and plan to be in my home for ten years max. By pre-paying, I can maybe reduce my 30 year loan to a 25 year loan. Does it really make a difference if I don’t plan to stay in the home for even those 25 years? Pre-paying only shaves payments off the back end of the loan — it doesn’t reduce the principal/interest owed on your regular payments each month.
They say that pre-paying amounts to getting a guaranteed 5% (or whatever interest rate your loan is) return on your money. But am I really realizing that gain if I move out after 10 years? Again, pre-paying now does nothing to reduce my interest owed over the next 10 years of regular payments.
Is there something I’m missing here?
Rae, the mortgage calculator at bankrate.com is pretty good for seeing the effect of extra principal payments. It was truely eye opening to see the effect of making a fairly substantial one-time principal payment: it cut the remaining 25 years of my mortgage in half and reduced the total interest paid by about $70,000! (and yes, I actually did end up doing this). Plus it made me realize that it’s now not worth refinancing: the total amount of interest I’d pay by refinancing is virtually the same as doing nothing after my extra principal payment, especially after adding in the ridiculous amount of closing costs. I’d much rather use the $2,000-$4,000 in FEES I’d have to pay to refinance to just pay down the principal on my current mortgage instead of giving it to those greedy bankers!
This might be a real Newbie question but I didn’t realize that you could contribute into an IRA if you were maxing out your 401k. Is this true?
@Carlo,
Yes, you can contribute to a 403b/401K/SEP-IRA/SIMPLE
AND
A Roth or Traditional IRA.
@Justin,
Thanks. That’s eye opening news for me! 🙂
CARLO.
I just found your website today by looking at the Zecco April fools joke on google, I gotta say , I’m really enjoying all the stuff on your website.
I have similar goals too 🙂
@ Justin & Carlo
If you have a qualified plan at work and you make more than $60,000/yr you are not allowed to take a tax deduction on your IRA. For a roth IRA you can not contribute if you make more than $120k as an individual or $176k as a couple, otherwise you can always contribute to a Roth no matter what is available at work.
If you exceed those limits and you have a qualified plan at work, you can always contribute to a non-deductible IRA, which is what Jonathon is doing, in preperation for next year when Traditional IRAs can be transferred to Roth IRAs, no matter your income (taxes on gains must be paid from outside the qualified account).
Looking good, well on your way to 25% of your goal!
@Jake,
That makes a lot more sense for my situation. Thank you for the clarification.
Carlo
If you paid off your credit card balances tomorrow with your cash on hand, how many months of an emergency fund would you be left with?
To Jason
An additional advantage is that money paid to reducing principle instead of fees pays off right now instead of long term. If you had to get out of your house next year the refinancing fees would be gone, but paid down principle would mean you’d take more money out or your house.
I think you made the smarter move.
I think you are fooling yourself about your home value. Those models are off due to the bubble bust. You need to subtract 20% from what Zillow, eAppraisal, and Cyberhomes projections.
I think your house is worth less than you posted, but everything else is looks great.
@Matt:
“Again, pre-paying now does nothing to reduce my interest owed over the next 10 years of regular payments.”
This is not correct. Prepaying increases the proportion of your payment going against principal every month. So prepaying does have a return even if you move in a few years, in the form of accelerating the reduction of your principal balance over the remaining life of the loadn and thus increasing your equity.
Looks like a lot of the questions are already answered. 😉
Matt – I am taking net cash when making those statements (cash minus credit card balance.)
I conservatively estimate $5k per month in expenses if unemployed (health ins, etc.) So one year would be 60k.
Re: paying down mortgage.
As Peter noted, when you pay extra towards principal, you are “moved forward” in the amortization schedule. This means each future payment (the amount stays the same unless you re-amortize) now pays down more principal than before, and that means less interest paid. If you sell, your loan balance is that much less. If you don’t, your mortgage is paid off earlier.
Re: house value.
Maybe, but there is no other better easy and objective way to do this that I know of. (I’m open to suggestions.) I also left out that I am taking the values provided and subtracting 11%. (5% to be safe and 6% for imaginary agent commission.)
Jonathan, I was shocked to see that the value of your house increased as well. But, I think that your method is correct. It is consistent from month to month. Over time, it will work itself out to be correct.
You went from $ 177 k in March to $214 k in April. (precisely $ 36870)
or 17 % of your net worth.
Its your blog/your website but that is a wild swing by any standards.
(Unless you got a bonus or some other one time event)
Secondly, IRA contribs. and Roth IRA balances went up 39 % and cash went down 3 %
In March you had a negative change of $ 5k in your ROTH. Assuming you recovered all of that in April which brings it to $ 37 k approx ($ 32k + 5k recovery), it still shows a deposit of $ 8 k this month which is inconsistent with your cash balance.
