Progress to Date

  • Original Loan Amount: $204,000.00
  • Balance at Beginning of 5-year Goal (1/1/08): $188,983.82 @ 6.00%
  • Balance at Refinance in February 2009: $148,000.00 @ 4.625%
  • Outstanding Balance: $0.00 (PAID IN FULL!!!)
  • Latest Payment Date: April 2011
  • Latest Additional Principal Amount: $17,623.22
  • Amount Ahead of Schedule (since refinance): $121,462
  • Time Ahead of Schedule (since refinance): 7 years 10 months
  • Interest Saved Last Month: $23,972.48
  • Total Interest Saved: $28,435.55 ($1,037.74 on original mortgage; $27,397.81 on current mortgage)
  • Months Remaining in 5-year Goal: 20
  • Average Monthly Principal Needed to Meet Goal: N/A (Goal achieved)
  • Progress List Explained

Sunday, February 28, 2010

Monthly Summary: February 2010

February turned out to be an expensive month for us. In addition to learning that our tax bill would be even larger than anticipated, we paid a plumbing company to replace our failed water heater, and have to start thinking about repairing the water damage to our basement. I am glad we never stopped putting money away for emergencies during the Death to the Mortgage project. We'll be able to tap some of our savings to help with the taxes and repairs while staying on track for our DTM goal.

In February we made the twelfth of 120 scheduled payments on our ten-year mortgage, and the 26th overall since we started the five-year DTM project in January 2008.

When February arrived, our loan balance was $104,432.09. We included a $2,000 prepayment along with our required payment, reducing the debt to $101,291.80 by month's end.

Our prior efforts saved us $125.89 interest this month, and $1,826.91 in realized interest savings to date.

The balance is $34,789 lower than what it would be if we'd never made any extra payments on the ten-year mortgage. If we had to abandon the project after this month, we'd still pay off the note two years and eight months early.

We have 34 months left in the five-year (60-month) goal period we set for ourselves. The average total principal we must pay each month to reach this goal dropped to $2,979.17.

We reached a couple of milestones in February. First, we've now paid down over 50% of the original mortgage balance (which began at $204,000 in 2006). Being more than halfway through the debt is a good feeling.

Second, I believe we reached the break-even point on refinancing the mortgage in February 2009. It took exactly one year (twelve months) for the interest savings to offset the costs (fees, etc) involved in the refinance transaction. I calculated this by comparing the amount we actually paid on the newer ten-year loan against the amount I believe we would have paid if we'd kept the old 15-year mortgage. I reduced the hypothetical payment on the old loan by the difference in required monthly payment amounts (about $175 less now than before). Going forward, the reduced interest charges represent pure savings to our bottom line.

One odd fact to note...if we had not paid down the mortgage so aggressively over the past year, we would have reached the refinance break-even point sooner than we did -- because there would have been a higher principal balance each month to generate interest charges (and the reduced interest charges with the new mortgage would have been more substantial). Of course, by paying down the balance, we're also saving ourselves interest charges, so I'm not disappointed by this at all.

I'm looking forward to the return of daylight saving time in March...it will be nice to be able to ride my bicycle to and from work without my headlight and taillights!

Wednesday, February 17, 2010

Hot Water

I woke up this morning and went downstairs to the basement to get some clothing from the laundry room. I noticed it was warmer than normal, and humid. After walking to the other end of the basement, I found our hot water heater had completely failed sometime during the night, pouring its contents out all over our (carpeted) basement floor.

I spent most of the day hauling stuff out of the affected area. The room where the water heater lives is also where we keep things we don't use on a regular basis: seasonal decorations, old books, mementos, extra lamps and fans, exercise equipment, and boxes and bins full of random life accumulations. My wife came home from work and together we quickly sorted items into "piles" in the garage: things to keep, things to donate or sell, things to recycle or throw away. A few items had to be trashed, because they had soaked up too much water. But fortunately, we discovered the flood before there was excessive damage, and a lot of our items (especially the decorations) were protected from the standing water because they were stored in waterproof plastic bins.

