I was paying off my mortgage early by the time-honored method of applying excess money to the principal back in the dot-com days, when everyone else thought I was nuts. I paid off a 15-year mortgage in 8 years. Just about the time the bust came around, Hub and I owned our house free and clear; our friends were all still paying on their mortgages and their brokerage accounts were to weep over. They’re still paying on their mortgages. Our brokerage accounts aren’t great, but we’ve spread money around and so are still seeing modest overall positive returns. AND we own our home and our vehicles. Being nuts is sometimes very productive.

A trait shared by the really big personal finance gurus is what seems to me to be rather inflexible “always” and “never” statements. Always buy mutual funds, never buy variable annuities, always pay down your debt, never use a credit card … ridiculous generalizations that are unhelpful at best and can be serious financial mistakes at worst. Because I don’t know your personal financial situation, I won’t be making a declaration about the best course of action for you but I will try to provide some thinking points.

One refrain you hear from personal finance people fairly often is that it’s better to not pay down your mortgage with extra money and instead invest it for (assumed) higher returns. The rationale is that the stock market has historically outperformed other investment vehicles (such as treasuries and corporate bonds), which is true, but the leap from that to “so you’ll come out ahead because you’ll earn a higher return than you’ll be paying for your mortgage” isn’t a sure thing at all. Quite a bit depends on when you begin and end your investment period - ask anyone you know about the late 60’s through the early 80’s about that - and what you invest in.  And although there is not anything wrong with someone making a living, keep in mind that the person telling you to invest instead of pay down your debt might be hoping for a commission.

Another common talking point you’ll hear is that since the mortgage interest is deductible, you’re really not paying the interest rate stated on your note and so the return you need to earn on money invested elsewhere is an easier target to hit. This is true, but the benefit is variable depending on where you fall in the tax tables and the bottom line is that you’re still paying interest to a bank, which means you’re investing your money in someone else instead of yourself.

Of course, the key to using an “invest instead of pay down debt” strategy is that you actually have to do it. Over the last several years (but not recently!) I’ve heard many pitches from mortgage brokers suggesting that people get interest only or adjustable rate mortgages with low teaser rates - and sometimes both - specifically so that there would be more cash left over to invest. It sounds good, it sounds logical, but it presupposes that people will actually figure out how much they’d be paying monthly on a regular rate and term loan and send the difference every month to an investment account. I remember thinking at the time that an excellent relationship building move for a mortgage broker who gave such advice would be to provide clients with a breakdown of how much that difference would be and the name of an investment rep at a discount brokerage firm at closing to set up such an arrangement immediately, but oddly enough, I never heard tell of such a thing.

Another potential downside to investing instead of paying off your home with extra funds can be the uncertainty factor. Unless you have a cash or cash equivalent reserve set up for emergencies, which is a good idea anyway, a sudden change in circumstances could force you to sell off investments so you can continue to pay your bills. Depending on what you’ve chosen to invest in and the market conditions at the time, you may find that you are selling at a loss or are forced to pay early withdrawal or surrender fees.

With all of that said, putting all of your money towards your mortgage debt instead of investing probably isn’t the best course of action either. Although you may enter retirement without any debt, you may find rather quickly that you’re going to have to use that equity as collateral on a new loan in order to pay your bills, and there’s really no telling what interest rates will be like when and if that happens. Furthermore, if you work for a company that provides matching in your 401k and you decide to forego that in favor of paying down your debt, you’re giving up free money.

Ultimately, you have to make the decision that allows you to sleep at night. Most likely, it will be a combination of gradually paying down your mortgage while setting aside money for investments. The proportions to each may vary at times, depending on market conditions, other debt you may be carrying, and cash flow, and that’s OK. What really matters is that you’re doing one or the other, because that means that you  are living within your means and have the ability to set aside money regularly to improve your financial future.

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Do you have a jar or a water cooler bottle half full of change somewhere in your house? We do. The last time we emptied it was about a year ago and I think we had nearly $75 in it. My husband is better about putting his change in there than I am, I keep mine in my wallet and end up using it, but why am I letting cash just sit in a jar??

