Why I chose to Pay off my mortgage early

PaidHouseOur family had just moved back home in the summer of 2015 to Boston from Malaysia after a 3 year international job assignment. As a result of low expenses in Malaysia, our savings had grown and we wanted to be done with renting after our move back to Boston.

We were in corporate housing for 3 months and we wanted to be done with renting. With a family of four and two little kids (4 and 1) at the time, we wanted to live in a home we could call our own. The housing market was hot and I think we were in the midst of a hot seller’s market and it still continues to be one today (Aug 2018). We made one unsuccessful offer (30K above the asking price) and were turned down.

About two weeks later we succeeded in the purchase of a house at asking price. It was an old 1959 house (a bit dated) but needed some updating. The asking was $728K and we ended up buying it at asking price. We had saved enough to put down 20% without touching our brokerage account and I chose an 7-year ARM loan with a fixed APR of 2.875%. I had set a goal to pay the mortgage off before the 7 year mark after which the interest rate would be adjusted.

The best part about buying the house was that I had not seen the house before making the offer. It was Mrs. Rebirthat45’s unanimous decision 🙂 What I liked about this deal was that she had lost her right to complain about the house later because it was her and her alone who made the choice. She did make a great choice. We loved our house while we lived in it for the next two years until May 2017. We still love it and I’m sure our tenants do now.

mortgage payoff

The chart shows the progression of our $580K mortgage loan that we paid off in about 2.5 years. We had been making extra principal payments in the first two years of the loan from our savings every quarter. In summer of 2017 when we moved to India, we rented our house and it became an income producing asset. We started making extra principal payments more aggressively through the rest of 2017.

2017 was a great year when our brokerage account appreciated by 37% and I was looking at sufficient liquid funds to pay off my mortgage. That is exactly what I ended up doing in January 2018. I was also growing wary of how much further the bull market had to run, and knowing myself I knew I’d play and experiment with my profits and may end up losing some of the gains. I continue to be pessimistic about the future returns of equity markets going forward and that is reflected in my current asset allocation (see the chart on my net worth page).

IRR of paying the loan off vs keeping the mortgage

My rental property has an IRR of 7.3 %. You can learn all about calculating IRR and download free excel spreadsheet to calculate IRR here. Had I chosen to keep my mortgage, my IRR on my house as rental property would have been 9.6 %. However there’s a lot of uncertainty in the latter IRR calculation. My 7/1 ARM had a fixed rate of 2.875 % only for the first 7 years, and in my latter calculation I assume that the 7/1 ARM rate would remain at 2.875 % after the 7 year period. It is likely that this would not be the case because rates have already gone up and my rate would be revised. The IRR of the project on keeping the mortgage would have been less than 9.6 %.

I sacrificed about 2% return at best by choosing to payoff the mortgage early. But what I bought with that sacrificial extra return is the certainty. The house is now mine. No part of it is now owned by a bank.

Had I chosen to keep the mortgage, with my current investment sentiment (which is pessimistic) I would have still parked my money in low returning conservative assets and the return on that would have been less than the 2.875 % interest I was paying on the loan. So It made sense to pay off the loan. That way I guaranteed myself a 2.875 % return on my funds that I used to pay down the loan.

I am completely debt free at 37. I own my home outright and I do not owe anybody a single $. Buy that’s a good feeling. So far, 6 months after paying off the loan I do not regret my decision. I may feel differently should the equity markets continue to offer returns in excess of 10% per year! Did I say I’m pessimistic of the future returns ?

At the end I asked myself two questions –

Would I regret paying off the mortgage if the markets continued to rally and return in excess of 10 % ?

Would I be OK losing a part of my capital should there be a strong market correction ?

To me, the second question was more important. I have become financially independent and I want to stay that way. I do not want to become financially dependent again. So capital preservation to me at this time is much more important than missing out on possible gains. Although I may be OK finding out that I missed a great run on the stock market, but would not be OK losing my capital.

 

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Asthmatic cycling in the Himalayas

himalayas

It started with rare bouts of coughs and occasional wheezing sounds at the ripe old age of 35. I’d generally been a fit person who cared about his health and more importantly about his ability to play sports. I easily dismissed the coughs and wheezes and never thought these would take over my life one day not so far in the future.

