Category Archives: Pretirement How To

The best mortgage term: 10 years

Want the best mortgage term? Think beyond the 30-year fixed

The best mortgage term: the 10-year fixed rate loan!

The best mortgage term: the 10-year fixed rate loan!

What were you doing 30 years ago?

Me, I was about to start my sophomore year in high school. I was thinking a lot about getting my driver’s license and staring at a lot of boobies. I had begun what would become a lifelong obsession with destroying my hearing, blasting Duran Duran, Men At Work and Loverboy through my orange-padded Walkman headset. All-in-all great times!

In other words, it was a lifetime ago. A lifetime.

Now think back to what you were doing 10 years ago. For me, I was working. My boss who thought highly of me got fired in a tussle with a hated adversary. That adversary became my new boss and he transferred all his hate to me. I was thus left fighting to save my job, even though from any objective measurement, I was doing great in my role. (No wonder I hate corporate America so much!) It was also the year I bought two fourplexes and I spent nearly every weekend for a year working on them.

The thing is, though, that doesn’t seem that long ago. Yeah, a lot has changed since then, but I still remember those days clearly.

Not long ago, when I wrote about how to get rid of your mortgage, I mentioned offhand that part of the strategy was a 10-year mortgage. I also mentioned in How much should you spend on your house that the payment on a 10-year loan should be the measure for how much house you should buy.

I realized I never completely explained my thinking around 10-year mortgages so I wanted to spend some time fleshing out my thoughts on that.

The 30-year term was created after the Great Depression in the 1930s to stabilize the real estate market. Now homes were accessible to a much larger market than ever before. As easy credit has a way of doing (we’re now seeing it with tuition costs), the rapid increase in the number of buyers created an increase in housing prices.

Thus, as time went on, the 30-year mortgage became less of an option and more of a necessity — particularly during periods of high interest rates. Now the 30-year mortgage is the standard loan in America. Nearly everyone with a house has one. Rather than simply believing it is the best mortgage term, many people assume there is no other option.

For people seeking pretirement, however, there is another option and it’s the best mortgage term: the 10-year loan.

Here’s why I say it’s the way to go right now while interest rates are still low:

It’ll help keep you honest about what you can afford

When I give the advice to not buy a house if you can’t afford the 10-year payment, I’m not necessarily recommending that you take out a 10-year loan — it’s just a way of determining the right loan amount for your budget. However in most cases I DO recommend it, because it prevents that money from cleverly turning into electronics and furniture. These many, many things that you’re going to want but don’t really need will be out of reach — and that’s a good thing. You may really want that nice, new couch for your living room, but you’re effectively buying that couch on credit if you’re only able to “afford” it because your house payment is artificially low.

The payment might not be as high as you think

Check out the difference in the payment amounts for two sample loans, one at $250,000 and the other at $450,000:

Loan AmountRate for 30 year fixedPayment on 30 year fixedRate for 10 year fixedPayment on 10 year fixedDifference in monthly payment
$250,0003.99%$1,192.102.75%$2,385.28$1,193.18
$450,0003.99%$2,145.783.25%$4,397.36$2,251.58

Now, I’m not pretending that the extra money you’ll be paying each month is not an insignificant amount of money. On the smaller loan example, you’d be out an additional $1,100 per month. That will sting. It’ll sting badly. On the higher-priced loan, you’ll be well over $2,000 more each month.

Here’s why I say that’s OK. While it certainly is a chunk of change, let’s remember that in most cases, we’re spreading this across two people. So on the smaller loan, we’re talking about $500 each. That should be doable. If it’s not doable, we have to say you’re buying too much house and send you back to my first point.

You’ll actually see results

Sure you’ll gain equity with a 30-year loan as well. Eventually. Nearly every first time home buyer is stunned that just a few pennies from their giant mortgage payment actually go toward principal. For YEARS you’ll watch your principal sit there, barely changing at all. If you sell in too short a time period and you haven’t seen any market appreciation, the theoretical equity that you’ve been earning by reliably making your mortgage payment each month will have been more than wiped out by realtor commissions, property taxes and home maintenance.