Again your blog/your website but some source accounts seem to be missing.
You need to come up with a better calculation for your house.
I value my house in a worst case scenario….because its a primary residence (If I sell, I would be homeless) and secondly, in any market in the US, you would not get market value.
I havent followed your blog that close but can you clarify how your payment is so low on your mortgage.
This is not meant to be a mean comment. If you are using this to calculate your net worth, then this just shows you a different perspective.
If you want to get a more accurate view of your house, you can pay for an appraisal yourself for about $300. You could also probably find a professional appraiser to do an “unofficial” appraisal involving no paperwork for much less. On my house (here in the Pacific Northwest), Zillow is spot-on with what the appraisers have said within the past 2 months. I suspect other regions may be less accurate.
Well the only true way to determine the value of your house is to sell it, anything else is just a guess. I think your approach is fine. I don’t bother including my home value in my net worth, it’s too depressing.
Raj Shah, re: mortgage payment…
This is a balance sheet, not an income statement, therefore interest on mortgage is not present, only principal…
You should follow the blog more closely…
(i) You’re both making more than $159k-169k together. You’ve made illegal contributions to Roth IRA.
(ii) You live in CA. You really think the value of your house went up in March? How would you even know this, the Case/Shiller index is published 2 months later…… (All CA houses are down). Is this an adjustment for previous miscalculations?
@Raj Shah. “You went from $ 177 k in March to $214 k in April. (precisely $ 36870) or 17 % of your net worth.”
They have >$10k to stick under their bed every months.
But overall I agree with your assessment. The stock market didn’t go up THAT much in March (DJI 12%). An increase by $36870 in one month is alot even for a high income earner. My guess is that they got taxes back from Uncle Sam.
I don’t know, it doesn’t sound that implausible compared to previous months. When your portfolio is bouncing around, big swings occur. Rough numbers ahead:
Let’s say my stocks/bonds portfolio was $100k (actually more). The S&P 500 went up about 20% in the last month alone, depending on the exact dates you choose. That would be $20k by itself.
$12,969 was our total 2009 year-to-date contributions, for March is was about $6,700. However, about $3,700 was a delayed “true-up” for company match we missed out on in 2009 due to reaching the $15.5k cap too early. So say another $7k there, only 3.5 of which was actually taken from income. Plus $10k into Roth IRA. That’s 20+7+10 = 37 already.
Payment for mortgage is not $500 (I wish!). That’s just the amount that went towards loan principal.
On the house valuation – I have no problem with the method being used, in fact I find it somewhat conservative. This is probably due to the fact that I’ve been following this blog for a long time, and my perspective might be different from some.
I can’t speak for Jonathan, but my viewpoint on the monthly status report isn’t so much to say “what am I worth?” but “how am I doing financially?” I don’t include my house in my personal net worth calculation, because I didn’t start keeping track of such things until after we bought the house. Since Jonathan started this before the house purchase, putting the house in there just keeps things more steady and enables him to better compare now to before. Just my view.
Also, I’m amused at all the folks who think they can judge how much a house is worth that they’ve never seen, don’t know where it’s located, and don’t know whether it was a great buy or not.
Tim
Numbers look great this month! Since it is tax season it would be nice if you could go over your methods for minimizing your tax bite and maybe give some rough info on how much ends up going to the gov this time of year (If you pay or if you get money back)
I’ve had to pay the last couple years because I have a lot of cash in interest bearing accounts (non retirement). I’m renting, so no housing deduction anymore 🙁
Good job! I told people that the recession was over. I made 250% in the stock market in the last 2 weeks and made about $3,000. I am looking to build wealth and retire at 25 years old.
Hi Jonathan,
Great job, as always. I was happy to see your long term goal is to pay off your house. There is always a huge debate about this, but I think that in the end, unless there are unbalanced factors like a disproportionate interest rate or no emergency fund or IRA, paying off your homestead is a great goal.
The feeling of accomplishment it will give you is no doubt incredible. I wish I could feel it!!
Mike
Just curious – I don’t see you have any car payments, which tells me you have paid it off. What car(s) do you drive .. old/new ? Or rather, did you buy your car new, paid it off and then keeping it ? I am asking because I have a 22 yr old car .. runs fine, but will not pass CA smog this year. Which means I need to get another one .. debating whether I should buy a new one and run it for 10+ years (my avg is 15). Problem is i don’t have $20-25K lying around and I am hoping not to get into car payments – I can easily borrow from home equity (have plenty of equity and excellent credit), but still hoping to avoid debt.
Any suggestions ?
Thx
I think a tax provision should be provided. No future tax liability on Roth, gains selling house, and 529 but taxes will be a lot on your tax deferred accounts such as 401k. Residual values on your cars can be included in the net worth.