Mortgage free ?

Mortgage free , a goal a lot of people aspire nowadays. It’s how I got started viewing my finances differently and more specifically my take on risk. I went on paying off as much as I could as fast as I could. The math was extremely simple, I had an interest rate on my mortgage of 5,35 % and was getting 0,25% or thereabouts on my savings acount.

This turned out to be a smart move , especially when bying a new house, there was some money left after selling the old house and clearing the old mortgage. This made the proces easier , there was no need for stretching towards the maximum lending capacity. We carried on paying off the mortgage at the same pace. The math was still in out favor, despite getting a significant lower interest rate of 2,7%. In the mean time the savings account produced only 0,05%. Full disclosure , I do not take into account any tax reductions or other tax advantages because they differ for everyone.

At some point I became aware of the fact that nothing in terms of housing was cheaper than any of the alternatives. Including a maintenance provision. All other alternatives like renting or buying a smaller house are more expensive. Even social housing is costs more , which I do not qualify for.

So all other alternatives are pricier. I started wondering if my extra mortgage payments still made sense. Isn’t it better investing these sums in other more liquid investments ? The mortgage will take care of itself in the remaining time the mortgage still has too run.

For me the answer was yes, simple math with a return of 5% gets me more money at the end of the line and the money is available, it’s more liquid.

Isn’t this simply hedging the mortgage against more riskier investments ? Yes it is , I am using the time and the debt in the house too take on more riskier investments. Brings us back too risk, what is the risk ? I live in the house and in the current market there are no opportunities in finding something cheaper. The biggest risk is I can’t afford the mortgage payments anymore. And this would mean finding cheaper housing when that happens, which isn’t available.

It’s now time for kicking my habit of extra monthly payments and the little voice in my head saying , just get rid of the mortgage ! So I am taking these monthly extra payments and putting them in my ETF portfolio. Then at some point , likely faster I will simply have the remaining mortgage sum in liquid investments , which means I could at that point pay it off in full.

A very reasonable risk if you ask me.

2019 goals

A new year and new goals, this will be my first time setting goals , up until now I mostly used to do lists and loosely set goals. Resulting in missing real focus. In turn running up the to do’s on the good old to do list.

First up the finance side of tings. Which can be roughly divided into 2 parts, mostly cost reduction and building wealth. The easiest way for reducing costs is paying off the mortgage which is the only and biggest debt. Last year saw the biggest reduction so far. It’s so easy it’s hard not simply keep on doing it. However I am now at a point which all the alternatives in the market, renting or buying another house will be more expensive. I have no way of living any cheaper. The mortgage needs paying off so I will continue doing the extra payments but the focus needs too be on other more lucrative investments. So the goal for 2019 is paying off an extra 1200 euro’s. That’s it.

Which leaves the other part , my stock and ETF portfolio. A fixed amount will be added each month, divided over ETF’s and handpicked company’s. In which dividend payments will be one of the main factors, as part of my passive income strategy. My goal is getting my dividend payments up too 1500 euro’s per year. In 2018 the total got over a 1000 for the first time, 1021,80. A small milestone. Let’s see if my new goal is achievable.

Something new I got into in 2018 and developed more during the year is options trading. Which turned out too be the suprise of 2018. I used too write options every now and then on stocks I wanted too buy, not really consistent and just for fun. Mostly I didn’t get the stocks and I tried again. After some time I started making this a more systematic approach and I also started writing options on stocks I had in my portfolio.

At the end of 2018 I also started using part of my cash buffers as collateral for writing options. Usually you will have a good idea which part of the buffers you don’t need in the coming month, so it’s pretty safe using a part of this as a way for generating extra returns.

All in all this approach yielded a nice 10,21% return on risked capital. Not shocking in the option trading world but for me an encourachement for learning more about it and applying this in 2019. I will write about my learning process in the option series on this blog.

So 3 finance goals, keep downsizing the mortgage , generate more passive income and enhance the result with option trading.

But without my health all the money is worthless. 2018 has been a year with a few stark reminders of my permanent brain damage. I took on too much in some instances and got into a few nasty periods afterwards. 2019 is all about finding and keeping the balance again and really accept my new me. I can’t keep going on adding more work each time until I crash. The focus will be on being stronger, training the left side of my body and going back too the start of my revalidation process and taking and celebrating small steps forward. I will elaborate more on this in coming blog posts. For now have a very good 2019 !

