“Good” Credit Card Debt
If you’re a new reader, you may have some concerns about 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, Home Purchase
If my posting has been a bit light lately, it has been because I’ve been bogged down by a combination of illness, travel, and the home-buying process. Also, I didn’t want to do it in real-time because there were some snags along the way… but we’ve finally closed!! I have lots of house-related posts coming about mortgages, inspections, and so on… but first here are a few details that will help explain this net worth update.
| Purchase price | $600,000 |
| Down payment (20%) | $120,000 |
| Discount points paid (1%) | $6,000 |
| Buyer’s agent rebate (1.5%) | $9,000 |
| Closing Costs | ~$3,000 (rest paid by lender) |
Our purchase price of $600,000 was more than the $500,000 we estimated we wanted to spend a couple years ago, but we are now in a 4-bedroom single-family home that we can see ourselves living in forever. In addition, we didn’t stretch too far as we can handle the mortgage payment on either one of our incomes.
We believe we got a good deal even though the short-term market looks bad, and the house has tons of potential. We’re even going to rent out a room to a relative. Our home appraisal actually came in at $640,000 – we’ve been told an appraisal coming in higher than purchase price doesn’t happen very much in this scared housing market. Using this value would actually leave our home equity at $160,000 instead of just the down payment of $120,000. However, I’m just going to be conservative and leave it at $120,000 for now.
As you can see, our 50% buyer’s agent rebate helped offset our closing costs and the points on the loan. Of course, mentally we are using the $9,000 rebate towards all the home improvement projects we have brewing. 😉 Finally, adding back in the $5,000 earnest deposit that I had marked as spent last month makes the numbers look a lot better than they really were.
Emergency Fund?
Our net cash balances have taken a big hit to less than $10,000, and that makes me nervous given that our monthly expenses just shot up drastically. Our foreseeable mid-term goal will definitely need to be to build up a proper emergency fund, which we’ve never officially had since we basically treated our downpayment funds as such. Visiting Brazil and Australia will have to be placed on the backburners for now…
Retirement and Brokerage accounts
February is the fourth month is a row that our IRAs and 401k/403bs have dropped by 3%. We may need to start setting up some regular monthly investments in order to help force ourselves to keep investing.
It’s been a wild month! You can see our previous net worth updates here.
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Congratulations on your new home!!
Congrats in the new home!!
You include the equity as an asset in your networth but you don’t have the mortgage balance in the liability column.
Should both be accounted for when calculating your networth?
Congratulations you are now owned by a home!!
Congrats!
I may have missed something, but shouldn’t your mortgage be listed under “liabilities” if you are including home equity as an asset?
Congrats on the new home. Why have you chosen not to put your mortgage into the liability column?
Congrats and welcome to the joys of homeownership!
Congratulations! Hope you have lots of good memories in you new home!
I’m sure you’ll visit Lowe’s or Home Depot more than you have ever imagined…
“Visiting Brazil and Australia will have to be placed on the backburners for now…”
I would recommend forgoing the emerg. savings in order to meet your midterm goals and travel to the places you want to go. Life goes so fast and money goes faster once you own a home. Also, it seems once ppl own a house, all of a sudden the travel budget goes into getting new floors….not worth it IMHO. Dont worry about emerg. savings – spend that money on traveling to the places you desire. It only gets more and more difficult to do those things.
Congrats on the new home! aa said it, you will make more trips to home depot and lowes in your first month than you have in your lives thus far.
My wife and I just bought our first home last month and we are already sick of home improvements. If you don’t mind I’ll offer up some advice… Don’t put your trips on the back burner. It sounds like you will live in the house for a very long time, so you have quite a while to make all the improvements you want. Mike F was right in the fact that it only gets harder to travel (though I disagree on not saving an emergency fund).
Anyway, congrats and enjoy the new house!
Congrats! Glad to hear the closing is over! By the way, would you share your interest rate?
oh yeah, there are some huge changes this month but at least it’s mostly good news!
i agree on pumping up your Emergency Fund for sure. there’s nothing like feeling totally secure and then investing all the extra $ from there on out. it’s not as sexy, of course, but it’s def. a smart plan 😉
Look forward to hearing more about the buying process.