When you go with the best mortgage term — the 10 year fixed loan — it’s the opposite. We have a 10-year loan on my current house (AND I live mortgage-free — guess I should explain that one of these days). It’s incredible watching the principal balance drop in big heavy steps. In fact, I’m finding it rather hard to put into words how breathtaking I find it to be each month. Even in the first month our principal began dropping by $1,700 per month. Every year it’s another $20,000 gone. Compare that to a 30-year loan where on a loan of our size you’d see a drop of just a few hundred a month. Take a look for yourself with an online amortization table.

Low interest rates make it possible

My favorite reason to pursue a 10-year loan is that you can. The low interest rates we see currently make a massive difference on your total payment size, all else being equal. That means you can put your house purchase on the accelerated plan, something that was largely impossible for middle class buyers until recently.

You can lower your debt load

Back when I was carrying five mortgages at once, it really sucked doing loan applications. Sure, credit was unbelievably easy to get. I once had a loan officer looking at my list of five mortgages and ask me “So do you want to run this through as a no-doc loan?” Meaning they wouldn’t need to verify my income, they’d just approve the mortgage based on my credit score. WTF?

That was still easier than in the days following the great economic collapse. When the list of loans popped up  on my credit report, it would take about 45 minutes to walk them through each one, explain the rental situation for each and explain how I managed to make all my payments on time. While it’s still pretty tough for me to get a home loan, it’s getting easier. As I’ve been shedding properties (and related debt) in recent years, the ice has been melting. My overall debt looks much more reasonable and I don’t get the shocked questions about the eye popping numbers on my credit report.

It gives you options

Even if you have a few years left on your 10-year loan, your disciplined focus on getting rid of debt and building up equity creates new opportunities for you. You’ll be able to consider buying investment property or just pay off your house completely. You can take out an affordable home equity loan and start a business or pay for your kids’ education. You name it. But even more fun, if you start out on a 10-year loan path and save up a little on the side, you could pay off your mortgage in as little as seven years! Now that’s an option.

It’s less risky

The biggest push-back against a 10-year loan is usually fear of a cashflow crunch should hard times arrive. The classic scenario is one or both members of the couple lose their job. The house payment is too large to be made on one salary and the house of cards collapses and you lose the house and the kids are out on the street.

Is it really a concern? Of course it is. But you’re not going to run into this situation because you’re reading Pretired.org and are going to take some measures to keep yourself safe. If we look a little deeper we can see that it’s actually less risky to go with the 10-year over the 30 year loan. You wouldn’t be buying a house if your employment wasn’t reasonably stable anyway. But how far into the future can you see? You might feel reasonably safe for the next 7-8 years but what about the next 20-25 years? It’s a lot harder to predict a couple decades out, right?

Also, because you’ll be building up your net worth instead of buying a bunch of crap, you’ll have a larger margin of safety. If things go south on you, you’ll have equity available and controlled housing costs so you’ll have more security than your highly leveraged neighbors.

Which brings me to final reason you’re safer with a shorter-term loan: Your emergency fund. Now, in the first couple years things could be tight and you need to be careful. Bad things can happen. I’d say keeping 6-12 months of emergency cash handy is pretty important in the early years. In later years, however, you can open a line of credit to access your newly-built equity, which will serve as your emergency fund.

Your housing costs will be controlled

One of the important steps toward reaching pretirement is bringing your housing costs under control. Whether it’s as a renter or homeowner, you need to ensure housing costs don’t rise suddenly on you in later years, eating up your cashflow and sending you back to work. Getting rid of your biggest expense gives you a lot of power over your monthly finances.

You could be mortgage-free

Hey, need I say more? The American Dream used to be “owning” a house (even though the bank really owned it). These days, the American Dream is about getting rid of your mortgage as early as possible in life. That mortgage payment is what keeps us chained to our desks. You dream of doing something else, anything else, but the career brought you to this place and you’d have to make much less if you changed careers. Getting rid of your mortgage is what makes this possible. And the 10-year loan is the best path to getting there.

What do you think? Have I convinced you the 10-year fixed loan is the best mortgage term?

Image courtesy of Renjith Krishnan via FreeDigitalPhotos.net.

