We have been casually looking for a new house since last spring. During this time we have been having a lot of conversations about where we want to live, what kind of house we want, and what different mortgage amounts would mean in the long term as a financial commitment. I have also been doing … Continue reading
We have been casually looking for a new house since last spring. During this time we have been having a lot of conversations about where we want to live, what kind of house we want, and what different mortgage amounts would mean in the long term as a financial commitment. I have also been doing some research on prudent numbers to use for guidance when determining how much we can spend on a new house. It’s taken me awhile to let the reality of the numbers sink in, particularly since the numbers I am coming up with for us are drastically different from what the bank is willing to lend us.
It’s not how much the mortgage lender said you can afford
We currently live in a two bedroom condo that was purchased during the housing boom. When I called to determine my housing budget, and I naively assumed the bank would help me with this, I was told I could take out whatever sized mortgage I wanted or needed. As someone who had recently finished grad school, spending the majority of my savings on the endeavor, and who had a job offer but no pay check, I was stunned. Lesson learned- do not rely on the bank to help you determine your housing budget.
Flash forward almost 6 years. When I spoke to our mortgage lender, he mentioned that they currently use the 28%/36% guideline in determining maximum mortgage amounts. Your all in housing cost, including property tax and insurance should not be more than 28% of your gross income, and total debt payments, including all housing costs, should not be more than 36% of your income. The implication of this, is that if you have a lot of current debt, you will not be able to take out as much debt.
This is actually the formula I used six years ago when determining how much home I could afford. While things have worked out for me, if I had it to do over again I would spend less. Using the 28%/36% rule left me feeling incredibly house poor and has motivated me to rethink things before purchasing our next home. This level of debt, while in some regards manageable, left me with very little wiggle room in my budget and with little room for any sort of financial emergency or fun.
Using these guidelines, if you have a gross household income of $100,000, you would be able to take out approximately $370,000 in mortgage debt assuming you have no other debt and using a 5% interest rate. This amount would vary depending on insurance and tax amounts. Here is a calculator if you want to do your own analysis, look at the conservative number.
After doing some research, and evaluating our own situation, there are two rules of thumb I am using when thinking about our next home purchase:
1) 20% down payment in addition to other savings!
When determining our housing budget, it is tempting to looking in our savings account and assume this is what we can use as a down payment. However, houses need to be filled, emergencies still happen, and cars still need to be replaces. So when saving for a down payment, you need to have your 20% down payment on top of your emergency fund and any other things you may be saving for right now.
More and more, banks are requiring you to put 20% down with home purchases. If you do not put 20% down, you will have to pay PMI insurance.
2) Maximum mortgage loan you should take out is about 2x your salary
When I first started doing research, I kept seeing 3x, or you can take out a mortgage that is three times your gross annual salary. Since that is an amount similar to what is recommended by the 28%/36% rule I kept looking for answers. It was my 91 year old grandmother who first mentions the two times your salary idea. My grandmother is a child of the Great Depression and very financially conservative. She mentioned that when she built her house 60 years ago, they paid just slightly over two times their salary, which was the standard rule of thumb back then, and things were tight for them for awhile. I came across this number again while reading the Millionaire Next Door.
I love this ‘rule of thumb’ in its simplicity. I hate it because it drastically decreases the amount of our housing budget. Continuing with the example from above, while the 36%/28% rule would allow you to take out a $370,000 mortgage, the 2x rule would leave you with a $200,000 mortgage.
After figuring out that I am most comfortable with the 20% and 2x rule, I still have questions. Namely, do we want to use one or both of our incomes when calculating the 2x? I most definitely will only use our base salaries, leaving out bonus pay that can vary a lot from year to year. In addition, does is make sense to put down more than 20% provided other savings are still in place?
So with a drastically reduced housing budget, we are currently sitting tight and casually looking. If we find a house we’re excited about within the 20%, 2x rule, we’ll likely make the move. Meanwhile, we are saving more money and making do in increasingly cramped quarters.
I have recently joined the Yakezie network challenge. The network was set up by a blog I follow, Financial Samurai. Since I’ve started blogging, one of the things I’ve enjoyed most is the community. By taking part in the challenge, I hope to grow the Where’s My Trust Fund community and continue to improve my … Continue reading
I have recently joined the Yakezie network challenge. The network was set up by a blog I follow, Financial Samurai. Since I’ve started blogging, one of the things I’ve enjoyed most is the community. By taking part in the challenge, I hope to grow the Where’s My Trust Fund community and continue to improve my blog. In addition, one of my New Year’s goals is to develop a charitable giving plan. This is a related endeavor and my hope is that, eventually, this network will help me to give more to the blogging community and to others as the Yakezie network is continuing to work on their scholarship program.
