Primary residence – to include or not to include it in your net worth calculation

Do you include your primary residence in your net worth calculations? I do but I admit I have doubts whether to include it or not.

 

Reasons for including:

  • It is indeed an asset that you have. In case of financial stress, you can always sell it and move somewhere cheaper or where you pay a small amount of rent. You can also rent it fully or partially.
  • The fact that you own your primary residence means that you do not have to pay rent, i.e., you are indeed saving this money on rent you would have to pay if you did not own it.

 

Reasons for not including:

  • It might artificially inflate your net worth. If you have a house which is worth 1 million EUR which is the only asset in your portfolio and debt of 200k EUR, that situation is totally different from someone who has a 100k EUR home, 900k EUR in assets that yield 7% a year and 200k EUR in debt. The second person can be considered nearly financial independent, whereas the first one is very far from it.
  • According to Robert Kiyosaki your house is not an asset and I agree with his arguments. Our primary residence does not yield us money and generally takes money away from us, in taxes, maintenance, etc. in addition to the fact that we generally buy more expensive goods for our primary residence.

I have decided to include it because I believe argument #2 is very strong, i.e., the fact that we own a property means we will not have to pay rent elsewhere, however I admit my net worth will be highly inflated by my primary residence, which I value at 380.000 EUR, in particular as I pay down the debt.

It almost seems as I giving in to lifestyle inflation and this is positively reflected on my net worth. My net worth is being benefited by the fact that I am kind of falling in the trap of lifestyle inflation, which should not happen. Nevertheless, I would indeed pay at least 1k per month if I did not own it and lived in a house slightly worse off that the one I bought. What are your thoughts?

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The hidden costs of a mortgage loan

I have recently been searching for apartments, not for the purpose of investing, but as a primary residence. I know, my house should not be seen as an asset and it is definitely not the smartest financial move I can do, however I do feel that I would be more emotionally comfortable if I buy my own apartment. Ultimately, you have to feel good about where you spend your money!

We currently own 2 small apartments which we rent short-term, we bought them relatively cheap and now we are checking the possibility of selling one of them, making a profit, and using that cash for our primary residence. As our primary residence would be a 3-bedroom apartment and in the capital city, we would still need extra cash to pay for it, which we currently do not have. And this is why we have decided to contact banks to understand how much would we pay for your mortgage. I am completely shocked and I have decided to share my concerns with you so that you can also be aware of all the costs you will face when asking for a mortgage.

First of all, there are taxes and costs related to the purchase of the house you have to take into account. If an apartment is advertised at 300k, do not forget you have to pay 300k + taxes + other costs. Depending on the country, normally you need to add at least 4% on the advertised price.

In terms of costs that you have to pay to the bank, there are a lot of small costs and the fact that banks do not generally merge all of those has a purpose, i.e., so that you do not clearly see how much exactly you have to pay. Be aware of:

  • Costs you have to pay at the beginning of the mortgage: depending on the country, those can include taxes on the mortgage (in Portugal you pay 0.8% on the value of the mortgage) + numerous small costs for formalising the deal, such as payment for evaluating the home and others. Those can easily increase the price of your home by 1% or 2%, which is relatively significant.
  • Interest rate: currently interest rates are very low which might be an incentive for people to buy real estate. Indeed, we were offered a 1% rate, which is quite low. However, even with a 1% interest rate, if we are considering a 300k loan, we would pay 65k of interest over the period of 40 years, i.e., an average of 135 Euros per month. In addition, in many countries, they do not offer you a fixed rate, but instead a spread on the Euribor. As the Euribor is currently around 0%, banks assume this will be the rate for the next 40 years when they provide you with the mortgage payment simulation. This is very misleading! Be aware that most likely interest rates will increase and, therefore, we would have to pay more than 65k.
  • Insurance: Because banks need to be protected in case you do not pay your mortgage, they generally request that you have both a home and life insurance. Normally they also have an insurance company in the group and they strongly recommend that you use their products. In our case, the costs of the insurances over a period of 40 years was almost 100k, i.e., almost 200 Euros monthly.

Even though this is all very country specific, I believe in general the rules are relatively similar in Europe. Of course the exact costs and %s will depend on the country, banks and your specific individual situation.

Summarising and just to give you an example with numbers, if you are buying a home of 300k, you will have to pay to the seller 312k. You will then have to pay the bank as initial costs around 3k, which makes the total initial cost of the property = 315k. If you are granted a 40 years’ loan, even with a low interest rate, you will pay 165k in total for both interest rates and other costs (mostly insurance). Total price of the apartment = 480k, 60% higher than the advertised costs of 300k.

Crazy, right?

To FIRE or not to FIRE?

