Tuesday, June 30, 2009

In which I get very detailed about finances

So, one thing that sucked about our beach trip was that Torsten had to do some work while we were there. He wasn't working full-time, but he's managing an important project that he couldn't just abandon for the week, so he did a few hours' worth of work each weekday that we were there.

So, now we're thinking that if we can finagle the time off and the finances, we'd like to take some sort of trip together in the fall, a real getaway where we can both not think about work at all and really relax. That's what this last week was for me, but not for him, and less so for me due to his absence at times.

By the way, we're taking suggestions on where to go. Mexico? Belize? California? Elsewhere?

So yesterday I started looking into some of our credit card rewards and other financial stuff to see if we'd be able to swing this trip. I haven't checked out any of our credit card rewards for quite some time, and it turns out that we have quite a bit accrued. In fact, we have about $1,000 worth of awards available to us. We have 25,000 frequent flier miles on one card (thanks to a 15,000-mile introductory bonus plus charging my surgery on that card). We have $250 on the card that gives us 6% back on all gas and grocery purchases. We have $300 on the card that gives 3% back on Amazon.com purchases, 2% back on restaurants, 1% back on everything else, and double all of those things for the first three months. And we have $250 available in our ThankYou network account, which accrues from multiple accounts.

The way we manage this without going broke is that we put every single purchase we make on a credit card, but we pay them all off every month. I know some people think that using credit cards makes them spend more without noticing, but for me it's always been cash that flies out of my wallet with shocking rapidity. The accountability of credit card purchases, the fact that you have to see them again in black and white when the statement arrives, makes me less likely to overspend. And by paying them off in full every month, we avoid interest and finance charges but still get to accrue tons of awards.

It's a great system, as long as we don't succumb to the siren song of leaving a balance on a card just this once (surgery excepted; health comes first). And it's saved us hundreds of dollars over the years. Plus, it has helped build up Torsten's credit score (which was lagging when I met him because he was foreign, had no credit history, and didn't really understand how credit scores worked), which enabled us to get a fantastic fixed interest rate on our mortgage (not to mention getting approved for the mortgage to begin with).

And speaking of our mortgage, we have a system for that too. Because our interest rate is so low, this might not necessarily make the most financial sense sometimes--if we could earn more interest on our money elsewhere, or if we could avoid paying higher interest elsewhere, this plan in fact would not make sense (except that the compound interest on the mortgage would add up over more years, costing us more in the long term? I'm a bit fuzzy on the calculations). But we do this anyway because we have a goal and we want to meet it.

The goal is to pay off the mortgage in 15 years instead of 30. Originally we wanted to get a 15-year mortgage but our mortgage broker pointed out, quite accurately, that with interest rates so low, it wouldn't change anything for us to go for 15 over 30, so instead it made sense to get a 30-year mortgage, pay it off as if it were a 15-year mortgage, and have the option of the lower monthly payment if anything were to happen that affected our finances (like one of us losing our job).

So, that's what we did. We went to a mortgage calculator and looked at exactly how much more money we would have to pay each month in principal and interest in order to have the mortgage paid off in fifteen years, and every month we write a check for our total payment due plus slightly more than that amount. And even though we just entered into this mortgage and have in fact made only two payments on it so far, we can already see the principal going down.

This, for those of you who aren't familiar with mortgages, is rare. Normally the earlier payments in a mortgage pay down the interest almost exclusively. In fact, our mortgage broker told us that, on average, it takes 22 years to pay down 50% of the principal of a 30-year mortgage. Paying a 30-year mortgage off over 15 years instead will save us over $100,000 in interest. It will also save us some mortgage insurance payments (we are required to have mortgage insurance because we did not put down a full 20%), because mortgage insurance is lifted when you get down to 80% of the principal, and that will happen sooner for us.

I know this is very detailed, and it makes me feel very... un-childish, but I find it fascinating. Finances and the way they work and the way you plan for the future and make your money get somewhere... it's all so interesting. In this case the plan is to be done with the mortgage before any college tuition bills show up (assuming we don't have one of those child prodigies that goes to college at age 10, and I think that's a fairly safe assumption).

Also, because we were first-time home buyers in 2009, we will get an $8,000 tax credit next year. We have already earmarked this money for new windows in our house. And yes, I understand that this makes us boring and stodgy, but can I just say that I am incredibly excited about those windows? Our current windows are the originals, and they have lovely wooden frames--but half of them don't open, and some of them are cracked, and some of them are drafty, and all of them are single-paned, which means we waste a ton of energy and also the house gets hotter in the summer and colder in the winter.

So, yes, although it makes me feel old and boring to say that we're going to use an $8,000 credit to pay for new windows, that's exactly what we're going to do. And, if you put in energy-efficient windows in 2009 OR 2010, you get a tax credit for that as well, for 30% of the cost with a cap of $1500. So that means we can wait until we get this year's tax credit, put it toward next year's windows, and get a credit for that the next year. Which is perfect.

