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Sometimes you get a reader case in your inbox that screams for help and comes with a twist, so obviously I had to pick it. Read on and you’ll see what I mean:
Hello! Let me start off by saying that I’m a huge fan of your blog and investing strategy. I discovered it in 2019 and I went through your free investment workshop. In 2020 (yes right when the markets tanked) I took the plunge and invested my savings into a well balanced portfolio of ETFs. As the market recovered I made quite a bit of money that year. But somewhere along the line I got lost in consumerism and the rat race. I kept getting more and more raises at work and instead of saving more, I bought more stuff. I got into debt. I bought a condo, got a car payment, and got some cats that are costing me a fortune in vet bills/pet sitting fees as I love to travel. I don’t know how I got so off track. I knew FIRE was what I wanted and then I got caught up in what everyone else around me was doing and trying to convince me to do too. So here I am, in a bad financial situation and starting from scratch. The worst is that I am stuck in a job that I absolutely hate and have no work life/balance. I work all the time and my relationships, physical and mental health are in a steady decline. Here are the numbers:
Gross annual income: $86,000 (I make more with premiums but they are hard to predict exact numbers, for example I actually made $93,000 last year).
Net income: $63,900
Monthly spending (varies greatly as I’ve gotten into quite the consumerist habit so I waste a lot on gadgets and gear. But aside from that here are the other expenses):
Mortgage/property taxes: $937.24
Car insurance: $165.03
Strata fees: $322.37
Condo insurance: $52.61
Car payments: $440.40
Electricity: $40-130 (depending on time of year)
Cell phone: $39.20
Coin laundry: $22
Gas (varies greatly): average $350
Going out: $150-200
Debt to parents: $1000 (see details below)
Car loan: $26,500 (interest rate of 5.99%, monthly payment is $440.40)
Mortgage: $203,865.04 (interest rate of 2.69%, 4 years remaining on term, bought last year)
Debt to parents (helped me with downpayment): $13,288 (zero interest, I’ve been paying them $500 bi-weekly but this is flexible as they are not in a hurry for the money back. I want the debt off my shoulders though).
– Currently in an underwater mortgage so I can’t count that (it’s worth less than what I paid for it. I got caught up in a bidding war which I am not proud of. It was a massive mistake.)
– I looked into selling my car and I should be able to get approximately what I still owe on it if I do. But I lose the money that I’ve already been putting in.
– I no longer have any investments unfortunately. I used it all for my down payment.
– $3900 in savings account in cash (I’m slowly building up an emergency fund).
Okay so, here’s what I would love an opinion on and help with. In what order would you advise I do the following in?
– Pay off my debts (and which ones first)
– Save up an emergency fund for 6-12 months of living expenses (I hate my job and want the option to quit if it becomes too much and go look for something better suited to me).
– Start investing in ETFs again (so I can head back towards FIRE, I want to retire ASAP or at least find a lower paying job I enjoy).
Also would you advise me to sell my condo at this point in time or when would you advise it? Should I sell my car and take the loss to get something cheaper and more affordable?
As you can see I’ve dug myself in quite the hole. I went from being frugal and smart with my money, renting, deciding to be pet free, and saving about 60-80% of my income. Life circumstances happened and I spent all my money, got myself into debt, and bought a condo with annoying strata fees. I feel so overwhelmed and don’t know how to get back to where I was (well on the way to FIRE). I would so appreciate some advice from you guys!
Thanks for reading and thank you so much for all that you do to help people achieve financial freedom 🙂
Hoo boy. This story had quite the twist ending. How does someone go from being well on the way to FIRE to digging themselves into the hole in just a few short years? Lifestyle inflation and keeping up with the Jones. Which is why I keep stressing the importance of hanging around like-minded people who won’t derail you from the FIRE path. But during the pandemic, it was easier to get lost in consumerism to fill a void when we were all banned from hanging out with other people. And even sadder is that LostMyWay made a lot of money from buying into the market dip but squandered it all on this underwater condo. And now they hate their job and it’s destroying their health and relationships. Sigh. Real estate bites another one.
One of the things Wanderer and I like to say whenever we get into a jam (which happens frequently when you travel as much we do) is “doesn’t matter what happened in the past. What do we do now?” This prevents you from spiralling into the “if only”, “what if” “this is your fault” scenarios and wasting time being stuck in the past.
Yes, LostMyWay screwed up. But from all the reader cases we’ve done in the past, there is always a way back. And when unexpected situations like this hit—housing crash, a job loss, health crisis, a stressful job—are exactly when you find out the real power of financial independence. It’s not about travelling the world or retiring early. It’s about having choices.
