Thursday, June 11, 2015

Dr. Mom

That huge break in blog posts was brought to you by baby-rearing and the dissertation writing process. Phew! Now that I have a doctorate and a toddler, maybe there's time to blog again?!

Herr Handlebar has been handling most of the money stuff for the past year and a half, so I'm just getting my head back in the game. We paid off all student loans, so we only have mortgage debt to pay down now, yay! Looks like we're still on track with our savings goals for early retirement largely thanks to HH's bonus and auto-scheduled 401k deductions. Hopefully I'll have more details soon!

- FH

Monday, November 18, 2013

Buy vs Rent: We Put Our Money Where Our Mustache Is

When Frau Handlebar and I found out we were going to have a baby it became clear we were going to need more space. We really liked our 750 sqft, one bedroom apartment but we wanted a guest bedroom for my parents to visit among other space intensive endeavors. We were looking for 3 bedrooms and a bathroom. We had tried house shopping in Seattle and had become increasingly disillusioned by it. Three bedroom houses in commute friendly neighborhoods we liked were mostly $400,000+. This motivated us to start looking at rentals in Seattle.

We found similar homes and apartments in Seattle were going to cost us $1,850 or more a month. After some soul searching we added the south sound city of Tacoma to the calculation. Family was the primary draw of Tacoma, as it is an hour away from my job in downtown Seattle. But when we ran the numbers on Seattle home ownership vs Seattle renting vs Tacoma home ownership we were pleased with the results.

When comparing buying versus renting it is essential to calculate the most common expenses of owning and renting. To make my life easier for this blog post I utilized the New York Times Buy vs Rent Calculator. When considering costs you must include opportunity costs, which include things like the return you could have earned by investing your money instead of spending it on a down payment. Renters in high cost of living areas are frequently able to apply a larger portion of their income to investing as renting frequently has lower fixed costs. You can make a decision about which scenario is better by comparing a renter's investment gains and costs to a home buyer's gains in selling a home and costs a fixed point in the future.

Home buyers have four primary types of costs associated with home ownership. These include the purchase costs, annual costs, lost opportunity costs and selling costs.

  • The purchase costs include the price of the house and closing costs. 
  • The annual costs include things like mortgage payments, renovation costs, maintenance costs, property taxes, homeowner’s insurance and HOA fees if you are unfortunate enough to find yourself paying them. 
  • Lost opportunity costs are the aforementioned costs associated with sinking capital into an illiquid asset as opposed to putting it to work in the market. 
  • The selling costs include things like a sellers agent commission and other fees as well as the remaining principal balance.

Renters have four different, but similar costs. These include initial costs, annual costs, opportunity costs and costs associated with leaving an apartment.

  • The initial costs in our area are primarily associated with deposits. 
  • The annual costs in a rental situation are typically your annualized rent and renter's insurance. 
  • The lost opportunity cost is the similar to the home buyer's lost opportunity cost but only applies if a home market is hot and houses are appreciating quickly. 
  • Leaving a rental also has certain costs and benefits which might include the return of your deposits.

There are a few numbers I need to throw out there before we dig into the results. For the rate of return on investments I used the current 20 year return for the S&P 500, which is 8.2%. I ran the numbers with a slightly more conservative number of 7% and they did not move too much. You should know that I am pretty bullish on stocks over the long term and that is reflected here. I used an inflation rate of 2%. This might be too conservative but more inflation seems to push things in the direction of buying. I used an annual renovation cost of 1% for an expensive Seattle house and 1.7% for a cheaper Tacoma house. These numbers are based on current forecasts for the cheaper Tacoma house we bought. In both cases I estimated 0.5% for maintenance costs in an attempt to not conflate maintenance and renovation costs.

Results Seattle Ownership vs Seattle Rental

As you can see in the above graph it never makes sense for Frau and me to buy a Seattle house when compared to the rentals we shopped. Many of the rentals were above the $1850/month included here but you have to get above $2,000/month in rent for the break even point. A key take away here is that north Seattle is a high cost of living area with really high housing costs. I only anticipate this to get worse over time.

Basically, if we were to remain in Seattle renting is a slam dunk. At the 10 year mark it will have cost us $57,804 less than renting.