Control your finances, but why?

Nice oneliner, isn’t it? But having control over your finances, what’s that exactly ? It’s knowing exactly whats coming in and going out each month, for starters. It leaves you with an exact number you have left each month. And you can go figure out what you can or must do with it.

In the Netherlands, where I live the national budget institute, which advises people on responsible finances has a lot of different data on budgets, savings etc. It says only 27% of all Dutch people keep a monthly cash flow report. And 25% has savings less then 2200 euros. Which is roughly 1,5 months of expenses if you don’t a lot of those. A lot more numbers are available but you get the idea.

It’s simply a fact most people don’t know their financial status from one month to the next. Which doesn’t have to be a problem if you simply spent less than you make. Which leaves a buffer automatically. Which in most cases end up in savings accounts.

But it pays dividends knowing how the numbers look and taking it as a starting point in thinking about your financial future. Best case scenario is thinking about how your surplus can make you money, worst case if you come up short each month how too fix that issue.

Let’s start easy, by making a simple monthly balance in a spreadsheet or on a piece of paper, doesn’t matter. You first write down your income, for most your salary. Then deduct your mortgage or rent, your utilities bill, all your taxes etc. Then if applicable monthly tax breaks and or subsidies. (which vary per country.)

Which leaves an amount of money which you can spend, but we’re not there yet. You need too eat. If you haven’t got an exact number on your groceries make an estimate. Deduct that and you have your free spending money for that month. Well most sensible thing you can do is make a fixed reserve and deposit in a savings account. Anyway now you know more or less what comes in and goes out each month. Easy enough right ? Your monthly budget is alive !

With what you have left , you can start doing stuff, spending it , or saving it, or reducing debt. It doesn’t matter really. You now now a figure which you can safely allocate or spend for this month. Start saving for future calamity’s is smart, replacing broken washing machines, unexpected car repairs and so on. You name it, it will happen and an nest egg will help you overcome such things.

Looking up all your monthly costs will take some time when doing it for the first time. Most don’t really changes a lot during the year and once you have 1 month mapped out, the rest will be less work. For inspirational purposes I added an example, a very basic spreadsheet as a start, click here Monthly budget . Most months after the first initial set up it will take about 5 minutes making a new one for the coming month. Maybe 10, but 5 is an amount people tend to want too spend on not so fun stuff, so just stick with 5.

But why ? Well stress which comes directly from financial issues is one of the most recurring causes of stress. A nagging feeling not knowing if you come up short or have enough money in reserve or when having have debt is a large amount of stress people experience on a daily basis. Im my experience starting out with a budget will make things a lot clearer and is a good starting point in solving financial problems one might have. Your feelings get to be facts and facts make solutions possible. You can now start improving your financial situation.

November 2018 – Dividend

Its the end of November and time for another albeit short dividend report. Let’s see, as usual November is a slow month in the dividend department. This year even more so as I sold ONEOK this year which paid dividend in November, which leaves Apple as the sole dividend paying position in my portfolio. So a 13% drop in dividend income compared to last year. Next month the last dividend update and a final report on 2018.

The very short list :

DateStockCurrencyAmount
15-11-2018AppleEUR9,69
TotalEUR9,69

Simple steps towards financial stability, paying off the mortgage.

A new series, aimed at achieving financial stability with rather simple steps. The first is aimed at one of the larger monthly costs for most people, putting a roof over your head. A lot of people at some point buy a house and get a mortgage. A long road of monthly payments lies ahead, there is however a easy way in getting the mortgage paid off a little faster, or a lot faster.

It only takes a periodic extra payment and persistence. Most mortgage lenders allow an extra amount of money being paid off per calendar year , or unlimited in some cases. Let’s look at an example, we start out without any extra payments.

Let’s take a few easy numbers, say I buy a house of 200000 , and get a mortgage for the same amount , 30 years until the mortgage ends and an interest rate of 3%, fixed at 30 years. There are variations with fixed interest running for 1, 7, 10, 20 years. But I keep it simple. So with these metrics the monthly payments will be around:

Mortgage 200000
Interest 3%
Monthly interest500
Monthly repayment555,55
Total monthly1055,55

So this is the example for the first year, depending on the type of mortgage the numbers can vary a bit, but it’s the about the principle, not so much the exact calculations of the numbers.

