November 2020 Finances: “Cash Flow and Stock Picking”
In November, we reduced our after-tax auto investments into Vanguard by 80%. While it stung a bit to reduce these investments, seeing my Wells Fargo checking account fill back up felt even better. Mrs. Disengaged especially likes the “cash cushion” and I’m a happy wife happy life subscriber. Now that we’ve eased the cash burden from some of our fall escapades, we will reengage our typical weekly investment amount starting this first week of December. Not to mention a bit of stock picking has started.
Our typical savings rate is 56% if we include pre-tax savings or 42% post-tax savings. If we split the difference it’s pretty darn close to a 50% rate and it fluctuates a few percentage points month to month.
Mortgage Refinance
We are in the process of finalizing our home mortgage refinancing this month. This is part of my new philosophy of Cash Flow homeownership. Once, long ago, my homeownership strategy focused on debt paydown and equity. I wanted to eventually sell my house and upgrade to a bigger house with land in a more rural part of the Bay Area (near where I live, just in the hills). To do this, I wanted to have as much equity as possible in my home to use as a down payment on the next house.
But I was awakened in March 2020 by the call to FIRE. I started to see things differently and ask different questions.
What does equity get me while I’m living in my house? Nothing. It’s dead money.
How can I get as much money into the market as possible, while keeping my housing expenses as low as I can?
While it’s likely never a good idea to refinance often, this is our reasoning and strategy for doing so in 2019, and again, in 2020.
I can live with less home equity. Equity gives me nothing if I’m not selling the house. I don’t consider a primary residence an investment vehicle. A house you live in is not an investment, it’s a home. The minute I’m not living in my home, then it will transform into an investment by renting it out or by selling it.
This means I’m okay with the closing costs of refinancing back to back like this. Which in 2 years will have totaled $20k of refi fees added to the mortgage (ouch!). Even so, I will still have +/- $137k in equity after the refinance—equity is just a cherry on top.
In exchange for refinancing, I will have $580 extra a month to invest than I did in 2019. That’s $6,960 a year going into the stock market.
Additionally, when I do FIRE, my plan will be to rent the house out while we move abroad. This lower mortgage will allow me to have increased net profit from the rent. Currently, houses like mine in my ‘hood are renting for $3000 a month. And if things change and we decide to stay here after FIRE, well, we will be able to live in this house with a super low mortgage payment.
In a nutshell, this is my Cash Flow strategy.
I am utilizing so-called “good debt” to allow me to pump more money into the market for (hopefully) higher returns than the 2.85% I’m borrowing at. As long as I’m returning more than 3% in the market, I call this a win from the refi aspect.
2.85%
Last year we refinanced down to a 3.85% from a 4% loan. The reason for this refi was to drop the dreaded PMI that was tacked onto our original FHA loan. Our mortgage went from $2,725 to $2,385 a month. A savings of $340.
This year we are doing it again to drop down a whopping 1% in interest to 2.85%. We will also be dropping our escrow account and only be paying principle and interest of $1,630 a month. Huge monthly drop from 2 years ago! The caveat is that we need to save roughly $540 a month for property tax and home insurance. This puts our monthly savings at around $240 a month. As I indicated above, this is a $580 monthly savings from 2019.
I decided that buying down for a lower interest rate than 2.85% was not worth that cost. It was something like $5k pay down for a $24 a month savings to go to 2.75%. The numbers looked worse the further down we went.
Again, this is likely not a good strategy for most people to refinance 2 years in a row. I will not refinance again…unless I can get a 1.85% rate. Not likely.
Stock Picking
I’ve decided to make myself a little playground in my portfolio…stock picking if you will. I have roughly $31k sitting in my traditional IRA that I’m not actively contributing to. This is from a 401k rollover from my previous employer while I was out of the union for 2 years.
In this account, I sold $20k of my beloved VTSAX and purchased individual stocks. Yes, I still love index funds and especially VTSAX, but I like the idea of stock picking and seeing how I can fare on my own, especially at this time before the economy opens back up. I am not doing any moonshot speculation, but looking for quality companies with growth potential and a loyal customer base.