Results Tacoma Ownership vs Seattle Rental

After some soul searching the Frau and I realized being close to her family after the birth of our first child was important to us. At that point we started comparing Tacoma home ownership with Seattle house renting. In this comparison Tacoma home ownership is the financial slam dunk. We come out ahead (on paper) in year one (assuming we could get the price we paid in a house sale). An interesting detail that pushed even the year one calculation in home ownerships favor was the buyer's market in Tacoma. In this market we were able to get concessions from the seller, like seller pays closing costs, that are unavailable to Seattle buyers in that city's hot housing market. In Seattle my friends have had to deal with multiple bidders, all cash offers and waived concessions. Not so in Tacoma. I made a few other changes in this calculation that you should be aware of. I lowered the home appreciation value to reflect Tacoma's more tepid housing market.  

One additional aspect this graph does not capture very well is the flexibility provided by renting. It could be that I am offered a fantastic job in San Francisco or Denver. In the Seattle renting scenario it would be fairly easy for us to pick up and take advantage of that opportunity. Because of how important family is to us we don't think we will be leaving Western Washington any time soon. 

I think one of the more exciting aspects of the Tacoma house is that the PITI (principal, interest, taxes, and insurance) on a 15 year mortgage is less than the rent on our old one bedroom Seattle apartment. At the 10 year mark it will have cost us $138,558 less than renting. Over the time period in which we hope to reach FI that is significant. Once we pay down the mortgage it becomes even more significant. 

Results Tacoma Ownership vs Tacoma Rental

We should also consider Tacoma renting versus Tacoma buying. While it does not have the same wow factor as the comparison to Seattle renting the equation still favors the purchase. The reason why is because the Frau and I were able to very rationally consider our needs and we picked a house that supported our primary goal, financial freedom. We purchased a home south of 6th Avenue which we find to be a nice neighborhood but which does not have the reputation of a north of 6th Avenue address. It is true there are parts of Tacoma where we could have found apartments under $1,000/month that would have tipped the balance in favor of renting. We had to weigh a lot of other factors to find the balance that was right for us.

Final Thoughts

Buying a home is not an investment. Buying a home can be a hedge against future housing costs. But homes are much more than this. The Frau and I made a lot of tradeoffs to end up here. Being close to family was very important to us and we prioritized that. I now have a much longer commute (which I accomplish primarily through a combination of bicycle and train or bus). Our house is not as extrinsically nice as some of our friends in Seattle. Our neighborhood is not as packed with amenities as the neighborhood with our old Seattle rental. At the end of the day though we found a home that supports us in the the things we most value right now, family and financial freedom. 

Saturday, November 16, 2013

Kitchen Demo: It's Finally Happening!

I'm escaping the dust, while Herr Handlebar and several of our handiest friends demolish the kitchen. Progress! The contractors are coming this week to tear down the wall that separates the kitchen and living room. They'll patch the hardwood floors, and then we'll have to wait for the cabinets to be constructed and installed. At some point in there, we'll move the horrible water heater from the middle of the kitchen to the laundry space - hopefully with a tankless unit.

We found great deals on appliances at Sears this week. We'll go this afternoon to officially order them, but it looks like we can get a fridge, gas stove and dishwasher for around $2,200 - all stainless steel. This is apparently a great time of year to buy appliances! We'll wait until black friday to buy a stackable washer/dryer - the Sears ad is claiming that we'll be able to get the pair for $800 plus tax. Fingers crossed that they have some in stock when we arrive.

After all that, we will still need to find an island for the kitchen - we opted out of having our own island built with cabinets below due to the expense. I'd be happy with a butcher block, but I'm not sure we can find one that's the right size.

Our next big hurdle is deciding what to do with old appliances - whether it's worth it to try to sell them on Craigslist, or if we should just have them hauled away when the new appliances arrive. Plus, it's going to be challenging to maintain our good habit of eating at home now that we don't have a kitchen sink or stove! I'm hoping to do some meal prep at my mom's house so we can primarily use the microwave and disposable dishes at home. The next few weeks should be interesting!

