Life status:
Married, 38, one 2-year-old, both parents employed, kid in daycare, both parents have masters degrees
Gross Salary:
Me - $58k/yr
Wife - $75k/yr
Total - ~$133k/yr
Tax-relevant Info:
Has not made sense to itemize in a few years.
Maxing out both 401k s.
Other Income:
None.
Current Expenses:
30y Mortgage @ 3.67%
P&I $734
T&I $302
26 yrs remain
Price of house: $200k
Probable value: $220k
Mortgage balance: $148k
Daycare: $6,864/yr
Utilities: ~$2,700/yr
All Other Cash Expenses: ~$38k
Total Lifestyle Expense: ~$60k, not including depreciation
Assets:
$425k in retirement, taxable, and checking accts.
Liabilities:
$148k mortgage
Two depreciating cars worth $9k each (commute is not practical to bike. Tried it.)
Specific Question:
I desperately want FI, but coupon-cutting isn't moving the needle! We just hit a savings rate of 50%, but I fear future investment returns may not meet my assumptions to retire in 8-9 years at most. I would gladly trade most comforts for a year of my future life back, but the wife is about to revolt if we cut much further. I'm looking at our huge 2,700 sf house as the obvious place to cut expenses by four figures. We could buy a house half the size in a similar neighborhood for about $120k, or a 1,000sf cottage in a poorer neighborhood near a freeway for less than $80k.
Option A: stay in 220k mansion
Option B: transact to 120k house
Option C: transact to 60-80k house, pay cash
About option A... After 3-4 years of shopping, we found a vintage house with a rare set of features we both wanted that was just 4.5 miles (15 min) from work, in a great neighborhood, etc. The only problem was it was too big - a whole other house too big. We threw a lowball offer at it and walked away from the seller's counter, only to have the seller accept our original offer a few weeks later. We hated our existing place, and most other places, so we reluctantly bought it. I calculated the sale, purchase, move, bid/ask spread, and minor customizations associated with the move cost us $20k in home equity. That's the price of moving.
Then, we installed an $18k ultra-high eficiency HVAC system and blew the attic full of cellulose to a foot deep for another $1k. Now the utility bill equals my old 1600sf house that was built 30 years later. We've made lots of other improvements thinking we would stay for life. We increasingly like the house, the neighborhood, and the short commute.
About options B and C...
We could convert up to $6,000 a year in mortgage payments, interest, insurance, and property taxes into savings, boosting our savings rate from about 50% to about 58%. This, and the lower post-ER expenses would shorten the distance to the goal line by up to a year.
However, then we'd be stuck in a house we don't like in a neighborhood where we might not want our daughter to grow up. Also, the cash savings do not account for faster equity growth and appreciation of the big house, so the actual effect on net worth might be more like $4-5k/yr. Add to that the thousands in material and our labor we'll likely re-spend remoding the next house.
Given the cost of trading houses ($15-20k), the payback period might be 5-7 years. By then we might be so frustrated we repeat history and make another expensive move.
Option D...
Buy the small house for cash. Attempt to rent the big house for $1,500/mo. This is what the previous owner attempted, and I suspect they lost money. (Arkansas is so cheap, you might as well buy if you can commit to 5 years.)
Sell one or the other in 3 years and pay no capital gains tax.
Your thoughts? I feel like I'm burning money on more property taxes, interest, and insurance than necessary, but trying to fix that problem might cost more than living with it. Then again, who can ER to a 2700sf house at a cost of $35 a day! Maybe it is better to account for the mistake now rather than later. Or, maybe it's a lot less stressful to focus on the other fatty areas of our lives, such as the $38k in groceries, merch, services, hobbies, and other bills.