Author: humblefi

Financial Independence Progress Report for September 2015

/ humblefi / 2 Comments
09/30/2015
Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 33.77% 33.94%
Passive Income Streams ($4000 pm) $178.58 pm (08/2014)% $439.96 pm (08/2015)
Retirement Fund ($900K) 54.66% 54.62%
Roof for our Family($1 mil) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways

Markets are continuing the roller-coaster ride…the DOW Jones index lost more than 200 points more than once this month. I did take advantage of this down market (another post on this coming up on how).
I expected a downturn and planned for it (here)…but, that did not soften the blow much. At the end of August, my portfolio had taken a beating….so, how did September do?

  • September was a much better month for markets than August.
    • College fund stayed even
    • Retirement funds stayed even.
  • Passive income for September 2015 continued the winning trend vs last year.
    • I compute Passive Income per month as (total passive income in this year) / number of months completed this year.
    • Total passive income is a sum of dividends + capital gains distributions.
    • September Passive Income = (total passive income in this year) / 9 == $439.96 pm.
    • Doing it this way keeps the monthly passive income more realistic because I can instantly know which of my monthly expenses are covered by this amount. I keep a separate tracker for this which I will write about at a later date.
  • I did take advantage of the down markets and added to my investment in VDIGX and VTMFX. Both these investments dipped to their 52 month lows when the DOW Jones index dropped more than 200 points. These new investments will contribute towards dollar cost averaging my holdings. Yeah for that!

VDIGX….an investment decision validated.

/ humblefi / 10 Comments

When I was travelling last couple weeks, I got time away from the day-to-day chores of family life. I kind of enjoyed this break….ssshhhh….don’t tell this to my wife 🙂 I used that time to read up on different articles related to my current investments. When the markets went down, I wanted to feel good about my investments!

One of my investments is in VDIGX (Vanguard Dividend Growth funds). I have talked about various dimensions of this fund in this blog.

  • My original rationale on picking this fund is documented here. Don Kilbride, the manager of VDIGX, is a recognized name in the industry and has done a wonderful job with VDIGX.
  • VTSMX is Vanguard Total Stock Market fund. I compared VDIGX vs VTSMX here. I wrote that both VDIGX and VTSMX have their rightful place in my portfolio.
  • I definitely see a recession coming and wrote about it here. As part of that, I did a Risk Analysis of all my investments here. VDIGX had the second lowest Beta Coefficient of all my investments….only VTMFX (a tax managed balanced fund) did better. A low beta coefficient means that my investments will be less volatile than the market i.e. income stability will be much better.

In addition to what I thought about, some other smart people have thoughts on VDIGX too. I read one such article from Morning Star while travelling and I really liked the content enough to post a link here.

This article argues that a fund may not provide the greatest current yield (usually, this implies less risk) but if the fund holds quality holdings, it will provide a more stable income stream and potentially lead to more capital growth in the longer term. Read more directly from Morning Star link above…it is worth it.

PS: There is good marks for VHDYX (Vanguard High Dividend Yield) also…this makes me more happy because I have invested in this also. Wish me luck for continued good success in picking good investments.

Financial Independence Progress Report for August 2015

/ humblefi / Leave a comment
09/05/2015
Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 35.00% 33.77%
Passive Income Streams ($4000 pm) $148.74 pm (07/2014)% $353.74 pm (07/2015)
Retirement Fund ($900K) 58.51% 54.66%
Roof for our Family($1 mil) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways

I came back after a two week travel on work related matters and every day of that trip was a emotional roller coaster. Markets up and markets down…sometimes, within the same day. I expected a downturn and planned for it (here)…but, that did not soften the blow much. At the end of August, my portfolio has taken a beating….but so did a lot of people. So, what were my main takeaways this month?

  • August is a soft month for dividends…so, not much cushion to soften the blow from the down markets. September is a much better month for dividends…so, looking forward to next month.
    • College fund took a hit
    • Retirement funds took a bigger hit.
    • Last month’s zero gain is looking good now 🙂
  • Passive income for August 2015 continued the winning trend vs last year.
    • I compute Passive Income per month as (total passive income in this year) / number of months completed this year.
    • Total passive income is a sum of dividends + capital gains distributions.
    • August Passive Income = (total passive income in this year) / 8 == $53.74 pm.
    • Doing it this way keeps the monthly passive income more realistic because I can instantly know which of my monthly expenses are covered by this amount. I keep a separate tracker for this which I will write about at a later date.
  • I did take advantage of the down markets and added to my investment in VDIGX. My cost basis was close to $23 per stock before the market hit a downturn…but I invested about $1500 at an average of $21.50 per stock. This new investment will contribute towards dollar cost averaging my holdings. Yeah for that!