The playground is less than 10% of my portfolio, and I don’t ever see myself going above 10% on individual stocks. Stock picking will only be a salsa to compliment my portfolio. Buying these companies did scratch a mental itch. I was surprised by how nervous I was to actually click “buy” for each company, there’s much more at stake than buying into a fund. But I have no buyer’s remorse. Actually, I enjoy following the business news for each of my companies now.
I spent time doing my research and reading the respective company debt, revenue, P/E ratios, competition, CEO’s, etc. Overall a great learning experience, not that I completely understood what I was researching; a lot of Investopedia and Yahoo Finance surfing occurred. For me, stock picking is a slow process.
This is what I bought with $20k. Yes, I’m a little heavy on the Chinese stock, but I think these “Amazons” of the East have a lot of potential in the coming decades. I’m a believer in International being a part of a healthy portfolio. Yes, I am betting on China. No, I’m not too concerned about the threats to delist BABA and JD. I’m sure I’ll do a bit more stock picking of companies on the other side of the Pacific in the years to come.
Southwest Airlines looked to have the best fundamentals of all the airlines. Looks like they treat their employees well and are semi-union friendly…Delta Airlines did come in 2nd for me, and I almost ditched my Disney purchase for them.
Value Stock Picking
As for buying Disney, I just think they are an all-around great company that will continue to be profitable over my lifetime. Their fans are rabidly loyal, and Disney owns some pretty good companies that each come with their own loyal fan bases. Value stocks will be a healthy portion of any stock picking we do. Why? Because they are a safer bet than the growth stocks. Disney certainly fits that bill.
November Finances
My expenses are broken up by Hard and Soft expenses (more explanation here).
Hard Bills– Under $328.
We were under “budget” on childcare because my wife was able to work from home for 2 weeks while my youngest was sick for a few days. This also trickled down to gas and Fastrak (bridge toll) savings. I’ll talk a little more about my child care situation in a separate post, but we are extremely lucky that my mother in law watches our daughters.
Our Comcast internet is still higher than I want. I won’t switch providers till our refi goes through, just in case they run my credit. I’m eying a deal from AT&T for $45 a month. I don’t yet know why the city utility bill was higher than expected, I’ll have to read the statement. Same with car insurance being lower, but I won’t complain about that.
Soft Bills- Over $932.
We ended up spending more than usual on random things, which tends to happen every month because…that’s life. Either an appliance needs to be replaced, it’s a birthday or anniversary—some curveball usually gets thrown into the mix. It’s frustrating for a guy like myself, but I have to realize that it’s not only me on this journey. I have a family and a house and shit happens. This is also why our savings rate is perfect for us because it can sustain these fluctuations.
Here’s why and what we went over on:
Mrs. Disengaged went shopping. I don’t know much about makeup, but I know not to suggest to her to go to Walmart for her products. She likes MAC and we can afford MAC, so she buys what she likes. Same with clothes, but she doesn’t buy makeup or clothes very often. She’s an HR manager at a Fortune 500 company based out of the east coast. And this company has very strict work attire requirements. In my line of work, I wear jeans, a collared t-shirt, and boots. Rarely do I get dressed up for work or have to look fancy, so I’m in no position to judge…once again, happy wife happy life. If we’re saving 50% of our income I can’t complain. The cost of a happy marriage in November is $255 haha, not bad.
I, on the other hand, got 2 parking tickets at work last month. This totaled $89 dollars. I let the meter run out while in a zoom meeting, and another time I stupidly kept hitting the snooze button on my “pay meter” alarm. I can expense my parking costs, but not parking tickets.
The Gym expense of $149 is outrageous! $70 over. It’s a local cross-fit type gym, hence the higher $80 monthly cost, that my wife swears by. They jacked up the price due to covid costs without telling us. I wasn’t too happy about that. $149 gym fee? Are the dumbbells made out of gold or what? We’re either going to cancel or they’ll drop the price back down. I’m all for supporting small business, but give us a fair warning before auto-deducting my account.
Groceries blew past our “goal” of $1200 a month. Ended up $500 over. We shop at a Safeway, which is more of a convenience thing since it’s our closest supermarket. For those that don’t know, Safeway is probably on the tier below Whole Foods, but above Walmart, on the fancy scale. We live out of town in an unincorporated area, so this is part of the cost of “being away” from town. I’ll admit that I don’t put extra effort into driving 10 miles more to the closest Walmart or discount grocer to get better prices; and my motto is “Lazy People Spend More”. So here I am spending more…
Thanksgiving shopping also had something to do with this food overspending. There was an extra shopping trip just for the turkey dinner. Plus, we bought food for my mother in law.