In order to get back on track to FIRE and having options again, LostMyWay will have to get their sh*t together and figure out how to dig themselves out of this mess.
Let’s start by Mathing That Shit Up!
|Income (after tax)||$63,900/year|
|Total expenses (including debt repayment)||$4410.52/month or $52,926.24/year|
|Debt||$26,500 (car) + $203,865.04 (mortgage) + $13,288 (Bank of Mom and Dad” down payment loan) = $243,653.04|
|Investible Assets:||$3900 (cash)|
So, given LMW’s single person’s current yearly spending of $52,926.24 and after tax income of $63,900, they’ll be able to save $10,973.76. Now, it might seem like we’re ignoring the debt, but in our base analysis, the debt payments are included in their monthly spending (don’t worry, we’ll do something more clever with this in a bit).
This means their FI number is $52,926.24 x 25 = $1,323,156.
If they were to continue spending this way, their time to FI would be:
Yikes! Given how much they hate their job and how it’s affecting their health, I’m not sure they’d make it that far.
This is especially depressing, given that they were originally saving 60-80% of their income, which would have put them in a good position to become FI in just 5-11 years. Now they’ve extended that timeline by more than 3x!
Killing the Debt
That being said, when you dive into the numbers you see quite a few loan payments in the monthly expenses, specifically $1000 is going toward the Bank of Mom and Dad for their down payment loan, and $440.40 is their car payment. Let’s pay these off and see how that helps the situation.
Now, to answer one of their questions: Which loan to pay off first?
The answer is simple: The car loan. It’s the loan with the highest interest rate, so mathematically we have to direct our firehose to that one first. This also means halting payments to their parents for a while. Is this a crappy thing to do? Obviously, but our reader’s drowning right now. The time to be nice is long gone.
By prioritizing the car loan with the highest interest rate, if they stopped paying their parents now, they’d be able to put an extra $12,000/year towards killing the car loan. Which means they’d be able to put $10,974 + $12,000 = $22,974 extra cash towards killing their car loan per year. At a current balance of $26,500, this loan should be gone in a little over a year.
Then and only then should they pay back their parents’ interest free loan, which would take $13, 288 / $22,974 = 0.57 years or about 7 months.
OK so that would take about 1.6 years to kill off their non-mortgage debt. What does that do to their numbers?
With the loans gone, their loan payments drop off their expenses. So that means, their base monthly expense is $4410.52 – $1000 (Bank of Mom and Dad) – $440.40 (car loan) = $2970.12/month or $35,641.44/year.
The lowered expenses mean that their savings rate would increase to $63,900 – $35,641.44 = $28,258.56 per year. It also means their FI number will be reduced to $35,641.44 x 25 = $891,036. How long would this take?
Around 17.5 years.
So that means that paying off the debt brings their FI date down from 36 years to 17.5 + 1.6 = 19.
Better, but still not great. Let’s see what else we can do.
Selling the car
Given that the car is costing them a ridiculous $440 (loan) + $350 (gas) + $165.03 (insurance) = $955.03/month, this is a good place to find some savings.
Selling the car frees up $955.03 a month which they can redirect towards paying back their parents. At the current loan balance of $13,288 and with monthly payments of $1000 + $955.03 = $1955.03, that loan gets killed off in $13,288 / $1955.03 = 6.8 months.
Of course, they’d have to add back expenses for public transportation. Let’s say $150 for a monthly transit pass.
So now, 7 months after selling the car, all non-mortgage debt would be gone, and their monthly expenses would be $4410.52 – $955.03 (car) – $1000 (parental loan) + $150 (transit pass) = $2605.49 per month, or $31,265.88 a year.
Their new savings rate would be $63,900 – $31,265.88 = $32,634.12, and their new FI target would be $31,265.88 x 25 = $781,647. How long would it take for them to get there?
Around 14.5 years. Add back in the 7 months it took to kill the parental loan, and we’re looking at 15 years. Still not the original 5-11 years to FI they had before but better than 19 years from before.
What about the Mortgage?
But wait. There’s still the issue of the mortgage!
LMW is in quite a pickle with their condo purchase, because the market has dropped and they’re now underwater. That means they can’t sell without writing a check for the difference, so they’re effectively trapped in that condo for the foreseeable future.
However, one small saving grace of this reader case is that even though they blew up their finances with a condo, the price of that condo wasn’t too bad. Plus, they got in at a low 2.69% interest rate. If that mortgage balance were in the $500k+ range, they’d be screwed, but at $203k, maybe there’s still hope.