Financial Independence Progress Report for July 2015

/ humblefi / 4 Comments
07/31/2015
Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 35.00% 35.00%
Passive Income Streams ($4000 pm) $139.55 pm (07/2014)% $319.11 pm (07/2015)
Retirement Fund ($900K) 58.51% 59.10%
Roof for our Family($1 mil) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways

  • July is a big letdown w.r.t. dividends compared to June….but, there were no rough spots in July on the personal side. Yeah for that!
    • College fund stayed even again…zero progress for the second straight month is not so good…especially since I pump money into it every month.
    • 401K took a hit in June…so, getting a positive gain in July was good news…not by much, but it is greater than zero 🙂
  • Passive income for July 2015 continued the winning trend vs last year.
    • I compute Passive Income per month as (total passive income in this year) / number of months completed this year.
    • Total passive income is a sum of dividends + capital gains distributions.
    • July Passive Income = (total passive income in this year) / 7== $319.11 pm.
    • Doing it this way keeps the monthly passive income more realistic because I can instantly know which of my monthly expenses are covered by this amount. I keep a separate tracker for this which I will write about at a later date.
  • I made a portfolio change in my IRA…moved some of the profits off to Vanguard REIT Index fund (VGSLX). This is my attempt at investing passively in real estate. I am happy I took this decision….somewhere in September/October time frame, I will think of adding to this REIT pile…I am expecting REITs to go down in  price some more around that time. Lets wait and see!

Investing in real estate….passively :-)

/ humblefi / 4 Comments

Over the past couple months, I have been thinking about all things real estate. Basically, the question boils down to: in what ways can I add a real estate component to my financial portfolio.

  • First, I was thinking about what is a “good mortgage amount” that fits my criterion for FI in 10 years. My primary residence will not be an investment in real estate, but will add a real estate component to my financial empire 😉
  • Second, the question that came to my mind was: can I somehow add a real estate component to my portfolio before purchasing my primary residence?
    • I use Personal Capital to track where my portfolio is and it is an AWESOME tool to track all your finances in one place. The one feature I really like is that it breaks down all the funds in your portfolio into the following categories, JUST by taking the names of the different funds like VDIGX, VTCLX, etc. For example,
      • Large cap, mid cap, small cap split
      • Cash and bonds split
      • Alternatives (real estate, etc)
      • US and International split
    • Personal capital pointed out a weakness in my portfolio diversification w.r.t. lack of investment in Alternative Investments like Real estate, hedge funds, commodities, etc.
    • Hence I started looking at how to add a real estate dimension to my portfolio.

This blog talks about the options I investigated.

Option 1: Rental Property Investment

I live in a HCOL (high cost of living area) on the west coast. Real estate is normally expensive in my HCOL area, but it is especially so in today’s market. There are many reasons for it, but primarily I would say that institutional investors and foreign investors are the main reason. For example, many houses that are listed in the market nowadays come from Berkshire Hathaway Property Holdings!

Anyways, I searched for a couple of rental properties (1B and 2B ones) in and around my area (radius of 25 miles max) and used my blog friend Well Rounded Investor’s Real Estate Income/Expenses spreadsheet. She is truly a well rounded investor, with investments in real estate and stocks. I played with numbers for some rental properties using her spreadsheet and I somehow never broken even on any property….not even close.

I could go more than 50+ miles from my area where the nos are a little bit more friendly, but I would not know the area and it would be a maintenance nightmare. Adding the cost of a property manager will make the numbers very unfriendly.

Another option is to go out of state and invest in rental properties. For example, my office colleague invests in Washington State rentals, but his sister is the property manager…huge trust advantage 🙂 I do not have such an advantage and when I barely have time left to breathe…out of state property investment is too much of a reach.

So, I tabled this idea for now. I will continue to learn from the real-estate-wise blogging friends and hope to add one or more rental properties to my portfolio at a later date.