- FH

Wednesday, November 13, 2013

Celebrating a Year of Mustachianism

Last year, I published my first blog post on November 3. We had just spent the month of October paying off a number of debts (including our car) in order to minimize our monthly expenses. Prior to that, we had several shared experiences with failed budgets (although, we did successfully save and pay for our wedding) and we each had various other experiences with money management (a small inheritance, credit counseling, a car accident settlement, family that lived on borrowed money, etc.). However, it really wasn't until both of us started reading Mr. Money Mustache's blog that we got on the same page as far as money is concerned.

I believe a big part of our money story has been finding a shared goal. We knew that we could achieve smaller money goals - our wedding, honeymoon, a new wardrobe, maxed out 401k, etc. - but when Herr Handlebar started to sell me on the idea of financial independence & early retirement, something clicked for both of us. While working toward this goal has not been easy, in the past year, neither of us have faltered in our newfound quest for financial freedom. In fact, it's kind of hard not to look back and wonder how we could have overlooked this milestone in the first place!

It's been a year full of challenges and we still have a long way to go in our quest to become Mustachian, but I can say with confidence that we are certainly more Mustachian and much closer to financial freedom than we were 12 months ago (and way better off than we were 24 months ago). Proof? Our average savings rate for the past year was over 71%. Even if you subtract the down payment for our house from this number (which I don't usually do since that money pretty much just turned from liquid cash into house equity), we saved almost 55% of our income. The year before that, our savings rate was 29% (not too shabby actually - we had some yo-yo budgeting successes and only 2 months with a negative savings rate). But the year before that? How does -39% sound? That's right... NEGATIVE 39%. We've certainly come a long way since then!

I'm looking forward to sharing more of our experiences "becoming Mustachian" this year as we transition into a new phase of our lives, as homeowners and parents.

- FH

Tuesday, November 12, 2013

Freebies & Leftovers: Redbox Free Movie Code FTW

I never thought I'd be so excited about a free movie rental, but it really is nice to get the things you want for free. For a month or so, I've been meaning to use a Redbox code for a free movie. In fact, several codes have expired since I first became aware that these free movie rental codes were available. However, I'd never gotten a movie from a kiosk, plus paying for an Amazon rental online was so easy, so I didn't bother trying it out. I can't believe how easy it was!

It only took a few seconds to search the internet on my phone for a "Redbox coupon" - a valid free rental code popped up in my first search result. I just walked up to the Redbox kiosk at our neighborhood Bartell's store (no one else was around), I selected the movie I wanted, the machine asked if I had a promotional code so I entered it, they asked for my email address, I swiped my credit card, and then the movie popped out. Free stuff!

The same movie currently costs $4.99 (plus tax) to rent for 24 hours on Amazon Instant Video, so I saved over $5. Basically, I would be paying over $5 for the convenience of not having to pick up and drop off a physical DVD from the kiosk (even thought the kiosk is only blocks from my house).

Now I'm ready to snuggle up with my chick-flick and some yummy fried rice leftover from yesterday's dinner while the husband is out watching sports with friends. Sounds like a perfect evening to me - all the stuff I could want for the low low price of FREE. :)

- FH

Monday, November 11, 2013

Every Little Bit Counts: Getting a Coupon Price Without the Coupon

We had a small financial victory at the zoo yesterday. When we arrived at the kiosk, the teller informed us that our memberships had expired and it was $75 to renew for the year. Even though HH was at the window, I said something about having seen a coupon (hoping the teller might tell me where it was) and started looking at my phone to see if it was on Groupon or AmazonLocal (I have apps for both of these on my phone). After failing in my search, I put my phone away and the teller asked if I found anything. I said no, and then something surprising happened... she asked if I had seen the Valpak coupon (a pack of printed coupons that comes in the mail about once a month). I said: "Yes! That's where I saw it!" She then asked if I had it with me, and I said no (in a disappointed voice). She gave us the discounted price anyway (letting us know that usually it's against the rules, but she was willing to help us out this time). 

Even though it was only a $7 or $8 savings, I was pretty proud of myself for speaking up. It's certainly nice to have extra savings in the bank! Taking a minute to look through the Valpak coupons the week before actually paid off (I often just toss the coupon pack). Most other coupons I've perused the past few months have been for (food) products that we don't buy, so I've learned that coupons for services and non-perishable goods seem to be the most useful for our lifestyle. Now I can focus my couponing attention on these items.

