What to do — and not do — with your former mortgage dollars
With the decision to stop paying our mortgage, our immediate expenses dropped by nearly $3000 per month. That saved us over $32k in 2011 alone.
So what did we do with all that â€˜extraâ€™ money?
Well, first of all, about $6000 went to pay additional income tax, now that we no longer qualified for the mortgage deduction. (If youâ€™re drawing wages when you decide to default, one of the first things you should do is recalculate your withholding to avoid a nasty tax surprise later.)
We also spent $1875 to take the kids to the Smithsonian in Washington DC for our first family vacation in four years.
But mostly? We saved. And saved, and saved:
- we set aside extra money for moving: truck rental expense, first and last monthâ€™s rent, plus a generous security deposit;
- we bolstered our emergency fund, which had seen attrition over the preceding low-income years due to a car accident, a death in the family, and (ironically) major house expenses;
- and we contributed to tax-advantaged retirement and health savings accounts.
Thatâ€™s it. No major new purchases. No minor new purchases.
Anytime you experience a sharp increase in available dollars — whether from increased income or a drop in expenses — the biggest danger is lifestyle inflation. You know, where you start thinking â€˜Hey, now that weâ€™ve got more money, I can afford to buy that …â€™
The problem with a mortgage payment that ate two-thirds of our income wasnâ€™t the reduced lifestyle; weâ€™d found ways to cut back on spending that actually increased our overall happiness. What was slowly destroying us was the need to gut our emergency fund and retirement savings. We were trading our house and our good credit scores to get them back. If we started spending more, it would defeat the whole purpose.
Money? What money?
Alert readers will have noticed that our budget contains a line item for â€˜Rent or Mortgageâ€™. Thatâ€™s because I calculated our future rent right into our monthly expenses from the beginning, even though we arenâ€™t actually paying it yet. As far as our spending was concerned, that money didnâ€™t even exist.
And yes, that means that for more than a year, we have been saving around 65% of our income.
If youâ€™ve been paying your mortgage but have determined that default is your best option (and it wonâ€™t be, for everyone), find out what you will need to pay in rent post-foreclosure. Craigslist is good for this. I recommend estimating a little on the high side, as rents are generally rising.
Then sock that money away. Hide it from yourself if you have to. Do a little Jedi hand wave: These arenâ€™t the dollars you are looking for.
Whatever you do, do not succumb to lifestyle creep. You need a sustainable way of life that does not depend on the inherently temporary condition of free housing.
Going through a foreclosure and a move will be chaotic and difficult, no matter how thoroughly weâ€™ve prepared. But I wonâ€™t have to worry about whether we can make ends meet — because weâ€™ve already been doing it.