Option 2: Investing in REITs

REIT is a short form for Real Estate Investment Trusts. REIT funds invest in real estate investment trusts i.e. in companies that purchase office buildings, hotels, and other real estate property types and generate income from renting out the properties. Most of the income produced is distributed as dividends to the investors.

Take for example VGSIX/VGSLX (Vanguard REIT Index Fund). This fund invests in many real estate investment trusts..the top 10 holdings of this fund are:

  • Simon Property Group Inc.
  • Public Storage
  • Equity Residential
  • Health Care REIT Inc.
  • AvalonBay Communities Inc.
  • Ventas Inc.
  • Prologis Inc.
  • Boston Properties Inc.
  • HCP Inc.
  • Vornado Realty Trust

One can invest in a REIT Index (VGSLX) or invest in individual REITs themselves. But, I prefer index funds for diversification. We will talk about this later.

Advantages:

There are a few advantages to owning REITs or REIT funds

  • Adds real estate exposure to one’s portfolio with minimal upfront cash.
    • For example, minimum purchase for VGSIX is $3000.
    • A relatively safe rental property investment in my HCOL area needs at least $70000 (20% on a 350K rental).
  • Diversifies the risk
    • A single rental property => all the risk in one single location and with one single tenant.
    • REIT investment => risk is distributed across multiple locations and multiple tenants.
  • Diversification of assets
    • REITs invest in different assets compared to most companies whose Stocks and bonds we invest in.
    • For example, a REIT that operates hospital buildings will generate  income even in market downturns where stocks and bonds may tank.
  • Liquidity
    • A rental property is not a liquid asset i.e. it cannot be sold quickly to generate money….selling a REIT fund is as easy as one click…ofcourse, quick selling both assets can lead to a loss.
  • Low effort (passive) Asset
    • Once you put in the effort to choose a REIT or a REIT index fund and set up the automatic investment option, there is no further effort required. A really nice asset for busy people 🙂
    • A rental property requires much more effort to manage…even if you are using a property manager. The variables with a rental property are many….quality of tenants, quality of property manager, quality of the property, etc etc

Disadvantages:

  • A REIT is not a tax-efficient investment
    • A REIT generates dividends that are treated as Ordinary Income. So, for folks already in the high income tax bracket, the dividends are taxed at a very high rate.
    • A rental property on the other hand provides an opportunity to claim tax deductions due to mortgage interest deductions, property depreciation, etc etc.
    • For high income tax brackets, tax efficient properties can be a boon.
  • Capital appreciation potential
    • A rental property, bought at the right time, can appreciate many times faster than a REIT fund can.
      • Especially, those that were bought around 2009-2011 time frame.
    • This is especially important when you leverage the buy using a mortgage i.e. pay $70000 down payment for a $350000 property and sell it when it reaches $550000 and make $200K profit leveraging money from a bank mortgage.
  • Single trick pony
    • Rental properties provide the triple threat of an ability to lower taxable income, potential for capital appreciation and doing all this by leveraging money from the bank.
    • REITs are a single trick pony….ordinary income every month.

Conclusion 

Both rental properties and REITs have their own charm. For me, at this point in my life, I am short on two things:

  • Time
    • I do not have time to spare. Between working full time and preparing for a job hunt, I am totally out of time. And a new job means putting in max effort in the first year to establish myself. So, I do not anticipate more time in the next year.
  • Down payment money
    • I am saving for the down payment for my primary home and cannot afford another down payment in the immediate future.

Considering that, I decided to invest in REITs. More specifically, I chose a REIT index fund called VGSLX. It is a Gold rated fund from Vanguard, the low-cost king of mutual funds. I had an IRA in my tax-advantaged portfolio that had accumulated gains over the past 3 years. So, I moved some of my gains in the IRA target date funds into a new position in VGSLX. REITs have gone down a couple percent this year and are close to their 52 week lows. So, I am am getting in with a little bit of a cost advantage. I expect the REITs to go down more this year and I will move a little more of the IRA gains into my real estate position of my portfolio.

I do not expect to tap into my IRA/tax advantaged retirement holdings until many many years from now. If my passive income strategy works out, I may never have to tap into it 🙂 Anyways, the REIT index fund will have many many years to compound all the dividends in a tax efficient way. So, go REITs !!

