Let me repeat this: Just because something is deductible, that does not mean you should spend the money.
Why in the world would I say this?
Because I think that many people have lost sight of what exactly a deduction is. First of all, a tax deduction is simply a REDUCTION of your income in the eyes of the IRS. So, if you are in the 30% tax bracket, and you can deduct $1,000, you will only receive $300 back. With a deduction, you only receive the amount by which you reduced your total tax burden back, not the (your) cost of the whole deduction.
We forget this, and go out and make a decision simply because it is tax-deductible. For example, you roll your capital gains deferral from your primary residence into a newer, bigger house because the interest is deductible. Your old house had a $180,000 mortgage at 5% for a payment of $966. The total yearly deductible interest from that note is about $9000. Now, this does not mean you get a check from the IRS for $9000 at the end of the year. Rather, you reduce your income by $9000, which if you are in the 30% tax bracket comes out to a $3000 check back from the IRS. Not nearly as cool.
Now, your new house has a mortgage of $240,000 over 30 years at 5%, and a payment of $1395. You can deduct $12,000 for the year from your income, but the check from the IRS will only be $3,600.
Wait a minute. You only get $600 more back from the IRS, and your cost of owning a home is $5,148 more per year. So, your decision has cost you a $4,548 reduction in your cashflow a year.
Sorry guys, I’m just a little worn out today. I realized I haven’t had a day off since we were in Kansas. And, although I very much enjoyed going, you can’t completely relax when you are visiting someone else’s house, you know?
My birthday is on Sunday, and I’ll be 24. I’ve been frustrated this week because it seems like it is going to take forever for us to get out of this hole - and get back to just being at $0. We’re not even at the stage where we can accumulate wealth.
The fiancee and I talked last night about some options. Because, really, we should be totally knocking this thing out. The kicker is really the car payment (his). If you add up the car and house payment, we are effectively paying the payment on a $300,000 mortgage, which if you have 20% equity - would be a $375,000 house. And here in Houston, $375k gets you A LOT of house. That thought was incredibly sobering.
But unfortunately, there is not a whole lot we can do about it at the moment, because 4×4 trucks (required for work) are pretty freaking expensive. A ten year old truck with over 200,000 miles on it was still worth $7,000. So at least we know the resale will stay high - but in the meantime, we just have to tuck in even more.
We’ve pretty much run out of notches in our proverbial belt. Dang. Truthfully, we should be more than fine, but this is definitely a precautionary measure.
I spent a good portion of yesterday trying to figure out how to skim from the budget, which we already thought was pretty bare bones to begin with. The reason? Our roommate will be closing on his first home November 8th, so we will no longer have that income stream. Having a roommate has definitely mad the financial road a little easier for us, and without one, I don’t think I would be able to be making the major life changes I am right now.
So how much did I have to try and cut out? About $800, because we also wanted to lowball what I am making. Here’s what we had to cut:
Gym Memberships: $60, net $40 <— we didn’t use them much, and there’s a local racquet club with a gym for $20 a household
Art: $100 <— this hurt a lot, I keep my sanity through classes
Eating Out: $100
Power: $100 (finally lowered our electric bill!!!!)
Cable: $30
Credit Card Payoff: $388
Reducing the credit card paydown hurt the most, but really, November is a five pay-day month, bonus month (which will help with December), and January we *may* have a roommate for a month, the February is another five pay-day month. So every bit of extra we have will go towards 1) our reserve, and 2) credit card payoff. Plus, by the end of February I should be up and running enough to give up the restaurant, or just have some mad money.
This is definitely not easy, but having everything paid off will be so exhilarating!!!
We’re getting a new dishwasher today. I cannot tell you how exciting this is. We just bought our home a year ago, and within a couple of months of being in the house, the dishwasher broke.
Lovely.
We tried fixing it ourselves, and it worked for a little while, but then it spewed water all over the kitchen.
So, my fiancee had me go out in search of a new dishwasher. Unfortunately, because we have just started consolidating finances and budgets, the pot for home emergencies is pretty low (we’re putting almost all of our extra budget into credit card payoff), and the $400 + $150 for install was going to be a rather large expense.
Then, we remembered something about a “home warranty” with American Home Shield that came with the home when we bought it. After washing dishes by hand for eight months, this was a brilliant thing to remember, especially since the policy was less than a month away from expiring.
