Reader Analysis: Should he refinance?

I was speaking to a friend today and we got on the topic of rental property as an investment.  I have always been intrigued at the idea of becoming a real estate mogul but I never had the knowledge necessary to make an educated decision on where, when and how to buy.  For the sake of this discussion I will refer to this friend as Joe. 

Joe and his wife bought a house 7 years ago, for $152k under the impression that they would live in it for the next 15-20 years.  After 5 years, in the house, Joe’s employer transferred him overseas and he was forced into a “sell or rent” decision.  At the time he chose to try and rent out his house because he felt that he would lose too much money in the sale.  He hadn’t lost any money in the house but he had not built up enough equity to pay for the realtor fees during the sale.

He informed me that he is now losing over $100 a month because he was not able to rent it out for a price that would cover all his costs.  After some questioning I realized that he still had his original 30-yr fixed rate mortgage.  He couldn’t tell me his interest rate, off the top of his head, but he was very proud to tell me that he only had 23 years left on the loan.  After some digging I found out that for the past 7 years he had been paying a 6.3% INTEREST RATE!!!  Ever since the market tanked in 2008 mortgage rates went from low to lower.  I asked him if he knew how much he was actually paying in principal and he didn’t know.  I also asked if he knew that the average 30-yr fixed mortgage rate was currently around 3.3%.  He said he had heard something about it but that it would change his payment much.  I very quickly did some math and showed him a few comparisons.

Current Mortgage:

Price paid - $152k

Amount owed - $136k

Interest rate – 6.3%

Monthly payment (minus tax/insurance) - $940

Amount to principal this month - $220

Now compare the numbers above to the amount Joe would be paying if he refinanced at todays rates.

15-Yr Refinance:

Price paid - $146 ($136 + $10k closing costs)

Amount owed - $146k

Interest rate – 2.7%

Monthly payment (minus tax/insurance) - $987

Amount to principal this month - $658

I understand that closing costs can change based on the bank and points but I wanted to illustrate that even with a huge closing cost Joe could still save money.

So with this new mortgage Joe would only spend $47 per month and would still be paying off $438 more per month towards the house.  That comes to $5,256 extra in principal paid just in the first year.  Under this new mortgage Joe will pay off his house in the next 15 years (8 years early).  He will also only pay $31,717,17 in total interest over the life of the loan instead of the $186,701.91 that he is currently on track to pay.  That is a savings of $154,984.74 in interest over the life of the loan.

If you haven’t checked on refinancing since the 2008 market crash than it might pay to take a look.

Online Degree + Tax Credit = Free Laptop

In January 2013, at the age of 31, I was able to finally finish my Bachelors Degree.  It wasn't really a 13 year journey but 11 years of nothing and then 2 years of hard work.  I actually started going to college at 18 but I spent more time sleeping than actually going to class.  I decided that school was not for me so when an email came out that stated I could quit school today and I would only owe the school half of my tuition or I could quit tomorrow and owe the entire semesters tuition I decided to quit school and try something new.

11 years later I decided it was time to go back to school.  For those 11 years I actually had access to tuition assistance, from my employer, but I was too busy being lazy to take advantage of it.  I finally decided to start taking classes at one of the for-profit online universities.  I don’t want to get in to the pros/cons of online education right now.  My job required travel, which meant that a traditional school was not an option, and at the time I was looking to check a box so I was more concerned with cost and the type of degree I was interested in. My focus was to make sure I found a regionally accredited school and as I started to take classes I realized how beneficial they were so I focused on getting as much as I could out of each class.

During my last year of school I maxed out my tuition assistance fairly quickly so I had to spend my own money to pay for a few of my classes.  I decided that my education and the increase in future earning potential was worth spending some of my own money.  Little did I know that I could actually claim those expenses on my tax return.  

The American Opportunity Tax Credit has the following benefits:

-       $2,500 credit

     - 100% of the first $2,000
     - 25% of the next $2,000

-       Used for course related books, supplies, and equipment

-       Used for first 4 years of post secondary education

-       Filing single with less than $80k in adjusted gross income

-       Filing join with less than $160k in adjusted gross income

-       Cannot claim this and claim the “tuition and fees” tax deduction

The key difference between the American Opportunity Tax Credit and the other educational credits is that “the term "course materials" means books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance” (irs.gov).  In order to get online and take classes a computer becomes “a condition of enrollment or attendance”.   This means that if I only have to spend $1,000 out of pocket this year then I can buy a computer for up to $1,000 and claim it on my 2014 tax return. 

