Put emotions to the side and make me move.

So ya know how last blog post I wrote about investing $100,000 in to our house so we could build an attached two-bedroom apartment? That’s still an option, but so is something else…

SELL OUR HOUSE

Yeah, I just said that. 

We bought in July, moved in in September, and here we are five months later, thinking about putting the house on the market. Is that crazy or what? 

You may or may not recall when we put our offer in on the house this summer, we found ourselves in a multiple offer situation. The other buyers offer escalated up to $378,000. Ours only up to a smidge over $350,000.

Fortunately for us, the sellers took our offer. 

Since move in, we’ve spent about $8,000 making our place a little more homey (new appliances, light fixtures, carpet, electrical work, tree service, etc).

And now, here we are, thinking about cashing in on all the sweat equity we’ve put in to the place.

Turn off emotions and profit:

I’ve been watching the local inventory like a hawk and I’m not seeing much competition out there. There are a bunch of houses for sale in our area for $500,000 or more, but it’s slim pickings for buyers with less than $450,000.

Limited supply is always good for a seller.

I’ve run the numbers and decided if we could sell our house for $425,000 (about $70,000 more than we paid for it five months ago), Girl Ninja and I will gladly pack our bags and hand over the keys.

I don’t want to bother our realtor just yet with an appraisal so I decided to test the waters myself by taking advantage of Zillow’s “Make me move” feature. We listed our house at our dream price, $425k.

It’s been on the site for a few days now and I’ve already received a few soft inquiries. Nothing too serious where I think people really want to buy the house, but I’m encouraged people are taking the time to shoot over emails and ask questions about our property.

Is our house worth $425,000? Doubtful. 

But when inventory is low, and buyers are freaking out because they think interest rates will shoot up very soon, the stars just might align in such a way that we find someone willing to pay us our asking price.

If we did end up selling, we would walk away with $103,000 after commissions and fees. Sounds pretty appetizing to me. We’d then likely rent a two bedroom condo somewhere until the next real estate correction comes; three, five, or ten years down the road.

Buy low, sell high, right?

How much cash would you have to walk away with in order to sell your house right now? Everyone has their price, what’s yours? 

The $100,000 addition.

Our house sits on a 15,000 square foot lot in such a way that adding on to the structure shouldn’t be too big of a deal. Here’s a quick picture from our backyard for reference…

463144_3353598331710_370226328_o

You see how much space there is on the left side of our house, that big grassy area that runs by the white picket fence. 

Call me crazy, but I feel like the gods above are practically begging us to spend $100,000 and add some square footage to our abode.

There is enough yard there we should be able add about 700-800sqft of living space.

“But Ninja, why do you need more living space?” -you guys

Short answer, WE DON’T.

Introducing the Additional Dwelling Unit (AKA a mother-in-law):

As many of you know, prior to buying our house, Girl Ninja and I rented a mother-in-law unit above a million dollar home. It was a tiny one bedroom, but had awesome finishes and a view of Puget Sound. Check out how dope the main house was (the staircase running up the right side of the house went to our front door)…

Screen shot 2014-02-18 at Feb 18, 2014, 8.38.54 PM

We paid $1,200/mo (utilities included) to live there. Since our landlord paid cash for his house, he literally had no housing costs. That’s right, our rent completely covered his property taxes and utility expenses. We stayed there for two years and loved every minute of it.

The plan:

If we could add a small, attached, two bedroom apartment (about 800 sqft) to our house for about $100,000 (works out to $125 per sqft), I can’t think of a reason why we shouldn’t. The math seems to work in our favor. 

The math:

Let’s assume Girl Ninja and I pay $30,000 from savings, and borrow $70,000 at 6% on a 30 year term. Our housing payment would increase by about $513 in this scenario, increasing our total PITI obligation to about $2,200/mo.

Since Girl Ninja and I looked at renting in our current neighborhood two years ago, we have an idea where rent prices are, although they’ve probably gone up a bit.

We should fetch between $1,200 to $1,500 a month in rental income from this place.

(leaving us with only a $800 house payment).

Do you get what that means!? 

We would be profiting $700/month minimum right off the bat. What’s more, rent prices over time would increase but our payment wouldn’t.

And don’t forget, the extra bedrooms and bathrooms would increase the overall value of our property. Booya for this idea not being a sunk cost. 

Passive income is very attractive and lord knows I need to start diversifying outside of my retirement funds. This seems like the most reasonable way to do both.

I can rent out 800sqft of our house (while we live in the other 1900sqft) and have over half of our house payment paid by someone else.

Is this not the financial stars aligning before my very eyes?

Someone with knowledge shed some light on the situation. Is this a pretty awesome idea? Or am I totally overlooking something?

side note: Our current roommate/friend is paying us $400/month to live in a small 10ft by 13ft room in our basement (she has full access to our house). 

Keep your credit card debt. It’ll be good for you.