Dividend mapping: The craziest thing I never did

Dividend Mapping: Stupid or brilliant?

dividend-mapping2Just for fun I thought I’d share an investing concept I dreamed up quite a while back. I never actually pursued the idea because it didn’t make sense on a number of levels. In fact it was pretty dumb once I thought about it a little.

Allow me to explain.

The whole concept of pretirement is built upon the idea that once passive investments generate enough money to pay for your monthly bills, you’re financially independent. Thus, you enter into a rarely discussed era of life: pretirement. As you age and become less able to work (thereby making your risk of financial problems higher), you then enter traditional retirement, adding in your Social Security, your personal retirement funds and Medicare to give you the security you need later in life.

OK, that’s straightforward enough, right?

Now let’s talk about investing. Every investor at one point or another has heard the advice about choosing stocks to invest in by looking in your own refrigerator (or looking around your own house, etc.) The idea is pretty simple: If you are a pretty typical person, then it’s fair to say that there are a lot of other people making the same buying choices as you. Therefore the companies who make the products that fill your own home are the ones you should invest in. Classically this advice has pointed investors toward companies like Proctor & Gamble, PepsiCo or General Mills.

Dividend Mapping (a term I just made up), takes this idea a little farther.

Here’s how it would work. I’ll use my own bills as an example (with some rounding to clean it up for you. Also, this is just my share of the bills. If you want the real number with both my wife and I included, just double it.)

1. Make a list of your ongoing monthly bills with the amounts you pay.

  • Food $175
  • Seattle PUD $50
  • Seattle City Light $50
  • Gas bill – PG&E $50
  • Comcast $32
  • Cell Phones $10*
  • Car Insurance $130
  • Life Insurance $45
  • Property Taxes $220
  • Homeowner’s Insurance $25

Total: $787

2. Re-jigger your list to organize it by company. So for me:

  • Food: N/A $175
  • Seattle PUD $50
  • Seattle City Light $50
  • Gas bill – PG&E $50
  • Comcast $32
  • AirVoice Wireless $10
  • Allstate Insurance (Car, Life, Homeowner’s) $420

3. Now, see if I can “map” investments to each line item:

Only three of my core bills are publicly traded, PG&E, Comcast and Allstate. Let’s ignore the rest for now and see if I can use dividend mapping to pay those bills.

  • PG&E: I need $50 of income per month, or $600 per year.
  • Comcast: I need $32 of income per month or $384 per year.
  • Allstate: I need $420 of income per month or $5,040 per year. (Actually what I need is a lower insurance bill, but that’s a story for another day, although this certainly does illustrate how buying too much house can kill you.)

OK? Now let’s dividend-map these three:

  • PG&E pays a respectable yield of 3.94%, so I’d need to own $15,000 in PG&E stock. Actually this is pretty doable.
  • Comcast pays a dividend of 1.77%, so I’d need to own $22,000 in Comcast stock. Kind of a lot of money to throw at Comcast, but possible.
  • Allstate pays a dividend of 1.95%, so I’d need to own a whopping $258,000 in Allstate stock — that’s almost as much as my entire pretirement fund. (Are you beginning to see why I never pursued this wacky idea?)

So here’s why I like this idea and why I spent so many late night hours so long ago thinking so deeply about this.

  • There’s a poetic symmetry to the concept of essentially having a company pay for its own expense. If my Comcast dividend pays for my TV and internet, I’m likely to hate them (and the bill) a lot less.
  • It makes investing, and the concept of dividend investing, easier to understand.
  • It allows (in theory, but not really in practice for the most part) you to pick off your bills one at a time. For example, I rather like the idea of suggesting to a person on a tight budget, “As soon as you accumulate $22,000 in Comcast stock, you can order cable.”
  • The companies that you send money to each month are likely pretty decent investment opportunities for the reasons explained above. And by staying on top of your dividend map mix over the years, you would adjust to changing times. For example, I just dropped AT&T as my cell phone company. Had I been dividend map investing, I would have also liquidated my AT&T stock at the same time and moved it to my new provider, if possible. In this way, you would also theoretically be following the herd, so to speak, as customers move and adjust with the marketplace.
  • Because it does take a fair amount of money to generate the income to pay for some of these bills, this concept is great for getting you focused on your monthly expenses. Suddenly saving $5 or $10 on a monthly bill matters!