We also ate out a bit more. My wife found it easier to buy food for the kids and herself a few times while she worked from home. This is why our eating out came in at $122.
Overall, a great November. I’m happy about starting stock picking again. The only thing missing is some rain here and snow in the Sierra.
-Happy Savings
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you make some great points (because i agree with them) about housing and marriage. we never had escrow so it was just a mortgage for us and we put aside money each month for taxes and fees. the 30 year mortgage before we paid it off was only something like $520. we would still have that mortgage and the free cash flow you mention but it was a loan from around 2000 at just under 7%. with less than 50k remaining the closing costs kept us from refinancing. A HOUSE YOU LIVE IN IS NOT AN ASSET. i strongly agree with that one. unless you’re renting out rooms or running a business from there that equity means nothing. we paid to renovate mrs. smidlap’s attic art studio a couple of years ago. it probably added value for resale but really we purchases enjoyment of the space and nothing more. the lighting is much better and the temps are bearable in high summer and high winter now.
happy wife happy life indeed. i don’t really know everything mrs. smidlap buys. i know it’s within reason and that’s good enough. if she wants to treat a friend to lunch or dinner and we can afford it then be my guest.
Wow a $520 mortgage sounds amazing. I can see why a refinance wouldn’t be worth it in that scenario. we’ve been slowly doing some remodeling around the home, more for ourselves than for any equity. Hardwood floors, fences, kitchen… But hey, if it adds value, well happily take it. Yea learning the “happy wife” thing has been one of the greatest lessons I’ve ever learned, it might sound like a one-way street, but it really isn’t. It’s a circle of happiness, as I’m sure you’re well aware. Thanks for stopping by to comment.
Looking good.
I like the cash flow model too. That’s why we no longer make extra payments on the mortgage. The interest is so low. I need to call our CU and see if a refinance makes sense.
Yes, we couldn’t pass up the lower rate, even though we just refinanced. It took some hard number crunching but it worked best for our overall strategy. Refinancing now rather than later might be a good idea. They’re supposedly going to be tacking on some refi fees starting next year. Thanks for the comment Joe.
Aw, your pictures of Vietnam are making me miss my travel days too. I’m jealous you saw Hoi An. I skipped it because I didn’t want to risk going during monsoon season. Oh well.
I’m with your wife regarding the MAC products. Yes, things like Cover Girl are cheaper, but in this instance you get what you pay for. MAC products tend to last much longer too, so in the end they cost less. If you’re running out of your Cover Girl powder every month, you have to buy it more frequently. I don’t know about your wife, but I could easily get a year or so out of my powder. Then again, I don’t wear makeup much these days.
I refinanced too and originally debated about what to do with the savings. I’m still overpaying on my mortgage to reduce the overall length of the loan and to have more equity in case I sell. I also feel like the market is overpriced, so I don’t mind putting more money into my house right now. But it’s not gonna last, especially if this place turns into a rental in the next year or so. We’ll see. I’d love to invest the extra dollars, but this market concerns me. Glad you’re doing your own research and investing outside VTSAX.
We almost skipped Hoi An too, but we were sure glad we didn’t. The old town was a bit touristy after a few hours, but the neighborhoods and rural areas around the old town were great. Nice beaches in that part of the country too. I had an uncle that landed there back in the ’60s with the army, so that was another, more sentimental driver for us to make it that way to the Da Nang area.
My wife wholeheartedly agrees with your comment about the makeup. I guess it’s like tools, it’s smarter to pay more upfront for the quality, rather than having it break on you in a month.
Yeah, I think overpaying on the mortgage can be a fantastic idea. I know many people who are now “wealthy” using this method. Especially with home prices skyrocketing over here in the bay area. It’s all about everyone’s individual strategy. Ours was the same for a few years, then we decided we wanted to live abroad. We think we can use our home as a fixed income tool when the time comes. I’m happy to spread my wings from VTSAX too. A bit liberating to step outside of my comfort zone. Thanks for stopping by and reading.
Aaah so much greatness covered in this one! The fact that you and your wife save half your income is awesome! You definitely say nothing about the MAC! Haha!