So if you pay an extra 100 dollar a month, each month in the first year this will lead to the following :

Your outstanding debt will be 100 less , divided by the remaining months left it will lead to a slightly lower monthly repayment. Combined with the lesser amount in interest payment you will save a small sum, around 0,52 cents for the first month.

As you can see , because of the monthly payments the mortgage costs gets recalculated each month, leading to a slightly larger decrease in the amount of interest you pay. Now a little trick, the amount you save in the first month you add up too the extra payment in the next month, so instead of 100 you will pay off 100,52 , then the recalculation will be a bit more and you will add it up again for the next month. And so on. Creating a snowball effect on the monthly payments while not having to shell out extra money. This is the power of compounding , even if it’s debt we are talking about.

So a set of very simple steps will decrease your mortgage debt while not increasing your monthly payments too much, and at the same time more stable in the finance department. It’s just a matter of getting started and hanging on.

Optionality

Optionality , one word we don’t come across a lot. At least not in Dutch, more so in the English speaking world. Nonetheless a very interesting concept. When searching for the right way in accessing risk I discovered the work of Nasim Taleb, who has written a lot about risk and fragility in our modern society. In his book antifragility, he explains how fragility in systems work and teaches a lot about risk assessment. At least it was an eye opener for me.

Risk is often misjudged or risks are overlooked. This happens in all sorts of environments, from surgery right up when you sign for your mortgage. My search was mainly focused on finance risks. As it turns out , having options helps a lot and is very important.

It all comes together in how we asses risk , when you have more options, you have more protection against risk. But what does optionality means? And how do you apply this in everyday life?

Optionality is the possibility in making choices without the obligation too choose. Abstract yes, or maybe should I say. Let’s talk about it some more in terms of my favorite topic. Finance. If you have money left at the end of the month , you have options , let’s say you can buy a book , pay off a debt or whatever tickles you. I am not debating what the smart move is here, but options you have. This is not exactly what is meant by optionality, hang on we are getting there.

When you come up short every month, there are no options. You can only borrow beg or steal. All of which are bad options , basically no options. The amount of pressure in finding a solution will most likely work counter productive. Or you can’t see any valid solutions any more let alone think about alternatives.

When you are free to do what you want , or more or less anyway, this is were the real power of optionality comes in play. Imagine that in any given job, as long as it pays minimum wage, you’ll still be able to cover all monthly costs. It will liberate you from a very big pressure in life, the need too making X amount of money for years on end.

Now that stress is out of the way, your job is not one you will have too keep at all cost. Loosing it isn’t life threatening anymore and it opens up your vast brainpower thinking about other options in life. You can change jobs , try out a new position in your company without the fear of failure.

In any case things start moving again, not driven by that sole risk of loosing a job and therefore an X amount of money. Money is no longer the only risk you need too manage. When you have high (financial) stresses it clogs up your brains and devotes a lot of brain power in finding solutions when that sole risk pops up. It also leads your brain in making a lot of wrong short term decisions which will be wrong in hindsight. It most likely make the risks you are trying to avoid bigger instead of smaller. If that’s all out of the way decisions tend too be more balanced, better thought out and make for far better choices over the long term. Some say it unlocks long term thinking.

It leaves space for creative thinking, thinking up new projects , planning all sorts of cool stuff and actually finding time and energy in trying some of those projects. In other words you think of new options. And the projects you do , fail or succes make you think again and come up with even more cool options. The power of the multiplying options if you like.

Lessening financial stress is a very good starting point in search of a life with less stress and more opportunities. Minimizing the necessary monthly cash flow will give a sense of ease and space for you too work on ideas and projects which are buried in the freezer and really get hands on with them. Inevitably this (financial) risk reduction will bring you optionality.

Why buying a home is not an investment, but still a good idea

With the housing market being at pre crisis levels again and people desperately trying too buy a house the euphoria is back again. The sort of euphoria were people count there paper profits as actual profits and fantasize what they can buy with it.

A strange phenomena which returns every time housing price rise, so I have been thinking a bit about and the only logical conclusion for me is, stop looking at the house you live in as an investment. But it’s still a good idea to own your home.

There are only 2 options when it comes too getting a roof over your head, renting or buying. Basically renting is paying for the use of the house and the owner taking the risks, which in return you will pay a premium for the owner too cover his expenses, inflation and profit. Too keep up with inflation rents are raised with a certain percentage every year. Fortunately in most country’s rents are regulated. And in higher segments during crisis you can get nice discounts. But for the most part rents tend too rise.