Specifically, what happens if we throw our money towards paying the mortgage off faster?
One thing that we need to consider is that even after the mortgage is paid off, they’ll still have to pay condos fees, insurance, property taxes, and utilities forever. This is a type of “forever rent” that you pay even if your property is paid off. So no, don’t listen to people who say once you pay off your house, you’re rent free. Ownership costs are forever.
First, we have to reverse engineer this mortgage. This is a little tricky since they lumped mortgage and property taxes together to give $937.24/month. Putting it into a mortgage calculator and assuming a standard 25-year amortization gave us a monthly payment of about $937, which doesn’t make sense since this amount is supposed to include mortgage and property taxes. It’s possible they meant this as only the mortgage amount, and it’s also possible that the loan has a longer amortization period. We’re going to take an educated guess and LMW can redo the numbers later on.
Using this mortgage calculator, if we put in the balance of $203,865 and an interest rate of 2.69%, and set the amortization to 30 years instead of 25, the monthly payment gets calculated as $824. If this is how their mortgage is structured, that means that their mortgage costs $824 a month, and their property taxes are $937.24 – $824 = $113.24. Again, this is only an estimate and LMW can easily redo the numbers themselves using the same calculator.
OK so let’s see how paying off the mortgage affects their FIRE journey.
Most mortgages have limits on how much you can put into your mortgage, but generally a standard fixed rate mortgage allows you to double your monthly payment without incurring penalties or fees. Check your mortgage documents to see exactly what’s allowed.
If LMW were to double the mortgage payments to $824 x 2 = $1648 per month, that would massively shorten the amount of time to pay off the loan, and save a ton of interest as well.
On the chart generated by this handy-dandy mortgage calculator , the light blue line represents the original loan schedule. The yellow line is our new mortgage with the doubled-up payments, and we can see that the mortgage gets killed off in 13 years, so less than half the original time. We can also see that the interest paid over the course of the loan (represented by the dark blue and green lines) would be way less, about $55k. That’s got to have a positive effect on LMW’s FIRE journey!
In the previous section, we calculated that after selling the car and paying back their parents, their monthly expenses would be $2605.49 per month. If we double up our mortgage payments, that expense rises to $2605.49 + $824 = $3429.49 per month, or $41,153.88 per year. That means their savings rate would be $63,900 – $41,153.88 = $22,746.12 per year.
After year 13, however, the mortgage disappears. The other costs like insurance, property taxes, maintenance, etc. don’t, but we no longer have to pay the $1648 per month that we were handing over to the bank. That means their expenses go down to $3429.49 – $1648 = $1781.49 per month, or $21,377.88 per year.
Their savings rate would massively increase, becoming $63,900 – $21,377.88 = $42,522.12 per year. Their FI target would also change to $21,377.88 x 25 = $534,447. How does all this affect their time to FI?
14 years, which is the year right after they pay off their mortgage.
This answer represents the best we can do. The mortgage is basically the limiting factor that prevents LMW from getting to FI any faster, and they can’t get rid of the mortgage by selling because their condo is underwater.
If I were you LMW, I would sell the car first. It’s causing you to bleed way too much money every month. Yes, it’s going to be painful since you’ll will be forfeiting the money you lost on it, but better to rip off the band-aid than continue bleeding. That immediately kills your highest interest loan. The money saved can be redirected to pay off the loan to your parents.
Next comes the 6 months of living expenses. Put that money into a high interest savings account or money market fund earning 4%. Because you hate your job, it’s good to have this FU money set aside in case you need to quit or take a leave of absence to fix your health. You don’t have enough money to never work again but this gives you the ability to take some time off to recover. Never prioritize money over health. Once your health is gone, no amount of money can buy it back.
Then invest toward your FI goal. Once you reach it, throw every last dime you have at your mortgage until you kill it. This is only under the condition that your interest rate stays at the very low rate of 2.69%. If that changes in 4 years re-evaluate. At that point if it’s above 4%, you’ll need to stop investing and kill your mortgage as quickly as possible before you can invest again.
What do you think?
Being chained to an underwater mortgage while having a hateful, stressful job is a horrible combination. In this case, unfortunately, LMW screwed themselves over by saddling themselves with debt that forces them into that exact suituation. The only way LMW can hope to get out of it is to sell the car, pay off their non-mortgage debt, restart their investment journey, and in 14 years, hopefully be able to pay off their mortgage and reach FI. What do think LMW should do? What would you do in their situation?
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