Chris Cookley

Blog

Don’t pay PMI on your mortgage

You’ve probably heard your whole life that buying a house is one of the smartest investments you can make. A lot of the time that’s true, but not always. And it’s certainly not a smart thing to do if you aren’t financially ready.

If you don’t remember the market crash of 2008, I’d recommend you watch The Big Short. It’s a slightly fictionalized movie about what really happened, but you’ll get the idea. Basically, banks gave loans to people who couldn’t afford their houses, and when enough of those people inevitably defaulted on their loans, the market crashed. Reality is more nuanced than that, but that’s the general idea.

Why is it relevant? Because there’s a thing called Private Mortgage Insurance (PMI) that the bank will require you to pay if you do not have a large enough down payment. It’s insurance that protects the bank in case you fail to pay your loan. It doesn’t protect you, but you pay for it.

You can avoid paying PMI by having at least 20% of the cost of the house as a down payment. If you want a $100,000 house, you’ll need a $20,000 down payment. This will prevent PMI from entering the equation.

Now, PMI is not inherently evil, and people need to buy houses for a variety of reasons. If you can’t accumulate the 20% down in a reasonable amount of time, I would suggest having at least 10% to put down. You’ll be paying PMI, but you’ll have some equity too. Then, once you’ve paid down another 10% of the value of the house, you can ask the bank to remove the PMI. You may need to get your house reappraised.

I don’t know about you, but if I’m paying an extra couple hundred dollars a month for my house, I want it working to pay off my house, not pay for the banks insurance.

Have your coffee. It’s more important to focus on income growth

So much of the prevailing advice about how to get ahead with money centers around what you should eliminate from your spending. What can you cut? People love to talk about a Starbucks latte.

I think that’s a joke, but we can’t entirely ignore the math. If you spend $7/day on a coffee, you’re spending roughly $2,500 every year on coffee. If you make your own coffee each morning for $500/year, and you invest that $2,000 savings every year, after 20 years that should be worth roughly $1,400,000.

That’s not a small number, but it really doesn’t matter. What if you love Starbucks? What if that latte is the greatest moment of your day? What if you just don’t want to make your own coffee?

Cutting unnecessary spending is an important part of becoming financially secure, but I would argue that it’s even more important is focus on earning more income. If you could earn an extra $2,000 annually, you can have your fancy coffee and invest. That’s earning an extra $5.50/day.

The truth is, you can only cut so much. Eventually you’ll run out of things to cut. But your income potential is limitless. Both are important, but we should focus more energy on earning a larger income.

Enjoy your coffee.

Do budget category amounts change each month?

When we talk about budgeting, often times we’ll say something like “I put $600 in groceries each month.” We say this as though the amount we put in each category each month is fixed. That is to say, it doesn’t change. If you treat your budget this way, allocating the same amount of money to each category each month, you might need to change that.

The reality is that a budget is fluid, no two months are exactly the same. In my house, we have what’s called a budget meeting on the last day of the month where we set the budget for the next month. This is where we decide how much we want to allocate to each category.

“But Chris! That’s so much work!” Not really. We do have fixed amounts for each category, but they’re starting points. From there we adjust each category, taking money from one and moving it to another, as needed. Is there a birthday we need to buy gifts for? Maybe a shopping category needs to be bumped up a bit. In that case, where can we take that money from? Can we spend a little less on restaurants to cover that? Or clothes?

It’s a balancing act, and it may take a little getting used to. Our budget meetings used to take about an hour, but now we’re done in under fifteen minutes.

The bottom line is that each month is different, and your budget needs to adapt. It’s not hard to do, you just need to be intentional about it.

Do you budget app or budget envelope?

It might seem crazy in this technology enabled world that anyone would choose to use envelopes to manage their money, but there’s a certain simplicity to the practice. An app can be fudged, but when an envelope is empty, it’s empty.

If you don’t know what I’m talking about when I say envelope, I mean using envelopes as your budgeting system. Each envelope is assigned a category, and then cash is literally put inside each envelope. Going out to eat? Take the restaurant envelope, etc. You are only allowed to spend the cash in the envelope on that envelopes purpose. Money in the grocery envelope gets spent on groceries. When you run out of grocery money, you better hope you have a lot of food at the house, or the end of the month is near. See? Simple.

Personally, I use an app. YNAB, actually. I do this mostly because it’s easier for my wife and I to track our finances together. If I was single, I would seriously consider envelopes. There’s nothing that says “you don’t have the money for this” as an empty envelope.

What’s all that stuff for?