It was summer of 2015 and we lived in Boston back then. Slowly the wheezes became more regular and so did the coughing. I had started to wake up feeling congested in the middle of the night (often around 3 AM) unable to breathe. It was scary. I saw the doc and was told I may have asthma and was sent back home with nebulizer treatment and was prescribed the Albuterol inhaler. I was very disappointed and the thought that just doing regular tasks could possibly become difficult for me, let alone playing sports, completely destroyed my confidence.

I didn’t want to be the guy who had to carry an inhaler to breathe. Months went by with coughing and the throat clearings and my frequency to doctors had increased significantly. In the fall of 2015 I ended up with low grade fever that went undiagnosed for almost a month and I didn’t know what was wrong. It turns out I had had pneomonia. Thankfully the antibiotics cleared it up but I had a miserable winter. Shoveling the snow in the winters was a nightmare and my energy started dropping. I wouldn’t even go out with my kids who wanted to build a snowman and slide down the hill on a sled. I felt awful.

Year 2016 didn’t go very well either. I had three visits to the Emergency Room when both my rescue inhaler (Albuterol) and corticosteroid (Advair) couldn’t help my breathing. I did several prednisone courses and got better, but it was always temporary. The bouts of cough and wheeze would come back within a month. I was in despair and didn’t like being on Advair, two puffs in the morning and two in the night. That had become my life.

I think I had googled every possible asthma related search tag and came across several promised solutions. I joined Facebook support groups. Some suggested holistic medicinal solution based on diet – paleo diet, vegan diet. Some suggested getting rid of fatty meals. While some suggested Asthma is mostly triggered by airborne allergens, others suggested its related to a leaky gut that makes your body mount an immune response to something very benign to a regular guy. Something such as milk or nuts.. I got my allergies tested and surprise surprise, the test gave me nothing. Nada. Zilch.

I realized that what works for one person may not necessarily work for another because the personal stories of people who had found solutions were so different from each other. I ended up reading quite a bit of peer reviewed medical journals as well and reached the same conclusion. There was no one root cause identified that seemed to apply to all.

I started keeping a record of my diet starting March 2017. And within a couple of months I started noticing a few things. My asthma attacks were different in severity depending on the food I ate. The reactions were also delayed at times to the food items and it was very hard to correlate whether the asthma attack was related to food. I even did a fasting experiment for 36 hours (I just drank water) and to my surprise the lungs felt quite airy after the fast. I started believing more that asthma is indeed the body’s inflammatory response to something in the food that it doesn’t like. My attacks were also very severe especially after eating mutton. So I became a vegetarian and then gave up dairy as well to remove all animal product from my diet.

It was something. I had started feeling a lot better and within about two months I had weaned off of my Advair. From 4 puffs a day to 2 puffs a day to 1 puff a day to none. That’s right none. I then decided to go on a cycling adventure in the himalayas in the summer of 2017 (after I had moved to India) going from Manali to Leh (about 500 km) riding through several mountain passes, the highest one at about 5300 m (18000 feet)! Check out the video below

I did take my advair puffs as precaution but I think I’d have done the whole 9 day trip without the inhaler. Fast forward to 2018, I’ve mostly been away from my inhaler but only when I haven’t been true to myself on the diet. At the time of writing this article I think meat and dairy are big triggers for me and as long as I stay away from these I continue to do fine without my inhaler. Couple of other things I do – I hardly consume any sugar and also I do not eat anything that comes packaged in plastic with preservatives.

I will continue to update how I do with my asthma and also my next adventures, you can follow my blog by subscribing. Should you have any questions or comments on asthma or cycling, or cycling with asthma please leave a comment below.

Next, I’m cycling from Bhalukpong to Bum La pass (at the Indo-China border) in September!