Get it out of the house and into the bank, either into a savings account where it can at least earn a little interest or into your checking account so you can turn around and pay off some debt.

Be sure to call your bank and ask them if they want it rolled or not. The last time I emptied the jar, we spent a few hours rolling it all up just to watch the teller have to unwrap it all and put it in their hopper thing to separate and weigh.

Oh - and don’t use those Coinstar machines, please. They charge 9% to do what the bank will do for free.

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That made my ears twitch because I don’t think that statement is entirely correct, unless you’re looking mostly at home prices. In that sense, the cost of living has definitely gone up - but it isn’t really the cost of “living,” it’s the cost of “looking like you’re more affluent than you are because you think your neighbors are rich but they aren’t either.”

Because these types of things really get into my head and won’t leave me alone until I spend way too much time researching them …

I hopped over to the Census Bureau to look a few things up to verify my beliefs, with the first stop being the report on New Home Characteristics for 2007. On page 363 of the document there is a historical table of new home sizes dating back to 1973. Picking 1980 somewhat at random (and in the hopes that I’d be able to find other data on other products from about the same time to help me out in this little project), it appears that the average new home size across all of the US was 1,660 square feet. By 2007, the average new home size was 2,521 square feet - an increase of 861 square feet.

861 square feet is a LOT, but not all of that is livable space that needs to be furnished. I also looked up the “parking facilities” to see how much space was being taken up by garages. In 1980, there was no data available on how many homes had three car garages, but by 2007, 19% of new homes had three car garages.

So right there, we have homes that are substantially larger and therefore, we have more room for “stuff.” Since most of us are not minimalists by nature, we feel compelled to fill up those spaces with furniture, gadgets and toys. Gone are the days when you borrowed a tool from your neighbor - just go buy one of your own, you have the room!

Moving right along, let’s look at incomes. In a Census report regarding 1980 incomes (in a hilariously 1980s font, I might add), the median household income was $21,020. In 2007, it was $50,233. Keepl in mind that in these figures, we’re not talking about the average, we’re talking about the median - the number in the middle when you calculate everyone out there making an income. If there is an extreme disparity between low and high ranges, the average would be lower.

Next, food. This one’s a bit more of a challenge because a lot of foods we see in grocery stores now did not exist in 1980, but I did find this from the Economic Research Service of the USDA:

Specifically, from 1980-2006, inflation-adjusted prices of chocolate chip cookies, cola, ice cream, and potato chips fell by an average of 0.5-1.7 percent each year. During the same period, inflation adjusted prices of Red Delicious apples, bananas, Iceberg lettuce, and dry beans fell by an average of 0.8-1.6 percent each year. Inflation-adjusted prices of cabbage, carrots, celery, cucumbers, and  peppers fell by an average of 0.5-1.5 percent each year, over a slightly shorter period of time. These latter time series are somewhat shorter because BLS did not report prices for these foods for all years.

Rising price trends were observed for broccoli and field-grown tomatoes. These trends are not counter-examples, but reveal that the selection process was not exclusive enough to screen out all foods that have undergone quality change. Unlike in 1980, today’s consumer expenditures for broccoli are for partially or fully prepared products— washed and bagged florets and other cut products. Similarly, a technological improvement in the late 1980s changed the types of tomatoes grown and their sensory qualities.

In general, it doesn’t look like food prices have gone up much, but one activity involving food that I believe has increased dramatically is dining out. I qualified this statement with “I believe” because I couldn’t find any data to support my statement (if you can find some, I would love to include it) but I think most people in my age group would agree that in 1980, most meals, especially breakfast and dinner, were taken at home. Going out to eat, even to a fast food joint, was a big treat. I was 11 in 1980 and am really struggling to even recall the name of a restaurant in the small Illinois town we lived in. I remember plenty of chicken and rice casseroles at home, though.