You know, seeing the fact that you bought a 600k house makes me less impressed, Jonathan. Based on what you financed, and knowing that you try to do things the right way, it means you probably make anywhere from 160k annually to 192k due to you probably stayed within the rule of thumb of 2.5 to 3x earnings in a house note.
I can’t remember how old you are, but for some reason I’m thinking that you are very early 30s, like 30 or 31. You’re making a big income, but saving 20% of your income a year would be between 30 and 40k. I used to think you were able to save big on a little income. Now I see that you save average/above-average on a large income.
🙁
Personally I am extremely skeptical of home appraisal valuations. I find them suspect along the same lines of the subprime mortgage debacle. Whether home prices are truly worth what they’ve been appraised remains to be seen. The question is will anyone really buy the house at such inflated prices?
I’m impressed single family home prices in your area are so incredibly low. Of course, this is speaking from someone who lives in the DC area where a $500,000 home is considered a bare bones start for a tiny starter home.
-Raymond
homeownership is not a joy. its a pain in the rear. welcome….u have been suckered into the dream created by bullshitters to keep the economy floating. This is not the american dream for sure. The yearly taxes, interest, maintenance, realtor fees wipes out any gains for the future. People dont look at these costs when counting their profits.
I am paying more than double to live and maintain my home as opposed to renting.
i was suckered in as well…..
this is worst that investing in the stocks….if u put $120K on a $600K house and if the house price falls to $480K, u have just lost 100% of ur investment and even more. Even the stock market is nicer during a bear market.
Wow! Thank you so much for sharing your plan. It gives me hope. My wife and I have a Financial Coaching company and it is awesome to see someone actually thinking, planning, and then implementing. This is very powerful stuff. I look forward to referring your site to my clients as a compass.
congrats. definitely save for an emergency fund, though, with either income able to hold you it doesnt need to be as high.
but…i definitely want monthly updates to your home equity…i’m curious how much it will drop
“Our net cash balances have taken a big hit to less than $10,000”
I think you meant $100,000? Congratulations on the new home!
You added the home equity in the asset side of the net worth calculation. Should the mortgage amount also be added to the liabilities when you calculated net worth?
fontraid said:
““Our net cash balances have taken a big hit to less than $10,000?
I think you meant $100,000? Congratulations on the new home!”
31k cash minus 23k credit card debt!
Wow, I really wish I made enough to afford a 600K home on one income! I need to stop churning out widgets and command people that turn out widgets!
Congrats on your new home. I’m a bit puzzled on your comment about being able afford the mortgage on one of your incomes. From the looks of it, despite the hefty down payment, the mortgage still seemed sizable? In my head, the amount of money required to make this kind of payment (one-income) and your overall net worth (which I would have though much higher as a result of TWO income) wasn’t an obvious fit for me. I’m sure I’m missing something in the equation, could you please provide some clarity?
@Mike Hardin:
Thanks for the clarification!
people then say….but a home is not an investment vehicle….its something u live in…..well a car can be seen that way too……its something u drive everyday, its ur own comfort….its ur own safety…..if thats the case, everyone should buy a volvo
No, he meant less than $10,000. You have to subtract the credit cards from the cash balances to get the net cash balance.
Instead of just listing the home equity as an asset, why not show the entire home value as an asset (purchase price or appraisal, whichever you prefer) and list the mortgage with your liabilities?
Net worth comments – There are two ways to do it:
1) Put $120k as home equity as asset. I own part of the home.
2) Put home value in assets ($600k) as I own the entire home and put the loan amount as liabilities ($480k) since I owe the bank a ton of money. 🙂
The numbers all work out the same in the end.
Owning a home – It will be quite a learning adventure. Sometimes I already wish I bought a condo instead when I look at all the stuff I have to do…
Affording a mortgage – I am using this term pretty loosely. I am not using a 2.5 or 3x multiplier. “Afford” is a very subjective term. I am basically saying that if one of us loses our jobs, we will still be able to pay all our bills. It may be very tight, but we won’t go into foreclosure.
