Frugal in the Fruitlands

Yesterday I talked about Money magazine’s retirement benchmarks, circa 2007. I explored the fact that I would need $72,000 at age 35 by these standards, or that I would need to be putting away $316 every paycheck for the next six years to reach that goal. I also hinted at why I’m not - because my husband and I are putting $500 a month towards our mortgage instead.

The Advantages of Prepaying a Mortgage

Recall that my house is financed in the “piggyback” route, with two mortgages. The second of those is the one we pre-pay. It is the smaller debt ($75,000), but it has the higher rate of 8.9%. We have currently paid off $15,000 of that debt in the first two years of ownership, for a current balance of ~$60,000.

Functionally, putting money into that is equivalent to investing in a product that pays 8.9% interest. Given the current financial state, this is a much higher rate than we would see anywhere else. We have been doing this since we bought the house, but it makes especially good sense right now.

There’s also the fact that the second mortgage balloons at 15 years (~13 years from now) - meaning that it will be need to paid in full at that time. This is another compelling reason to prepay. Admittedly, we could refinance at any point before then, but that’s just shuffling debt around. Paying $500 extra a month, we are on track to pay this off in less than 10 years.

Once the second mortgage is paid off, we will turn our attention to the first ($302,000). It has a fixed rate of 6.6%, but the payment amount increases at 10 years - at which point we will have paid off the second.

But the biggest advantage, to my mind, of prepaying the mortgage is decreasing the period of your life you spend paying for housing. If retirement is as difficult as it seems, then the freedom of owning one’s house outright is immense. With both mortgages paid off, that frees up ~$3,200/month for us - about half of our current income. Yes, there will be maintenance; and we would still have to pay for oil and electricity, but that is manageable on a more limited income. This would give us the freedom to be more mobile. I could, for example, spend three months of the year working at my mother’s tax business, pulling down about $20,000, and then go spend six weeks in Argentina learning intensive Spanish (one of my many dreams!).

This lifestyle would lend itself easily to mini-retirements, rather than the typically depicted Orlando-dwelling, shuffleboard-playing Retirement with a capital “R.” I could live with that!

I just need to stop telling myself this would be even more feasible if I had never bought a house to begin with… that train has sailed, to quote the immortal Austin Powers, and I’m not about to sell my house at a loss.

The Disadvantages of Prepaying a Mortgage

Well, really, there’s one big one: If we suddenly weren’t able to make our monthly payments, all the money we prepaid wouldn’t make much of a difference. The primary way this would happen would be a job loss.

This is why it’s so key to build oneself a safety net: an emergency fund and appropriate insurance coverage.

This is still something I’m working on. I’m building an emergency fund, but I worry I’m not building it fast enough. The figure to aim for is three to six months living expenses, which for us is $15,000-$30,000, on the generous side - but more like $8,000-$15,000 if we just want to cover the mortgage.

… I currently have $1,600 in there. I contribute about $150 a month, but it seems like every time it gets to a decent value, we have an emergency. Oh, only little disasters - car repairs, or vet bills - but it does continually deplete the fund.

As for insurance, I tend to hold the minimum coverage in just about everything. I have only liability insurance on the Tercel (admittedly, it’s almost 15 years old). I have what life insurance comes free at work (which won’t help a lot if I leave my job). Matt and I have the health policy that’s available to him at his job. We have whatever homeowner’s insurance is required by law. It may be time to reexamine this particular way of doing things, for maximum emergency preparedness.

In conclusion: we’re choosing to pay down our mortgage rather than contribute more to our retirement. I believe it’s the best choice for us right now, but I need to construct a better safety net for the “somedays” as well as the now.

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Trent at The Simple Dollar happened to link a much older article of his recently, A Closer Look at Money Magazine’s Retirement Benchmarks, from April 2007.