Clothing prices have also not increased since the 1980’s, although just as with food, we all have more than we did back then. Just think about how big your closets were when you were a kid, or even now if you live in an older home. The first home I purchased in Denver was built in 1949 and each bedroom had a closet with about 5 feet of hanging rack space. That was it. And the rooms themselves were not large enough to hold a large dresser, so I had to scale down my wardrobe accordingly.

Some other “cost of living” adjustments that we’ve seen between 1980 and now are expenses that simply did not exist or were not widely utilized back then:

• Cable television (HBO wasn’t widely available until the 80’s, and MTV launched in August of the 1981 - quick, you know the first song played on MTV, right? Do they even play songs anymore, by the way?)
• Cell phones and fees, including data plans
• Video game consoles in the home.
• STARBUCKS - yeah, you know who you are!
• iPods (yes, there were Walkmans, but the model has changed dramatically)
• Blockbuster, Netflix and home theater systems
• Multiple personal computers and accompanying internet connections (we have three computers)
• Multiple televisions (we have two - but we never watch one of them)
• Kitchen gadgets (microwave ovens were widely available in the mid 70’s but not a standard household item)
• TOYS - the sheer volume of kids’ toys.
• Gym memberships and equipment, along with diet supplements.

There are probably hundreds of other differences between the world of 1980 and now, but I’m not going for a dissertation here. The point is that when you think of your “cost of living,” it’s important to keep in mind that many of the items you spend money on now are not necessities of life or even of comfort. Much of your “cost of living” is within your control, with a little creativity, a little more community sharing, and an understanding that keeping up with the Joneses is ultimately an immature need for approval that doesn’t serve you or those around you well.

Harsh? Maybe … but so is the prospect of living on social security and food stamps in your retirement because you couldn’t bear the thought of looking less affluent than your neighbors.

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We currently use Vonage, which has a flat monthly rate that ends up running about $30 per month after all of the surcharges and taxes, and for the most part we’ve been pleased with the service. There’s a bit of an echo on the line and if the cable and/or electricity goes out then the land line goes down too, but that doesn’t happen often.

The thing is, there are four people in our home who are capable of using a phone - me, my husband, my 13-year-old and my 9-year-old, and three of us already have cell phones. At first blush, it seemed like paying $10 (plus fees) per month to add a line to our cellular plan so that the 9-year-old could have a phone for those few times when he’s left alone in the house was much less expensive than paying $30 per month for Vonage. I’ve been wanting to get him one anyway, since he’s starting to want to wander the neighborhood and also spends about half the week at his father’s house, so we figured we’d make the switcharoo. If we all had cell phones, it seemed like the only purpose Vonage served was for 911 service, and $30 per month seemed like a lot to pay for that kind of insurance.

So, as of yesterday, Jake has a new phone. He’s very excited. He has to pay for his text plan out of his allowance, which includes 250 texts for $5 per month. I found out this morning that he texted “good night” to his brother when they went to bed, and when Ethan came in to tell him not to waste texts, Jake waited until Ethan was back in his room and then texted, “sorry.”

I thought that was pretty funny. Almost as funny as Christmas morning when the toddler received a toy phone and instead of putting it up to his ear, held it out at arms length with both hands and started “texting” with his thumbs.

Anyhoo, I went online to cancel our Vonage service this morning but had a moment of pause after I signed on and saw how many calls we have made in December. It’s not a huge amount, really. My husband tends to use that line when he calls from work because if he called from his office to my cell phone, we’d use minutes. Calling my cell from his cell phone also uses minutes in our case because at the moment, my employer pays for my phone service and I am on a different carrier. That’s not a big deal really, since the rest of them are all on the same carrier along with several members of our extended family, so overall, our 400 minute per month plan is fine for our family.

No, what stopped me from canceling the VOIP line immediately was customer service. Not Verizon Wireless’’s customer service - I’ve never had a big problem with them. What had me on pause was the thought of all of the other times I’m on hold with customer service departments. Insurance companies, utility companies and the like. Did I really want to compound the frustration of being stuck on hold by having an overage on our cell plan that could costs quite a bit of money? Probably not.