Wow, after looking at your previous posts, you seem to have ammassed a lot of wealth in a very short period of time. I’m assuming you must be a corporate executive, or this blog is bringing in a lot of dough
Where we live, you don’t need to be anywhere near a corporate executive to make $100k per person. But that’s also why houses cost so much… 🙂
Lets get real here – alot of that 120k “equity” would be eaten away by the $30,000 real estate fee, transfer or other taxes, and any loss that would be absorbed in the next 6-12 mos as the housing mkt goes down… 160 is a pipe dream I’ve seen a zillion appraisals higher when you buy or refi. Pedal to the metal when you sell. I wouldn’t even include the equity for 5-10 years.
xmasy – well you’re post seems interesting but as a homeowner (recent) who just had their company sell my house and get all my equity back out tax free i’m very happy to be getting out of home ownership in dismal areas like California and going to an area like Texas were homes actually appreciate in value (albeit very slowly). i may even rent for a while. homes can be alot and i mean a lot of waste.
Congrats!
I’ve been reading your blog for quite a while, but I only noticed now that your net worth seems to be both you and your wife’s. Is that correct? If that’s so, how does this figure into that graph of your net worth from age 18 to now? It would be interesting to know where in that graph did your wife’s net worth get added.
To everyone that talks about the “Home owning you” — don’t be jealous. Owning a home is the american dream and there is nothing more fufilling than buying your first home. Yes it is a big expense and sometimes it’s a pain to fix/repair things around the home. But at the end of the day, it’s all worth it.
If you don’t want to own, fine – don’t — continue renting and making money for your landlord. But don’t knock Johnathon or other homeowners that own their homes!
congrats jon
Did you not have to pay off your credit cards to get the best loan deal? Or did I miss a previous post about that? Thanks.
How can your cc debt go down .6%? Isn’t the law of debt pay off something that would force the cc company to charge you a minimum of 1.5%? or 1% + fees, whichever is greater?
Hey Jonathan,
I have been thinking about how much my house should be worth compared to my “target net worth”. For instance if my target net worth is around $2million, a $600k home is about 30%.
I am thinking based on what I have collected so far, that ultimately my home should end up being 10-20% of my target net worth. I think its safe to assume your target is significantly higher than mine.
What happened to those plans of working part time when you have kids and financial freedom? My guess is your trying to accomplish them with higher income rather than reduced expenses. Would love to see more on how your planning has changed.
I haven’t read all the above comments. But I did read a few about not putting your trips on a backburner and I dk what, if any, trips you were/are considering. But there is a lot of good advice in that. My husband and I started pulling our kitchen apart, took up the tile floor, scraped wallpaper, etc. Four years in a row we haad a choice of finishing the kitchen (which was usable) or taking a trip to visit family and vacation in Florida. The adventures we had when driving down 3 years and flying once, of all the fun activities we had were the best. The fifth year my husband died at a young age. The kitchen wasn’t done but damn, I am so glad we chose the vacations. The kitchen eventually got done. Actually miss the mess of it, especially all the notes, greetings, kid’s drawings, phone numbers that were written on the bare walls.
2mil – I’ve never really thought about it that way. I think of it this way – I want to both live in my “forever” house and have it paid off by the time I retire early by 55. That way, I have minimal housing expenses to budget for. Now my retirement accounts only have to pay for medical + food + utilities + leisure.
Like you mentioned, I also want to be able to live on one income (or two ~50% incomes) when family time comes. We can do that now, it’s tight like I said but everything should be covered including a bit towards retirement – though not nearly as much as now. But we have a fixed monthly payment, whereas our incomes will likely only increase due to experience and inflation each year. So I think my plan remains pretty much the same?
We are 29, and kids are still a couple years off so we’ll max out our dual-incomes while we can 🙂
“forever” house? Red flag buddy. Big time. As any homeowner in CA is rightfully scared that prices will/could tank “forever” is a rationalization. I’m retiring at 40 to spend time with my little ones and live in a paid of 250k home in TX instead of working another 15 years to pay off an overpriced home in CA with iproperty/income/sales taxes that require a 3rd income for the average family to pay if ever. $100K incomes are a dime a dozen anywhere in this country with the right IT credentials.
Allan,
paying realtor fee, mortage and interest is making ur bank and realtor rich?
