It’s been far too long since I’ve reviewed my monthly necessary expenses. For those who aren’t well-versed in the term, it’s expenses that we have to spend every month… things like heat, electricity, car payments, mortgage payments, insurance. The idea is that as we minimize these expenses, we lower our financial obligations and get closer to financial freedom.
It’s one piece of the financial picture, but I feel it is an important one.
Real Estate (Residence)
Mortgage – $2,622.82
This is a PITI number. Pity it isn’t smaller, right? Sorry, I couldn’t resist. PITI is short for principal, interest, taxes, and insurance. Since it bundles all that in, it is a good basis for determine how much we pay for housing. It is worth mentioning that I should tack on another 10% to account for maintenance.
Loan = $430.86
Insurance = $98.01
Gas + Maintenance = $100.00
Loan = $753.19
Insurance = $78.46
Gas + Maintenance = $100.00
Total Transportation = $1,560.52
We recently bought a Subaru Forester and a Acura MDX. Prior to the purchases, we had cars that were, on average, more than 10 years old, and not well-suited for our growing family.
Our average interest rate on both of them combined is under 1%. I consider that very good debt. Even if I won the lottery tomorrow, I probably wouldn’t pay them off early.
The gas is an estimate. It may seem low to you, but I work from home all the time and the wife does much of the time. The plan is to get my credit cards registered with Mint and/or Personal Capital and get a better view of our spending on these variable costs.
Technically, it is less than that now since our youngest son is only about 4 weeks old and not eligible for day care yet. When he is though, this will be the monthly number.
Much like gas above this is an estimate. It is probably more than we actually spend as we are pretty frugal and the military commissary’s prices are very good. Additionally, if we were to take the view of necessary expenses, this number could be much lower. We could subsist on beans and rice for awhile (but then we’d have much back, right?)
Gas = $134.92
Electric = $90.08
Water = $27.49
Cell Phones = $90.00
Internet = $52.00
Landline = $3.00
Total Utilities = $397.49
Remember when I said the above gas and food were estimates? These aren’t. I went through our gas, electric, and water bills for the last year added them up and divided by 12 to come up with a monthly cost. The cell phone number is price for two monthly all you can use Straight Talk plans as detailed in my Best Cell Phone/Plan Savings Today article. The $52 is what our cable company charges for internet and our landline is around $3 in Federal Taxes with our Ooma VOIP. Okay, I estimated that $3 number.
While some may argue that internet is a necessary expense, it is extremely necessary for me to earn my income. For the amount that we spend, it is one of the best bargains around.
I should break this down a little more, but it includes the cost of food (again estimated), nail trimming, vet visits, emergency care (it happens sometimes), and boarding costs when we are on vacation (the biggest expense). At least we do save money with DogVacay.
If there’s interest in me breaking this out in the future please leave a comment.
I really need to beef up my insurance. Over the last few weeks, I’ve mentioned this a couple of times. Right now my insurance category includes life insurance and valuable insurance. This expense is mostly life insurance as the valuable insurance is just my wife’s wedding ring.
That said, I’ve included multiple home insurance policies in the mortgages and car insurance in the transportation section. So I have more insurance than it might initially appear if you look at this section.
Real Estate (Investments)
Rental Property #1
Expenses = $1989.93
Income = $1500
Profit = -$489.93
Rental Property #2
Expenses = $1296.18
Income = $1250
Profit = -$49.18
Rental Property #3
Expenses = $1031.48
Income = $1250
Profit = $218.52
Total Rental Property Expenses = $4317.59
Total Rental Property Income = $2500 ($4000)
Net Rental Property Losses = $1817.59 ($317.59)
There are multiple ways to look at this part of my necessary expenses. From a purist standpoint, it is $4317.59 in monthly obligations. That’s a huge number. However, when the properties are rented, which is a vast majority of the time, the net necessary expense is $317.59.
I should make a couple of clarifications. Expenses are “all-inclusive”… they include: mortgage, taxes, condo fees, insurance, etc. It’s worth noting that all the mortgages on these are 15-year mortgages. I could have lowered payments and been cash-flow positive by going with a more traditional 30-year mortgage, but I want to get these properties paid off sooner and working as part of our retirement plan. The overall bigger picture trumps the necessary expenses snapshot.
For more detail on my real estate “investments” (we are somewhat “reluctant landlords”), see about our real estate “empire”. Since that article we bought the third rental property which, you can see, is cash flow positive.
If you add up all those expenses, our monthly obligations come to $6,593.39. I’ll save my reaction (which included multiple four letter words) for tomorrow’s post where I give a little more insight to these numbers.
Regarding your investment properties; I am looking into buying a rental property and am thinking due to the tax code it makes much more sense to lower the payment by increasing duration since you can deduct the interest payments from you rental income. You currently don’t have positive income from them so it would seem you are missing out on a large benefit of a rental. Did you give some thought to this and still decide the positive outweighed the negative? I will soon be deciding which type of mortgage to take out myself, and am leaning towards 30yr.
Lazy Man says
I’ve given a little thought to 15-year vs. 30-year mortgages before, though that wasn’t really in the context of a rental property. I’m not a tax specialist, perhaps the furthest thing from it, but my thinking was, pay the least amount of interest possible (lower rate and lower time does that) and get the properties producing significant income by the time I’m 51, not 66.
One thing that I thought about is that if you do a lot of real estate investment, the banks might not lend to you… you might not have the income to cover the monthly payments. So if you really wanted to go crazy with the leverage (I’m trying not to because it can be dangerous), you could keep those monthly payments down by choosing 30-year mortgages. With lower monthly payments, it is more likely you’ll get approved for the next property. More importantly, if you have lower payments, you’ll be better able to withstand a hardship and be able to get by with a smaller emergency fund.
That said, I don’t know if there is a mathematically right answer here. It’s a really tough question and I think there are pros and cons to each. I think taking the 15-year was riskier, but potentially more rewarding.