So what does this mean for you as a reader? Well, if you are looking for other personal finance blogs, Yakezie is a great place to start. Beyond that, look forward to consistent posting over the next 6 months, and hopefully an increasing readership and community that will help us all learn and grow.
Thank you to all my loyal readers and supporters and those of you who have reached out to me through comments or emails. Where’s My Trust Fund is already almost six months old. I’ve been shocked at how much work it is to get a blog up and running, but I have also been surprised by how much I have enjoyed the process.
I have been thinking a lot about our Crossover Point ever since reading Your Money Or Your Life. Defined as the point where the income from your investments is greater than you expenses, the Crossover Point is the stage at which you no longer need to depend on income from your job to support your … Continue reading
I have been thinking a lot about our Crossover Point ever since reading Your Money Or Your Life. Defined as the point where the income from your investments is greater than you expenses, the Crossover Point is the stage at which you no longer need to depend on income from your job to support your life. It is traditional to think about retirement at age 65, but what if you could retire earlier? As someone who is many years away from traditional retirement age, I find the concept of the Crossover Point to be much more concrete than the numbers spit out by retirement calculators.
Unfortunately, the Crossover point is highly dependent on interest rates and we are currently in a very low interest rate environment. In Your Money Or Your Life, the Crossover point is determined using the rate on long treasury bonds. These rates have moved up over the last few months, but are still only around 4.5%. Investments in long treasury bonds put your principal at risk, if interest rate rise you will be left with less principal. If you want to calculate your Crossover point at a level where you are not putting your principal at risk, you need to use the rate available in savings accounts which is even lower, somewhere around 1.25%.
To calculate how much capital you will need to reach your Crossover Point calculate your annual expenses and divide this number by the appropriate interest rate. So if your expenses are $4,000 a month or $48,000 a year you would need either $1,070,000 invested in long treasury bonds, or $3,840,000 invested in a high yield savings account. The calculations are as follows:
$48,000/.045 = $1,070,000
$48,000/.0125 = $3,840,000
These numbers are ballpark numbers and assume that this money is not earmarked for anything else, such as a down payment or college costs for the kids. If you really wanted to put this plan into action you would have to think through the withdrawal limits and restrictions on different retirement accounts and also think about the cost of health care if you will reach the crossover point before age 65.
Getting closer to your number
There are three things that will get you closer to your Crossover Point number: higher interest rates, lower expenses, and a higher personal savings rate. While the U.S. is at a historical low rate for interest rates, this is something that is out of your control and also hard to predict. However, if interest rates do rise, you will need to have less capital to be at your Crossover Point.
Annual expenses and savings rates are things well within your control. Now that you know your Crossover Point, you may find yourself more motivated to lower your expenses and to save more. Either of these things will get you to your Crossover Point sooner.
What if you do not want to retire ‘early’?
Even if you love your day job think of the freedom you would feel if you could separate your work from your income. Would you enjoy your job even more? Consider working a little less so you can spend more time on hobbies or with friends and family? THIS IS YOUR TRUST FUND. Once you are at your crossover point you can work doing whatever you want, regardless of pay.
Do you find the concept of the Crossover Point exciting? What changes would you make if you made it to your Crossover Point? or even half way there? Are there changes you can make to your daily spending or savings rates to get to your Crossover Point sooner?
I had never heard of Your Money Or Your Life until last year when I kept coming across it on lists of people’s favorite personal finance books. Once I had identified it as a ‘must read’ I even had a bit of difficulty tracking it down as my local used book store and big box … Continue reading
I had never heard of Your Money Or Your Life until last year when I kept coming across it on lists of people’s favorite personal finance books. Once I had identified it as a ‘must read’ I even had a bit of difficulty tracking it down as my local used book store and big box book stores did not carry it. After reading it, I wish it was more widely distributed as I see what all the fuss is about.
Your Money Or Your Life was originally published by Joe Dominguez and Vicki Robin in 1992. This most recent revision was published by Vicki Robin in 2008. This book is based on Joe’s financial experience, which helped him to retire in 1969 at the age of thirty-one.