That refinance rate is awesome too. What great savings! Mind diving a little more into why you guys choose not to escrow? I’m intrigued.
For some reason this comment was in my spam folder…sorry took a while to respond I just noticed it in there…
Yup nothing to say about MAC haha. I learned early on not to question make up or clothes purchases. She’s frugal in other areas I’m not, so everything balances out.
Sure. We decided to skip out on the escrow so that we can have a little more control over the month to month money going out. Eventually interest rates will be going back up and we would like to place the money in a high yield account. If something like a job loss were to happen, it would be way easier to make the payment now and give us breathing room. Plus, this way we can pay our property taxes and home insurance with our credit cards now to help out with the travel hacking bonus points. Overall, it’s a control and psychological thing…I like saying/thinking my mortgage is $1630 a month.
Thanks for sharing your experience with refinancing, Noel. We have been thinking about doing it all year, but part of me is reluctant to mess with it because I’m not sure if it’s worth it for us. Do you have any recommendations for how to judge?
Yes we had to do some number crunching to see if it made sense. There are so many factors that play into it. It all depends on your plan for the house. I know you guys are really close to hitting FIRE, the fees might not be worth if you plan on selling the house soon or if you don’t owe much. If you plan on keeping the house for long while it might be worth looking into. We didn’t pay anything out of pocket, the fee was rolled into the loan.
Every time we refinance, the rate dives precipitously. I am cursed. We refinanced to 3.375 on 20yr. A few months later and we could get much lower. I’ll be honest, I am contemplating just paying the darn thing off and freeing up 2700 a month in cash every month. We’ll see.
Disney is a wonderful company. I have it in the portfolio and I buy stock in Disney for my kids.
We were torn about refinancing especially because we just refinanced a year ago. But the savings per month was worth it to us, and the fact that we don’t plan on selling anytime soon. Having the house paid off would awesome! Yes so much you could do with that extra money. We still owe quite a bit ($380K) and figured we could do better than the 2.85% we borrowed at in the stockmarket. Knowing we probably won’t sell was a huge factor for us.
Agree, Disney knows what they are doing! Great acquisitions. Great business model. Great fans. My daughter has VTI, but I might buy her a stock of DIS now that you mention it. It might get her more excited about the stock market than she already is. Thanks for stopping by.
Good timing on Disney! I think you’re onto something with the Chinese ecommerce plays… definitely looking into those myself.
Right on dude. I got lucky with Disney. Sheer luck. It’s almost a bad thing, I don’t want to start thinking I know how to pick stocks haha. I will say that it’s nice having a few stocks go up on days where the indexes are down. Sort of balances things out. Yea I’m hoping BABA and JD have a helluva roaring ‘20’s.
Dude, this is cool. It’s always interesting to see what people actually spend on.
I’m also in the happy wife, happy life club… hahaha. I let her decide her “personal care” budget and do not comment.
I think based on your goals you’re making the right move with the refi. I’m in a somewhat similar dilemma. I’m house shopping right now and the question I’m always debating is do I buy lower and know I have to do a remodel in a few years but push it out, or do I just pay more for what I want now. It’s been interesting because I’ve had the opportunity to place offers on both scenarios but keep getting out bid. The market in LA is ape shit right now.
Plus, I’m a first time buyer, so the emotional roller coaster has been a trip.
And yep, we always need a playground. Gotta take our shots at beating the market! Haha. I’ll always have my little fun portfolio as well.
Good stuff man.
Yes, best not to comment on the “personal care” haha I’m with you on that.
Oh man, yes decisions decisions when it comes to remodel vs turnkey. I really wanted a fixer upper, especially so since I’m a carpenter and have been wanting to bust out my skills. But we ended up getting a house maybe halfway fixed up already…sort of a compromise. Bathroom and landscaping done and a few other nice touches like stone tops, nice doors and hardware,and tile. And you know what, I’m really glad I don’t have much to do. It’s such a time suck, especially with my kids bouncing around. But there’s good equity to build if you can do it. I added floors and a new fence so far.
The playground was an itch that felt really good scratching. It’ll be fun to compare it to my true love VTSAX. Thanks for the comment Q-FI!
PS this was in my spam folder again…good thing I know to check it regularly now.