Dong – Well, $5k was spent last month already + about $12k in new cashflow in this month + $103k in cash from before = $120k.
Jonathan, maybe you answered this already (though I don’t see it in the comments). How did you put down 120k with using much less than 120k in cash savings? Am I missing something?
Ok, that makes sense. I’m very impressed that you were able to put 12k in new cash flow towards the house. Keep up the good work.
congrats on your new house.
I don’t know what it is about buying your first home… but expect your finances to be f**ked for the first year. After that everything evens out… no matter what your mortgage that first year is killer.
Hey Jonathan,
I am new to your site.
Congrats on your new house!
I was wondering how much you and your wife make each month? It looks like you should be a lawyer or a doctor to afford living like you do.
And what is your monthly mortgage payment on the house?
John, congratulations on the home purchase and don’t worry if you have any buyer’s remorse, it is common especially in this market. Based on your location you will probably take a paper loss on the home for the next couple of years but don’t pay attention to that because it is meaningless if you’re not planning on moving. But like some others have said, be prepared to spend a lot of money in the first year or two. Houses are definitely money pits in the beginning. I bought my house 5 years ago when I was 27, I paid $770K and the first year outside of mortgage, insurance, taxes, closing costs, etc. I must have spent at least $25K just on furnishings, home improvement things, etc. And I didn’t splurge on anything at all.
Jonathan,
What’s your take on the following.
Warren Buffet in his most recent letters to investors said that 8 to 10% returns are things of the past and cannot be sustained in future. This along with frequent cyclic downturn in market with market barely returning to historic highs there is a renewed talk that, the only way to have sufficient retirement fund is to constantly time the market. I know this is easier said than done. This is so contrary to conventional view that it is snubbed immediately by most fund advisers. But lately there has been renewed interest in this theory (considering NASDAQ/NIKKEI never returned to their historic highs in past decades and DOW barely could sustain it), one among these advocates is: Compass-Institute, which works by sending action reports aimed at timing the market by constantly reallocating assets and surprisingly it has some high profile participants such as IBM, SAP, Merck etc. I am wondering what’s your take on this approach.
Do you think this is the new way to invest in constantly moving efficient frontier ? Keep up the good work, there are so many who constantly benefit by reading your findings.
Relevant Links:
http://www.compass-institute.com/
http://www.compassinvestors.com/
Warren Buffet 2007 Letter: (Page 19, 4 and 5 Para)
http://www.berkshirehathaway.com/letters/2007ltr.pdf
crazy stuff in them big cities ya’ll. that the standard rural jive for ya.
here in rural ohio, i paid $170 for a 3 bedroom, 1600sqft home, plus finished basement.
that said, wife and i are public servants if you will pulling in 90 between us – and we do very well for our age (younger than our money wiz here).
should have saved that money for 5 more years, moved to a small town, bought a house in cash that wasnt overvalued, and enjoyed life without mortgage payments at a lower income, with a good school system for raising your kids.
i too wouldnt count the house as liability – you have the full value to cover that, so hypothetically you arent out – unless resale potential drops below what you owe, then revise your numbers accordingly.
Jonathan, where’s your mortgage info? I’m surprised you haven’t posted with more detail on what you ended up with (e.g. which bank, interest rate, etc.).
I think I need to start my own blog after reading about what FundInvestor has to say. Everyone chasing the high immediate profit and scorning a loss – likely driven by the software that sets a buy and sell price, may help you in the short term, but I think it is creating greater unnatural swings in the market – ie everyone buys and sells in what amounts to mass quantities automatically, further exaggerating what may have been a small blip if everyone had just stayed put. I think a lack of patience is one of the biggest problems the market faces – everyone wants to get rich quick – ie invest in ethanol – which just went bust. people need to calm down and take a 30-40 year approach – this isnt a sprint people.
willyj and Trips – We definitely have a lot we want to do with this house, so I would agree that our spending will be erratic.
