It’s been awhile since we did a this financial life episode. Today we have this financial life with Broc.
Some of our this financial life guests were just getting their financial footing and we got to learn along with them. Broc is doing pretty much everything right so his this financial life gives us the chance to learn from him.
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Broc and his wife managed to pay off their mortgage in just five short years! The home cost $325,000, they put down 20% leaving a mortgage of $260,000.
They had a 30 year, variable rate mortgage. That meant their interest rate for the first seven years was 3.3%. After that, the rate could change but it was capped at 8%. Broc took this seven year period as a challenge and decided to pay the mortgage off before the seven years was up and the rate would change.
Their property taxes were $5,000 a year and they figured large, yearly expenses like that into their regular budget so it wouldn’t sneak up. The mortgage payment was $1,200 a month. During this period, the expenses were about $5,000 a month and their gross income was about $200,000.
Broc’s wife was maxing out here 401k, Broc was working for a start up that didn’t offer a 401k. Their emergency fund was fully funded at $10-15,000. The family had an extra $2-2,500 a month to throw at the mortgage.
Debt or Invest?
There is a lot of debate in the personal finance world about whether it is better to pay off all debt, including low interest debt like mortgage or student loan debt as quickly as possible or to focus more on investing where you can expect to get an average return over time of 7%, so you are still growing your money even while you have that debt.
Dave Ramsey believes all debt should be paid as fast as you can, Broc’s wife agreed and aside from maxing out her 401k, they paid off the mortgage at the expense of investing. Mr Money Mustache credits paying off his mortgage quickly as a big part of the reason he was able to retire early. LMM generally believes in investing if your debt is low interest.
However, if your debt is high interest, like credit card debt, than nothing is more important than paying that off as quickly as you can either with the stacking or snowballing method. The only investing you should do if you have high interest debt is putting enough into your 401k to get matching from your employer because that is free money. Otherwise, no investment is going to give you a return in the mid teens which is what the average credit card interest rate is.
Broc and his wife had no other debt during this period so it made the decision a little easier. Had they still had student loan or credit card debt, they may not have been so aggressive on the mortgage debt.
Money in Relationships
Money is one of the most contentious issues in a relationship. Broc admits to being the spender in the relationship but you can’t achieve a goal as ambitious as paying off a mortgage in five years if both partners aren’t on the same page.
Money should be talked about in a relationship early and often. Broc and his wife included personal spending in their budget and his indulgence is shopping on Amazon for things that cost under $100. The couple saw friends who regularly spent $100-200 on dinners out and then complained about being in credit card debt and they were relieved enough not to be in that situation that skipping that kind of spending didn’t feel like much of a sacrifice.
Kids are expensive, there is no way around it. But there are plenty of ways to make them less expensive. Not everything they need has to be new. If you are having kids, you probably know plenty of other people doing the same and you can all share clothes and baby accessories. Babies don’t have any feelings about hand me downs. Even if you don’t have friends to trade stuff with, you can thrift a lot of it.
Broc and his wife had two kids during this period. His wife cut back her hours to part time to spend time with the children and to cut down on day care expenses which are probably one of the biggest expenses parents face.
And while kids are expensive, some of your DINK expenses will be out the window when you become parents, fewer dinners out, fewer social and entertainment activities, fewer vacations or closer to home vacations than you previously took, so some of the costs balance out. What you used to spend on dinners out, you now spend on diapers.
Now that the family is entirely debt free, what are their plans? Their expenses run about $4,000 a month, leaving $2.5-3,500 left over each month. Part of that is going to accelerate the college funds for their children as during the mortgage pay off they were only contributing a few hundred dollars a month to that. The children are just three and four years old so they have plenty of time to catch up.
They plan to make some home improvements and take a family vacation to Disney. They are both maxing out their 401k’s and are toying with the idea of early retirement. Their tap out number to reach financial independence is $4 million which sounds like a lot based on their expenses but they will retire much earlier than most people so that number is not unreasonable.
Money Doesn’t Come Into It
The definition of financial independence is making decisions not based on financial concerns. By paying off his mortgage so quickly, maxing out 401k’s, saving for college, and having an emergency fund, that is not far off for Broc.
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