Reasons this idea is terrible:

  • The main reason I never seriously pursued this concept was one of the reasons shown by my Allstate example. Because the yield is so low relatively speaking, my money could be performing better by not using this gimmick. Who cares if there is no poetic symmetry? I need to maximize my entire fund if this is going to work.
  • The other reason made clear by my Allstate example is that it could trick you into being over-allocated into certain stocks. If I put that much (impossible in my case, but you get the idea) into Allstate, I could be very vulnerable if Allstate fell into trouble.
  • This idea could trick you into buying really poor companies just because you happen to be their customer. It could be doubly painful to be paying a company money each month on top of watching their share of your portfolio collapse.
  • Not every company is public. Utilities obviously make up a big portion of the bills we all pay each month and not every company is on the stock market, especially publicly owned utilities.
  • Some line items aren’t that simple. I’m mainly thinking of food here, but there could be others. Who do I invest in to cover my food budget? The grocery store chain? The food manufacturers?
  • It leaves out some great buys. Apple has been a great growth stock in recent years, but you would have totally missed out on it if you’d only been dividend mapping. Had you moved to AT&T because of the iPhone, that could have made both of them good buys (see the variations section.)
  • Because bills do go up, you’re not necessarily keeping up with inflation unless you’re getting stock growth or leaving some dividends in to reinvest. Depending on your strategy, this could mean you’d need to keep an extra margin invested beyond what I’ve shown here. (Plus I’m leaving out taxes and fees for these examples to keep things simple.)

Variations to consider:

Like I said, even though this idea is stupid on its face, there may be some redeeming factors to some parts of the concept, such as investing in companies that you use every day. Therefore there are a few variations to think about:

  • Buying a sector vs. individual stocks. Perhaps buying a set of food stocks, mutual fund style, instead of just a single stock could bring the yields you need as well as simplicity and safety desired.
  • Buying bonds as a proxy for your utility stocks could make some sense if you were in love with the dividend mapping concept.
  • Buying a supplier to your company could be an option if your company is private or is just not investment-worthy. For example, AirVoice Wireless uses the AT&T network. Therefore I could look at how much AT&T I’d need to cover my $10/month AirVoice bill ($2,500).
  • Buying a similar company. Perhaps I could find another insurance company to substitute for my Allstate stock.
  • Keep the mapping, but forget all the perfect symmetry nonsense. Just keep it really simple and focus strictly on the investment and ignore everything else. The idea here is really about attacking one expense at a time. So maybe you start with your smallest bill. In my case, maybe it’s my $10/month cell phone bill. Let’s say I found a company that offered a yield of 5%. I take my $2,500 in hand and buy in. Now one of my bills is gone! Then I start saving for the next bill. It’s not as pretty as the pure dividend mapping, but it’s still mapping dividend income to a specific expense.

The last point is probably the best one for people just beginning to think about financial freedom. By picking your bills off one at a time in this fashion, your goals will seem more attainable than ever. Invest until your smallest bill is covered. Then invest until the second bill is covered. And so on. I’d especially love to see young people try this approach as they gradually move toward financial freedom.

So there you have it: An entire post dedicated to something I’ve never done and don’t recommend. Aren’t you glad I didn’t waste your time?

You can give me a piece of your mind in the comments! 

Buying 25 percent of a cow: 100% worth it

When buying the best pays off — buying a quarter cow

quarter cow

What a quarter cow looks like

It was almost a decade ago now that my girlfriend (now wife) and I made the fateful decision to pick up some delicious Jones Barbecue and bring it back home to eat. It’d been a tough week and a Friday night at home watching TV while eating an amazing beef brisket dinner with sides was just what the doctor ordered.

We came home and started mowing our beef like we’d done so many times before, commenting on the spiciness, soaking up the sauce with cheap bread. About two-thirds of the way through the meal, however, she suddenly stood and quickly walked to the bathroom. I set my plastic fork down as the sounds of someone violently puking her guts out immediately ruined my appetite.

