Yesterday I wrote about my necessary expenses detailing what our spending obligations are every month.
The final number may have been staggering to some — $6,593. It was staggering to me. That’s approximately $80,000 a year… in after-tax dollars… without stepping in a restaurant or including any entertainment. I didn’t even include buying a stitch of clothing (no, I’m not a nudist.) And this doesn’t include saving a dime for retirement.
Yesterday I said, “It’s one piece of the financial picture, but I feel it is an important one.” It’s a damn good thing it is only one piece because it looks like a depressing piece.
Today, I’d like to broaden the scope of the financial picture with one key thought sometimes we pay more now than we are going to in the future… and we can predict exactly how much.
All the mortgages and real estate investments are 15-year mortgages to grab the lowest interest rate possible. Typically people have 30-year mortgages which allows them to make smaller payments. If I had done this, I’d believe I’d shave off a couple of thousand dollars from the nearly $7,000 we pay in mortgages (PITI). Some of the investment properties would actually be making money.
In addition, we’ll be making car payments for the next 5 years on average. However, we expect to continue driving the cars for around 10 years, so the car loans will drop off this report. When I amortize this expense across the expected life of the cars, it halves the cost of the car loans, which is a savings of another $600 a month.
Finally the day care number will only get cheaper as the kids enter school. I’ll be adding other expenses (school supplies come to mind), but as that goes to zero or necessary expenses get cut further.
I did a little math taking out the day care, amortizing the car loans over 10 years, and giving myself a $2000 mortgage discount to account for the difference between 15 and 30 year mortgages. With those numbers, admittedly rough numbers, the necessary expenses come out to just under $3000 a month or $35,000 a year.
An interesting thing happens after the 15-year mortgages are paid off. At that point, the mortgage calculation with PITI becomes just TI (taxes and insurance). (Okay, there’s maintenance as well.) The income from the investment properties (hopefully) continues to be at least $4000 a month. It is impossible to accurately project how all our expenses will shake out in 15 years, but did a little back of the envelope calculation. It turns out that the $4000 rental income would likely cover taxes and insurance for all the properties, including our primary residence, transportation, dog care, groceries, and utilities. In fact, it looks like it will cover all that, with $500 a month left over. I’m not expecting that $500 to really exist though… it will get eaten up by inflation and the maintenance of the properties that I glossed over above.
We’ll hope that everything goes according to plan. It won’t. It never does. However, paraphrasing words that the great Bill Belichick has said hundreds of times, “We’ll make the decisions that we feel are best for the team and go from there.”