Do you have an income?

Do you have expenses?

If you answered yes to either of those questions, you darn well better have some financial priorities in place.

While there are a million different things we could talk about in regards to financial priorities, today I want to focus on just one.

Which comes first: investing or paying down debt?

I think financial priorities are something most of us think we have figured out, but don’t always truly understand.

Today I’m going to show you why investing in your 401K is often a better option than paying down high interest credit card debt.

Let’s look at an example:

Jane, makes $50,000 year. She’s 30 years old and her employer fully matches 5% of any contributions she makes to her 401K plan. Jane also has $5,000 in credit card debt, at 15%. What should Jane do, pay down the card as quick as possible, or start building up a nice little nest egg for retirement?

A 15% APR, on a $5,000 balance, means Jane will be paying about $62/month in interest. If she made nothing, but minimum payments, it would take her a little over 22 years to pay that sucker off. She’d also pay $5,729 in interest over that time resulting in a total payment just shy of $11,000. Yikes, that $5,000 original bill became a whole lot more expensive. Better pay that sucker off ASAP, right?

Now let’s examine the investing route.

Jane would be investing $208/month in her 401K if she contributed 5%. Her employer matches that and gives her another $208. If she earned a doable 6% return on this money, and never got a raise in her life, she would end up retiring at age 67 with $683,030 in her 401K. Not bad at all.

If Jane decided to postpone contributing to her 401K, she could use that $208 to make accelerated debt payments each month. But let’s not forget, that 208 number is pretax, so in reality she’d have about $175 extra to throw at her credit card. With the additional payment, Jane will now be credit card debt free in 20 months and will have only paid about $673 in interest. Sounds a heck of a lot better than the 22 years it was going to take in the first example.

Here’s where it gets interesting.

Wanna know what Jane’s 401k would look like if she didn’t start investing until after she became CC debt free? She lost nearly two years of company matching and compound interest, resulting in $596,388 in her 401K. That’s $86,642 less then if she started investing at age 30.

Guys and girls, this point is SOOOO important it can not be overlooked. It is absolutely in Jane’s best interest to start investing in her companies 401K, even though she is not debt free. If she waits until she has her credit card paid off, she loses a crap load of money. I know this seems to go against the grain. Credit card debt is evil, don’t get me wrong, but that doesn’t mean it should always be at the top of our financial priorities.

Obviously, in a perfect world you will have enough discretionary income that you can not only contribute to your retirement, but also pay down your debt quickly. I always have been, and always will be a DEBT PUNCHER, but only when it is in your best interest.

Does your employer offer a 401K match? (I’d like as many people as possible to answer this question since I’ve heard a lot of the retirement benefits in the private sector have been getting cut left and right). Are you taking full advantage of that match? If not, you’re crazy. I’m sorry, you just are. You are literally giving up FREE money. In Jane’s situation would you go the way of Dave Ramsey and still pay down your credit card first, or would you let number’s guide you and start contributing to your retirement?

To infinity and beyond

Next pay period I will receive a small raise at work, to the tune of $2,500 (a 3% raise). While I’m stoked to be getting any raise at all, let’s be real, it’s not a life changing amount. In fact, I’m only expecting to net $75 more each paycheck because of it. Big Macs on me tonight guys. Wait… too expensive, dollar menu cheeseburgers on me instead 🙂

Girl Ninja and I have decided to do the boring and responsible thing and increase our retirement contributions, as opposed to increasing our discretionary cash flow. We’ve been contributing 10% to my 401k, but looks like it’s time to increase it by another 3%? My employer matches 5%, so in total 18% of my gross pay will be going to my 401K plan.

Is that hot or what?

So yeah, technically I got a $2,500 raise, but before I even have a chance to see it in my paycheck, it will be going straight to 65-year-old me via retirement contributions. If that’s not keeping up with the Joneses I don’t know what is.

Since I’m a self-proclaimed PF nerd, I thought I’d run a quick calculation…

If we keep throwing that $2,500 in to our 401K plan for the next 40 years, do you want to know how much extra we’d have come retirement? This example assumes an 8% rate of return.

$732,141.92

You can see the decision was easy. Get $75 extra in each paycheck or have an extra $732,000 waiting for me when I’m older? I don’t know about you, but I’m picking the latter every time.

Lifestyle inflation is cool and all, but if we are already content with what we have, what else is there to inflate besides our savings, retirement, and charitable contributions? I’m not going to go run out and buy another TV or laptop just for the hell of it (pardon my language).

Last time you came in to a little extra money, what did you do with it? If you had to inflate your lifestyle in one aspect how would you do it? (We would probably dine out a little more, or maybe pay for a maid service).

Too much bad personal finance advice out there.

You ever read a blog post that went something like this…

You might want to think twice before you buy that brand new TV. It would set you back $2,000, and will likely only provide you entertainment for a handful of years. What if you invested that money instead? 