DIGIT savings….Month 4 update

/ humblefi / 2 Comments

I started using DIGIT, a new way of squeezing out some extra cash from my bank account, four months ago. I wrote about it here. My goal was to squeeze some leftover money after accounting for all the budgeted categories (expenses, savings and investment goals). Every time the savings account accumulates to a couple hundred bucks, my plan was to withdraw it and apply towards my Financial Independence goals….more specifically, my home down payment fund.

That said, how well did DIGIT save money for me in June?

  • For the month of June 2015, DIGIT squirreled away 226.64 from my bank account.
    • This is 226.64 that I would have spent on something less important than my financial independence goals.
    • Every month, DIGIT is getting more aggressive and squeezing out all the extra fat from my account…way to go!
  • Since signup, DIGIT has saved me $748.50.
    • If money is saved at the same rate for the rest of the year, I will have $1000 (!!) added to my down payment money…this is money I did not know I could save. So, go DIGIT!

But, where is the saved money going? About a month back, I wrote about my plan to benefit from the next recession here. My plan is to buy a house at a price less than the bubblicious prices prevalent in my HCOL area today. So, at the end of every month, the money DIGIT saves for me moves to my home downpayment fund. DIGIT savings is an opportunistic saving for me…apart from the planned savings towards home down payment. I will take the money however I can save it 🙂

PS: If you want to sign up and try it out, go directly to Digit’s website here at https://digit.co/

If you do sign up at all, please do share your experiences, positive OR negative, via comments on this page. I would love to hear from you on how this works out.

Link to Yahoo Article: http://finance.yahoo.com/news/29-old-invented-painless-way-170000170.html

When you have total control of time, you feel wealthy!

/ humblefi / 3 Comments

The month of June was a difficult one for me and I re-learnt an important lesson. There was a perfect storm of difficulties i.e. both professional and personal difficulties arriving at the same time and creating havoc.

  • Professionally, my company had a layoff…it was a stressful week while all of this was happening as the laid off folks were not announced at the same time. Fortunately I was not affected, but a friend and colleague was. It left a bad taste in my mouth. Nothing to compare what my friend was going through, but I have been around a few layoffs in my career and it leaves more disgust in its wake each time. My mind was yearning for freedom from all of this for many days. What this event made clear is that the path I am on right now i.e. the path of achieving Financial Independence, is the best choice I could have ever made.
  • Personally, there was a family emergency that forced me to travel across the country and away from my office at the critical time of layoffs. The issue took a week to resolve itself and the resolution was mostly positive. But, while I was spending time out there, my mind kept coming back to my work and the layoff scenario. I know that is really lame, but I kept wishing I had the freedom to spend some more time taking care of the family issue rather than coming back after a week or so.

On my path to Financial Independence, I am learning a lot from my experiences and in a bigger way from all the smart people who share experiences from their financial independence journey. And somehow along the way, my journey has focused mostly on financial goals. Yes, finance is a great part of achieving financial independence, but I think I forgot the true underlying reason to reach for Financial Independence. I would like those who are reading this to pause and rethink the reasons for their FI journey. Anyways, my real reason is hinted in the title of this post, which is a total steal from some wise person. I just do not remember whom to make a proper attribution to….my apologies for this.

True financial independence is not only about having enough money, but it is also about having total control of your time. It is the ability to spend time as you wish and when you wish it. I remember some wise soul saying that everything in life is about trading money for time OR vice versa. FI is about trading money for time i.e. building enough FU money (link below) to be able to gain control of our time in life. The amount of money needed for FI may be different for each person, but once achieved, you have control of how to spend your time and that is being wealthy. While I was waiting for the family situation to resolve itself, I re-learnt this important feeling of wealth. Thanks to June 2015.

PS: I am behind on some of my blog updates and replies to some wonderful comments. My apologies for that along with my promise to get back to them soon.

