That was the subject line of an email I just got :)
(The first thing I’d do is crack open a bottle of champagne and celebrate!!! Check out their incomes!!)
From “Method & Madness”:
Hi J Money,
Thank you for all you do for the online community and being a general butt-kicker. I’ve been a huge fan since the podcast days. I was wondering if I could pose a question/situation to you and the BAS Community. I always learn a TON when you’ve posted scenarios with all the numbers attached. Those posts are my favorite to read comments on because of the breadth and depth of knowledge you and your community have. My question is about taking our extra savings and applying it to the balance of our mortgage.
There a few things you should know about my husband and me. We are in our mid-to-early thirty’s, we live in a high tax, high cost of living area and have a mortgage balance of $206,000. Our home is worth approximately $460,000. We currently have a combined income of $350,000 but we both are in Sales so our income has the potential to fluctuate quite a bit. We are anticipating having that same income for 2018 but in 2019 and on it could go down by $50,000. Or more, you never know in sales!
We are currently maxing out our 401(k)s at work. In 2018, that is $18,500 per person (like you don’t know…). After that, on a monthly basis we are putting $3,000 into a post tax investment fund through Betterment (which I love). We also save a minimum of $1,500 a month in an account which started out as a “fluctuating income” fund, but over the last 24 months that has accumulated $122,000. We just transfer our extras/bonuses in the account, so it doesn’t stick around in the checking and get spent 😊. We do have an emergency fund of $25,000 and various other funds for ongoing expenses like house/car maintenance, vacation, my husband’s toy fund (there’s various off-road vehicles owned and on the wish list LOL). Our current mortgage payment is $1,600 a month, we pay an extra $1,000 towards principal.
Here are the deets:
- 401k’s: $152,495
- IRA’s from Old Jobs: $29,700
- Pension: $29,000
- After Tax Investments (Betterment): $14,716
- Savings Account in consideration: $122,558
- Add’l Savings not being considered (Emergency, Vacation, House/Car Maintenance): $38,564
- Mortgage Balance at 3.625%: $207,852
- Monthly into 401k’s: $3,083 (two separate 401k’s)
- Monthly into After-tax Investments: $3,000
- Monthly into Savings Account in Question: $1,500 every month, 4 times a year + $5,000-10,000
- Monthly extra on Mortgage: $1,000
We would like to (or we think we would like to) take the “fluctuation income” fund money and apply it to the mortgage balance. The remaining $84,294 would take us 14-19 months to pay off depending on how aggressive we get and successes at work.
On the personal side, we think we would feel more liberated to live a different version of life if we didn’t have a mortgage. We are unsure whether we want retire early, take a sabbatical, or if we just want to be financially independent. Either way, we want to be smart and focused. PLUS! We don’t have anything else we want to “do” with this money (not off-road vehicle related😊). This seems like a great goal to go after together.
I’d love to know your thoughts if you have a moment. Thank you for being a beacon of bad-assery,
– Method & Madness
Let’s just get this out of the way – definite first world problems here :) But good for them! They’ve figured out The Hustle and are now reaping the sweet sweet benefits of it. We should all be so fortunate!
The first thought I had was actually why they didn’t have even *more* banked with incomes like that (answer to come in a sec), but my rule with all this sorta stuff is pretty straight forward:
So long as it increases your net worth in the end, just jump in and start slaying whatever it is that moves you! You’re always MUCH more likely to keep going with things when you’re passionate and on a mission than you are just doing the “more responsible” thing. Who cares if you don’t maximize every last penny – you gotta do what best fits your personality and lifestyle!
(Unless your personality is motivated by chasing the most optimum route – in which case you crunch those numbers like a champ and do yo damn thing!)
And remember this too – we’re always allowed to change our minds. You may want to pay down those debts or save/invest/cut expenses *now*, but who knows what life will hit you with later or what new dreams will come your way. You have to be able to adapt to this stuff even if it flies in the opposite direction than it used to. As long as you’re always focused on the one thing that drives you NOW, there’s no way you can go wrong in the end.