If you put $2,000 in to a Roth IRA and let it grow for 30 years, at 8%, you would end up with $20,000. 

I repeat, TWENTY-THOUSAND DOLLARS!!!!

Is that TV really worth $20,000 to you? I didn’t think so. Now go give yourself a spanking and put yourself in time out for even thinking that buying a TV was a smart move! 

I can’t tell you how many times I’ve read some iteration of the post above. Maybe instead of a TV, it’s a vacation. Or a boat. Or a house. Or probably the most popular topic for an argument like this to appear, a wedding post.

Consider this my permission to flip those other PF bloggers the internet version of the bird and tell ’em to buzz off. Unless of course, your goal is to be miserable for the rest of your life. Then by all means, drink the kool-aid.

Personal finance bloggers commonly confuse the term financial freedom with wealth. THEY ARE NOT THE SAME THING.

Say I had $1,000,000 in my 401k right now. I am literally a millionaire. But am I free?

HECK NO!

My 401k isn’t going to pay my cable bill, put groceries on our table, or a car in my driveway for another 30+ years. Yeah, I’m a millionaire, but I’m no more free than the dude that bags groceries down the street at the local Safeway. We both still have to go to work tomorrow.

Do you get it? 

You need to be working towards financial freedom, not wealth building.

I think, at 28 years old, I’ve reached that place. My job provides the best work/life balance of anyone I know, I make a reasonable, but still down-to-earth five-figure income. We have a roof over our head. We contribute 15%-20% towards retirement. And we’re content living within our means, no pinching pennies, but we still have to be mindful of our spending. As far as I’m concerned; we’re retired.

It’s a beautiful place to be, and a place I hope you are in, or working towards finding. 

Don’t get discouraged by the PF bloggers who talk about how great early retirement is even though they are still slaves to their blog (or their portfolios), who make you feel terrible for buying a new car, or who tell you there is no such thing as saving too much.

Those bloggers suck.

You be the best you you can be. Make a plan. Stick to it. And enjoy the ride along the way…even if that means you end up buying that TV.

You don’t have to be a millionaire to be happy. Promise. 

Thursday Poll: What day will the government get its crap together?

I recently mentioned I have not yet contributed to my Roth IRA this year. If you haven’t been living under a rock, I’m sure you’ve noticed the markets are down a couple hundred points as the Republicans and Democrats are being a bunch of drama queens. I would never advocate trying to time the market because no one can predict the future, but almost surely one of two things will transpire over the next week…

Option A) The government shutdown continues, and for the first time in the Nation’s history, we will default on our national debt obligations. The economy will likely see an immediate and sharp decline. If I buy in today, with the dow at 14,800, it could easily be thousands of points lower a month from now if the economic crap hits the fan.

Option B) Republicans and Democrats continue bickering, but ultimately strike a deal. Either the national debt issue is pushed back for another few weeks/months, or the debt limit is permanently increased and the shutdown ceases. The markets will react positively to this news.

What’s going to actually happen?

No one knows exactly. But, I’m pretty sure no elected official wants to be part of the nation’s first debt default so I’m betting a deal is struck before default becomes a reality.

Now is the part where you, the reader, can help me out.

I want YOU to pick what day I should make my Roth IRA contribution. Ideally I will contribute on the last business day BEFORE The House and The Senate strike a deal (right before the markets would make a nice little jump). Only problem is, I don’t know what day said deal will be made.

To have a little fun, I’ll let you do the picking for me. Whichever day gets the most votes, will be the day I drop $4,500 in to my Roth (side note: I’ve already contributed $1,000 to regular IRA). 

This could end up being the greatest idea I’ve ever had, but it could just as likely end up being the worst. Haha. Should be fun either way right?

So reader…

[poll id=”22″]

 

Financial laziness.

I’ve been a big sack of laziness lately when it comes to keeping up with my retirement planning. Apparently the calendar has decided to say it is September (when did that happen?) which means I could have contributed to my Roth IRA as early as nine months ago for the 2013 tax year.

Had I just invested the $5,500 Roth IRA contribution limit on January 1st like a good little Ninja, that amount would have grown by $935. Or in other words, basically my $5,500 contribution would be $6,500 right now. 

How lame am I?

Answer: only kind of lame because at least I’m realizing my lameness as opposed to justifying it? 

…Okay, well part of me wants to justify it for the following lame reasons…

  1. I upped my 401k contributions this year quite a bit.
  2. We bought a house, which hopefully will have some investment aspect to it.
  3. I’m lame.

It’s time I give myself a swift kick in the butt and get my Roth contribution in.

Have you needed to give yourself a kick in the rear for being financially lazy in any capacity?

  • Avoiding paying down debt faster than you could/should?
  • Not contributing to retirement when you have the means?  
  • Paying for two cable boxes when you haven’t turned your basement TV on in months?