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Why we chose to refinance our 3.75% mortgage

House icon on green field

KJ: One of the benefits of lower interest rates these days is the very low cost of credit: be it mortgage loans, home equity lines of credit, car loans, student loans (er, generally…), etc. Well, for some reason, credit card interest rates don’t EVER seem to decline, so that’s really the exception to the rule and why you should avoid carrying any balance from month-to-month anyways. But, just because interest rates are lower, doesn’t mean you should go out and take on NEW debt just because! With rates as low as they are today, we chose to refinance our 30 year despite our historically-low 3.75% mortgage rate. I would have never thought I would utter those words, but crazy as it is, we did, and here’s our story why (thankfully we weren’t around to purchase a home when interest rates for mortgages were in the TEENS in the late 70′s/early 80′s!).

Some background
When we moved into our current home, rates were about as low as they had been in all of the recorded history for mortgage rates. Unbeknownst to most, interest rates and mortgage rates declined throughout 2014 and into the first part of 2015. So, what were we to do? How could we benefit from the decline? While interest rates themselves actually aren’t all that different from when we bought, fast forward a year of continued savings, changed goals and circumstances, and the timing was right again. So, after a lot of number crunching and analyzing, and rates dipping to a point that we were comfortable, we decided to go ahead and take the plunge on refinancing. Of course there are costs associated with refinancing (loan costs, appraisals (if needed), surveys, and title policy to name a few), but here is the breakdown of why we still chose to refinance:

We switched to a 15 year mortgage
What!? Yes, I know. I generally am quite averse to getting a 15 year mortgage, but it was right for us for a number of reasons. One of which was that it allowed us to drop our interest rate even lower than it was by more than 0.5%. We locked in 3.125% for fifteen years. But, the fortunate thing about home “amortization schedules” (i.e. those sheets of paper at closing that show how much EACH payment EACH year for what seems like an eternity counts toward your loan principal versus what goes toward interest) is that a 15 year mortgage is NOT double the payment of a 30 year mortgage. In fact, ours only changed by a few hundred dollars more. Plus, each payment will now have roughly DOUBLE the amount applied to principal than it had last month. And, if something were to happen to either of our incomes over the next 5-10 years, we have continued to build up our emergency fund to be able to weather the storm.

Housing prices in our area have increased
With housing prices increasing in our area over the last couple of years, we were able to eliminate some costs by having an even lower loan-to-value of our mortgage simply due to housing prices having increased. Not something everyone could expect to do, for sure, but something that just happened to work in our favor this time. We don’t have any intentions of selling in the next 5-10 years, but hopefully those values can maintain themselves!

We were able to go with a better loan servicer
Not much that you really can do about this, but it was nice to move to someone who has a little better loan servicing department, better website, etc. Not that we’ve ever run into any servicing issues, but just nice to have a little more technology and website behind the company. As with most loans though, they end up getting sold off, so that may change in the future anyways, and it wasn’t that strong of a reason for us to make a change, but one for the refinance column nonetheless.

You skip a payment
While not in and of itself a reason to refinance since the costs far outweigh the benefits of refinancing regularly, it does help. In fact, with the refinance we did recently, by still making our regular payment in the month that didn’t require one, we were able to actually get ahead and have a lower principal balance than had we not refinanced in the first place. Break-even rate already hit!

We are debt averse
We just flat out don’t like debt. Even the “good” kind that mortgages and the like are often referred to as. Sure, it’s good for your credit score to have diversity in credit types (home, auto, credit card, credit lines, etc.), but there’s just something about a regular fixed payment we don’t like (I guess better than an irregular, variable payment though!?). So, long story short, with our refinance, we’ll get to this goal much quicker than we had planned before.

Uncertainty versus certainty
While with interest rates as low as they are today, the math would otherwise suggest that you mortgage your house to the hilts and you take on leverage to be able to earn more with productive assets, we chose a slightly different route. It’s a little “a bird in the hand is worth two in the bush” if you know what I mean. It’s about balancing the certainty of what you KNOW the interest rate is on your loan now, versus what the next DECADES worth of investments, expenses, life, returns – you name it – may be. As well, you don’t know that like clock work over the next 20 years that you would even follow the exact schedule of what you can to make the analysis work like it needs to.