AHS was very pleasant to deal with. They sent out a service rep who confirmed our dishwasher was pretty busted, but still possibly fixable, and AHS wound up giving us $215 credit towards a new dishwasher. Since they get dishwashers in bulk for a discount, our total cost with install is about $175, instead of the $550 we were anticipating. Glorious.
But should we renew? Well, for a year of coverage for everything from dishwashers and tubs to the air conditioner and roof, it costs $500 per year.
We decided: $500 is MUCH better put towards a safety reserve for the house in case something big breaks, because unless your air conditioner goes out, it isn’t worth it. Plus, most things in the home (shouldn’t) wear out for at least a couple of years, enough time for us to build a larger reserve.
However, for a house we have just bought that is older (ours is 40+ years old) I don’t think I would consider buying unless the seller had purchased such a plan to ensure peace of mind for at least the first year.
My fiancee and I just had the first anniversary of being in our first home. My fiancee chose the home (he bought it just before I moved here) because it was in a well-established neighborhood with good schools and custom built homes with nice trees. Good home values with slow, but steady appreciation.
The suburban dream, really.
Only problem is, we’re both 24. We don’t care about school systems and lots of space. In fact, once our roommate moves out, 2,800 sq. ft. is entirely too big for us. We want a younger, hipper part of town where people are more active and we can walk to a restaurant.
More urban, if you will.
The previous owner did a lot to update the home, but he never touched the most important part - the kitchen. And some of the other things he did, like the bathroom renovation, are ghastly. So, now here’s my question: do we move out, rent it, and rent downtown for a year, then buy downtown?Or do we renovate now, stay for an extra year, then sell?
We want to make some changes before we sell, regardless. The question is, sell now or later?
We bought this home for $135,000 (gotta love cheap homes in Texas!). If we were to rent this house, we can make it cashflow for about net $200-300 per month, so let’s say $3,000 over the year. Plus, if we were renting downtown, we figure we can knock our expenses down somewhere between $100-250/mo. or about $1,800 in a year because we are renting and our power would not be as much. So in a year, we could save around $4,800 in a year by moving and renting.
We figure we have about $10,000 to put it in to get this bad boy up to snuff, so really, I guess our break-even is somewhere around $153,000 for closing costs, etc.
Homes in the area are starting to list (and sell) for around $155,000+. I think it would be worth our while if we could get somewhere in the neighborhood of $175,000 or more for this. We want to be out within five years (for the statute of limitations for rolling capital gains), so I guess we just need to watch the prices to figure this out.
People seem to go batty over the fact that the interest on your mortgage is deductible. They also seem to do the same thing over the the capital gains deferral for your primary residence. But just because you can sell your house, take a profit, and buy a bigger house to have *more* of a tax deduction, that is not necessarily a good thing.
Let’s say you have a $200,000 house. You put 20% down, so you have a $180,000, 30-year fixed mortgage at 5% (for the purpose of round numbers). Your payment is: $966.
Suddenly, your house appreciates. You can now sell it for $250,000. Rather than taking the capital gains and paying down a mortgage on a similar house, you decide to capitalize on this, sell your home, and trade up. After closing costs and fees, you have about $60,000 to put towards your next house. So you buy another home with 20% down, the new home being worth $300,000 with a 20% downpayment = a 30-year mortgage of $240,000.
At the same interest rate, your payment is now $1,395. You have just increased your overall debt by some $60,000, and your monthly cashflow has been stretched an additional $400/month. That is a 44% increase in your mortgage payment.
For what? A bigger house? Do you really need that much more room?
Let’s look at another scenario. Say you capitalized on your gains and rolled it into another, similar priced house. You take the $60,000 to pay down your mortgage, so your total mortgage on a $200,000 home is now $140,000. Your payment on a 30-year 5% fixed rate mortgage is now $751.That is a 22% decrease in your payment.
Now, here is why trading up really is dumb sometimes:
If you took that extra $200 per month and put it into a high-yield savings account at 5%, the compounding interest would give you $167,448 in 30 years! That is more than your new mortgage! And if you took the money you would be saving by not “trading up” to the bigger house ($1395 - $751 = $644) you would have $535,970 in 30 years. So, even if you can afford the bigger house, if you decide to save the money, rather than dump it into a bigger home (with higher costs of heating, etc.) you can have almost half a million dollars. Just see what you are giving up!