Although I'm not happy about the circumstances, I am glad for the opportunity for us to get rid of things we were holding on to for no good reason. There's nothing like a frustrating morning of hauling boxes out of the basement to make you think to yourself, "Why do we even have this?" I realized that I had lost the emotional connections to a lot of things which I had packed away earlier in life.

I was surprised to learn that our home insurance policy covers clean-up and repair of the water damage to the house, but not replacement of the water heater itself. So unfortunately, we have to dip into our emergency savings to replace it. We are going with at tankless "on demand" model with automatic shut-off (to prevent flooding). It costs more than a tank model, but it is supposed to last about twice as long, and may help us use less natural gas fuel over time.

Since we bought our house four years ago, we've had our fair share of plumbing mishaps, including upstairs toilets and shower drains leaking through the ceiling onto the main floor. I am wondering if we should proactively inspect and replace the other fixtures to ensure that we don't have to discover any more unexpected water damage. I had hoped to replace the water heater after the mortgage project was complete, but obviously that didn't happen. Seems like plumbing repairs are always more of a hassle and expense when we haven't planned for them.

Sunday, February 7, 2010

Taxes and Interest

I completed our 2009 tax returns this weekend. Happily, almost exclusively due to my wife's hard work, our income was almost eleven percent higher in 2009 than it was the year before. And because of our focus on killing the mortgage, we paid about 37% less in mortgage interest in 2009 than in 2008.

It would be easy for me to say something like, "Unfortunately, because our income rose and our deductions fell, we owed more in taxes in 2009 than we did in 2008." This is true, but not unfortunate. We did lose enough of the mortgage interest deduction in 2009 that it was no longer advantageous to itemize our deductions (the standard deduction was higher). But overall, we reduced our expenses. I think it's important to consider the relationship between expenses and deductions on taxable income. Here's an explanation.

Our two largest deductable expenses over the past few years have been our mortgage interest payments and our state and local property taxes. These are out-of-pocket expenses which we pay in installments, but which cumulatively reduce the amount of money we have left to spend on everything else. The other expense which significantly reduces our income is our total US Income Tax due each year. This is roughly calculated by taking our income less any deductions and multiplying by a percentage (which gets progressively higher as each tier of our income exceeds certain thresholds). It's also paid in installments, in the form of withholding from our paychecks (and a lump sum due April 15 if our withholding was not sufficient). I've tried to express the total impact of these three expenses on our finances for 2008 and 2009 in the statements below, along with a few other bits of info, in an attempt to evaluate our progress last year.

  • Income: 2009 > 2008 (increase of 11%)
  • Mortgage Interest Payments (MI): 2009 < 2008 (decrease of 37%)
  • Property Taxes (PT): 2009 > 2008 (slight increase)
  • US Income Tax (UST): 2009 > 2008 (increase of 18%)
  • Total Interest and Tax Expense (MI + PT + UST): 2009 < 2008 (slight decrease)
I think the first and last points above are key. Our income was higher in 2009, but our total interest and tax expense was lower. I personally don't really care whether we're paying more (or less) money to our lender or to our government from one year to the next, as long as the total amount of money we part with continues to trend down.

This is more evidence to confirm my suspicion that the mortgage interest tax deduction is not the great benefit that some claim it to be. Hypothetically, it makes sense to me that it's not advantageous to pay interest on a debt so as to save 25 (or 28 or 33) percent on taxes. And after running the numbers in a real-life scenario, I can see that my assumption holds true. Our efforts to pay off our debt reduced our total interest and taxes in 2009. Projecting this into the future, I look forward to the year in which we pay zero mortgage interest -- not because I want to pay more taxes, but because I want to reduce our total expenditures as much as possible.

Wednesday, February 3, 2010

Credit Card Strategery

My wife and I recently received a credit card "reward" payment, which is something of a regular occurrence for us. I've been receiving them for years, but for whatever reason I had never thought to keep track of them until the most recent one appeared in our savings account.