    Have you considered refinancing?
    Have you refinanced in the past?
    Tell us about your experiences in why you did or did not go through with it!

Image courtesy of hyena reality / Freedigitalphotos.net. Why we chose to refinance our 3.75% mortgage is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Time to update your savings plan for 2015 – new 401k, HSA, and other contribution limits increased!

2015 Contribution Limits
KJ: With updated savings limits for 2015 being finalized by the IRS recently, it’s time to plan for this next year for any changes to your savings plan. Some limits were increased (401(k), SEP, SIMPLE), but others remain the same (IRA). Either way, it can mean more strategic cash flow planning for your family, so you can eek out a little more savings for your future selves.

401k Employee Contributions
The IRS updated their contribution limits for what you can save to your 401(k). Regular & Roth 401(k) contribution limits for 2014 were $17,500, and this number increases $500 to $18,000 per year for 2015. And, if you’re over the age of 50, then you can contribute an additional $6,000 for a whopping $24,000 per year.

Whether you contribute to the 401(k) pre-tax or via Roth, the limit is the same! That works out to a savings of $1,500 per month. Whether you’re early to the saving game or late to the game, contributing SOME amount is critical. Then, as you get better and better with your savings, work to try and maximize this over time.

IRA Contributions
IRA contribution limits are unchanged for 2015 from the 2014 levels. So, each person can contribute up to $5,500 for 2015. If you’re over the age of 50, then you can sock away an extra $1,000 per year for a total of $6,500.

HSA Contributions
HSA contribution limits have increased slightly for 2015. For single individuals on a high deductible health plan (HDHP), you can contribute $3,350 per year. For family plans, you can contribute just shy of double that figure at $6,650. And, if you’re age 55 or older (not to be confused that this is a different age than the IRA and 401k “catch-up” contribution limits), you can save an additional $1,000.

SEP IRA Contributions
These accounts are typically just for those who are self-employed, and the contribution maximums are quite substantial. For 2014, you can contribute $52,000. For 2015, this figure is increased to $53,000.

SIMPLE IRA Contributions
Some people have access to a SIMPLE IRA through work – not uncommon for smaller employers, and these contribution amounts have increased for 2015, too. The old figures for 2014 were $12,000 with a $2,500 age-50 catch-up. This figure is increased $500 per year to $12,500 with an extra $3,000 contribution for those who are over age 50.

Read more about SEP IRAs and SIMPLE IRAs on the IRS site about Individual Retirement Arrangements (IRAs).

Regular savings
With your regular savings account(s), you can sock away any amount per year or month that you want until your heart is content!

Investment savings
If you have a long-term investment brokerage account with some good old stocks, bonds, mutual funds, etc. then you have NO limits on what you can contribute each year for these accounts either. The sky’s the limit!

Setting your plan for 2015
With LOTS of ways to save in tax-advantaged ways, there typically isn’t a shortage of ways you can save. If you have a 401(K) at work, an HSA, and an IRA, then $26,850 is what you can contribute between the three accounts – that’s about a hefty $2,200 per month! For a spouse or significant other in the same situation, double that figure for a total of $53,700 for your household! Woah!

And, just because you don’t have a 401(K) through work, doesn’t mean you should throw in the towel and stop saving. In fact, it means it’s all the more important for you to contribute to your regular savings and investments to build your net worth that way over time.

    What are your savings goals for 2015?
    Will you be changing your contributions for any of these accounts?

Time to update your savings plan for 2015 - new 401k, HSA, and other contribution limits increased! is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Personal umbrella liability insurance: what you need to know

Dollar Bag Under Umbrella
KJ: If you are like us, you’re working toward your goals. And working toward your goals (be it children’s education, retirement, or just financial independence) means saving money. Over time, you want to see that your money is protected in the event something happens. Most of the time, you have insurance for that – health insurance, disability insurance, etc. All of this to say that there’s a lesser known type of insurance that can help cover pesonal liability above and beyond what’s already on your home or auto insurance (plus some additional coverages), and it’s called umbrella insurance. Umbrella insurance isn’t as the name implies. It’s not coverage for when it rains – though it may be thought of as a protector for a very rainy day personally!