Links

Financial Independence Progress Report for June 2015

/ humblefi / 2 Comments
06/30/2015
Emergency Fund ($72K) 100.0% 100.0%
College Fund (80K) 35.00% 35.00%
Passive Income Streams ($4000 pm) $104.34 pm (06/2014)% $277.37 pm (06/2015)
Retirement Fund ($900K) 59.29% 58.51%
Roof for our Family($1 mil) 00.00%
Medical Fund 00.00%
Life Insurance Done (term life insurance payments initiated)

Main Takeaways

  • For me, June is the second biggest month for passive income. So, when I wrote the progress report for May 2015, I was eagerly waiting the end of June. But, June has its own ideas…it was a rough month on the personal and professional side for me and looking at the FI progress report, it looks like FI progress also has some rough spots.
    • College fund stayed even…which is great news actually considering the performance of the stock market this month. But, still, zero progress was depressing.
    • 401K took a hit in June….especially after a great month of May. A 1% drop is a chunky drop and that stings.
  • Passive income for June 2015 increased quite well in comparison to June 2014, even though the mutual funds did take a hit to the principal. This was the only bright spot this month.
    • I compute Passive Income per month as (total passive income in this year) / number of months completed this year.
    • Total passive income is a sum of dividends + capital gains distributions.
    • June Passive Income = (total passive income in this year) / 6 == $277.37 pm.
    • Doing it this way keeps the monthly passive income more realistic because I can instantly know which of my monthly expenses are covered by this amount. I keep a separate tracker for this which I will write about at a later date.

My investments went a bit down this month. So, I am going to look at my mutual fund investments this month and see if there are any investment opportunities to dollar cost average down the cost. More on this later.

Mortgage Case Study 3: $425K mortgage

/ humblefi / 8 Comments

This post is the third in a three part case study in finding out how much mortgage should I take on to fit into my plan to FI in the next 10 years. The first post is here and the second post is here.

In the first post, I considered the feasibility of a $625K mortgage. My conclusion was that having a $625,000 mortgage will definitely not fit into the 10 year FI plan that I have. From the calculations in that post, we are talking close to a $5000 pm mortgage payment. Adding 5 more years to the FI plan will be sufficient. So, if I get a $625K mortage, the following things have to happen:

  • Pay $5000 pm mortgage
  • Work for 15 more years

In the second post, I considered the feasibility of a $525K mortgage. My conclusion was that having a $525000 mrtgage will not fit into the 10 year FI plan that I have BUT will will fit into 11 years i.e. one more than my 10 year FI plan. So, if I get a $525K mortage, the following things have to happen:

  • Pay $5000 pm mortgage
  • Work for 11 years

Adding one additional year of work seems most acceptable 🙂

This post will consider a $425K mortgage and see how t fits into my 10 year plan for FI.

My Mortgage Assumptions

The basic assumptions I will make about the mortgage, beyond the max amount of $425000, are:

  • Interest rate per year 4.5
  • Mortgage start date May 2016
  • 30 year mortgage

With that, I am going to crunch some numbers for a 30 year mortgage. My ideal early retirement is in approximately 10 years. But, I cannot afford a 10 year mortgage…trust me on this…I have crunched the numbers and it is not pretty. The best case for me is a 30 year mortgage. Why?

  • It is a safe bet because
    • the monthly payment is the lowest among 10, 15 and 30 year mortgages
    • in case there is a loss of income, having a lower monthly payment is very helpful until the income source restarts
  • It is very flexible
    • If there is money available, then I have the option of paying more to simulate a 10 or 15 year mortgage

Hence for safety and flexibility, a 30 year mortgage is the best option for me.

What does my monthly payment look like for a $425,000 mortgage?

I have used a mortgage amortization calculator (link below) which gives me the details on how my monthly mortgage payment is split into interest and principal repayment and how long before my entire loan is repaid. I am going to use that calculator to come up with the nos below.

Case 1

Mortgage term in years 30
Monthly payments $2153 (Total = $2153 pm)

Case 2

Mortgage term in years 30
Monthly payments $2153
Monthly extra payment $800  (Total = $2153+$800 = $2953 pm)

Case 3

Mortgage term in years 30
Monthly payments $2153
Monthly extra payment $1600 (Total = $2153+$1600 = $3753 pm)

Case 4

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $2847(Total = $2153+$2847= $5000 pm)

This case is a new one for this $425K post to have one case for $5000 monthly payment that was there in the $625K post.

How soon can I pay off the $425,000 mortgage?