I recently drove past an estate sale and saw dozens of people waiting in line to walk through the house. If you’ve never been to an estate sale, I highly recommend it. Nothing so easily drives home the idea that things don’t matter, than having a bunch of strangers picking through the accumulation of someone else’s life, searching for a deal.

Now, I like stuff, and I would never suggest you shouldn’t aspire to nice things, but do it with a purpose. Buying endless quantities of cheap, meaningless trinkets is a quick way to spending your way out of being able to provide memories, and memories are what stick.

Think back on your favorite birthday. Can you remember all the gifts you received? No? But I bet you remember the party.

We would all be better off accumulating memories. Leave the things for someone else.

New to budgeting? Give it three months

No matter how well you think you know your spending, if you’re not already budgeting, I can promise that you really don’t. Sure, you know what your rent or mortgage is, you might be able to guess how much gas you buy each month, and food is, well, honestly, it’s probably a mystery. If you aren’t budgeting, I’d wager that you just don’t know.

This makes starting to budget really hard. Not only is it difficult to develop the habit of tracking purchases, which is an essential component of budgeting, but guessing what to allocate to each category will be almost impossible.

There’s good news here. It’s only impossible the first month. The second month, you can see where you went wrong and adjust. Your numbers will still be off, but they’ll be closer. After the second month you can refine further. Your third month may still be wrong in a few places, but not by much. And after that third month, you’ll basically be there.

The first three months are hard, but if you just work through them, adjusting as you go, your budget will straighten out. It will become the foundation of your financial system.

If you’re looking for a budgeting software to use, I recommend YNAB. It’s what my family has used for six years, and it’s great. That’s a referral link, so I’ll get a free month if you sign up through it, but it won’t cost you any extra.

Wow, food is expensive

One of the most common pitfalls around budgeting comes when you’re just starting out, trying to guess how much to put in each category. And at first, it really is a guess. It’s hard. If you’ve never paid attention to you’re spending before, it will seem impossible to get the numbers right.

The biggest offender here is usually food. Restaurants and groceries both. For whatever reason, we always begin by underestimating how much we actually spend on food. I’m not going to blame the Starbucks latte as the sole reason for this, thought they are quite expensive. Food just costs more than we think it does. We buy it because we need it, we pay the bill, and we move on. Should that chuck roast cost $9.67/lbs? $11.43/lbs? $6.72/lbs? Who knows, I just want a steak! Ring it up!

When you’re doing your first budget, pick a number that you think is reasonable for food, and then double it. It will make the rest of your budget harder to fill out because you’ll have less money to work with, but it will be much more accurate. And hey, the next month, if you over estimated your food budget, reduce the amount and filter those dollars somewhere else. Winner winner chicken dinner. Speaking of chicken…

You’re planning for Christmas, right?

It’s March, so we all know what that means. It’s almost Christmas! Well, maybe not. But even if Christmas is actually nine months away, you should still be thinking about it. A little bit.

The great thing about Christmas is that it’s on the same day every year. This means you can, and should, plan for it. There’s no reason to be caught unprepared when December rolls around. If you want money for gifts, or decorations, or lights, then do this:

Set up a category in your budget called Christmas, and throw some money in there every single month. If you start in January, by the time Thanksgiving is testing your waistband, you’ll have 11 months of savings to draw on.

I also think we should try to focus less on gifts, and more on family, which would decrease just how much you’ll actually need to save for Christmas, but that’s a discussion for another day. How much do you need to save? Easy. How much do you plan to spend? Divide that by twelve. Or if you’re just starting now, divide that by nine.

You don’t want a tax return

Does that sound crazy? Maybe, but it’s probably not a new concept. You’ve likely heard someone say that when you get a tax return, you’ve given the government an interest free loan. I don’t necessarily buy that line of thinking, but it is true that getting a tax return means you’ve paid more in taxes than you need to.

What are the practical results of that? Well, when you get a tax return, you’ve been taking home less than you could have with each pay check. That might be substantial. If you get a $4,000 tax return, you’ve been shorting yourself $333 every month from your take home pay. I don’t know about you, but I would love to take home an extra $333 each month. That goes a long way towards groceries in my house.

Think of it like this. The next time you get paid, take $200 from your check and give it to your in-laws, or a friend, or anyone you trust. Tell them you’ll be giving them this money every time you get paid, and then next spring, you’ll just ask for all the money back.

If you’re wondering why you would do that, I can’t tell you, but that’s exactly what you’re doing when you get a tax return. Except it’s the federal government, and not a friend, that’s holding your money.