And also? On the windows? Another reason why I'm excited other than the reduced energy consumption (and bills) and being able to open them all and have them be airtight? Is that they will make the house quieter, which is important when you live next to a highway. We can hear soft highway noises from the back of our house, but our next-door neighbors, who have double-paned windows, cannot. And I am looking forward to that, even though the highway noise doesn't really bother me as it is. I think it will be one of those things where you don't notice it until it's gone, and that will be nice.

Also on the energy efficiency thing, did you know that in Denver if you buy an energy-efficient washing machine, you get a $150 rebate from Denver Water? I applied for ours a couple weeks ago and was told that it would take 8 to 10 weeks to process, but when we got back from the beach, the check was waiting in the mail. I'm very excited about that as well.

This whole tax thing is just so complicated. It used to be that I earned so little that I hardly had to pay taxes, and then even once I graduated and had a real job, I just filled out those EZ forms, waited for my small refund check, and went about my way. Now there are tax credits and tax deductions and all sorts of scary adult things--and we don't even have kids yet so there is nobody filing as dependents or heads of household or any other such alarming stuff.

But I've learned so much about taxes! Not only do we get credits for buying a house and putting in new windows... we also get all these deductions! You can deduct anything you spend on health that exceeds 7.5% of your income, so this year with my surgery we will have some deductions, and thus are hoarding all our receipts (including prescriptions and office visit co-pays) to calculate in our deductions. We can deduct our mortgage interest (and that's a lot). And, because we work from home, we can deduct costs we incur for that as well. For example, we can deduct the cost of the desk we had to buy for Torsten's office. And we can calculate what percentage of our house we use for work purposes and then deduct that percentage of our energy and internet bills.

Plus, Colorado has a really low state income tax (a flat rate of 4.63%) and we are slightly overpaying, so we should get a refund there as well, though it will be a pain to calculate because we'll have to do partial-year payments (or refunds) with Colorado and DC.

So, let's see. Two credits (though one not this year), three types of deductions, and two states. I think this will be the year that we hire an accountant to do our taxes. I can't believe how much more complicated things have gotten since I last filled out that EZ form two years ago. And I am very excited to receive a big check from the IRS next year. Although, of course, we have already mentally spent it ten times over.

If you've managed to make it to the end of this post, tell me: are your finances this complicated? Do you have systems in place? How do you manage it all?


  1. We have Pella argon-filled windows and they are fantastic! I do not think that new windows are a boring choice =)

  2. As you'll see in today's post, our finances are the opposite of complicated.

  3. We also put everything on our credit cards and pay it off in full every month. We've already earned a free 7 day cruise for each of us among many other things. It's definitely worth it.

    Regarding your mortgage, you guys are doing great! The first few years of our mortgage were just as you described: paying down the interest only and that was so disheartening!

  4. May I recommend Sacramento as a layover on the Fall Relaxation Trip?

    We do the same things with credit cards. And reading this post made me think life was so much nicer when I was earning a paycheck. Siiiigh. Things are pretty simple with us (has to be, I'm the one who does the budget and I am not bright) but we're about to complicate things up with financial aid and school loans. And go broke. Should be fun!

  5. I love how you went from how you and Torsten deserve a real vacation later this year to the depths of your personal finances! Too funny.

    One thought before you jump to an accountant. Try Turbo Tax. It has an amazingly simple way to walk you through your taxes, including housing and medical credits and deductions. It asks you questions, has you fill out stuff and whatnot. Knowing the two of you, you'll do it February 1. And if you still have questions or it truly is too complicated, then you have plenty of time to seek help from an accountant!

  6. I am extremely impressed with your planning. I have no idea what I'm doing when it comes to finances due to my father being pretty sketchy in that department and my mother never having anything to do with it at all. I honestly felt like I learned quite a few things from your post that I will remember when it's time to buy a house. Thank you!

  7. We are very much the same as you, we pay more than necessary on our mortgage and put all purchases on credit card which we pay off monthly in full. Generally we get one or two international flights a year out of our rewards.

    The only real difference is that my husband has no idea what I spend or where and no idea what we have in the bank (nor does he even have an eftpos card for our accounts!). He just isnt interested, I'd show him if he asked and he knows how/where to look things up. It is my responsibility to pay all bills on time but we still make major decisions together. Oddly one of those was to replace the windows in the house at the end of winter!

  8. Ok, YET ANOTHER person who is better-suited for my job than I am. I find personal finances kind of a snoozer, which is lucky, since, you know, I'm a CPA and all that.

    I think, as usual, you are the rare exception for your age. This is all wonderful. Good for you guys.

  9. umm.... yeah. my finances are pretty much the opposite of this. one job, one income, one state, and i don't own anything but a car. it takes about 30 seconds to do my taxes :-P

    i'm the same way as you with cash vs credit card, though. i feel MUCH more accountable when i pay w/plastic. with cash, it's like... well, i have this $20, and i broke it to spend $7.50 on lunch, so now the rest is "left over" or "bonus" cash that doesn't count when i spend it. works HORRIBLY.

