Monday, September 28, 2015

Frugal Living: Listen to the Math, Not Just Your Gut

Image by M. Gustafson Gervasi, 2015
"You guys have an ARM?" a work associate of my husband asked, eyes widening in shock. "Yeah, we got a lower rate which means we save $x/month rather than paying more to insure the rate doesn't adjust." My husband replied, and then I assume he launched into a more detailed discussion involving math, economic theory, the cost of insuring against change, and interest rate policies.  As he went on the other party nodded, "yes, yes, that makes fiscal sense -- it is a better deal than a fixed-rate mortgage."  When turning off his emotional response to the ARM he saw what we'd seen back in 2010 -- the ARM was the best deal. But when emotion lead his thinking, he shunned the device.

Following my frugal-other-half's lead, we try and leave emotion out of all financial decisions.  This is easiest accomplished when you determine the number, or cost, before being presented with a price. "Never ever hear the prices and then decide -- always enter with a price in mind", or says my husband. Taken to the extreme, I've seen him walk away from a bottle of soda that was $0.25 higher than the amount the was willing to pay.  No, I am not kidding, he has done this on more than one occasion.

As for those ARM -- adjustable rate mortgages, they are not perfect for every one or for every situation. But it was the best choice for use when we went from renters to owners back in 2010. Why?  The ARM rate was low, and lower than a fixed because we assumed some risk that when it re-set down the road it might be higher.  Looking for consistency?  You'll end up paying a bit more for that assurance of no change in what you pay.

One  reason the ARM worked for us is that we borrowed about half of what the bank would have lent us, and we had a hefty down payment.  As a result our monthly mortgage payment as a percentage of our monthly budget was not that high.  If it were to adjust upwards, it wouldn't be too hard to absorb. The other factor that makes an ARM easier for us than others -- we have no other debt.  No student loans, no car loans, no loans of any kind too worry about or feed.

In the end, as we approach the end of 2015, it appears the risk or gamble we took back in 2010 will pay off.  The rate is set to adjust, but rather than go higher, it will likely go lower given the Feds position on not raising long-term interest rates.

Should the frugal life appeal to you, I urge you to apply frugal ways to the three biggest items on your budget (and if you don't have a budget, get one -- take control of what you spend, don't let expenditures control you).  Ask how you can save costs in those top three areas.  Frugal shopping sprees will likely never come close to the savings you may reap in these areas, likely: housing, child care, transportation, or food.  And by frugal I do not mean "go cheap", but rather how can you most efficiently spend those dollars.  Follow the math, not just your gut.

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