Frugal Babe

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Making Progress Towards Our Savings Goals

November 4, 2013 By Frugal Babe

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.

 

Filed Under: investing, real estate, savings 8 Comments

Comments

  1. bogart_yahoo says

    November 4, 2013 at 7:56 pm

    Er, to borrow (paraphrase) from Monty Python — you have a garbage disposal?! Now that’s extravagance.

    But otherwise, sure, there with you on the basic philosophy.

    Reply
    • frugalbabe says

      November 4, 2013 at 9:13 pm

      :-) Definitely extravagant. And we hardly ever use it, since we compost everything. But the house came with one, and we do run it every now and then when a few scraps make their way down the drain. If we were still strapped for cash, we probably would have just skipped the disposal and put in a regular drain. But we opted to install a new -very low end – disposal to replace the one that died.

      Reply
  2. moneystepper says

    November 5, 2013 at 12:20 am

    Nice! That’s a pretty awesome crossover point to reach where your passive income is greater than your mortgage payment! And its pretty nice to have 5 years at such a low rate! I’m jealous! :)

    Reply
    • frugalbabe says

      November 5, 2013 at 7:03 am

      Thanks! It’s greater than the interest portion of our mortgage payment, but it’s going to be a good long while before our passive income exceeds the whole mortgage payment ($850/month). We definitely feel fortunate that we found such a great rate with really low closing costs and took advantage of it when we did.

      Reply
  3. Mindo Wilkes says

    November 5, 2013 at 5:10 am

    Congrats on your saving goals progress!! And I applaud your attitude regarding your home, it keeps you safe and warm and doesn’t strain your budget.
    I have some regrets about the home buying choices we made when we moved to the USA. We moved from a small home (1000 sq ft) in the UK, and found that large houses cost so much less that we splurged on a large home with a pool. Great while we had 2 kids at home, lots of space and room for their friends to visit but not necessary at all. We would have still had lots of space in a 2400 sq ft house (the smallest we could find in the school district) and, even if we had installed a pool, we could have had a much smaller mortgage and far smaller outgoings.
    Then the kids grew up and left home, and we didn’t grow up and cut our commutes by buying another large house. Doh, we now realize that much of this was for image’s sake and because “we deserved it”.
    Both my kids now have their own houses and I hope that they stick with what they have, their houses are large enough to accommodate the typical 2+2 family, and I hope they don’t get sucked into upsizing.
    We’re overseas now and renting, and will certainly do things differently when we move back.

    Reply
  4. Kendra says

    November 5, 2013 at 8:16 am

    Great post! I love your philosophy on not upgrading your lifestyle just because your income increases. We have a modest home that keeps our family dry, warm and safe too yet I fantasize about upgrading this and that in it. Why? I don’t know. It’s a perfectly wonderful home, as is. Hoping I can switch gears in my head and focus on what we have, rather than what we don’t. Just because we can afford more, doesn’t mean we need more. Thanks for the reminder!

    Reply
  5. M- says

    November 13, 2013 at 7:51 pm

    hey frugal babe. which bond fund do you put your extra payment for your home into. I was thinking about doing that with out extra payments. thanks for the help

    -m

    Reply
    • frugalbabe says

      November 14, 2013 at 10:59 pm

      We have it at Vanguard. We started with VWITX (intermediate term, tax exempt), and switched to the admiral shares version of that fund (VWIUX) when we had enough money in the fund to allow that (I think it needed to be $10,000?). Hope that helps!

      Reply

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