(Again, so long as it all pushes your $$$ forward and not backward — we’re not talking about snatching up new cars or shoes or boats anytime you’re excited about them ;) Just *financial options*.)
So obviously you know my stance with our reader’s situation here (GO FOR IT!! PAY DOWN THAT MORTGAGE AND GET YOUR FREEDOM!!!!) but here’s more data for you before you chime in with yours…
The only thing I saw missing here to better put things in perspective were their general monthly expenses, as well as wondering why they “only” had $300k or so saved up with those types of incomes.
Here’s what she responded with:
Great call out on the income. Yes, it is relatively new to us, 18 months new. Our income went from $200k to $350k. And even though we get giddy and proud at that number at the top of the sheet, much of our income are bonuses (40-50%) and are subject to the federal tax on bonuses. Once it comes into our pocket it’s 40% gone. California can be a biatch.
We’ve also been mind ninja-ing ourselves in small steps to get to the savings rate we are currently at. So any time we realize an increase in pay (base pay raise) or a decrease in spending (cutting cable), that next month we up the amount into one of our savings accounts. That’s slow work. So both of your assumptions are correct, both the income and savings rate is new to us. That’s the reason for the lower account balances.
We also used some of that for large purchases in the last two years – $18,000 vehicle paid for in cash last year, – $10,000 off-road vehicle, etc.
$206,800 is the income that hit our bank account after 401k, taxes & benefits were taken out in 2018.
By category this is our “normal” monthly expense at $6,600 out going. We do our best to pay for larger, infrequent expenses (ie fence repair) in the months we have extra income come it. I haven’t included that in the average monthly budget below.
- Giving – $685
- Housing (not including extra on mortgage, but does include things like Cell Phones, Internet, Utilities, Ongoing Maintenance & Upkeep) – $2,500
- Car Gas & Maintenance – $220
- Food (Groceries, Restaurants & Bars, Coffee, Hosting BBQ’s/Dinners) – $1,165
- Lifestyle (Gifts, Weekend Travel, Netflix, Haircuts, Shopping, Housecleaners, Hobbies) – $1,250
- Health & Wellness (Chiropractor, Massage, Vitamins, Meds, Gym, Yoga) – $525
- Taxes/Insurance – $178
I’m excited (and nervous) to hear what you have to say.
Now we have the bigger picture :) In other words, they spend the same amount of money every month as I do, only with three times the salary! Haha… Which leaves a looooooooooooooot of extra money for $$$ goals which again is just amazing!
So if I were them I’d be maxing out every last financial checkbox as well just in case it does come crashing down one day… They can take away your job, but they can’t take away your wealth!! As long as you’re building a nice fat moat around it like they’re well on their way in doing.
So my vote is yes – 100% pay off that mortgage and free up that mind! Not only do you have plenty of cash flow and padding all around you, but it’ll only net you even MORE $$$$ once that house is paid off! It’s a beautiful thing!
And if liquidating all $122,000 in savings is still scary, maybe pull $80,000 from it to start with, and then throw the other $40,000 into your “Emergency, Vacation, House/Car Maintenance” fund giving you a whole *12 months* of expenses banked and ready to be used in case the $hit hits the fan… Which of course the odds are a long shot – especially with all your other $$$ stashed – but still. Might help you feel more confident and knowing you’re covering all the bases before going “all in” :)
Those are my thoughts – how about you guys?? Is she safe to start storming the mortgage?? Would you change anything else with her setup? Do you wish you had those levels of income too? ;)
Drop your thoughts/comments/questions below, and our dear reader here will be pouring all over them and hopefully getting closer to a good answer for her family. Just please keep it respectful! Y’all kinda went buck wild on the last one – which is fine – but keep in mind it’s not that easy divulging your goods to the world so please keep it as attack-free as possible…
If you missed the last few articles like this we’ve posted, here they are again:
- “I’m Semi-Retiring at 43!”
- “You might get a kick out of our recent financial journey”
- How a Journal Completely Changed My Finances
Happy gawking! :)
Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!