I’ll blockquote the benchmarks he blockquoted, just for the sake of discussion:

Assuming you want to retire at age 60 and plan to have no pension and no job in retirement, you need to have…
1.6 times your salary in savings at age 35
3.5 times your salary in savings at age 40
5.8 times your salary in savings at age 45
8.5 times your salary in savings at age 50
11.9 times your salary in savings at age 55
16.0 times your salary in savings at age 60

A lot of other stuff is figured in here: retirement at 60 with 80% of your current salary withdrawn each year, Social Security kicking in at age 62, an annual real rate of return of 4%, and 4% withdrawn every year.

Trent uses the example of Joe (the Plumber?) with a salary of $50,000. Joe needs to have $80,000 at age 35 to be on track with these benchmarks. Trent goes on to say that Joe needs to save $5,000 a year at 9% interest annually (This is how we can tell it was written in 2007!), or around $100 each week, if he starts saving at age 25, to reach this goal.

Okay, well, that’s great for Joe. I asked myself, what about me?

Right now I’m 28, my salary is $45,000 per year and I have about $10,000 in my 401(k) and IRA (I’m not counting my husband in any of this, just to simplify). I’m currently putting $56 per pay period x 26 paychecks per year = $1456/year into my 401(k). That means at 35 I’ll need a total of $72,000 to be on track.

I’m not going to assume a 9% annual return. But I’m not going to be a total pessimist, either. My money will need to grow at least 3% annually to keep up with inflation. I can earn 3.5 - 4.0% sticking it in a savings account (though that’s not tax-protected, of course). Since I’m investing every other week, I’m going to assume I have the power of dollar-cost averaging on my side. So let’s go with a more conservative 5%, and let’s take that number over to a compound interest calculator.

Here’s how it looks with the current amount I’m putting in per week (I’m assuming six years to grow because I only have about six months to my birthday):

Okay, $23,799 is a leeeeetle far off benchmark.

So how much extra WOULD I need to put away every pay period in order to meet this benchmark?

I would need to be saving $8,205 annually in order to meet my age 35 benchmark. That’s $6,729 MORE than I’m saving now in my retirement. That means I need to be putting away $316 per pay period, or $260 more than I currently am.

Can anyone be expected to save this much? That’s functionally a 16.9% savings rate. The average savings rate in the U.S. currently is less than 1% - not that I condone that, but let’s be realistic.

This is why I’m starting to think that Retirement, with a capital R, is not the answer. Maybe mini-retirements, a la Tim Ferriss, are, however.

And here’s the next part, for me: instead of putting $316 a month into my retirement, my husband and I are putting $500 extra/month towards our mortgage. Is this a smart choice? I’ll talk about that next time.

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In late August, I asked my readers, male and female, to provide insight into how much they spent on clothing, beauty and hygiene. My hypothesis is that as a professional woman it is difficult to spend frugally in the hygiene category, due to the demands a professional environment puts on looking put together.

Being a research analyst by trade, these results are not as clean as I would have liked, since many of the questions were open-ended, but there are still interesting findings to be gleaned.

Including myself, 21 readers took the survey - 6 men and 15 women. This uneven gender balance is pretty standard in survey research, I’ve found, as women are much more likely to respond to surveys than men.

The professions of the participants varied tremendously, but many were technical in nature (i.e. research associate, technical writer, systems analyst). There were also several graduate students who participated.

Responsibility level was hard to judge - I divided it into “low,” “medium,” and “high,” but this was basically a judgment call on my part. If you wrote down “manual labor” or “delivery driver” I judged your level of responsibility to be low; whereas if you wrote “working attorney” or “booking agent” I judged it to be high. For some I could not even make a guess - how would you judge “personal trainer?”

Clothing: I asked how much each participant had spent on clothes in the past six months. The overall mean was $286. For men, the mean was $240, with a range from $11-$600. Women spent more overall, ranging from $60-$1,000 with a mean of $305. (I did not test significance on this, or any, numbers, as the N was too low). The highest spending participant was a woman, and the lowest spending participant was a man.

Haircuts: I asked how often each participant had their hair cut, and how much it cost each time. On average participants cut their hair 4.7 times per year; the average cost was $31 (ranging from $0-$115). Several individuals cut their own hair or had a family member or partner cut it (one man and three women), for a net cost of $0. For men, the average number of haircuts per year was 5, and the average cost was $17 (ranging from $0-$30). For women, the average number of haircuts per year was 4.5 (longer hair does need to be cut less often), and the average cost was $36 (ranging from $0-$115).

