My wife and I moved to Delaware in 2005. The insurance agency I worked for was consolidating offices and everyone was being giving an ultimatum; transfer or lose your job. At the time, my wife was working for a hospital. The benefits were great, but her department was also downsizing. The handwriting was on the wall. Local job prospects were bleak. Relocating was our least bad option.
With a pre-approval letter in hand, we began our search for a new home. Our Realtor's advice was to "buy as much house as you can afford." We resisted that temptation knowing that my wife did not have a job lined up and I was taking the first major risk of my young career. We maintained our position that we must be able to run our household on one income and soon settled on a home in the price range we wanted.
Looking back this might have been the single smartest financial decision we ever made. We dedicated one income to our monthly household expenses including the mortgage. We banked the second paycheck whenever there was one using it to make extra mortgage payments each year and to build up an emergency fund and investment portfolio. By following this strategy we have been fortunate to never charge anything to a credit card we couldn't pay off at the end of the month.
One more thing I should point out is that we bought our house near the height of the real estate bubble. When the great recession hit, we watched many of our neighbors lose their homes to foreclosure. Why? Most of them bought their homes without downpayments (never, ever do that). The other is that they likely bought "as much house as they could afford" leaving little slack in their budgets for building up a sufficient emergency fund. When you rely on two incomes to run your household and one spouse loses their job, you're screwed.
As the federal reserve aggresively cut interest rates hoping to stabalize the economy, we refinanced our mortgage which saved us several hundred dollars a month. Instead of spending the monthly surplus, we simply left our mortgage payments the same. That allowed us to build up equity really fast. Also, during this time I wound up landing a well paying job which had an annual bonus component. Instead of factoring the bonus into our budget and spending it, we treated it as found money and used it to fund our chilren's 529 college savings plans, our retirement accounts, and make extra payments towards our mortgage. Most importantly, we resisted the urge to move to a nicer neighborhood.
Again, that turned out to be a great idea. After 6 years, that well paying job I had went away. My entire division was laid-off. We were provided with severance packages and left to ponder what comes next. Right around this time the stock market hit an all time high and so did our investment portfolio. We completed a review of our taxes and realized we would no longer be able to itemize deductions and therefore could no longer use our mortgage interest as a deduction. We opted to liquidate a portion of our investment portfolio and combine it with my severance check to pay off our mortgage. That freed up significant cash flow and allowed me to open my own financial planning practice.
Today, we still live in that same house. It's relatively modest compared to many of our peers, but it is enough to suit our purposes. That doesn't mean we won't some day look to trade up, but when we do, we'll stick with the philosophy that allowed us to be mortgage free before the age of 40.
About the author: David A. Iobst is a Certified Financial Planner™ with nearly 20 years of combined financial planning and insurance experience. He is located in Bear, DE and maintains securities and insurance licenses in Delaware, Pennsylvania, and Maryland. You can find out more about David by visiting his web site http://www.davidiobst.com.
David offers securities and investment advisory services through LifeMark Securities Corp. 400 West Metro Financial Center Rochester, NY 14623. Member FINRA/SIPC. 800-291-7570. You can email him at diobst@lifemark.com.