Case Study: Growing a Money Mustache at Sea

I just got an interesting request for a Mustachian Makeover*. Here is our reader’s story:

Dear MMM,

I was wondering if you might want to do an analysis of some reformed spenders working hard on their stash but dealing with the repercussions of previous and lasting life choices (like a mortgage) in their newly reformed lives.

My husband and I have a large mortgage at 6.5%. It is also (cringe) interest only. We were paying a little extra on it every month, but I have since stopped and opted to invest that extra instead. My thinking was I could keep up with or beat 6.5%, and if anything terrible were to happen I didn’t want all our extra money tied up in a house that was still underwater. We save as much as we possibly can every month, including contributing to a 401K, $500 to each Roth every month, and additional savings. We live on a very strict budget in order to max out that additional savings.

We recently made a huge life change. We have a boat which we intended to live on after selling our house and while building a new one. Selling our house didn’t happen though, so instead we have rented out our house and moved onto the boat. We continue to save what we did before, but now additionally save the rent payment and the money that was being spent on utilities, cable and internet. It’s amazing how much extra money you save when moving to a smaller space!

Our house is under water. If we were able to pay the mortgage down by $100,000 we would be able to refinance at today’s lower rates and the rent would cover our new payment and then some. Instead, we’re stuck in an interest only mortgage with a balance that doesn’t move and rent payments that cover only about 70%.

Eventually we would like to move back onto land, probably in a different area. Our only other debt is our car payments – modest in comparison to old payments, but (I know) still not very mustachian. The rates are only 3.9% though.

What would you suggest is our best course of action? Should we put everything towards the mortgage instead of investing it? Or should we try to make our savings grow at a faster rate than the mortgage, and then later use it to pay the mortgage down and refinance? If we can eventually bring the mortgage payment inline with the rent, should we look into buying a smaller more practical home while continuing to rent the existing one, or should we move back into the one we already own?

Dear Lost at Sea,

First of all, congratulations on your new-found Badassity! Moving from what sounds like an expensive luxury house to a boat is a sign that you have what it takes to get yourself out of trouble very quickly, and then amass some serious riches for yourself in your new future.

From the sounds of it, your mortgage situation will never go away unless the house appreciates quickly, or you get it paid down to a level where refinancing is possible. The bad news is, housing appreciation is unpredictable and a $400,000 house would take 11 years at a 2% inflation rate to appreciate by $100,000. The good news is, a hundred grand is pretty easy to come by when you have two people working.

You didn’t tell me the price of your house, or the mortgage balance, but let’s assume it is a $400,000 house with a $400,000 mortgage. To refinance, you need to pay off at least $100,000 so that you have 20% equity to qualify for a good mortgage.

Current interest cost: 400,000@6.5%: $26,000 per year
Interest cost after paying down $100k and refinancing: $300,000 @ 4.5%: $13,500 per year
Savings: $12,500 per year.

So by investing $100,000 into your mortgage, you’ll end up saving $12,500 per year in interest. That’s equal to a guaranteed rate of 12.5%** on your payments – the best you will get anywhere in the world.

So I would suggest that you temporarily suspend ALL savings for this emergency – 401k, Roth, investments, piggybank, whatever, and put it straight into the mortgage. Transfer any liquid savings over as well, except for a small ‘Stash in case of emergency expenses. Every cent you put in is earning you 12.5%, so it is very exciting! Skip dinners out, skip driving on weekends, and just go crazy on that hundred grand. Plan all your rewards and future purchases for sometime after you reach that goal of getting this refinancing done. Also, we cannot predict when interest rates will rise, so the sooner you get it done, the better.

Next, if you have car loans, you probably have cars that are way too expensive for your current net worth. You could save an additional boatload of money by selling them both, and buying some nice 2004 models for $5000-$8000 each.  Toyota Corolla, Matrix, Scion xA, Nissan Versa, Honda Civic, even a Volkswagen Jetta or Golf  TDI – all great choices because of fuel savings and tying up only a small amount of cash.

Mr. Money Mustache feels that nobody with less than a million dollar net worth should even consider buying a new car (and even then, you must pay cash of course), and even then it must not be a car over $20,000,  and even then they must punch themselves in the face after making the purchase to acknowledge the unnecessary expenditure.

To answer your other question about the long-run housing choice – to answer that seriously I’d have to know about the size of the house, the cost, the location, etc. But to put it in my usual generalized and opinionated terms, I would say a couple with no kids should have a house no bigger than 2500 square feet (ideal size is 1500 sf), that costs no more than three years of their combined salaries put together (ideal ratio varies widely depending on your city). Instead of size, focus on quality, like big windows with nice views, open floorplan, big fancy kitchen with a nice island for entertaining people and cooking at home, in a walkable and bikeable neighborhood that will free you from car dependence. And of course, with a minimal or zero commute to work.  So you may indeed want to downsize and pick a new location.

As for renting it out vs. selling it at a loss – it is a good rental if the annual rent income exceeds about 6% of the current market value if you sold it. Or AT LEAST if the rent payments cover all the costs and you don’t mind being a landlord.

