Reader KD’s guest post about looking at the big financial picture really put many of my posts to shame. I post many small tips and tricks here and there but they often fall on the trees side rather than the forest. Most of them aren’t even trees, but twigs and leaves.
Getting an extra $5,000 in I Bonds via tax refund is cute and all, but how much difference does it really make? Suppose I Bonds pay 3% more than the alternative, which is really generous, getting extra $5,000 in I Bonds means getting an extra $150 interest a year. Does the extra $150 even register on these two pie charts KD shared with us?
How does KD get to save 41% of his income? Not by earning an extra $150 interest, that’s for sure. I don’t know if you noticed his housing expenses are only 7% of his gross income (35% * 20% = 7%) or 9% of his net income after taxes. Isn’t the mortgage payment guideline something like 28% of gross? When you spend 7% of your gross income on housing while others spend 28%, your savings rate can be 21 percentage points higher. It’s that simple.
How does KD keep housing expenses that low? I asked him via email.
TFB: Are your housing expenses low because you paid off your home already?
KD: No, I haven’t paid off my mortgage yet.
TFB: Did you only count mortgage interest but not principal repayments or taxes and insurance?
KD: No. It includes principal, interest, tax, insurance, plus condo fees.
TFB: Do you live in a 300 sq. ft. studio?
KD: No. It is a 1,000 sq. ft. 2-bedroom, 2-full-bath condo with a wood burning fireplace, a balcony, a walk-in closet, a washer and a dryer, a dishwasher and all that you need to make yourself comfortable and at home.
So what’s the secret? Housing in some parts of the country is less expensive, sometimes much less expensive. Within the same area there is still a wide variation in housing. It’s all about what you choose. You choose which part of the country you live in. You choose between consuming housing and having a high savings rate.
When you don’t have to spend that much on housing, you free up so much cash for savings. From some earlier comments I learned KD’s mortgage was less than $50k when he bought his home a few years ago. Now it’s down to $30k. Compare that to other people having a mortgage of $300k or more.
People in more expensive areas do get paid more. Does it make up the difference? I don’t think so. Having a higher income also means you pay more taxes because the government doesn’t consider cost of living when it comes to taxes. Unless your line of work is really tied to a specific area, choosing where you live makes a huge difference.
It’s even more so for retirees. I keep hearing people have inadequate retirement savings. Moving to an inexpensive area (not Florida) will make the savings last much longer.