If you've ever read any news articles about credit card companies, you may have heard that they use endearing terms like "deadbeats" or "freeloaders" to describe customers who make purchases on credit each month, but who pay off the balance in full by the due date (thus avoiding any interest charges). I hope we always fall into this category, since I'm not a fan of paying interest to anybody. We're using our credit cards as if they were charge cards, which no longer seem to be in fashion here in the US (but may still be elsewhere).

We keep three active credit card accounts. One is our primary card, which offers "rewards" of 2% on every purchase. Our backup card offers 1% back, but occasionally offers special rebates of 3-5%. We also have a Discover card, which ordinarily pays a very paltry "cash back" rate, but which features a 5% "reward" on a certain category of spending (like gasoline or groceries) which changes every few months.

Over the past year, we've received $600 in rebates from the credit cards we use. We just dump this money into our savings account, so I was able to sort through our transaction history online and find each of the credits, typically appearing in amounts of $50 or $100. Assuming a 2% rebate rate, that means we spent at least $30,000 on our credit cards over the last twelve months. And I'm happy to say that we didn't pay interest on a dime of it.

It seems like personal finance bloggers fall into one of two camps when it comes to credit cards. One group avoids them at all cost, citing the tendency to overspend and lose track of purchases. The other group (which includes the wife and me) embraces the "charge card" method of using credit cards for most purchases, which allows the convenience of cashless transactions, consolidated spending reports, and the rebates that come along with most cards held by responsible spenders.

I used to think that by using our credit cards this way, we were getting an "automatic two percent discount" on everything we buy. I've come to the realization that we're probably doing something more like paying the true cost of things. Since credit cards assess merchants a fee for each transaction, which apparently can range from two to four percent of the charge, merchants typically respond by raising their prices by the same amount, and passing along the expense to their customers (usually regardless of whether the customer uses cash, check, debit, or credit). Some frugal shoppers try to avoid this by negotiating discounts for cash transactions. We just try to use the card which will offer us the largest rebate on each purchase.

We have debit cards which we could use in a similar fashion, but in my opinion debit cards fall short of credit cards in a few areas. First, the money is withdrawn from the associated checking account immediately. This means that if there are any mistakes, the account is more likely to be overdrawn. And I'm sure our bank would be more than happy to charge us one (or more) "overdraft protection" fees if there was any sort of mix-up. Some merchants (like gas stations and restaurants) will reserve more than the purchase price as a "temporary authorization" which could also lock up our checking account if we paid with the debit card more often. For example, my wife bought gasoline from a station which charged a $250 preauthorization last week (the actual amount of gas she purchased was about $20). Since we used a credit card, it didn't cause us any issues -- as we never come close to reaching our credit limit, this was not a problem.

Other reasons I prefer using credit cards over debit cards, in no particular order:

  • Our checking account history shows only one payment to each credit card every month, along with our other bill payments. This makes it easier to reconcile spending when there aren't a bunch of little expenses on the statement.
  • Though "reward" debit cards exist, I haven't found one which rebates as much as the typical "reward" credit card.
  • I can budget for an expense without having to have the cash for it right away. Since the two of us get paid in regular intervals, it makes sense to have our expenses debited at regular intervals as well. I know when credit card bills come due, and I can plan to have cash allocated to cover that bill as needed. With debit purchases, I think we might modify our behavior to purchase items at only certain times of the month. This seems like an unnecessary inconvenience to me.
  • We can pay for occasional business expenses (for which we eventually get reimbursed) without having to immediately allocate some of our own money to cover the debit. And, as a bonus, we get the rebate for those purchases as well.
Having said all of this, I still keep a close eye on our credit card spending, typically logging into our account four or five times a week to make sure our spending is in line with our expectations. I also make sure to read everything that the credit cards send to me so that I'm not caught by any surprise changes in terms. For example, if one of our cards ever started to charge an annual fee, or removed the grace period for purchases, I would immediately pay it off and cancel the account. I'm not about to give the credit cards any extra money in fees or interest. If the credit issuers ever decided to change terms at an industry-wide level, we'd ditch our credit cards and use another spending strategy. But until that happens, we're satisfied with being a couple of "deadbeats".