As you build your wealth (or maybe you’re already there!), this can be a critical component of your overall financial well-being. Personal umbrella coverage basically serves as an umbrella over your homeowner’s insurance and car insurance, kicking in extra coverage amounts above and beyond your homeowner’s and car policies. Plus, liability coverage amounts are significantly higher than under your existing policies (i.e. with coverage amounts $1 million and greater).

How it works
So, let’s say you have $300,000 worth of liability coverage on your homeowner policy and $1 million of coverage with your umbrella policy. If someone trips and falls on your property and has a massive claim against you (yes, it was that bad of a fall!…who knows!) for $500,000, then generally the homeowner policy would pay the first $300,000, then the umbrella policy will step in to kick in the other $200,000.

It’s cheap
Relatively speaking, it is a very cheap insurance to have for significant amounts of coverage. As with all insurance policies (and companies), there are a few things that could impact your coverage costs – pool, lots of land, and potentially other factors – but for around a couple hundred dollars per year, you can obtain $1 million in coverage. So, why not cover your family in the event of a catastrophe for such a cheap insurance?

It provides additional coverage
Additionally, umbrella insurance actually covers several scenarios that are NOT part of your standard homeowners or auto policies. In fact, they often cover slander, libel, false arrest, and many other personal liability scenarios (note: not business liability).

Some assets may be protected
Keep in mind that all states vary based on what is considered protected in the event of a bankrupty, but generally, some (or all) of your house can be protected and your retirement assets may be protected too. However, for a lot of your other assets, you may need some additional protections.

So, call your financial advisor and/or your insurance agent to discuss the coverage to see if you may need additional protection.

Image courtesy of digitalart / FreeDigitalPhotos.net.

Personal umbrella liability insurance: what you need to know is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

The oh-so-simple secret to building long-term wealth

Deadline Calendar Means Target and Due DateKJ: And…the oh-so simple secret to building long-term wealth boils down to a few basic concepts: time and patience. That’s it. Take patience, and add in a little bit (or a lot a bit) of time, and voila!

The inspiration for this blog came when we stumbled across a Motley Fool video some time ago that really emphasizes this point in further detail, but the reality is that it is that simple.

Time
The longer time frame you have to accomplish your goals, the more comfort you can have in knowing whether you will accomplish them. Not only do you have a longer period of time to actually save TO your goal, but if you’re investing your money, then it means you have time to weather the markets.

We’ve written about this concept a few other times too on starting your savings while you’re young. Check out one of our prior posts for some startling numbers on why it’s so important to save early and let time be on your side!

Patience
Most goals you set are not very short-term. In fact, most of them are probably very long-term goals when you think of purchasing a home by building up a down payment, retirement (that could be 20+ years away), children’s education (that could be 15+ years away). Keep in mind that getting to those goals takes years, so don’t get frustrated if you’re making what seems like slow progress. Check up on your goals periodically and how you are doing: it’s a good way to not get discouraged and to actually see the progress you are making.

If there’s one thing that markets do, it’s that they ebb and flow. Some years will be great, some will be terrible, and others will be middle of the road. In fact, you probably will have very few “average” years. Learn early to take the panic out of investing and try to keep as level-headed and analytical a view as you can. Endure the ebb, so you can be part of the market’s subsequent recovery (flow)!

Making any investment should not be a whimsical decision. Whether you’re investing in your own “human capital” (i.e. an investment in yourself), buying bonds, or buying stocks it can take some time to realize the fruits of your labor/analysis. Keep patient and don’t react instantly. Sure, if fundamentals change or new information comes to light it may make sense to change course, but if your thesis hasn’t changed and the fundamentals are still there, don’t panic in a moment of uncertainty!