Shaken, but clearly feeling better, she emerged from the bathroom with her stomach as empty as it had been 20 minutes earlier.

We didn’t really know what to make of it and just assumed that the spices were too much for her delicate tummy. That theory went out the window some months later when we were cooking steaks at home. Same thing: immediate, violent vomiting. OK, clearly it had something to do with the meat. Could she simply be allergic to cow meat? That didn’t really seem to be the case because we had certainly eaten beef many other times without a problem. And it also didn’t appear to be food poisoning because I never got sick even though I ate the exact same food. Plus, the reaction was so immediate and so violent that it seemed more like an allergy than a bacteria problem.

After doing a bit more research, we realized that it may not be the beef itself, but rather something in some of the beef we ate that was causing the problem. Something she reacted to, but I didn’t. I finally found an article (now long lost) pointing out that most supposed beef allergies are actually allergies to the antibiotics given to cows on overcrowded cattle lots.

This was worth testing. After doing a bit more reading, we found out that corn makes cattle sick so the beef factories (they’re not “farms”, don’t kid yourself) give them massive doses of antibiotics. They, in fact, give them the antibiotics even when they’re not sick as a preventative. Why are cows being fed food they weren’t evolved to digest? Because it’s cheap. Why is it cheap? Frankly because the government subsidizes the landowners to grow lots of corn thus feeding it to cows is a good way to get rid of it.

If you want a wonderful overview of the modern food system with ways to positively rethink our approach to food, be sure to read Michael Pollan’s The Omnivore’s Dilemma: A Natural History of Four Meals. (Did you catch that? My first affiliate link!)

So we sought out grass-fed beef. In fact, you have to look for grass fed AND grass-finished as some “grass-fed beef” is actually corn-finished as a way to add more fat marbling to the final cut. We carefully selected some overpriced steaks that were reliably sourced and well-labeled. Guess what? No problems at all.

The test was repeated many, many times after that point. And so we continued like this for many years, until I finally read the Ominvore’s Dilemma while in vacation in Kauai a couple years ago. This is where I learned of the concept of “pasture-raised” beef. Without giving away the whole book, the idea is that every creature and plant on the farm has its role to fill, which it was given by eons of evolution. So the basic approach when it comes to cows is that the cows eat the grass, the cows fertilize the grass, the chickens eat the bugs out of the pasture so the cows aren’t covered in insects and the whole system is moved around frequently so no part of the system is overtaxed. In fact, interestingly, even the grass did much better as it had evolved to be trampled (creating water pockets) and fertilized regularly. Simply put, the system is in balance. No antibiotics are needed because there isn’t a stress on the system causing illness.

Fate intervened again when our fridge started to die. We weren’t sure if it was going to be savable, but most of the food we were worried about was our frozen stuff. Plus we had an old bar fridge in our basement that wasn’t being used. We decided to spring for a deep freezer and then use the bar fridge as back-up if our refrigerator truly did bite the dust. (We’d been thinking about getting one anyway as a way to be a bit more self-sufficient and to buy in a bit larger quantities.)

So we were all set when we decided to take the plunge and buy our first quarter-cow. It worked out great when my wife was pregnant as she was told to up her iron intake. So about a year ago my wife, then six months pregnant, and I drove up to Snohomish to pick up our meat.

It’s taken us about a year to eat that meat, with the lesser steaks and some of the roasts taking awhile to get through. (It was just a couple weeks ago that we gnawed our way through some nasty chuck steak.) We still have a few pieces left from last year, ribs (I’ve never cooked them, so that’s something I’ll have to figure out) and a couple roasts left. We also gave away all our offal last year (we just didn’t take it this year) and we gave away a few other choices as gifts.

Is buying a quarter cow a good deal money-wise?