Finding your reason to R2I (return to India)

r2iI juggled with this idea a lot over a few years before I returned to India. I must have gone through hundreds of blogs and r2i (return to India) discussion forums to help me reason my own decision to move to India. The age old wall of worries about differences between the two countries in job opportunity, work culture, salary, society, safety, taxes, ethics, and infrastructure completely had me flustered. I remember having endless discussions on the weekend get-togethers with desi friends about the pros and cons of moving back and how life may change. I had gazillion MegaBytes of data on R2I in my head that I was trying to analyze to help me get to an actionable conclusion once and for all. Although I was (am) doing just fine financially, in the end the money never played a part in my choice.

The feeling of a being that branch of the family tree that was slowly getting severed from the rest of the tree as years went by didn’t sit very well with me. And I thought that the severance was almost a certainty after I get old as my kids (now 7 and 4) wouldn’t feel the same connection with the rest of the family back home in India as I did. This had been the leading reason that kept the thought of R2I going in my mind for most of the 17 years that I spent in the States. But this wasn’t strong enough to drive me to make the move back.

One afternoon as my wife (who also grew up in India) and I sat on the deck watching our kids run around in the yard, we thought to ourselves about how our parents must have watched us run around when we were little kids with their hearts filled up with the same joy and pride that we were experiencing in that very moment. It was magic! The haze and the confusion had just disappeared and it was very clear to us that we wanted to move back to India to be with papa and to be with maa. Everything else from that moment on was secondary. I was excited and so was my wife – we told our parents we had made up our minds and couldn’t contain the joy we felt in those moments.

We spent the next couple of weeks fixing the nitty gritty details of life – i.e. house, belongings, finances, travel and relocation. My plan was to go back to my hometown, live in the house we grew up and maybe I’d end up teaching Physics in the same school that I went to. I didn’t have a career plan but I felt confident my US employer would figure something out and create a job for me to work remotely from India. This was my hope. So, I walked in to my boss’s office and told him about my decision that I’d be moving to India in 2 weeks. I had thought about my employer’s BATNA and was very hopeful that I’d be offered a job. And I was.

I have been living in India since May 2017 and I do not regret my move at all. I do miss the American comfort, the weekend get-togethers, our friends and neighbors and countless other good things. America truly is a great country. And I’m not going to talk about the details of little things (traffic, housing, maids, and work culture) in India and if you’re reading this to help with your r2i decision I’m sorry it’s not going to be helpful. You need to find your very own reason and understand that my reason cannot be your reason. All I’d say is that if you do decide to make the move you just need to come with some patience. A lot of it, actually. Embrace India as your own with its shortcomings. Don’t let the little things bother you and you’ll do just fine.

So, I’ll talk about some of the things I’ve been able to do since moving to India. The most important one of them all – my parents live with us and they just love having their grandkids around. Their pride and the strength they get from me being there, all the time (not a 24 hour flight away), are invaluable to me. I’m positive I moved for the right reason. My 7 year old not only fluently speaks in Hindi, but she also writes and reads Hindi well. And my 4 year old who didn’t utter a word in Hindi a year ago is preparing to sing for the 15th August “Nanha Munna Rahi Hoon, Desh ka Sipahi hoon… bolo mere sang Jai Hind, jai hind. Jai Hind.

Jai Hind

Please drop a comment or question if you have one and I promise a reply 🙂

Want a raise ? What is your BATNA

Salary raise model

What’s your BATNA ?

A lot of FIRE blogs talk about the two ways to become financially independent: (a) increase your income or (b) reduce your spending. A lot of them have gone into the math of how frugal lifestyle can accelerate your savings rate, reduce your needs (in retirement) perpetually in turn reducing the size of your required nest egg thereby reducing the time you need to work (Mr. Money Mustache, Root of Good). Not many talk about ways to increase your income and what areas you need to focus on to increase your income. The “ways to increase your income” side of the coin is often dismissed as something not entirely in your control. While you are the only one to decide how much you spend, someone else gets to decide how much you earn? Not entirely true.