In the end, just the knowledge of the coupon was enough to save us some money, so it never hurts to ask! 

- FH

Tuesday, October 29, 2013

5 Things We Did This Month to Cut Our Food Spending in Half

While checking last night, I was pleasantly surprised to find that we have only spent $704 on food in October, with just 3 days left of the month. Grocery spending was $623, so we've spent less than $100 eating out - pretty incredible for us! Even if we spent another $100 on food in the next 3 days, we'd still beat our previous food spending record of $814 from last November and way exceed my goal of spending under $1000 on food this month. My plan is to make the food we have stretch for the next few days so we can keep a nice low number to motivate us in the coming months! I'll likely head to Costco and Trader Joe's on Friday to stock-up for November.

Also, it turns out that aside from house renovation costs, we've spent less this month than any other month on record. I think this proves how significant an impact our food spending habits have on our overall spending (combined with lower transportation expenses, we had a killer October). Below I will detail 5 things we did this month that I think helped us streamline our food spending:
  1. Less eating out: This one is obvious in principle, but actually accomplishing it is another matter. Both of us were committed to eating out less this month, motivated by the high numbers on the spreadsheet of our food spending over time that I shared at the end of September. Having quick breakfast and lunch options available was key in this area, so HH didn't have to spend money on food during the workday. I contributed most evenings by either having dinner ready when HH got home from work, or at least having the ingredients on hand to make dinner, so there was little temptation to go to a restaurant or buy too much prepared food at the grocery store.  
  2. More meal planning: While I didn't do as well in this area as I would have liked (I only made an official meal plan during the first week of the month), even planning meals for one week out of the month contributed to developing our habit of eating at home. I think it was especially important that I planned for the first week of the month, so we had developed a routine of eating dinner at home by week 2. 
  3. Fewer quick runs to the store: Having meals planned, or at least better developed food storage (from Costco), meant less need to run to the store for ingredients or pre-packaged items. Those quick store runs usually cost us $30-$50, and often include items that we don't really need (chips, cookies, sodas, etc.). 
  4. Easy-to-prepare recipes: With our kitchen on its way to demolition, many of our appliances and other kitchen supplies are still packed away in boxes (for example, I can't find the lid to our crockpot). It's been a challenge to cook with basic tools, but we've definitely made it work. We ate quite a few PB&J and grilled cheese sandwiches, as well as pasta and rice dishes. 
  5. Shopping at cheaper stores: I started this month by stocking up at less expensive stores before heading to the Metropolitan Market or local co-op to buy groceries. There will always be some items that the cheaper stores do not have (such as vegan Daiya cheese and certain organic produce), but shopping at the bulk and discount stores first guaranteed that I got the cheapest prices first before spending top dollar for the foods we love.
    • Costco: This month was the first time I've shopped at Costco in years. I was surprised by how many organic options they offered, including these pantry staples: whole wheat pasta, pasta sauce & diced tomatoes, rice, quinoa, peanut butter, olive oil, garlic, frozen peas & corn, baby spinach, cashews, and lunch-size bags of chips.
    • Trader Joe's: It's also been a while since I shopped at TJ's, but I was happy to walk out with 3 full bags of groceries for only $80. Some staples I'll likely repeat next month are: canned beans, root beer, orange juice, old-fashioned oats, coconut milk (refrigerated and in aseptic containers), frozen greens & fruit, nuts & dried fruit, chopped veggie mix, organic veggies (especially potatoes), hummus, peanut butter pretzels, dry cereal, and chocolate-covered almonds. Many of these are more "snack-y" foods than those from Costco, but they also keep us happy eating from home and not feeling like we need to make a run to the store.  
    • Local produce stand: Our local produce stand offers a few organic options, plus quite a few local options. I basically follow the "dirty dozen" rules, always buying potatoes, apples and greens organic - usually peppers and celery as well. I'm more flexible with many other foods, especially if they are local and in season. Our produce stand also offers pretty good prices on fruit frozen while in season and hispanic goods such as tortillas & chips. 
- FH