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Recent Lessons Learned

April 28th, 2007 at 02:43 pm

I have learned a couple of big lessons lately that are leading me to tweak my goals again.

I think I can sum them up into 2 lessons:

1 - The answer to most financial questions is: it depends. No one-size-fits-all!!!

2 - Doing something without truly thinking it through and looking at the big picture (like doing it on a gut feel) is not smart.

My gut feel used to be I wanted a lot of cash and no mortgage, etc., etc. But I was falling behind on all my financial goals by being so short-sighted about the BIG picture.

I've been coming to this realization slowly over time, but I finally gave into the other side of the great mortgage debate and completely change my tune. I no longer am paying an extra dime to the mortgage. I don't see the point. I decided to change my tax withholding because I was a little behind. At first I was frustrated as it significantly compromised my savings goals. & then I looked at the stupid $30 extra mortgage payment and decided I would commit that to retirement instead. Much smarter! Before I looked at it as a forced savings, a small amount I wouldn't bother with otherwise. But forced with such a huge budget change, I thought, gosh, I have been saving that $30 no prob - why not just put it to retirement instead. I can commit to save a small amount. & that is huge - a huge change in my thinking just over the last few months. Getting away from the so all or nothing thing.

We also have formulated a plan for our cash savings. We are going to keep 3 months bare minimum expenses and that is it. The rest - again to retirement - much better returns in the long run. We are losing out on so much earnings potential wanting a lot of cash in the bank.

In my new thinking I am just able to weigh everything with our goals and make decisions now. Vanguard dropped their fees so the $50/month I have been adding in a slow attempt to erase the fee of 1 fund (thought it was screwing up my allocations - and was why I was doing it slowly) - well I no longer have that need. I dropped the investment plan yesterday. By doing so we are on track to meeting our 3-month EF by December, $1k to invest, and the $1500 to do my final ROTH conversions. No more money to retirement this year, but with a $13k contribution from my job this year, just makes sense. We can go into 2008 with a full e-fund, an investment account started, all ROTHs, and can contribute heavily to the ROTHs in 2008. Woohoo.

Anyway, many circumstances have changed this month, but having the big picture in mind it was easy to make the appropriate changes and work with them.

Anyway, besides 3 months in expenses we will be adding $100/month & my overtime to savings for bigger purchases (cars and house maintenance) but should be plenty, with these interest rates anyway. We will start investing a very minimal amount in a balanced fund, since my new-car horizon is so far away. & for longer-term stuff. & then hoping to set aside about 8% to ROTHS. But of course, any unexpected windfalls will got to max those out. So I think the odds are high we can max out next year and still make decent progress on our savings. My gut wants to max out the ROTHs, but realistically, we don't need a 25% retirement contribution next year. Not at cost to all else. We'll get there in a few years. No hurry for now. Having more than enough for my own ROTH, on one income, sounds nice and dandy. But if anything extra comes along... It is reachable to fund both, all the same!

Some reasons I have changed my tune:

1 - thinking about our time horizon and how we have a 40-year plus investment horizon for investments. Longer horizon means more time to ride out the wave.

2 - Even if we take the full 30 years, the house will be paid off in our young 50s or well before retirement, no need to stress about it right now. It will be so much easier to make extra payments in a few years and will still have a significant impact - if we our making all our other goals.

3 - Our interest-rate is low and we will have the mortgage deduction (effectively making it lower) for years to come.

4 - I feel confident in the ability to earn twice as much over the long haul - 8 - 10% vs. the effective 4-5% mortgage interest rate.

5 - Yup, 8-10% because in the ROTHs it is all tax free earnings! Makes it the no-brainer.

6 - Over 90% of our net worth is in our home - we need to spread out our investments.

7 - Our mortgage is very reasonable and low-cost for the area. If I had a huge windfall I would have NO urge to pay off the house. I find small monthly payments much more manageable. I NEVER got the idea to pay off a house with life insurance, but I guess being the sole breadwinner I wouldn't - LOL. I look at life insurance as more of the retirement contributions that my dh would have made in life. Of course if something happened to him I would downsize the house anyway, may be able to pay it off in that case. On the flip side, the mortgage is quite huge at $215k. It would take a big effort to significantly pay it down early, at all costs to retirement. Instead I expect we will have the income in a few years to pay it down faster and in the end will still pay it off just as fast as originally planned. But will have lots of money in the bank, earning a nice return, to boot. Wink

8 - I still can't get past the idea that my house could flood away or we could get sued for something stupid and have it taken away, but that our retirement is so safe from creditors, bankruptcy, lawsuit, etc. I just do not feel warm and fuzzy about having a $600k asset paid off. Frankly, it scares the hell out of me to sink all our cash into the house. If it was a $200k or $300k house I would feel differently. It's all in the sheer size and weight in our overall wealth I guess.

& as far as cash:

1 - job security out the ying-yang

2 - Plenty of insurance on all fronts

3 - Plenty of 0% credit options as well as plenty of well-off family to fall back on (loans) if we hit some really horrible times like the house flooding away or major medical bills.

So though I really want to hoarde a lot of cash, we probably could hardly be in a better position to not really need it. We just have a lot of options. So we decided to stick with the 3-month expense thing. The odds I will be out of work for more than like a day are just really slim to none in this market, and my job is quite recession-proof to boot. ( I exaggerate a tad, but not really, I could go find a job in a day - it is just crazy in my field right now). Disability actually would cover all of our bills - both the short-term and long-term (disability), and we have plenty of life insurance and all that. Medical is the big unknown for now, but we have low deductibles at least. I am starting to think we should keep a little less in the bank and try to pay for the higher premiums again next year. Might just be worth it to keep the costs controlled, even if the premiums are insane. Something to consider.

Anyway, overall it is amazing to me how much my thinking has changed in just the last few months. But I think we are looking at the big picture a lot better and are maximizing our wealth.

I still can't believe car is paid and we are so on track to so many goals this year. Though the year is young and anything can happen, all the same.

All that and a HDTV!

But setting goals and being focused has sure paid off tenfold... I had the focus before, just really not any tangible goals. What the hell were we doing anyway? LOL.

2 Responses to “Recent Lessons Learned”

  1. KEALINA Says:

    1 - The answer to most financial questions is: it depends. No one-size-fits-all!!!

    this rule reminds me of something i've been thinking about lately...
    i've been thinking the #1 rule of finance is to
    -know yourself. You have to do what works for you.

    i think they might be the same idea phrased differently..=)

  2. monkeymama Says:

    Yeah - I like that! You will have to know yourself to get to the right answer, for sure. Even the best financial choice, for you, won't work if it will keep you awake at night (& increase your stress and medical bills)...

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