Now, there’s a line of comfort here that each of us needs to determine for ourselves. If you adjust your withholding so you don’t have enough taken from your check, you’ll owe money come tax time the following year, and no one wants to be in that situation. The IRS will get their money every time. It’s better to get a small return than to owe taxes. How much should that return be? That’s up to you. I try to keep my return under $500. The IRS has tools to help you figure this out.

It’s hard to say goodbye to that multi-thousands of dollars deposit every spring, especially when it feels like free money. But it’s not free money. It’s your money. And you should have access to it as soon as you earn it. Take it home on your check, don’t send it to the government.

COVID-19 killed the retirement market

Right around this time last year, the market was hitting the bottom of a free fall, thanks to the spread of COVID-19, and the world shutting down to stop it. Things looked bleak, and if you had your retirement invested in index funds that tracked the S&P 500, it may have felt like the bottom dropped out of your future.

Between Feb 14, 2020, and March 20, 2020, the S&P 500 dropped from 3,380 to 2,304. If you had a 401k worth $500,000 invested in S&P 500 index funds in the middle of February, it was worth $340,828 by the end of March. You would have lost almost $160,000 in five weeks.

It would have been terrifying. For many people, it was terrifying. They panicked. They sold their positions. They made an enormous mistake.

The thing we always need to remember about the market is that it’s resilient. Funds like the S&P 500 are built to mirror the economy, and the economy was not collapsing. The country was not shutting down for good. Given enough time, things would stabilize, and then once again, grow. We saw that throughout the rest of 2020.

The only people who were hurt by the COVID-19 slide last spring, were those who cashed out their positions at the bottom. As I write this, in the middle of March 2021, the S&P 500 is at 3,943, almost 600 points higher than before the slide last February. Today, that $500,000 would be worth $583,284 if it had been left alone. Not a bad return, given the year we all had.

Investing in gold? You’d have better luck catching a leprechaun

Gold has historically been thought of as the ultimate currency. It’s considered stable, reliable, and desirable by a majority of people. There was even a time when every single United States dollar was backed by an equivalent amount of gold, the “Gold Standard.”

But those days are behind us, or, they should be. Gold has proven, over the last 50 years at least, to be a terrible vehicle for investment, and a lousy hedge against inflation.

Companies will sell you gold bars or gold bullion and make it seem as though you are making a smart purchase. They’ll say you’re putting your money in something substantial and historical. The reality is that when we adjust for inflation, gold was worth more in 1980 than it is today. I don’t invest in things that lose money over 40 years.

What about as a reserve if the economy collapses? When the dollar is worth nothing, at least you could have gold, right? Come on. The impracticality of gold in that situation is astounding. Are you going to trade your 1oz gold bar, worth up to $2,000 today, for a loaf of bread and some milk? If not, are you a goldsmith, ready and able to melt and recast your gold into appropriately sized pieces?

In that sort of end of the world economy, will anyone who has food even value gold? I don’t own gold in any capacity beyond jewelry, and I don’t think you should either. And if you think it’s a good investment, well… read the title.

What will you do with your stimulus check?

If you live in the United States and earn less than $80,000 as an individual, or $160,000 as a married couple, you’re likely to receive a stimulus check soon. You may have already received it. Do you know what you’ll do with the money?

They call it a stimulus check, as though it’s meant to stimulate the economy and set the country moving towards recovery. Some people may hear that and think it’s their obligation to spend their stimulus check, to do their part in this national economic stimulating. I disagree.

It is your obligation to do what makes the most sense for your family. Are you desperate for groceries? Get them. Are you behind on your rent and risking eviction? Catch back up. Are you fortunate enough to be in a comfortable situation, with no real needs? There should be no guilt in stashing that money away for a rainy day. Or, if you’re able, being generous with it.

But do not feel pressure to spend the money in any way that does not benefit your personal situation. Don’t buy a gym membership to prop up the local gym if you’re struggling to put gas in your car. These checks are gifts meant to help keep people whole during this unusually fragile time. Don’t squander it by buying unneccessary things in the name of national economics.

Don’t fear a budget

A lot of people think “budget” is a four letter word. They think of a budget as something that is constraining; something that stands in the way of fun. Most of the time, users of the budget forget that they set the budget.

This anguish is often driven by fear. The fear that with a budget, restaurants will no longer be an option. The fear that with a budget, a fancy pair of shoes or a new watch will be unobtainable. And the fear of the unknown, because a budget is seldom understood by anyone who doesn’t use one.

A budget should not be feared. It isn’t complicated. You simply take all of your income over a given time period, usually one pay cycle, or one month, and you decide what you want to spend your money on. Do you value eating out? Put it in the budget, and enjoy the meal.

And definitely don’t fear a budget.