Happy November! I hope you all had a good Halloween and that your week is off to a great start :-)
Last spring, we refinanced our mortgage. We’ve been loving our 2.44% interest rate, and we haven’t made any additional principal payments since we refinanced – it just doesn’t make sense with that rate of return. Instead, we’ve continued putting money into the bond fund that is earmarked for eventually paying off the mortgage in a lump sum. And this month, for the first time, the amount of dividends we got from the bond fund exceeded the amount that we paid in interest on our mortgage. Happy day! Our mortgage interest was $213 for November, and our bond fund paid us $219. As we continue to pay down the mortgage and increase the amount in the bond fund, the difference will be a little more each month.
When we first started setting money aside to pay off the mortgage, our plan was to do so as soon as we had accumulated enough money. But now we’re planning to wait until our mortgage rate resets in early 2018. At that point, the interest rate will most likely reset to 4.44% (that’s the reset max… it could be lower, but it’s unlikely that rates will stay much lower than that for the next several years) and we’ll pay off the loan in full.
Right now, the balance in our bond fund is $24,000 less than the outstanding balance on our house (getting them to the same point is the next goal… I always like to be working towards something tangible). But even with that discrepancy, we still earned more in the bond fund than we paid in interest on the house. Once the two balances are equal, the bond fund will be paying quite a bit more in dividends than we pay in mortgage interest. So although it would be awesome to just own our house outright, it’s financially beneficial to keep the loan until it resets, and just let the payoff money sit in the bond fund, earning dividends. We opted for a very stable municipal bond fund for our mortgage payoff money because we knew we’d be needing it within a few years. We’ve had the account for several years now, and the share price and dividend rate have hardly budged in that time. It’s nowhere near the rates of return that you can get in a stock fund, but it also doesn’t have the big drops that a stock fund can have. And yet it pays a lot better than a CD or basic savings account. It seems like a good happy medium to us. And for years we’ve been anticipating the month when the bond fund would pay us more than we pay our mortgage company… so it’s awesome to have finally reached that point.
We’ve been able to increase the amount that we’re saving lately, thanks to my second job writing content for another site. It’s increased our income considerably, but we’ve avoided lifestyle inflation almost entirely and are banking nearly all of the additional funds (with additional outlays to Uncle Sam and various charity causes). We basically ignore the extra income and still pretend that our income is at the level it was in 2005. I still buy just about everything we need at Goodwill, use my crock pot to cook dried beans while we sleep, get all of our books and movies from the library, have a cell phone that costs us $10 a month, and run around town with our toddler in a 15 year old hand-me-down jogging stroller (it still works – there’s no reason to upgrade it when he’ll only be in it for another six months or so).
We have just one car, and are perfectly content with our builder-grade house – and we especially like the $850 mortgage payment. The counters are laminate and so are the floors. It’s neat and mostly clean and very functional, but it doesn’t look like something you’d see on Pinterest. And that’s OK. It keeps our family warm and dry and provides a perfect place for us to focus on all the things we need to do each day. Since we already have everything we need, there’s no reason to start upgrading things just because we’re earning more money.
On the other hand, sometimes things really do need to be upgraded. Our garbage disposal bit the dust a few weeks ago, and our car needed new tires. We got a new disposal at the hardware store and had four new tires put on our car. It was certainly nice to be able to do those things without stressing about the money. Back in 2005, having to do both of those things in one month would have caused consternation for sure. So although we’re mostly keeping our budget the same as it’s been for years – and saving the extra income away in an out-of-sight, out-of-mind fashion – it’s nice to know that the additional income is there if we really need it.
That’s the beauty of avoiding lifestyle inflation. Most people are earning more money when they’re 40 than they did when they were 22. But if you increase your spending every time your income goes up, you never get to a point where you have a genuine surplus. Having a surplus means that you don’t need to worry about necessary – but perhaps unexpected – extra costs from time to time.
So our plan is to keep on keeping on, spending the way we always have. We already have everything that we need (and a lot more, really… as is the case with most middle class Americans). And we like knowing that we’ve got our spending at a point that is easy to maintain with our current income, and would be possible to maintain even if our income dropped significantly. I prefer being in that situation over living lavishly and having to depend on every penny we earn in order to maintain our lifestyle.