I was attending an executive leadership session at Harvard and the professor asked the class to guess the average Industry return of an employee i.e. how many times their cost an average employee returns to his employer? I jumped in and said 10. Boy, was I wrong! The average industry number is 2. What dawned on me immediately was that I was significantly better than the average employee in terms of my return to the employer (or at least I had that perception). Even if you can carefully articulate the value you bring to an organization in dollar terms and show that what you’re paid is a lot less (even if the ratio is 1/10, although the industry average is about 1/2) than the profit the company generates that can be directly attributed to your work, it doesn’t guarantee you a raise. Sure, you’ll get some appreciation but that may not be sufficient for you to get a raise. Superior performance and more responsibilities are the most important arguments in salary negotiations. However, even though you perform like a superstar and continuously enhance your areas of responsibility but have no alternative career options, your salary and title may well remain the same.

The primary factor on which the outcome of a negotiation depends is the BATNA of either party. BATNA is Best Alternative to Negotiated Agreement. In short Best Alternative. At the negotiating table both the employee and employer need to assess their own (and more importantly each other’s) Best Alternatives. Let me repeat. You need to look at what alternatives does your employer have in addition to looking at your own alternatives. If you have an alternative (such as another job offer) the balance of power between the two parties shifts towards you. An employer’s BATNA is to replace you at the same or lower cost. If your skill sets are unique and not easily replaceable you just got another point on the balance of power table. The employer doesn’t have a better alternative than retaining you with a higher pay.

It is all too well known that the rich keep getting richer, and the C-suite leader and the vice presidents keep getting more and more. So unfair? right. But have you thought about why they mostly end up winning in the salary negotiation arguments more than the average Joe? Because the Employer doesn’t have a BATNA. Because, the VPs and C-suite leaders (or for that matter all the highly paid employees) have skill-sets that are unique and are not easily replaceable. It is the unique, irreplaceable (or not easily replaceable at least) skill set that shifts the balance of power to the employee’s side of the table. And this is the root cause of what may seem to be such an unfair remuneration system where the rich keep getting richer. i.e. the higher the base pay of an employee the better the chances of him or her walking out with a raise.

These factors are not the only ones that impact the BATNA of an employer or an employee. I’m positive I consistently delivered value in excess of 10 X my annual cost while I kept getting paid in $100K range. I worked on sharpening my skill sets and I focused on learning as much as I could. At one point (5 years into my job and my base pay must’ve been around $115K) I was considering going to B-school and I broached the topic with my supervisor. The very same evening someone from the C-suite called me to congratulate how great a performer I had been and was awarded stocks that would vest in 3 years. No negotiations, nothing. Just the fear of losing a valued employee was sufficient for the employer to take action. That just opened my eyes. More so, I realized that I had been underpaid. Two years later, I negotiated an expat assignment in Asia (because I wanted to be in Asia to be close to parents). See the climb in my money trail in 2013. You should focus on the entire package and there may be room to move on other things than just the base pay. You can negotiate “other perks” to not disturb the pay range established by the company for your “grade” or “level”. I was able to negotiate $20K in annual travel allowance for my family. Pretty good eh.. but I knew in my heart that I had strong skills and that I brought value in multiples of my cost (as high as 40 or 50 x in some years). Ambitious people always tend to stay ambitious. Few years later in 2017 I negotiated an expat work from home agreement working from home office in Asia in a country where the company barely has a presence. I ended up with a superb location arbitrage (paid in US and spending in a low cost of living country) that resulted in me seeing my savings swell. This was a win-win for both my employer and myself. Why ? Because I was still creating value well in excess of my cost so the employer still considered me a good investment, and on the other hand I got to work on my terms which I considered a good price for my services. Win- win. It was OK for the company to pay me more than my range under the pretense of an expat assignment and it did not shake up the “pay range for a grade” thing.

Such options can be limited when the only negotiation points are base pay and number of holidays. You cannot be preferentially treated (beyond a reasonable difference) on these items within the same salary range. Even though promoting you and raising your pay may be good investment for the employer, they may choose not to do so if doing so significantly upsets the “grade pay range” and has a cascading effect on other employees eventually raising the cost of the company to appease everyone.

Salary negotiations should never be need based. Because your expenses have increased and therefore you need a pay raise is never going to get you a pay raise. Ever. To sum this up the best way to have an upper hand in negotiations and to work on your terms you should always be focused on improving your skillset in the early parts of your career (and later), especially on the one that makes you unique and irreplaceable. The one that makes you different from others. The one that later in your career becomes your brand.