30-year mortgage. One last payment. What'll prove I'm debt-free?
30-year mortgage proof of payoff, setting a budget, and baby life insurance are three topics in this week's reader mailbag. Answer to payoff of 30-year mortgage comes in question No. 9.
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Saving for future dream home
2. Setting a budget
3. Forgiving loans to stimulate economy
4. Should we buy a house?
5. Best book of 2011
6. Repaying an old debt
7. Baby life insurance
8. Paying off no-interest loan
9. 30-year mortgage payoff paperwork
10. Vegan to vegetarian
The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.
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I’ve learned some things and gained some new insights from the Occupy Wall Street movement. They encouraged me to learn more about the issues they’re protesting about and made me reconsider some of my political ideas.
The thing is, I could make the same exact statement about the Tea Party movement.
You can always learn something and grow from anyone, particularly when people congregate under the same banner. Something is making them do this. Why? What makes them so passionate about the idea that they take action? There’s usually something valuable there if you take the time to learn about it instead of just discarding it.
Q1: Saving for future dream home
I was just wondering how you and your family save for your future dream home? Do you put it in a Index fund? If so, at what point would you move it out from that and into a cash account? I remember reading unless my goal is greater than 10 years away, to just keep it as cash. Does that mean 10 years out from your goal you would move it into a savings?
For us, we sat down and asked ourselves what needed to be in place for us to move forward with our plans for a dream home. We decided that we needed to be able to pay cash for the land and have our current house completely paid for before we decided to move forward with the plan. Mostly, this is because we’re pretty debt-averse. Ideally, we would like to buy the land with cash, then use the future sale of our house as collateral to build, then put our house onto the market as soon as (or just before) we’re able to move.
Once we had that set in mind, we asked ourselves what financial moves would get us to our goal as quickly as possible. After playing around with several investment and debt calculators, we came to the conclusion that the approach that would lead to success most effectively was a split approach, where we made larger-than-average payments on our mortgage while also contributing a small amount each month to some sort of investment.
Since our timeline for this is a little more than a decade off, we elected to use an index fund for this savings. We are placing half of our savings into Vanguard Total Stock Market Index, which basically indexes most domestic stocks, and half in Vanguard Total International Stock Index, which indexes a wide variety of international stocks.
We re-evaluate these choices every year, watching how the investment grows and adjusting our splitting of our “savings” on an annual basis. As we get closer to the date where we’re able to do this (a date that’s inching earlier and earlier, actually), we’ll move the stock investments into something more conservative that won’t lose value.
Q2: Setting a budget
A friend of mine (she’s 23 and single, part time student with a good paying job and benefits) asked me about budgeting. She said she looks up to my frugal ways and wanted to know if her budget was good percentage wise. I was embarrassed to tell her that other than making sure that housing is no more that 25% of your gross and saving AT LEAST 10% per month, I didn’t know what the “rules” were for percentage of income in the other areas (needs, wants, debt repayment, etc). My personal method is to list my fixed expenses first (of which I include tithe, retirement and regular savings as fixed expenses) and then I try to keep all my other stuff (gas, groceries, entertainment, etc) as low as humanly possible, and then either save the remainder at the end of the month for short term stuff or other things we are working towards (home improvement, vacation). Can you tell me the rule of thumb for budgets? What percentage should be housing, savings, transportation, needs, wants, etc?
The problem with sticking to someone else’s recipe for percentages is that they vary widely. The proportion of housing costs, for example, depends heavily on where you live, your housing requirements, and your total salary. For example, a single person making $30,000 a year in New York City is going to have a lot higher percentage of their annual income devoted to housing than a married couple making $120,000 a year in rural Iowa.
The best way to budget is to simply track all of your expenses for a few months, then use that data to calculate the percentages of what you’re actually spending. Then, spend some time thinking about that data. What can you actually cut? What percentages would you like to see elsewhere?
You can categorize all of your spending however you’d like. Just make sure that it’s grouped in ways that make easy sense to you.
Q3: Forgiving loans to stimulate economy
I keep seeing posts on Facebook about asking the government to forgive student loan debts. I’m no economist, but I cannot understand how not repaying the government could prove to be a good idea (though it would benefit me). I’d be interested to read your thoughts on the matter.
The idea is that if the government forgave student loan debt, a lot of people under the age of 40 would suddenly have a lot more discretionary income. They would of course then spend that discretionary income, thus stimulating the economy.
Think of it in terms of your situation. If your student loans vanished, you’d probably use that money in other ways. You might buy some things you’ve wanted. You might make a down payment on a house much sooner rather than later.
All of those things would help out the economic recovery. It would be a huge economic boon at the sake of some significant government income over the next few decades. It would increase personal income tax a bit and also increase business revenue a bit too so the government would get to recoup some of it in the form of tax revenues.
Q4: Should we buy a house?
My husband and I are in our early 30′s. We are both from India and have been working in the United States (Texas) for 6 years now. We have no debts and are pretty disciplined about savings. We are on H1b (work) visas and hope to get our Green Card in the next 2 or 3 years.
We have been renting and would like to know if its a good idea to buy a house in the current market? Does it make sense to buy if there is chance that for some reason our GC is not approved and we have to move back to India? Our concern is that we would most probably end up staying and might be wasting money paying rent when we could already be investing in our house. What additional expenses are we looking at and is there anything we need to keep in mind if there is a need to sell in the next 1, 2 or 3 yrs?
The best time to buy a house is when you can afford one and it meets your housing needs. If you’re buying a home as a residence, that’s the primary consideration.
Market timing on a home purchase is only a good idea if you’re able to move it easily as an investment. That’s much harder to do if it’s your primary residence. Besides, the future is notoriously difficult to predict. I wouldn’t make a house-buying decision based on the arcane art of market timing.
One point of advice, though. Without a green card, you may find that some lending institutions are hesitant to offer you a mortgage, even if you have a full down payment and good credit, as you might be a risk of just disappearing back into your home country. Don’t let it get you down and shop around.
I’ll name two books. No, three.
The most enjoyable book I’ve read this year so far, at least in terms of keeping me entertained and keeping me turning the pages, was The Way of Kings by Brandon Sanderson. It’s a fantasy novel that centers around a small handful of really compelling characters, plus Sanderson has a particular gift for making it all come to life.
The most thought-provoking book I’ve read this year so far, in terms of making me reflect on it and altering my way of thinking, was Moonwalking with Einstein by Joshua Foer, which focuses on the neuroscience of memory and how to improve one’s own memory. I’ve also got to give a nod to Born to Run by Christopher McDougall, the best book on running I’ve ever read.