I have been recently been thinking a lot about my options in terms of reaching or not reaching FI. My FIRE number, for me and my family, is around 900k and our net worth is currently a bit over 300k, which is great, but I am still veeeeeery far away. My options are the following:

  • Stay for 6 more years in Germany and reach my number (I am Portuguese and currently living in Germany where salaries are much better compared to Portugal) with the caveat that around 30% of my networth would be in my pension, i.e., I could only have access to it at 55 (whaaaat? I am only 32!);
  • Stay for 1 more year in Germany, reach barely half FI and go back to my home country where prices are lower and with a passive income that would cover 30/40% of my expenses + some cash.

This is probably a typical dilemma that many people in this community face: wait for FI or risk and try a career that does not yield that much money but you feel passionate about? In my case I have also strong personal reasons for wanting to go back to Portugal, I am waiting for baby #2 and I would really like to raise them near my family and near our friends which are having babies at the moment as well. I could also use some help from family members 🙂 But on the other hand, I feel like I am bailing on my own plan if I go back and that we did the effort of saving and investing for nothing, i.e., we would still would need to work.

I recently listened to this podcast from Journey to Launch and I am in a very similar situation as her: in a corporate job with a great salary, waiting for a baby, and it got me thinking whether I should just take this opportunity where I will be out of the workforce anyway (due to my maternity leave) to not go back to this job. I am definitively a Type-A personality and I know I will not be able to stop working, I need projects, I like business interactions and I am passionate about so many topics. None of them would allow me to get a similar salary to the one I have now (not even 1/3) but I feel like I could give it a try. Worst case scenario: I am young and I could go back to working in Banking in my home country. Not ideal as salaries are not very high and hours are long..

Problem: my partner believes we should stay for a couple of more years and that my 900k estimation is too optimistic, especially taking into account that we will soon have 2 kids. He is also very risk adverse and does like the instability of an entrepreneurial lifestyle.

What are your views? “Suffer” until you reach FI or reach half FI and risk a new job/occupation that fulfills your heart but would still have to yield some cash?

You have 168 hours this week

Reading is one of my passions. I love reading about personal finance, behavioral economics, psychology and business in general. I literally cannot fall asleep if I don’t read, even if only for 5/10 minutes.

About 2 weeks ago, I had nothing to read and no ideas on what to read next. I found this post from Paula Afford Anything and the 168 hours book she recommended sounded interesting. I was feeling a bit overwhelmed trying to manage a full-time demanding job, a baby, buying property #2, a constant effort/research on how to save more and where to invest. A book on time management was exactly what I needed, in particular one tailored to families and written by a woman.

Laura is amazing (you can listen to her TED talk to understand what the book is about) and her book made me feel I really have more time than what I think I do.

Hours in a week 168
Sleep (8 hours/night) 52
Work (8 hours/weekday) 40
Commute and getting ready for work (1.5 hour/weekday) 7.5
Total time left 68.5

A week has 168 hours. After accounting for sleep, work, commuting and personal hygiene/getting ready to work, I still have 68 hours left to do whatever I want. The key is to use this time on what makes you happy, which for me is my family, exercising and my sidle hustle (my investments, this blog and my passion for personal finance).

Laura made me realise than I actually spend more time with my baby than at work! Even though I only see him 3 hours a day on weekdays, which feels too little, I have the whole weekend to be with him. Plus, I found strategies to maximise the 3 hours I am with him by outsourcing what I don’t prioritise in my life. I realised I was spending too much time going to the supermarket, cooking, some days I would also do some laundry and this was all done, of course, during these 3 hours I was supposed to be with him. Non-sense! I have decided to talk to my cleaning lady and double the time she comes every week. She will, not only clean the house, as she did before, but also cook and take care of our clothes. We have also started shopping online, which saves us at least 1 hour per week. Now, I am fully enjoying these 3 hours stress-free with my baby and it is so much better/easier for everyone.

On the other side, yes, I am spending more money than what I “should” which seems not to be in line with my financial independence goals. I gave a lot of thought to this, since I consider myself frugal, but I think I will try to be more easy going from now on and think about my core competences, where really I want to spend my time on. And, I have to admit, I don’t like home work, I hate cleaning, doing the laundry, I don’t mind cooking but also don’t love it. I do like: spending time with my family and friends, my work, my side hustle, doing exercise, in particular yoga, reading, thinking about where to invest next and how to help people having a healthier relationship with money. This is where I will spend my 68 hours per week that I have left, on the things I love, and not on the things I hate, which I was doing just to save money. Plus, I don’t plan to retire early, my goal is finance independence but not early retirement. I want to create passive income so I can feel free to pursue my passions, try my luck by starting my own company and hopefully make some money while helping others.

