Photo: Post office in my hometown, photo taken October 2015.
One of the best ways to build wealth and reach the financial summit is to have a high savings rate. As I detailed in an earlier article, our savings rate had continued to increase since last June. Our goal prior to purchasing a house was 50%, but now a decent chunk of our income will be going towards the mortgage payment. I do include a portion of the mortgage payment as savings. This is because the payment that goes towards principal is paying off the house and that money is an investment. Our second mortgage payment was due November 1, 2015, but we used to put money in savings in the middle of the month, so we started paying our mortgage early and made the second payment on October 19, 2015. The monthly mortgage payment percentage breakdown currently looks like this:
- Principal: 42.9% (Savings)
- Interest: 30.6% (Mortgage)
- Homeowner's Insurance: 4.3% (Insurance)
- Taxes: 22.2% (Mortgage)
Due to the fact that we paid earlier and the fact that we paid a little bit extra mortgage payment, the interest payment dropped a little bit. Based on my calculations, the extra mortgage payments has saved us $500 in interest over the life of the loan. Since we plan to make extra mortgage payments regularly, I will try to keep this number updated also. In the month of October, we invested in a Roth IRA, continued to invest in our works retirement plans, we paid a little bit extra on the principal, paid the mortgage and bought a refrigerator. All of these items affected the monthly breakdown of our spending. Savings was the highest, but household expenses continue to grow because of the big purchases associated with buying a house.
The image above shows our 2015 October spending rate, which shows most of our spending going towards Mortgage and Savings. Below is the percentage breakdown of the spending rate.
- Savings: 34% (includes principal from mortgage)
- Mortgage: 15% (only includes taxes & interest)
- Household: 13% (purchase of new mattress and frame)
- Donations: 10%
- Insurance: 5% (Homeowner's, and Car)
- Auto 5% (gas and tolls)
- Groceries 4%
- Other: 14%
The Savings rate was only a measly 34% in October, which is a 3% drop from September. We actually saved the same amount as last month, but we did not receive as much income as September, which caused the percentage rate to drop. We paid the bare minimum mortgage payment on October 19th, and on October 28th we paid and extra amount on the principal. Anything extra leftover will be thrown at the house to try to pay it off early, every month.
Now, let's look at the yearly spending rate to keep track our yearly savings:
You will notice that the savings rate continues to be the largest amount of our monthly spending. Below is the complete data of the yearly spending rate.
- Savings: 41% - No Change from September
- Education: 10% - decreased 1% from September
- Donations: 10% - No Change from September
- Auto: 5% - No Change from September
- Vacation/Travel: 5% - No Change from September
- Groceries: 5% - No Change from September
- Household: 3% - Increased 1% from September
In August, I mentioned that we had a 50% savings goal. After two months of living with a mortgage, our savings rate was 37% and 34% respectively. We will continue to evaluate the savings rate based on the expenses that come with having a house, but I believe a good goal could be somewhere around 35%. I will continue to update you on our monthly spending and hopefully we can get a grasp on how much we will be saving monthly. Interestingly, our overall spending stayed about the same this month.
As I continue to preach, savings is the fastest way to reach financial independence. I may need to challenge ourselves to find a way to increase savings. This could be cutting out some expenses. Although, the biggest reason of the lower savings rate is household purchases and mortgage expenses. One of those, can't be changed. Household expenses could be decreased, but there are still some necessities that need to be purchased for our house. Our decision was to purchase one big item a month, until we have all necessities (i.e Bed, Refrigerator, Washer and etc.) So far we have purchased the bed and the refrigerator. Until all of these items are purchased, the savings rate will be hit. This will motivate me to find ways to save money in other places. Where can you cut expenses and increase spending?