When buying a property , you carry all the costs , maintenance insurance taxes and so on. You can simply buy a house with cash savings but most people will have to take out a mortgage on the property. This is a different risk landscape, the bank will loan you the money and will ask a certain interest percentage for risk covering and profit. But the house is yours, and here is where the fun starts.

At a certain point in time when you buy the house, a large part of your living expenses is set for the duration of the mortgage , mostly 10, 20 or 30 years. So your monthly payments are the same. When renting you will see a raise every year.

The monthly mortgage payments consists of interest and a part of the initial loan the principal (the part of the loan you pay back to the bank and thus lowering the outstanding debt). Now the fun bit, most banks permit paying back extra on the principal , so your monthly expenses will go down, you will pay less interest on the remaining loan and the amount you are obligated in paying back each month also drops. What you can do with this extra money is food for another post.

You have a certain control on what the roof over your head will costs you each month, the most significant is the absence of the yearly rise in rent. But buy paying back extra you will own your house faster and save paying future interest. This can add up quickly.

So why is owning your house not an investment ? Well simply because it doesn’t yield any income. No interest will come your way, like when you have a savings account with a bank, nor will there be dividend payments like when you own shares in a dividend paying company.

The only way in cashing in is selling the house. You should not consider yourself richer because of the paper profit which at some point wil be there. Your house is simply an expense which your are obligated inlaying each month , but you need too live somewhere.

Why it’s still a good idea? First you own the house and you can control your monthly expenses more easily.
Second, buy simply having the option repaying the mortgage faster you can get your costs down. Instead of the sure rise in living costs you have when renting. And historically housing always been following inflation (minus the bust and bubbles in the meantime) So after you are done living in your house and downsize start renting after retirement there wil always be a sum of money left over after the sale. You simply gain an asset by doing something you need , having a roof over your head.

Why not rent ? Renting can be cheaper in some cases, when you need the excess money after retirement and downsize. When you move a lot for work. But most people live in a house for years, making buying almost always cheaper than renting. It’s also the easiest way to control a large part of your monthly expense.

But just remember a house you live in is first and foremost a roof over your head and not an fictional ETM machine which you can use for your daily groceries. So no investment but still a good idea.

2016 Mortage payment

It’s a new year which means I can pay off another 15% on the base sum of my mortgage. And that will save me around 100 Euro in interest payments each month. For the duration of the mortgage.

Most people still think I am crazy, because I am missing out on my tax deduction on the interest payment. Well I still feel differently about this. Since I am paying this interest in the first place and I also pay tax on my savings. Which yields a whopping 0,75% in interest at the moment. And I am paying around 5% on the mortgage.

for me it’s an easy way to save money each month without having to do anything , and I need to pay back the loan anyway, so why not now. It might not make for a spectacular story at a party but saving 5% is exciting enough for me. More people should do it in my opinion. Debt is debt , no matter what you have as collateral. Your net value might include the value of your house , but you have to live somewhere. So having a mortgage free house will help you a long way too financial independence. Just do the maths.

The Mortgage, paying off and how to begin.

Well, it’s getting less, and is making a significant impact on our monthly expenses . so far it saves about 115 Euro a month. Most people will say that’s not all that much.

It’s a nice dinner for two every month for example. Some money you can spend on something else than interest.
It gets more interesting if you save that money and pay your mortgage off some more. Let’s take an example.

For instance you have a 200.000 mortgage. Let’s take 5% interest. I know it’s lower nowadays but a lot of people are still around 5% from before the 2008 crisis.
In the Netherlands it was all the rage to have a mortgage where you only paid the interest and didn’t pay off the debt every month.

This works well if the market keeps going up and when you sell the house is worth more than the original price you paid.
Not so much now , and a lot of people are either waiting it out or some start to pay off. the latter being a very wise decision.

Back to the example , Let’s say you pay 20.000 which saves you about 1000 per year in interest. (not taking into account any tax benefits etc.)
Save that 1000 and pay off again at the end of the year or better monthly (if possible). Saves another 50. And next year you can pay off 1050 , saves 52,50.

Etc etc, well you get the drift. This goes pretty fast without costing any extra money per month except for the initial payment. You simply start. It’s that easy.