Hopefully you will use the entire credit to to complete more classes and graduate early instead of buying a computer but if you are like me, and cant take any more classes this year, go ahead and use the entire credit.

Retirement Calculators....Schmalculators

For the last 3 years I have been focused on when and how to retire.  I set an age of 55, which I thought was young.  I always read how most people retire in their mid to late 60s so I thought 55 was a very ambitious but attainable goal.  I would go to one of the various retirement calculators online and it would say I needed millions in the bank in order to retire.  I played with the settings and slowly made the calculator lie to me and tell me I could do it.  I’m not saying that saving millions is impossible I am just saying that I would need to save a lot  (which I can control) but I would need the market to cooperate and average 10-15% for the next 20 years (which I cant control).

  I don’t make a lot of money and my wife is a schoolteacher so our earnings are limited every year.  We are not worried about our next meal or staying warm but we also aren’t not biding our time until one of graduates from medical school and can finally start earning the big money.  I am sure we will both get raises, as the years go on, but I am just hoping that those raises keep up with inflation.

While online, doing retirement research, I stumbled across a blog called Mr Money Mustache.  The owner of the blog and his wife saved over 50% of their income every year, until the age of 30, and then retired.  I was amazed!  I had never heard of anyone retiring at 30 without winning the lottery first.  Immediately I went back to the retirement calculators to input a savings rate of 50% but I still didn’t come up with a final amount in the millions.  What was Mr Mustache doing that I wasn’t?  I kept reading his blog and realized that he had also figured out how to live off of $24k a year.  I always thought that once I retired (at 55) I could live off a small amount of money.  I figured that if I had no debt than all I would pay for is basic utilities, gas, food, taxes, and some luxury items.  That is basically what he is doing but he did it at 30.  I am beyond impressed at his dedication to save and then his ability cut spending down so his magic number didn’t need to be in the millions.

When I went back to the retirement calculators and put a new rate of saving, and a realistic rate of return, I got a number that sounded low a few weeks ago.  However, with my new spending plan I think I can retire much earlier than my late 60s.  

Welcome to Money Life Leaders!

This is a blog about money and how it can make or break your life.  I am not saying that money should be the most important thing in your life but having money allows to focus on those things that are the most important.

My current goal is to retire by the time I turn 45.  I know 45 might seem too young but the more I look at it the more I think it is attainable.  I am already changing the way my family lives and changing the definition of retirement for my family.

I wasn't always this focused on retirement:

Every year, on my birthday, I look back and try to figure out what my main accomplishments were.  Somehow my mind has decided that aging one more year is ok as long as I ended the year better than I started.

For most of my twenties these accomplishments revolved around physical fitness, saving money, and acquiring more “stuff”.  If I ended the year with a lower net worth than I began I would be ok as long as I had something to show for it.  I’m not saying that this was a smart way to save but I was young and it made sense to me at the time. 

The first few years where I did not meet my yearly goal was 2008-2010 and the stock market did not behave the way I wanted.  I was still a newbie investor but I had enough invested for the crash to hurt me.  After that I made the best decision I could think of and I doubled down and made some risky trades.  I figured I could make huge gains that would not only erase my previous years losses but also make even more money. 

Every trade I made I pictured the best possible scenario and what things I could buy with the new money.  I would always tell myself that I had done the math and assessed the downside but I never focused on it as much as the upside.  This allowed me to trick myself into thinking that these trades were good ideas.  I ended up losing my shirt on those moves and decided that I had to stop, especially when I was risking my family’s future.  

It took each one of those experiences to bring to where I am in today.  I have realized that there is no magic formula for saving for retirement.  You can’t bet your future on your ability to pick the next Apple, Microsoft, or Facebook.  You also can't just put money under a mattress and hope no one finds it.  You have to find a way to make money, spend what you make efficiently, save as much as possible, and let time and compound interest work in your favor.  

This blog is way to document my change of thinking, find like minded people to share this journey with, and hopefully teach/learn at the same time.