How to correctly calculate break even time on a refinance – For Math Geeks

After my last post on refinancing, I found a refinance calculator on Zillow.com that compared loans the way I suggested. It has a shortfall though, it calculates break even time with the difference in your new payment compared to the difference in your old payment. This is actually quite incorrect. That number is good to show you how much money you’ll have extra in your bank account each month if you are making only the minimum payment. What if you pay extra on the mortgage though? In order to make almost any refinance the most beneficial, you need to pay extra on the new mortgage so that it doesn’t take as long as the new term of the loan to actually pay off the mortgage. i.e., you should at least pay what you were paying on your old mortgage.

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Should I refinance my house?

OK, disclaimer: I’m not a financial professional. That said, I do enjoy financial topics and am somewhat of a hobbyist. I’ve written articles in the past about how I do envelope budgeting with Gnucash for instance. That said, I’ve been thinking a lot on these interest rates lately and thought I’d write down a few thoughts.

Anyway, if you haven’t noticed, long term interest rates are quite low. At time of writing, my local credit union is offering 30 year mortgages at 4% and 15 years for 3.25%. Naturally, I got an email from the broker we worked with last time we refinanced saying we might be interested in another refinance. I figured lots of other people are in a similar type of situation so I thought I’d write down a few tips.

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Simplified Envelope Budgeting for GnuCash

OK, out of popular demand, I’ve decided to revisit this topic. My original Better Budgeting with GnuCash article is still highly relevant and worth a read for the background if you haven’t read that yet.

The method I proposed in my 1st article works. I used it for over a year with great success. After some time though, I decided we could simplify a few things.

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GnuCash Budget Followup

Here is a followup to a few questions that have come up since my GnuCash Budget post.

  1. How much did I spend for this month?

    I find the Cash Flow report useful for this question. (Reports->Income & Expense->Cash Flow). You need to customize the report a bit before you get the information you need though. 1st, change the date range to the period of time you’re interested in. 2nd, select any additional accounts you want included. By default, the report only includes expenses and asset (cash) accounts. You need to select any liability accounts (like credit cards) that you spend money from.

    When you’ve set up the report, you get Money In and Money Out sections. The Money Out shows you not only how much each budget account spent, but also you can see which expense accounts you spent the money in.

    This is a particular subtlety of this budget system that I really like. You don’t have to spend budget money from the same account as the expense. Example: I have my own personal budget but I use it to by items in many different expense accounts, e.g., movies, games, food, computers, etc. The report might look like this:
    Budget: My budget: 100
    Expense: Food 25
    Expense: Movies 25
    Expense: Computer 50

    I do that exact thing all the time. We might buy a particular expense item but choose to take it out of our savings budget for instance.

  2. Did I go over the budget this month?

    This one is easy. There is not “this month” or “last month” in this budget system. You can choose to think of your budget that way, but I like to think of it as a continuous budget amount. Budgets increase when you increase them and decrease when you spend from them. For me, my budget increases when I earn income. That might be monthly, bi-weekly, and it may have occasional spikes. (Like we got our tax refund back, so I added the money from that to our budgets).

  3. How much did I spend on food and transportation this month?

    Just look at the Cash Flow report and find the category you’re interested in. Note that you can look at both the Expense (how much you spend on a certain thing.) and the Budget (how much you used from the budget.) They may be the same or they may be different depending on how you choose to record transactions.

  4. How much was my net-income for the last quarter?

    Since the budget balances to 0, it doesn’t affect your balance sheet. You can use the standard GnuCash balance sheet and asset reporting to figure out your income etc. One note though, I try to remember that my budget money will need to be spent at some point in the future.

  5. Which area can I spend less and save more?

    This one is pretty easy. Just look at your budget accounts in the main GnuCash window. Since you always see the current balance of your budget account, just look at which ones are positive and which ones are approaching zero (or heaven forbid you didn’t go negative did you?).

    We transfer money between budgets too. Say I built up over a few months a few hundred extra dollars in my Auto:Fuel budget since gas prices have been low. I can decide to make a transfer from that budget to another one that perhaps we had some extra expense from.

Since writing my original post, I’ve only grown to like this system more and more. Feel free to post more questions/comments and I’ll do my best to answer.

Better Budgeting with GnuCash

As a fan of tracking my finances electronically, I’ve paid attention to GnuCash for quite a while. In the past, it wasn’t ready for my needs since it didn’t automatically import finances from my bank. That has changed though. I was happy to recently successfully download bank transactions with the latest GnuCash and I decided to go ahead and make the switch for good.

There are a few reasons GnuCash is better than a number of proprietary alternatives. GnuCash is Open Source Software and can be downloaded and used without purchasing anything. You don’t have to pay extra to unlock more advanced features. You don’t have to pay anything at all! Speaking of the advanced features, you can track stock prices and investment accounts in addition to normal cash based accounts. Also, GnuCash uses a double entry accounting style that can be used to do your accounting in a GAAP compliant fashion.

Anyway, that brings me to my reason for writing this post. I have been somewhat dissatisfied with the budget tracking abilities of other software. I’ve been using Quicken for years and have found that it’s budget features provide a disincentive for my wife and I to actually continually use them. Here are a few of the problems:

  1. Budgets don’t accumulate money
    Lets say you want to save for a vacation and you’d like to budget $300 a month so that after 6 months you have $1800 to go on your vacation. That works fine if your six months fall within a calendar year. You can run a budget report and see how much money you have in that budget. If you happen to cross years however, you’ll have to create a new budget and initialize it with amounts from your old budget. Suppose you had 4 months saved. You’d have to put your budget for the new year’s January at $1200 and then continue saving $300 for the next couple months. This is not only annoying to do for more than a couple budgets, but it causes your budgeted money for January to exceed your income if you’ve been saving for a while. This is especially the case when part of your budget includes savings that you don’t spend.
  2. Budgets don’t balance

    This problem is directly related to the 1st problem. Because you can’t accrue a balance in a budget, you can’t balance your budget with the money you actually have in a savings account. I created a custom report to do this manually but it was never exact.

  3. Budget balances are difficult to adjust

    Suppose you save $50 a month in one budget and $50 in another. After 6 months, you decide that you didn’t need as much money in one account. When do you make the budget adjustment. You can go back and edit every month for the 6 months. You could also make adjustments to a budget all in one month. There isn’t a good way to do it though and unless you adjust it tediously every month to reflect what you need, it’ll mess up your custom reports that you worked hard on.

Anyway, I don’t claim to be an expert at Quicken so you may find my rational unsupported if there are better ways of doing your budget. The point of this however, is that my wife and I didn’t have time to adjust our budget every month. Life doesn’t follow a preset budget. Sometimes you need to make a purchase and use money from savings or another account. We found that every month we wanted to adjust budget values and it was too time consuming.

Getting back on track, we’ve found a much better way to track our budget and are happy with GnuCash. The rest of this post shows how we’ve created budget accounts with GnuCash and how we’ve solved the problems we had with Quicken.

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