What I have changed in my life after reading 168 hours:

  • I now have a cleaning lady 6 hours every week instead of 3
  • I use my lunch hours very effectively, either to take care of something I need, or to go to the gym or to have lunch with friends (I schedule appointments to make sure I have lunch with people I care about and not just because they are my work colleagues)
  • I don’t feel bad about spending money on books, it is an investment towards my financial future and I love reading
  • I am more organised and I plan more, to make sure I am able to do everything I want during the week
  • I am more present, I try not to get distracted and enjoy the moment. If I am working, I try to focus and get things done as quickly as possible. If I am with my family, I don’t even look at my phone.

This book is of course tailored for people living in developed countries and who have their basic needs fully fulfilled. You have time for everything. You just need to define your priorities and organize your week around them. Time is more important than money. Do you agree?

Going Greener Monthly Challenge 2

This month I took the decision not to use any straws, neither in the house nor outside. Of course if I really loved them, I could still buy environmentally friendly ones to have at home. But I don’t really need them, and I have to admit that most of the time I use them outside home just out of habit. From now on, I will not buy any and not accept from any shop. This is my monthly action on my my way towards a greener life!

Have you realized how much money you can save by being environmentally friendly? 🙂

Total net worth or passive income: which metric to chase?

I have been thinking a lot on which metric shall I use to measure how close I am to financial independence. Both total net worth and passive income have as a basis my expected yearly expenses but whereas total net worth generally assumes a 4% net return rate, the passive income assumes that the amounts I am earning now can be replicated in the future. Both have flaws but both can be used as a guide.

In my specific case, I have invested mostly in real estate (on my way to buy property #2) and my investments yield more than 4%. Therefore, if I consider both properties and the passive income generated by them, 40-45% of my yearly expenses are already covered by these properties (potentially even more, because I can still decrease the amount of taxes I pay for both properties if I decide to create a company and deduct expenses and VAT, which I am planning to). On the other hand, if I use the total net worth metric, I am only 30% financial independent.

It is more conservative to target total net worth, which, in our case, is 870k EUR (my husband disagrees and think this is too low) but I will still celebrate when we reach 100% of expenses covered by passive income!

What about you? How do you keep up the motivation towards your goal?

Going Greener Monthly Challenge

I have recently become even more aware of how much waste we generate around the house. I consider myself very conscious on the environment but there is still so much I would need to do to reduce my waste, in particular plastic. Nevertheless, let me focus on the positive aspects/actions that I am currently undertaking now:

  • I do not eat meat: as you probably know, meat production is one of the top responsible for greenhouse gas emissions, in particular beef. I do try to eat vegan most of the time, but I definitely cannot consider myself a vegan, as I eat regularly eggs and fish. I do not drink milk and very occasionally eat cheese.
  • I do not own a car: living car-free is also one big plus according to this recent research but I do occasionally use cabs and rent cars.
  • I recycle but sometimes when visitors come and they are not aware of the rules I “relax” a bit and put everything in the normal bin. I also do not do any recycling in the toilet bin out of laziness.
  • I have reusable shopping bags.
  • I use cloth diapers on my baby: most of the times but not always.
  • I drink tap water, i.e., I do not buy plastic bottles at least for water

As you can see, I am not an all-or-nothing type of person. I do not advocate for going 100% car-free or being 100% vegan, I would say I am on the range of 80/90% which I consider good enough. I am lucky to be able to bike to work but if you really can’t, do not blame yourself for that and try to compensate, for example by sharing your car with colleagues or by not using it during the weekend or by not eating meat, etc, etc, whatever you fell most comfortable giving up on.

What I currently do “wrong”, environmentally speaking:

  • Airtravel a lot, as I do not live in my home country, I travel every 2 months to visit family and friends, plus I travel to other places for holidays. This is something I am not willing to give up on.
  • Use plastic when shopping: bread, nuts, fruits, shampoos, etc. everything is covered in plastic!
  • Order food at least once a week: some plastic again here.
  • I use regular cleaning products which are definitely not environmentally friendly, not only the components but also the packaging.
  • I use regular cotton and plastic toothbrushes.
  • I use a lot of paper when cleaning my baby.
  • I could eat more local and not buy exotic fruits/vegetables.

These lists are not exhaustive, as hopefully there are more things I am doing right and for sure there are additional things I could improve. My challenge is to slowly go green and do something greener every month, in particular something that will have an impact not only on that month but also in the future. Therefore, my commitment in this blog is that every month I will announce one action/life change towards a greener life.

This month my step towards a greener life is to give up on disposable tampons and sanitary pads and use a menstrual cup instead. I have tried and I am a fan! Do you know that a woman uses on average 11,000 tampons in her lifetime and that it takes decades for one to degrade? This is a women’s only step but I am sure my future steps will apply to both genders.

How about you? What are you currently doing that is considered environmentally friendly and what are your plans to slowly become greener?