Well, we paid $764 for about 120 pounds of beef. That was $511 for the cow and the rest for the butcher’s time. That puts us somewhere around $6/pound. However, we didn’t actually weigh our product, plus we didn’t take the offal, which is included in the price. On the other hand, this is organic and we know where it all came from and, of course, it also includes plenty of premium cuts like T-bones and rib steaks. I’ve heard a clean rib eye can go for as much as $20/pound. There’s also the difference between “pre-hang” weight and the actual weight of what you buy, so it’s a true apples and oranges problem. To really tell you what our value was compared to supermarket meat, I’d have to weigh each cut and compare each one to retail prices and total it up. I’m way too lazy to do that! Instead, I’ll roughly estimate that we eat beef 1.5 times a week on average and that this amount lasted over a year. That is around $63/month, or $15/week. At one and a half meals per week, that’d be around $10/meal (for two people). That doesn’t include power for our freezer and gas to go up and get the meat, but you get the idea.

Bottom line to us is we don’t feel we’re being gouged, we’re getting quality, clean meat and we have it on-hand when we need it — plus, no puking! To us, that’s a great deal!

What do you think? Is clean meat worth it? Has anyone else tried buying a quarter or half cow? 

Online advertising: Another piece of the pretirement puzzle?

Should I fill Pretired.org with ads?

EPSON scanner imageWhen I threw this site together back in March, I had some things to get off my chest and I wanted to keep my mind sharp as I began my life as a semi-pretired stay-at-home dad. In my mind I pictured my two teenage nephews listening attentively to my every word and learning how to be financially independent and living rich, full lives. In reality they couldn’t give a crap about any of this so they’re more like me at that age than I like to admit.

It started as a very personal blog. I never really expected to have, you know, readers. So to make it look the way I wanted and to best represent the clean, efficient approach that is the secret to financial freedom, I chose the most minimalist blog theme I could find. Ample white space, lots of of clean lines, minimal decoration. And no ads. I was so sure I would never put ads on my site that I chose a layout that doesn’t even have a natural place to put them.

I’ve enjoyed sharing what I’ve learned, including even my dumb mistakes. It’s thrilling to think there may be a few people out there that could avoid some of my errors and live happier lives because of words I threw up on the web in the middle of the night. I’ve also enjoyed getting to know some of the other financial bloggers out there. Best of all, by exploring the world of personal finance a little more deeply, I’ve been learning even more.

But now I feel like a chump. And a hypocrite! I’m supposed to be writing about how to live without a corporate job and I’m ignoring a potential source of side money! Almost every site I visit now has a nice mix of ads and affiliate links. Many (like this one) have also been sharing their monthly earnings and I feel like I’m missing out! The traffic to Pretired.org has been continually growing over the past four months. I never thought I would have this kind of audience. Feeling all these eyeballs on me makes me want to take this more seriously. It makes me want to write with more care, explore new topics and put myself out there a bit more (never easy for introverts such as myself).

Will you still come by?

If I put online advertising on my site, I don’t want it to turn people away. I’m still going to write first for myself, but every writer craves an audience most of all. Of course I would avoid anything too annoying (you’ll never see a pop-up here). And I would do my best to restrict spammy garbage ads from the site, realizing that’s always an imperfect science.

My other concern, of course, is to place ads where they’d be seen, yet unobtrusive. Somehow I need to find nice, little places on my site to tuck the ads in where they won’t upset my chi when I look at my own site. Naturally I’d disclose when a link is an affiliate link so you can take what I’m saying with the appropriate grain of salt.

I guess my other worry is that I don’t really want to become a servant to Pretired.org. I’ve been having fun, but if it becomes a job then it starts defeating the purpose. I in NO WAY consider blogging or other online moneymaking activities to be truly passive income. But, if you’re semi-pretired or pretired and just want a little extra side money, why not put some free time into sharing what you know? That’s where I want to keep it. If it becomes drudgery, I might as well go back to an office job and make the big coin again.

What works and what doesn’t?

While I have a lot of experience in all manner of online marketing and communications, one thing I haven’t done a lot of is generating money via blog ads. For those of you who are already quite successful in this area, what’s working for you? How much effort is it taking each week to keep the money rolling in? Any other tips for a neophyte such as myself?

Sorry to go meta twice in a row! I do hope those of you who have explored online advertising on your own sites will share your thoughts in the comments! 

Related Posts Plugin for WordPress, Blogger...