For the time being, I changed our Vonage plan from unlimited minutes per month to 500 minutes. It only saved us about $7 per month, which is less than the charge we have for adding Jake as an extra line on our cell plan, but I want to watch the minutes for a few months and evaluate our usage before cutting off that line entirely.

I bring all of this up because I think that cell-only is becoming a bit of a trend - just be aware of your actual usage patterns both at home and at the office. If you tend to use an office phone for drawn out “hold” calls, keep in mind that those will become home based if you lose your job or possibly even if you just change jobs.

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Note: This originally posted in July but I’m moving it to now because it’s a GREAT way to start the New Year. I don’t actually expect you to do much on actual New Year’s Day … I’m certainly not planning on it … but at least print out a year’s worth of calendars from your word processing program or from an online calendar program and then this weekend, go through the rest of the exercise …

Like most people, I hate putting together budgets. Blech.

You sit down, you know you SHOULD do a budget. Heavy sigh. You make spreadsheets of income and expenses, most of the time not all that accurate because you didn’t take the time to go back and see how much you actually spend in categories like gas, dining out, and food in the first place so you just toss a number in there and hope for the best. You promise to follow it and within a week, it’s at the bottom of a pile of mail and the next time you look at it, you realize that you’ve totally gone off course and you feel like a weak-willed loser.

In other words, budgets are like diets. And do you know what else? Just like most diets, they’re simply not realistic because they don’t fit in with our actual lives. In the case of budgets, the issue isn’t only about the net inflow and outflow, it’s about WHEN the money comes in and goes out.

So guess what - I don’t want you to do a budget. Yay!

Don’t get too excited, I still want you to write down your income and expenses, but try this instead of using a spreadsheet:

1. Get a monthly calendar with plenty of space to write in the date areas. Please don’t go spend a lot of money on a calendar, a free giveaway one from a store will work just fine as long as it’s big enough. I actually just print out a bunch of months from Word, punch holes in them and put them in a three ring binder.
2. Pull together a copy of any bank or credit card statements that note regular monthly expenses - mortgage, credit card payments, direct deposits, utilities, insurance, etc.
3. Write the payment for each bill in pencil on the day that the money is set to leave your account (not the due date). For example, if your water bill is usually about $100 per month and it goes out on the 15th, write that in on the calendar on the 15th, with parentheses around the amount to denote a debit. If your regular bills change monthly (water bills tending to be higher in the summer if you have a yard, for example), either remember to adjust them for an estimated upward amount in the appropriate months or see if your utility company has some sort of level billing program (if they don’t, you can still set up a level billing program - just send more than necessary in low payment months and let a credit build up).
4. Enter any irregular (special) upcoming expenses, such as summer camp tuition or annual car registration expense.
5. Enter your income on the dates that you receive/deposit your paychecks.
6. Add up how much you spent in the last month on groceries, gasoline, eating out, and other things like clothing and entertainment, multiply it by 12, divide it by 52, and enter that amount as a debit (parentheses) on each Saturday.
7. Get your calculator and write down a running balance in each day - I usually put all of my debits and credits at the bottom of the box and keep my running balance (again - in pencil!!) at the top of the box.

What you’ve done is essentially lay out an actual cash flow for your household. I want you to do it in pencil because things change over the course of a year, but I guarantee you that having a year’s worth of cash flow written out.

Why is this preferable to a simple, “we make this much, we spend this much” monthly budget?

• It gives you an opportunity to look forward and see where in the month you will have quite a bit or not very much money at all.
• Keeping the running total at the top of each day gives you a bit of a goal - if you overspend, you won’t be able to hit that number, right?
• Sharing this calendar with your partner can help show him or her that even though it looks like there is a bunch of money in the bank when they look at the ATM receipt right after payday, that money is already “spent” in the future.
• Seeing where you tend to accumulate funds might offer you an opportunity to send extra to credit card companies or savings accounts before it gets spent little by little on lunches, entertainment, etc.

E-mail me at info@foolsandsages.com if you would like for me to send you an example of what this type of cash flow calendar looks like. I scanned one but it ends up being so small on the page that you can’t really see the writing.

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