This book is not specifically about getting out of debt, or increasing your savings, although these things will happen if you follow the Your Money Or Your Life program. Instead, this book sets out with the goal of transforming your relationship to money and increasing your Financial Independence. Let’s face it, unless you have a trust fund, we are all a slave to out money at some level. Your Money Or Your Life takes the reader through a 9 step process, after which, you will have a new outlook on how you spend your day and how you value your possessions, with the ultimate goal of having enough money whereby it doesn’t dictate what you do for a living.
Stop ‘making a dying’
The bottom line is that we think we work to pay the bills- but we spend more than we make on more than we need, which sends us back to work to get the money to spend to get more stuff to….
This books aims to transform the way you view not only your finances, but also your job. The nine steps force you to look at how you are spending your days and to think about what this costing you in money as well as unrealized dreams and life goals. In addition, these steps bring into stark focus how much your current lifestyle, everything from your house to your vacations, is costing you in hours worked.
It is so easy to fall into the trap of working and saving, assuming you will retire at 65 like ‘everyone else’, without actually thinking about the implications. The 9 Steps in the book requires you to test all the assumptions you have about work and retirement and also to think about the differences between paid employment and work.
The Crossover Point = Your Trust Fund!
Your Crossover Point is achieved when the earnings from your investable assets are greater than your expenses. To find your Crossover Point, each month use the following formula on your total accumulated capital (not savings, which is money that is earmarked for something in the future):
capital * current long-term interest rate / 12 months = monthly investment income
Your Crossover Point comes at the point where your monthly investment income is greater than or equal to your monthly expenses.
The concept of the Crossover Point was the highlight of this book for me. I have not yet come up with a hard or soft number for calculating when I retire. However, when I do think about retirement, it’s always in the mindset of calculating how much money I need to have by age 65 or 70.
The Crossover Point flips this mentality on its head. Instead of thinking of how much you need by age 65, your Crossover Point is thinking about whether you could ‘retire’ at any given time, and thinking in terms of when your investment income will meet your monthly expenses.
To me, the Crossover Point, epitomizes what I mean when I say, ‘where’s my trust fund?’. If you have a trust fund, you can think about what you want to do for work without having to think about it in terms of paid employment. The exact same thing happens at your Crossover Point. This is the point where you can live your dreams without worrying about whether your work covers the bills.
The 9 Steps
The steps in the book are not at all hard, but they take some time and commitment. Following this book to the letter would require your to calculate and chart your income and expenses on an on going basis.
Step 1: Calcualte your gross earnings for your lifetime of work, from your very first paycheck to your most recent paycheck. Then calculate a personal balance sheet of assets and liabilities.
Step 2: Establish the extra costs in time and money required to hold your job, and compute your real hourly wage. Keep track of every cent that comes into or goes out of your life.
Step 3: Take your spending information and create categories (health, clothing, household maintenance, etc) for monthly tabulation. Then convert dollars spent into ‘hours of life energy’.
Step 4: Evaluate your spending by asking three questions about the total amount you spent in each of your subcategories: 1) Did I received fulfillment, satisfaction and value in proportion to life energy spent? 2) Is this expenditure of life energy in alignment with my values and life purpose? 3) How might this expenditure change if I didn’t have to work for a living?
Step 5: Chart your monthly income and savings on a wall chart.
Step 6: Lower your total monthly expenses and increase your consciousness in spending.
Step 7: Increase your income by valuing the time you spend at your job, and find the highest pay consistent with your health and integrity.
Step 8: Find your Crossover Point.
Step 9: Educate yourself about long-term income-producing investments and manage your finances to fit your needs over the long term.
Is this book for you?
Unless you currently independently wealthy and living your dream life, I think almost everyone could benefit from reading this book. From someone with large student loan debts who is just starting his first job, to someone making millions and with a million dollar lifestyle, this book will force you to think about whether you are getting what you want out of your life.
If you are looking for tips or tricks on how to get out of debt or invest your money, this book is not specific enough for you.
This book is uniquely suited for you if there is a large disconnect in your life between your day job and your dream life or if you are particularly interested in becoming financially independent before the age of 65.
This book talks a lot about ‘life energy’ which took me a bit of getting used to. It also can come off as a bit preachy. I was intrigued enough about the overall message of the book that I was willing to get past this.
I hope this book makes you as excited to think more about your Crossover Point as it did me.
When I was a sophomore in high school, I gave up pop for New Years. Besides falling of the wagon twice, I have kept this New Years resolution for almost two decades now. However, this is one of my only New Years resolutions that I can remember, much less have stuck with for any period … Continue reading
When I was a sophomore in high school, I gave up pop for New Years. Besides falling of the wagon twice, I have kept this New Years resolution for almost two decades now. However, this is one of my only New Years resolutions that I can remember, much less have stuck with for any period of time.