Hair products: I asked how many hair products each person used on a regular basis, and how much each one cost. Keep in mind that measurements may be skewed here, as people buy products in different sizes, which thus determines how frequently they buy them. On average, participants used 2.3 hair products (ranged from 1-7), with a mean total cost of $17. Men on average spent $14 on 1.6 products (range of 1-3 products for a total of $3-45); women on average spent $19 on 2.5 products (range of 1 to 7 products for a total of $0-$50). The highest spending participant was female, as was the participant using the largest number of products.

Number of steps in routine: Reports varied tremendously here, depending on what people considered to be part of their routine. Many people did not include obvious steps, like “get dressed.” (I want to work in their office!) I discounted any steps that did not specifically have to do with hygiene, such as “check email” or “grab my iPod.” On average, participants’ routines included 5.3 steps (ranging from 3-10). For men, the range was narrower (3 to 5 steps) with an average number of steps of 4. Women’s routines ranged from 3 to 10 steps, with an average number of 5.8. The most detailed routines were those carried out by women.

Monthly hygiene expenditure: Not everybody knew how to answer this question, but I calculated responses from the nine people who did. The average monthly expenditure was $45, and ranged from $15-$100. For men, of whom there were only two, the average cost was $65 (range: $30-$100). For the seven remaining women, the mean was $40 (range: $15-$80).

Overall observations on level of responsibility: expenses did seem to differ as a function of the level of responsibility. The highest spending women, and some of the highest spending men, were in jobs with medium or high responsibility. Although I did not ask about office environment, this seemed to be predictive, with participants who worked in traditional environments, such as law firms or corporate offices, spending more on their appearance than others. Students - all of whom were female - were a low-spending group, unsurprisingly.

I urge caution in interpreting these findings, as always, because the N is so low - especially for the last items! But in most places this survey shows women spending considerably more time and money on personal appearance.

Women out there: what do you do - or what can you do? - to reduce the hold personal appearance has on your finances?

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September was a goal-less month, but I covered a lot of ground, nonetheless. The number of subscribers to Frugal in the Fruitlands grew to around 40, and I visited topics as diverse as productivity, price comparisons, identity, local eating, and fashion.

The most popular post this month was Identity: The Problem Money Can’t Solve, thanks in large part to Paid Twice’s kind referral. Some of the other popular posts from this month were:

• Coupons vs. Generics, Round One: Contact Solution
• Interview with Nick Pagan on Establishing Alternative Income with Limited Energy - if you haven’t had a chance to review this meaty article, I invite you to do so now. Nick’s wisdom is worth your time.
• Shopping in the Fruitlands

I also talked a lot in the past couple of weeks about the $700 billion bailout of Wall Street, and why I was against it. With the Senate backing the bill, the outcome is looking more and more certain, but the bill still does not address what I feel are the biggest issues with the credit markets - the need for re-regulation. To quote this Mother Jones article:

Perhaps, the greatest lie resides at the very top of the proposed plan: that the bailout will somehow “[assist] American families in preserving home ownership, stabilizing financial markets, and protecting taxpayers.” The only way to protect citizens is to re-regulate the industry along the lines of Glass-Steagall: divide its players and their books into understandable, less risky, more transparent entities… The Democrats inserted a lukewarm provision into the bailout legislation to have the government aid in renegotiating borrowers’ mortgages to better terms, but they didn’t include any enforcement measure requiring lenders to comply.

That said, and my opposition to this bill in its current wishy-washy format registered, the American Housing Institute presents a cogent discussion of pro-bailout thinking. I understand where they’re going, but I reject the assertion that most of these bad debts the government is buying up are “real Vermeers.” I also don’t believe that this bill will encourage the credit industry to reinvest the proceeds in the economy - at least not in a non-toxic way - without credit re-regulation.

And with that thought, I leave you to pursue Day Two of Web Browing Reduction Month. (Day One: Success!)

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