  10. HELLO, EXCUSE ME! I would like to hire you as my financial planner, please.
    Holy bejeezers, you are WAY more educated and money-savvy than i think i will ever, EVER be. Taxes scare the crap out of me, and so do credit cards. In fact, some of my credit card interest rates are ridiculous, AND i don't get rewards on them. FAIL. I am also really impressed by you being able to pay off your mortgage in half the time.

    Seriously: holy crap.

  11. You've described our financial situation exactly! We managed to pay off our first home in just 10 years by doubling our bi-weekly payment and making a few larger pays with tax return money. We maybe could have invested that money instead but man, it was SO liberating to not have a mortgage. The freedom!

    Your credit card rewards are way better than ours. I should have a look around and see if we can get a better deal.

  12. Oh my. I wish I had such a good handle on our finances but alas, I do not. And I am the one in charge! I am good at planning vacations though! :)

  13. I am super behind the 8 ball with all of this stuff.

    How did you find out all of this Tax credit information?

  14. Haha funny you should post about this. Up until this year, I just filled out the TurboTax form and waited until the refund check came. This year I moved from a state that had no state income tax to one that did, and I quit my full-time job to go back to school full-time. And I had a workstudy job. And student loans. I filed for an extension and still haven't mustered up the courage to tackle my taxes. I do know, however, after extensive exit loan counseling, several things about student loans that should be passed on to everyone you know. First of all, the interest you pay off on student loans is tax deductible. So is about 80% of the cost of joining an alumni association. Second of all, if you have federal loans and are planning on working for a nonprofit (501c3, and this includes universities-like even if you're a professor or something) you should restructure your loans to reduce your payment and pay the absolute minimum amount so that you do not have everything paid off in ten years. This is key because after working ten years for a nonprofit, the remainder of your federal loans is FORGIVEN. Also badass? Those ten years don't even have to be consecutive.

  15. Hi, Sounds like you and your husband are on the right track. We are making extra mortgage payments as well and hope to pay it off way before the 30 years.

    The credit cards you use have some great rewards. Do you mind telling me which ones you use? I am thinking about signing up for a new one because so far I only have one master card.


  16. I feel the same way about credit cards vs. cash. I'm much more accountable for what I put on my card because I see it twice. Once when I sign and a second time when I review my statement. And I too pay off my balance in full every month, without fail.

  17. Our finances are probably complicated, but we're one of the lucky ones that make more than we spend, so there's always room to make some (small) mistakes. We boggle at how 95% of lesser-earning American middle class can afford just to live. Seriously. No idea.

  18. We do the same thing with credit cards and the same thing with our mortgage! We were really glad for our 30-year mortgage payment option when Paul lost his job and money was tight, and for months when for example the refrigerator breaks. But we've also paid the extra many, many times, and it's made a huge difference in the total amount we'll have to pay.

  19. I second the recommendation of TurboTax. We have tricky taxes, and I use TurboTax and it makes it almost easy. Plus, you can deduct the price of the TurboTax software! (It's about $40.)

  20. Thankfully, I have a husband who majored in business economics, and is quite adept at working out our finances.

  21. The onliest thing is 25,000 miles is probably the minimum you need to get a free domestic flight. Watch out for expiration dates on those and the ones in the airline accounts. I wasn't paying attention and lost about 20K miles on United last year.

  22. finances are so complicated! tall guy does the thing where he puts everything on his credit card and then pays it off each month. i cant do it! first of all, i have a big balance on my card so i can't pay it all off right now. plus, even if i didnt carry the balance, i dont think i'd have enough self control to not go crazy. my credit card is for emergencies only!

  23. Finances make my head spin. I have my own system to help keep mine posted. My main financial goal for the next month is to NOT have a massive credit card bill. I can always pay it off but between trips and expenses for that, I need to be GOOD for a month.

  24. I would also recommend TurboTax for filing your taxes. I was completely freaked out about buying a house because I thought that the taxes would be complicated. The majority of my income is also incentive which also complicates things. TurboTax asks detailed questions so you know exactly what to deduct. If you guys paid origination or discount points with your mortgage you can claim those on your taxes. You can also get a deduction for donating to charities.

  25. It's weird how you make finances sound so interesting. I was genuinely interested in all this, and I don't care about my own finances.

    I'm avoiding my googlereader right now because of a weeks-long backlog I don't want to face, but I keep popping over here to read you anyway. Just thought you'd be glad to know. :)

  26. Planning for the future? Whats that?

  27. I agree with you- I spend far more when I have cash, but I have weird rules with myself, like, I can't break a $20 if the item in question costs less than $5.

    PS. Vacation in Poland! I know, not most peoples top choice, but so amazing!

  28. I'm the friend that everyone comes to when it comes to "adult" money situations. I can tell you about taxes and real estate but I couldn't tell you how to change a diaper.

    I had a Citibank card and it was awesome.