Get Your Plan on Track
With such a simple solution to build your wealth over time, why wait? Start creating those good saving habits early in your life, and it will have a compounding effect over very long time periods. The younger you start saving and investing, the better! There’s always going to be something that you could say “let me get past this month, and we’ll start next month.” Learn to get your expenses in check with a handy-dandy budget tool, and start maximizing what you save each month.

So what’s stopping you from getting your wealth kick-started?

Image courtesy of Stuart Miles / FreeDigitalPhotos.net.

The oh-so-simple secret to building long-term wealth is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Is your time worth as much as you think?

Time is MoneyKJ: Have you ever sat down to actually figure out what your time is worth? Time is one of the scarcest resources, and it’s one that you can never get back. Knowing the trade-offs of what you are missing out on (often called an “opportunity cost”) can go a long way in understanding how you bring balance to your life and evaluate a purchase (whether significant or not). Let’s start with a simple calculation:

What is your yearly take-home (or family’s take-home)?
This should be relatively easy. For those of you that are salaried, the number is pretty easy to calculate – just add up your income from this last year.

For people with irregular incomes and uncertain bonuses, don’t put a whole lot of weight to those lumpy income payments. Instead, try to take a 6-18 month average (depending on just how variable your income can be) leaving out some of the larger bonuses/commissions/irregular income payments as applicable.

The 2,000 hour rule of thumb
Under both of these methods, simply divide the income number by 2,000 (the approximate number of hours worked by someone who is full-time at 40 hours per week). So, if you made $20,000 last year, your hourly rate is about $10 per hour. If you made $50,000 last year, your hourly equivalent is closer to $25.

Back out taxes
Now it’s time for the not-so-fun part. Take your number from above (sounds nice, doesn’t it?), and subtract out your taxes – boo! If you’re in the 15% tax bracket, then simply take the number from above and multiply by 85%. So, if you made $25/hr then your after-tax would be $21.25. If you’re in the 25% tax bracket, multiply by 75% ($18.75 if we continue our example). Don’t forget the impact of Social Security, Medicare, and state taxes (if that applies!) which could all take another 10%+ off your take-home pay! What you thought was your real take-home pay per hour could be significantly lower.

DIY or hire-it-out
Now that you have a quick rule-of-thumb of what your typical hourly-equivalent rate is, it might help you think about purchases in a different light – or hiring out that project instead of DIY. While I’m all for doing as much as you can yourself, there are definitely times when your time may be better spent hiring out a professional who will (1) have a better idea what to actually do, (2) has experience in doing it error-free (or as near error-free as you can get), and (3) who can do it far more quickly than you could accomplish it.

Even if the project is quite basic, maybe you would spend $400 worth of your time when you could have hired it out for $300. If instead the numbers were flipped, and it would have taken $200 worth of your time, yet you would have had to hire it out for $300 then maybe the hire-it-out option doesn’t make as much sense.

Money you have is different than money you could have
Clearly not all decisions are based on the fact that you could be working and generating income while the person you hired is completing the task. You may need to factor in some non-monetary considerations as well like needing a break – there are only 24 hours in a day!

Particularly if you live in the salaried world where extra work doesn’t quite relate directly to your take-home, the decision might not be quite as easy. It could boil down to whether you could be building your marketable skills for future (unknown) income opportunities – i.e. investing in your human capital – to be able to increase your hourly-equivalent rate in the future. Surely that’s worth something!

Use this to calculate any purchase
If the purchase of [insert product name here] is going to set you back $200, and you’re hourly equivalent after taxes is $20, then it would cost you 10 hours of work to pay for said item. It’s a good way to ask “was my hard-earned time for 10 hours really worth this purchase?” That’s about 25% of your entire week’s work…framed that way, your answer might differ.

This can be an exceptional way to really balance your wants and your needs for that good old budget of yours.

    Have you thought about how many hours it would take you to pay off something?
    Did it sway you into making the purchase or did you realize the purchase wasn’t worth it?

Image courtesy of hin255 / FreeDigitalPhotos.net.

Is your time worth as much as you think? is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

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