Case 1: $2153 pm

Mortgage term in years 30
Monthly payments $2153

DATE         PAYMENT  PRINCIPAL  INTEREST   TOTAL INTEREST       BALANCE
June 2016  $2,153.41  $559.66       $1,593.75    $1,593.75                   $424,440.34
June 2031  $2,153.41  $1,097.81    $1,055.60    $245,164.17               $280,396.50
May 2046   $2,153.41  $2,145.37    $8.05           $350,228.52               $0.00

Repayment time is 20 years.

Case 2: $2953 pm

Mortgage term in years 30
Monthly payments $2153
Monthly extra payment $800

DATE           PAYMENT  PRINCIPAL   INTEREST   TOTAL INTEREST   BALANCE
June 2016    $2,953.41  $1,359.66    $1,593.75     $1,593.75                $423,640.34
June 2031    $2,953.41  $2,667.05    $286.36        $183,263.19            $73,695.52
Sept. 2033    $732.16     $729.42       $2.74           $187,088.56            $0.00

Repayment time is 18 yrs approximately.

Case 3: $3753 pm

Mortgage term in years 30
Monthly payments $2153
Monthly extra payment $1600

DATE          PAYMENT   PRINCIPAL   INTEREST  TOTAL INTEREST  BALANCE
June 2016   $3,753.41   $2,159.66    $1,593.75    $1,593.75              $422,840.34
Sept. 2028  $2,502.98   $2,493.63     $9.35          $129,254.63          $0.00

Repayment time is 12.5 years approximately.

Case 4: $5000 pm

Mortgage term in years 30
Monthly payments $2153
Monthly extra payment $2847

DATE          PAYMENT   PRINCIPAL   INTEREST  TOTAL INTEREST  BALANCE
June 2016  $5,000.41    $3,406.66     $1,593.75   $1,593.75               $421,593.34
Dec. 2024  $2,677.86    $2,667.85     $10.00         $87,719.94            $0.00

Repayment time is 8.5 years.

Additional expenses

In all the above calculations, the astute reader might have noticed that I left out two parts from the above calculation:

  • Property taxes from the calculation.
    • Assuming a 1.25% property tax rate, it is not unreasonable to have a $1000 per month property tax in my HCOL area. But, assuming that this expense is tax deductible, I will ignore this cost.
  • House maintenance expenses
    • From the experience of our current rental, I estimate house maintenance expenses to be roughly about $2500 per year i.e. $appx $200 pm
  • Home insurance
    • Lets estimate this to be $200 pm.

So, approximately $500 more per month needs to be budgeted for house maintenance and insurance expenses.

Conclusion

Having a $425,000 mortgage will definitely fit into the 10 year FI plan that I have. Note that this with a $5000 pm mortgage payment. So, if I get a $425K mortage, the following things have to happen:

  • Pay $5000 pm mortgage
  • Work for 8.5 years

This plan seems the most acceptable one from a money perspective 🙂

Conclusion from the 3-part mortgage series

I considered three different mortgages and their feasibility to pay them off within my 10 year FI plan and the results are:

  • $625K Mortgage:
    • Pay $5000 pm mortgage
    • Work for 15 more years i.e. 5 more years than my FI period of 10 years
    • PLAN FAILS by 5 years
  • $525K Mortgage:
    • Pay $5000 pm mortgage
    • Work for 11 more years i.e. 1 more years than my FI period of 10 years
    • PLAN FAILS, but only by 1 year
  • $425K Mortgage:
    • Pay $5000 pm mortgage
    • Work for 8.5 years i.e. well into my FI period of 10 years
    • PLAN SUCCEEDS!!

So, the best case scenario for me is a mortgage anywhere between $425K to $525K. Yeah!! I am super happy to have this number!!

Links

Mortgage Case Study 2: $525K mortgage

/ humblefi / 8 Comments

This post is the second in a three part case study in finding out how much mortgage should I take on to fit into my plan to FI in the next 10 years. The first post is here.

In the first post, I considered the feasibility of a $625K mortgage. My conclusion was that having a $625,000 mortgage will definitely not fit into the 10 year FI plan that I have. From the calculations in that post, we are talking close to a $5000 pm mortgage payment. Adding 5 more years to the FI plan will be sufficient. So, if I get a $625K mortage, the following things have to happen:

  • Pay $5000 pm mortgage
  • Work for 15 more years

This post will consider a $525K mortgage and see if it fits into my 10 year plan for FI.