FundInvestor – That just looks like any other stock-picking or market-timing newsletter to me. I will agree that long-term returns may not be 8-12% annually. But timing the market has proven to be very difficult even for professional investors with billions under management. I think I’ll pass as well.
chrisMR – I definitely agree that we could retire even early somewhere else, but as I’ve mentioned we want to be near our family and our community. In addition, we might not make as much in a rural community as we do here. Still, I often do ponder buying a house in cash and settling down in a less hectic life.
chrisMR/Jonathan,
Kiplinger “2008 Mutual Funds” special issue has a reference to Compass institute and subsequently suggested that fund investors should not attempt to time the market. I agree with you that it impossible to time the market to maximize the gain. But my question was more from perspective of principal protection and locking gains, consider for example some one who just started his personal investment (or 401K) with an age appropriate (bond + stock) portfolio with an year or two of bear market his portfolio would loose ton of value before returning any gain. For such an investor isn’t it a better idea to focus on principal protection rather than chasing elusive gains in future ?
I agree same is not true for someone like you who is in the market for at least one bull market cycle (2003-04). If you backward run you portfolio to start through 2000-01-02 bear market you will realize that your gains might be (much ?) lower.
The only remedy I see is, constantly lock on to the various market points (ups or downs) by investing on monthly/bi-monthly basis, but that requires initial set-up which requires funds minimum of 3000/2500. If your portfolio has say 6 funds that means you have to invest outright in a bear market with 18K and continue investing into it with patience in face of constant principal erosion to realize any gains 5/10 years from now. Is this the right strategy ? or there might be another way ? This becomes even more complicated with the frequent Bull-Bear cycles. There is much smaller window to realize and carry forward a gain before you are back again into bear territory.
In face of all this, isn’t it wise to constantly (every six months ?) reallocate assets to protect the gain. This might not return the best gain but will flatten the yield curve, in a way you will not loose the most during the Bear run and you will NOT gain the most during the Bull run either.
This Monday DOW was hovering at 11,740 just 500 points short of previous bull market high of 11,400 (Oct 1 1999). Now that we are entering the bear territory (first time since you started blogging) it will be interesting to see the strategy at work and portfolio performance. In the bear market of 2001-02,S & P lost 40% of its value from peak and just when we regained that peak we are into another bear market. The cycle is getting shorter now and we are seeing a bear market every 6 years as opposed 10 years cycle of the past few decades. That’s not a good thing for long term investors. Look no further than Japan, where most portfolio gains now come from overseas and domestic market barely beats the inflation.
You can’t protect yourself from downside without limiting your upside. My crystal ball doesn’t know when the bear market will end. If yours does, then you can trust it if you wish. But the data does not support such a decision.
Jonathan,
Thanks for taking time to reply. I read your recent blog on “A Rough Start For New Investors In 2008” and “Recency Bias”, you nailed the points. For new investors it is always about timing, but waiting is worst than loosing value in short term. Market timing for either principal protection or short term gains is bad for long term health of portfolio. I have decided to stay away from it.
On a different note I noticed you have a 19% exposure to VTSMX, which when compared with Index 500 VFINX, Value Index (VIVAX), Small-Cap Index (NAESX) and Small-Cap Value Index VISVX has performed poorly according to Paul Merriman in this article:
http://www.fundadvice.com/fehtml/bhstrategies/0404a.html
———————
“The Total Stock Market Fund outperformed this four-fund combination in only one of these years. A $100,000 investment in the Total Stock Market Fund at the start of 1999 would have grown to $104,910 by March 31, 2004. The same investment in the four-fund combo, with annual rebalancing, would have grown to $134,720.”
——————–
I know this question should be asked at Bogleheads, but thought I will hear your view on it. I own VTSMX, VIVAX, VISVX in the same proportion as you. Along with this I also own Total Intl Stock Index (VGTSX). I did this to get into a passive index fund with Value along with emerging market tilt (20%) without investing in Value and Emerging Markets separately. Now I am wondering if that was the right choice.
One question I have is: Is your house still worth the $600K you paid for it? I know in most of the country thanks to the lending crisis and increased foreclosures, most home values have decreased. I know you probably got a deal on your house in the first place, but is it still worth the $600K? If not, your equity is not as high as you think it is. Hope it is and that your numbers are good, but it might be better (for the reason above) to list mortgage balance and appraised value vs a simple purchase price minus original mortgage balance (listed as equity) as a single entry.
BTW, you’re doing a great job being 29 and at the stage you are at. Congratulations.