Monday, August 20, 2012

Trying to Save More Money

Matt and I are in the final stretch of finalizing our house design and the construction budget. With a construction loan, we will have to pay a down payment + closing costs on the total cost of the house. Then, at the end of construction, we will have to pay closing costs again to covert the construction loan into a 30-year fixed loan. 

We haven't yet filled out the bank paperwork to see what we can qualify for. I'm terrified that we won't have enough money. I'm so eager to get settled and to take advantage of the amazingly low interest rates right now, but it's not the best time for us since I'm only working part-time. 

If we can get through the initial chunk of change required for the down payment + closing costs, then we need to work really hard to save money for the rest of the construction process. We're going to need money for the final closing costs + we'll need to pay midwife costs if I'm able to get pregnant again + we'll need money to cover my maternity leave when we drop back down to one income. 

I feel like we've been in save-save-save mode ever since Henry was born and we dropped down to one income. It's a hard place to be. I hate scrutinizing every single purchase, but I know it will be worth it in the long-term. I'm eager to get through this final saving stretch. I estimate that I will have a full-time income again in April 2014, if all goes well with my school. Shoot; that's still 1.5 years away! 

Oh, well. In the meantime, we really need to focus on living on Matt's full-time income and banking my part-time income. To get us back on track, I returned to our list of budget categories and made sure they were updated. We've recently started subscribing to Netflix again. Also, since we purchased a 1/2-acre of land, we have to pay a small mortgage payment every month. With those two additions, we were spending more than Matt was bringing in. I adjusted our allowance for groceries to account for the difference. Now the numbers match up; we can technically live within one income. 

I added up all the things we purchase with our credit card (groceries, entertainment, eating out, etc.) and came up with our total allowance for the month. I entered that number into an app on my phone called Spend Free. When we're out and we spend money, I simply subtract it from the total in that app. When we get to the end of the month and start to run out of money, it forces us to be even more conscious with our spending (such as not shopping at Whole Foods).

I know I've written a handful of posts about this process because we start doing it for a while, it works really well, and then we drop the habit because it's just not fun to live within a strict budget.

But here we are again. It's time to really prioritize saving and make it through this particular stretch in our lives. It will be so worth it once we get to the other side. We'll have a home in which we want to raise our family, we'll have a mortgage that we can afford even if we're living on one income, and we'll be up to two incomes again (so we can save more for retirement and trips and a swimming pool). 

A participant in the current round of Purposeful Conception recommended the book Start Late, Finish Rich. I got it from the library (free!) and have read the first chapter. The first chapter is about identifying the little ways in which we waste money (called the "Latte Factor" after the habit of daily trips to Starbucks). Those little bits of spending every day can add up to quite a bit over a week, month, and year, especially if you take that money and invest it in a retirement account where it will accrue compound interest. 

The book seems a little outdated (I'm not sure the stock market is doing as well as his projections from more than seven years ago), but I'm definitely getting something out of it. It's already inspired me to track every purchase with Spend Free, which will keep us very conscious.

As tedious as it is to track all of our spending when we're out, it's also a very empowering process. It helps me feel like our finances are within our control. We're choosing what we want to prioritize as a family right now and taking concrete steps toward our goals. 

I hope we stick with it this time!

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Stephanie said...

We follow the same sort of budget structure too. There are categories our expenses fall under but mostly on a weekly basis we look at food and entertainment. Our other expenses are pretty much fixed and don't vary from month to month, like rent, netflix, etc. But grocery shopping and trips to the movies or out for dinner can add up and often tip the scale. So we give ourselves a limit for these two categories and I find it much easier to stick to it. I even find us saving money here and there.

As a part of this process, we ended up adding more to our grocery budget. Too many times we found ourselves thinking there was nothing to eat at home, so we would spend more money at restaurants. Now that we added $20 to our groceries instead of spending 20-50 out to eat, it seems to be making a huge difference.

It's not easy! But consistency is key. And then watching your savings, or at least not going into any more debt over the months becomes really motivating and rewarding.

Good luck!

Sarah said...

Budgeting is so hard, especially when it feels like you are constantly analyzing every little purchase. It's exhausting.

We've been working on figuring out our budget. The biggest category is groceries and I'm just not sure how to cut back there. Eating unprocessed, organic food is a priority for us, which as you know, is expensive. I'm going to check out Boggy Creek's farm stand this week and hopefully start getting our eggs and produce there. My husband isn't terribly interested in cutting back our grocery budget because he sees it as an investment in our health and a way to support a more sustainable food system. Unfortunately, that means we have less money to save for retirement... It's always a trade-off, isn't it?

It sounds like you and Matt are on the right track. And as you said, this period of really limiting yourselves is temporary.

katharina said...

Have you thought about about starting a food group to cut down grocery bills by buying in bulks together with others? That way you get the food you want but more reasonable. Check this link for more info
I´m thinking of starting a food group but have to check norwegian suppliers or import regulations first.