Every year I try to make a few New Years resolutions. I am a big proponent of evaluating your life for any changes you may want to make and setting goals to help you achieve them regardless of the time of year. Even if you hate resolutions, the beginning of the year is uniquely suited for setting financial goals. Roth IRA, 401k, and 529 plan contributions are all calculated on the calendar year, as are taxes and most bonuses. A new year is a great time to think about what you can do over the next 12 months to get your financial house in order.
Here are a few of the things I want to accomplish this year. I am keeping the list relatively brief so that I actually get these things done and I am hoping that this blog post will hold me accountable.
1) Finish will and estate planning by the end of January
This one is embarrassing for two reasons. Not only is our daughter past her first birthday, and this is something we should have taken care of long ago, but we have actually done the hard part and just need to finish. We’ve found a lawyer, met with a lawyer, and everything is drawn up. All that’s left to do is review the documents and sign everything. Hopefully this post will guilt me into action.
2) Roll over 401k from old job by February
This one is also embarrassing to have on my list as I have been at my current job for over two years. Not only that, I have a roll-over IRA all set up from previous job changes. I am currently on my 4th job since graduating from college. After leaving my first two jobs, I diligently rolled over my 401k into a roll-over IRA. However, both of those times I was single and could do all the paperwork myself. Now that I’m married, my husband has to sign the paperwork too, and the papers need to be notarized. None of this is that hard, but it’s been enough to prevent me from completing this task. Again, I’m hoping this post will guilt me into action.
3) Get a handle on squandered money
This is a goal I have already started on. We live within our means and save money each month for retirement, a down payment on a house we hope to buy in the next couple of years, and for college. But our budget has changed a lot since our daughter was born and we’re not saving as much as we used to and I feel like we could be doing better.
To get a handle on this I started tracking our expenses again a few months ago. This is something I’ve done regularly throughout my adult life, but had not done in awhile. I’m going to continue to track our expenses at least through February, and use this information to revise our budget.
I have also opened up a new sub account in our ING savings account and nicknamed it “2011″. I have calculated how much extra we will be receiving as a result of the 2% tax break on Social Security in 2011 and have set it up to have this amount automatically deposited into this account each month. I will increase this amount if we get any raises this year and will also add any additional money we receive, through tax refunds, cash back on our credit card, or any other extra savings we do this year, to this account. Our biggest savings goal right now is for a down payment, so eventually this money will go to fund that goal. In the meantime, I am excited to see how much extra money we can save this year and having a specific “2011″ account will help with motivate me to save as much as possible.
4) Develop a consistent plan for charitable giving by June
My husband and I are always aspiring to give more to charity. While I am very happy with the progress we have made over the last couple of years, both in the amount we give, and the charities we give to each year, I would like to have a more formalized plan. This is going to take a little research and some conversation with my husband so I am giving myself a little more time to complete this goal.
If you are setting any goals for 2011 I encourage you to make S.M.A.R.T goals. SMART goals are specific, measurable, attainable, realistic, and timely. So rather than saying, “I will pay off my credit card debt in 2011″, say, “I will pay an extra $50 of my credit card bill each month for the next 12 months”.
What are your financial goals for 2011? Contact me or leave a comment below.
Happy New Year everyone! Starting a personal finance blog has been a goal of mine for a number of years now and I finally got to work on it in 2010. It has been a lot of fun writing and I’ve especially enjoyed getting to interact with some of my readers either through comments or … Continue reading
Starting a personal finance blog has been a goal of mine for a number of years now and I finally got to work on it in 2010. It has been a lot of fun writing and I’ve especially enjoyed getting to interact with some of my readers either through comments or personal emails. In 2011 I’m looking forward to growing the community so please keep the comments and emails coming! A special thank you to everyone who has subscribed to my blog, it is fun to know people are actually reading what I write.
People find this blog through several different sources. A lot of my readers are personal friends of mine, but as the blog continues to grow I get more and more readers through word of mouth (thank you!), Facebook, and web searches.
It’s always interesting to me to see which posts get the most buzz, and it’s not always the ones I expect. In case you are interested, here are the top 10 posts from 2010:
Where’s My Trust Fund Most Read Posts From 2010
And here are a few posts that I really like, even if that are not the most popular of posts:
Here’s to a happy and healthy 2011. Thank you for your readership and support!