My Mortgage Assumptions

The basic assumptions I will make about the mortgage, beyond the max amount of $525000, are:

  • Interest rate per year 4.5
  • Mortgage start date May 2016
  • 30 year mortgage

With that, I am going to crunch some numbers for a 30 year mortgage. My ideal early retirement is in approximately 10 years. But, I cannot afford a 10 year mortgage…trust me on this…I have crunched the numbers and it is not pretty. The best case for me is a 30 year mortgage. Why?

  • It is a safe bet because
    • the monthly payment is the lowest among 10, 15 and 30 year mortgages
    • in case there is a loss of income, having a lower monthly payment is very helpful until the income source restarts
  • It is very flexible
    • If there is money available, then I have the option of paying more to simulate a 10 or 15 year mortgage

Hence for safety and flexibility, a 30 year mortgage is the best option for me.

What does my monthly payment look like for a $525,000 mortgage?

I have used a mortgage amortization calculator (link below) which gives me the details on how my monthly mortgage payment is split into interest and principal repayment and how long before my entire loan is repaid. I am going to use that calculator to come up with the nos below.

Case 1

Mortgage term in years 30
Monthly payments $2660      (Total = $2660 pm)

Case 2

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $800  (Total = $2660+$800 = $3460 pm)

Case 3

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $1600 (Total = $2660+$1600 = $4260 pm)

Case 4

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $2340 (Total = $2660+$2340 = $5000 pm)

This case is a new one for this $525K post to have one case for $5000 monthly payment that was there in the $625K post.

How soon can I pay off the $525,000 mortgage?

Case 1: $2660 pm

Mortgage term in years 30
Monthly payments $2660

DATE         PAYMENT    PRINCIPAL    INTEREST   TOTAL INTEREST   BALANCE
June 2016  $2,660.10    $691.35        $1,968.75     $1,968.75                $524,308.65
June 2031  $2,660.10    $1,356.12     $1,303.98     $302,849.86            $346,372.15
May 2046  $2,660.10     $2,650.16     $9.94            $432,635.24            $0.00

Repayment time is 30 years.

Case 2: $3460 pm

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $800

DATE           PAYMENT  PRINCIPAL   INTEREST   TOTAL INTEREST   BALANCE
June 2016   $3,460.10   $1,491.35    $1,968.75    $1,968.75                 $523,508.65
June 2031   $3,460.10   $2,925.36    $534.74       $240,948.88             $139,671.17
Feb. 2035   $2,947.53   $2,936.51    $11.01         $253,009.45             $0.00

Repayment time is 19 years.

Case 3: $4260

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $1600

DATE         PAYMENT   PRINCIPAL  INTEREST    TOTAL INTEREST    BALANCE
June 2016  $4,260.10   $2,291.35    $1,968.75    $1,968.75                  $522,708.65
Mar. 2030  $2,914.45   $2,903.56    $10.89          $180,830.60             $0.00

Repayment time is 14 years.

Case 4: $5000

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $2340

DATE          PAYMENT   PRINCIPAL   INTEREST  TOTAL INTEREST  BALANCE
June 2016   $5,000.10   $3,031.35     $1,968.75   $1,968.75               $521,968.65
July 2027    $3,519.20    $3,506.05    $13.15        $143,532.21            $0.00

Repayment time is 11 years.

Additional expenses

In all the above calculations, the astute reader might have noticed that I left out two parts from the above calculation:

  • Property taxes from the calculation.
    • Assuming a 1.25% property tax rate, it is not unreasonable to have a $1000 per month property tax in my HCOL area. But, assuming that this expense is tax deductible, I will ignore this cost.
  • House maintenance expenses
    • From the experience of our current rental, I estimate house maintenance expenses to be roughly about $2500 per year i.e. $appx $200 pm
  • Home insurance
    • Lets estimate this to be $200 pm.

So, appx $500 more per month needs to be budgeted for house maintenance and insurance expenses.

Conclusion

Even without adding the “Additional expenses”, having a $525,000 mortgage will definitely not fit into the 10 year FI plan that I have. Note that this is even with a $5000 pm mortgage payment. Adding 1 more years to the FI plan will be sufficient. So, if I get a $525K mortage, the following things have to happen:

  • Pay $5000 pm mortgage
  • Work for 11 years

Adding one additional year of work seems most acceptable 🙂

The next case study (last) will tackle a $425K mortgage.

Links