Rachel said...

With years of private school tuition and another kid planned, this doesn't sound temporary to me. Your lifestyle choices have stretched your resources to this point.

Frankly, I'm surprised the builder let you get this far without loan approval, that seems odd. It's nearly impossible to get a construction loan without that down payment, and those loans are not as common and harder to get than plain old mortgages. Your builder should know that.

Sara E. Cotner said...

Yes, Stephanie! I totally agree!

Hi, Sarah! It was such a relief to talk to you about how much you and Neil spend on groceries. Matt, Henry, and I went shopping yesterday, and nearly every everything we put in our cart was organic. That's so important to me, but it's so, so expensive!

Hi, Rachel: We are sending Henry to private school for two years, but since he's only 18 months, it's really only a daycare. All daycares are private at that age. There is no option for free, public daycare where we live. Yes, we are sending him to a Montessori daycare which is more expensive than the average daycare, but we would still have to pay for daycare regardless of whether it was Montessori or not.

I guess I was hurt by your assertion that our "lifestyle choices have stretched [our] resources to this point." I feel like Matt and I work really hard to live within our means. Although it's hard to make it through a 20% downpayment, we are actually building a house that is half of what we could technically afford (according to online calculators). Our end mortgage will be less than we are paying for rent right now (although we will end up paying slightly more when you factor in insurance and property taxes). Everything is so tight right now because I am choosing to only work part-time so I can be home with Henry right now, but that's important to us, too.

beth said...

I'm really excited to hear more about the process and construction of your house! My partner and I are years away from that achievement, but I enjoy hearing about your plans! I hope you share pictures when the time comes!
My main budgeting break-through was when I realized that produce keeps better in closed containers in my fridge (I actually only got the containers to keep my fridge more organized). I'd just leave whatever in a bag or plastic container from the store and it would go bad in less than a week, so I was always throwing out and replacing things.
Ugh. Oh well, better late than never! Also, have you considered container gardening? We live in an apartment and I have a tomato plant that's doing well on our porch, along with basil and other herbs. The tomatoes aren't ready yet (soon!), but the basil and herbs are DELICIOUS. Better than any I've ever had from a store.

Rachel said...

I'm sorry I sounded harsh, and I'm not telling you what you can afford, but it isn't like you have a budget crisis from an emergency or a layoff. You chose this. New construction, having kids, private school, staying home, eating organic, and living in a hip city are all great lifestyle choices which I have made as well, though not all at once. We all have to own our choices.

When I got my construction loan, it required 20% cash plus we had to own the land outright so they had the first lien on it. Overbudget changes (which happened constantly) we had to pay with cash. My construction loan was more difficult than my three previous mortgages combined. There are certainly other options, but I'm confused that you bought land without getting pre-approval, and that the builder didn't make you get pre-approved months ago.

Sara E. Cotner said...

No worries, Rachel! I'm glad we're having this conversation. I understand the context of your assertion much better now. You're totally right: we are very fortunate that we are "tightening our belts" because we are trying to make our dreams happen, not because we're forced to by illness, a lousy economy, etc.

Did your construction budget have contingencies built in?

I'm not sure why our builder hasn't asked us to get pre-approved yet. As for the land, our construction loan will be for the construction + paying off the lot.

Rachel said...

Our lender only did construction loans if you owned the land and paid the overages. I shopped a billion banks because construction loans were absurdly expensive -- and we had the money to (theoretically) pay for the half the project in cash and owned the land plus our existing home outright.

Our builder warned us on the first meeting that the loan would be harder than I expected. Granted, this was in the dark days of home loans during the recession, so it has to be at least somewhat easier now.

Sara E. Cotner said...

Hi, Rachel:

Our loan process hasn't been so difficult. Our lot loan had a (relatively) high interest rate at 5.75%, but it will be paid off with the construction loan (4.49%). Then we'll move into a 30 year fixed loan (we're hoping interest rates stay down in the 3's!). It's crazy how much interest rates and the loan process can shift every couple years. The couple that bought our last house paid $20,000 more for our house, but because interest rates were lower, then ended up owning even less at closing than we did.

Matt said...

Hi, my wife love's your blog and I read it a bit as well. It's great to hear that you're looking into your finances and figuring out what you can do to save more. I've recently become addicted to a personal finance blogger who goes by the name of Mr. Money Mustache. He's got a lot of great ideas for saving money on his site. Here are a few of my favorites:

The Loves said...

Hi Sara!

I am curious if you could get into the process of what it takes to buy land and build a sustainable (modular) home. Where did you start? I am particularly interested in how to find land with with potential to build, cost of land preparation (plumbing, electrical...), and the process of putting a down payment in and saving for a mortgage.

I am not quite sure where to begin; any insight is greatly appreciated!

Love your blog!


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