Tuesday, October 16, 2012

What are we saving for?

Last weekend, Brian checked our bank balance at the ATM and noted that it was about time to make an extra payment on our mortgage principal. Ever since we first bought this house, we've been making these lump-sum payments pretty much any time we had cash to spare (beyond the amount we keep on hand as an emergency fund). We did this partly because we're both really uncomfortable with debt and eager to get it paid off quickly, but also because, in the present economic climate, it seemed like pretty much the soundest investment we could make. During the first two years, in particular, we had a 30-year loan at 6 percent APY—a much better interest rate than we could earn at any bank, and a much safer return than we could hope to get in the unpredictable stock market. After two years, we refinanced what was left of the balance for 15 years at 4.5 percent APY—but by that time interest rates had plummeted to nearly nil, so a guaranteed 4.5 percent return still looked like a pretty good bet.

There's no doubt that doing this has helped us financially. If we'd simply kept paying off our original loan at the original rate, we would have paid more than $375,000 in interest charges over the 30-year life of the loan. As it is, we'll end up paying less than $40,000 in interest, and we'll have the loan paid off in less than eight years from the time of purchase. And that's if we stopped making prepayments right now; if we continue to pay at the rate we've been going, we can have the whole thing paid off in less than seven years. By April 2014, or maybe even sooner, we'll be debt free.

And then what?

For pretty much the whole time we've been together, we've been fixated on this one financial goal. For three years, all our spare cash went into a fund to be put toward the down payment on a house; once we had the house, we started working all out toward getting it paid off as fast as possible. We never really stopped to think about what to do with our money once we reach that goal. Of course, we will still need to save for retirement, and indeed, we have been doing so during this time: Brian has money taken out of his paycheck to put in a 401(a), and I put a lump of my freelance earnings into an IRA once a year. So once the mortgage is paid off, we could simply take the extra money we've been putting into the house and start feeding it into our retirement accounts instead. But when Brian suggested this, I questioned whether it would really help us. Owning our home outright was a specific goal that we knew we could reach faster—a lot faster—by paying down the principal. But would putting more money away for retirement help us retire any sooner? Probably not, because we need our jobs (or Brian's job, at least) to provide us with health care. There's always private health insurance, of course, but the costs, at least in New Jersey, are astronomical. To get coverage comparable to what we now have, we'd have to spend four figures a month—just about enough to make up for the mortgage we'd no longer be paying. So unless the new state-run health exchanges mandated by "Obamacare" lower health care costs by a significant amount, at least one of us will have to remain in a full-time job until we're both eligible for Medicare, which won't happen until 2038. And who's to say that we'll want to retire even then? We both like our jobs, more or less, and neither of them is so physically demanding that we couldn't keep doing them well into our 70s.

So while we could start putting more money away for retirement (and almost surely will), this won't really give us a new goal that we can work and save for with the same fervor we're now putting into paying off the mortgage. It almost certainly won't absorb all our extra cash the way mortgage prepayments are doing now. So what will we do with our savings? Will we continue to save just as a matter of habit? If so, where will we stash the money, once we no longer have our nice safe 4.5-percent-guaranteed investment to tuck it into? Might it actually make more sense, if interest rates remain as pitifully low as they are, to—gasp—spend more of our money?

Amy Dacyczyn addresses this question at the end of her first Tightwad Gazette book, in an article entitled, "When You Don't Need to Be a Tightwad." She says it's not uncommon for a couple to find, "after decades of pinching pennies," that their mortgage is paid off, their kids are through college, and they have all the money they need for retirement—and they find themselves "confused as to how to let go of a lifestyle that has brought order and control to their lives and that they have come to enjoy." Family and peers may pressure them to spend in ways that they don't find rewarding, and they may be unsure how to respond to kids' or grandkids' pleas for treats when they can no longer plead poverty. The solution, according to the Frugal Zealot, is to "understand that the tightwad life is not only about spending less...it's about spending in a way that reflects your values, and that should not stop if you have a billion dollars." (If the idea of a billionaire tightwad sounds farfetched, recall that retail mogul Sam Walton continued to drive a beat-up old pickup truck throughout his life, and Warren Buffett still lives in the same house he bought for $31,500 more than 50 years ago.) Thus, for example, tightwads who have achieved their financial goals might choose to spend more on environmentally sound products (like organic veggies or solar panels that have a long payoff time); they might choose to support local businesses that have higher prices; or they might give more to charity. They could also treat themselves more in ways that aren't inherently wasteful, like going out to dinner or hiring people to do the jobs they've always disliked (whether that's painting the house or cleaning the bathrooms). And of course, those who have jobs they don't like can choose to retire early—or switch to a different job that's less lucrative, but more satisfying.

So I suspect that, once the monthly mortgage payment is no longer a part of our lives, we'll be doing a little bit of all these things. Sure, we'll put away more for retirement, because it can't hurt to have extra, and because that cash cushion will help protect us against a financial crisis like a job loss or a major medical problem. But at the same time, we'll need to start adjusting to the idea that it's okay to spend more when we want to. We can ramp up our charitable giving, increasing our donations to the groups we consider most worthy (while continuing to screen out those that don't use our money effectively). We can continue to buy some of our holiday presents at yard sales, but not feel bad about filling in the gaps in the gift list with expensive goodies that we know will go over big. We can pay someone to landscape the back yard if we want, rather than putting it off until some future time when we have a free week and good weather and no troublesome muscle problems. We can buy the good orange juice, the stuff that's not from concentrate, even when it's not on sale.

It will be a big change, I'm sure. But I suspect that in time, we can get used to spending our money, and maybe even like it.
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