Once you get to this stage (or even sooner if you like), write in and tell us how you’re doing and we can tell you how to get the additional million dollars saved for a luxurious semiretirement for both of you.

I’ll admit this is a wide-ranging and highly detailed prescription. But hey, you asked for a Mustachian Makeover! If you follow it to its fullest, I guarantee you will both be retired, muscular millionaires with great happiness and health within 10-15 years, and Mother Earth will open her big blue watery eyes and wink at you as you sail your boat over top of them on a sunny summer Sunday shortly afterwards.

* The reader actually invented the term Mustachian Makeover herself, and said I could add it to the growing MMM dialect. Thanks, Lost at Sea!

** Note that even though we don’t know her mortgage amount, the actual return on the 100k invested is likely to be equal to, or even greater than the 12.5% listed, since the savings amount scales up with the ratio of current mortgage size compared to $100k.

  • Roger June 13, 2011, 10:15 am

    Another thing to consider related to the cars is whether you really NEED two cars. Maybe one of you can use public transportation or bicycle to work.

  • No Debt MBA June 13, 2011, 12:21 pm

    You can also look into cheaper slips or a mooring for your boat. You’ll probably pay a price in convenience, but it may be worth it depending on the savings. If you have a storage unit in addition to your boat (many people do, you may not) I’d examine if you really need to keep it. Selling the extra belongings and getting rid of the rental fee is extra money for your mortgage.

  • Brandy June 13, 2011, 2:40 pm

    I had to put this quote on my facebook page, “Mr. Money Mustache feels that nobody with less than a million dollar net worth should even consider buying a new car (and even then, you must pay cash of course), and even then it must not be a car over $20,000, and even then they must punch themselves in the face after making the purchase to acknowledge the unnecessary expenditure.” LOL

    • MMM June 13, 2011, 3:57 pm

      Oh, thanks a lot Brandy. Mr. Money Mustache LOVES when people like his one-liners. It reassures me that I’m not always just sitting here alone re-reading my own stuff and having a chuckle :-)

      • Madge June 14, 2011, 7:38 am

        yeah i totally LOLed at that, too, MMM. and had to read it to my fiancee, who also laughed.

        you know, that’s not an every day occurrence when reading about money!

    • Elkbark May 18, 2012, 4:22 pm

      I laughed too, but then stopped abruptly when I realized that I needed to punch myself in the face.

      • Marcus August 8, 2013, 7:08 am

        I now have a black eye!

  • Lost At Sea June 13, 2011, 2:45 pm

    Thanks for the makeover, MMM! I truly appreciate your insight, and I’m starting to feel inspired that we might actually be able to do this. I didn’t initially think about stopping contributions to our retirement accounts, but the interest savings on the mortgage does probably trump the potential of some short term cut backs towards our retirement. We can always ramp up 401K contributions later and might even have time to catch up with our 2011 Roth contributions by April next year.

    We made fairly reasonable choices on our cars – both purchased used and under $20k. My husband needs his truck for work, and my Prius saves me at the gas pump, but I am considering whether refinancing the truck and freeing up an extra $200 to put towards the mortgage would be smart, and whether I can go without a car completely.

    Our moorage payment is as cheap as it possibly can be, but we do have a storage unit at $100 a month. I am going to seriously think about what we could purge.

    I feel like I’m in a race to get to $100k before interest rates start rising again! It’s too bad my ARM won’t adjust right now – it would be at just 3%.

    Thanks for the additional suggestions in the comments!

    • FreeUrChains March 28, 2012, 9:59 am

      You can always ramp up your 401k with excess cash you will probably earn from a before age 62 retirement. It’s better to retire at say 35, THEN when your volunteering and they insist on giving you money for doing the things you love, put the extra cash into the 401k for increases in medical care from ages 62-125.

  • Kitty June 13, 2011, 3:55 pm

    Refi of rented house could be a problem since it is no longer your primary residence. You should check into that before dumping a ton of money into the interest only mortgage. Check what mortgages you could get for a rental. In fact, now that it is a rental, is there a new group of mortgages to look at that may not require the $100k paydown?
    Perhaps MMM could comment.

    • MMM June 13, 2011, 4:15 pm

      Hi Kitty, thanks for the excellent point.

      You can definitely refinance a rented house, both I and other landlord friends have done this in the past. But banks charge a higher interest rate for an “investment property” – for me the spread was 0.5% or so back in 2005.

      Depending on the timing, it might be possible to time the refinancing for right at the end of a rental cycle. So you can move back into the house during the re-fi and get the owner-occupied interest rate. After a refinancing, banks aren’t allowed to prevent you from re-renting it, so you can keep the low mortgage rate even if you re-rent in the future (just as your current loan is a non-investment loan).

  • Here to Help June 29, 2011, 4:53 pm

    I say go for strategic default. Don’t put anymore money into an “asset” that’s underwater. Lets say it takes you however many years to pay it down to 400k. Who’s to say that the market value won’t be less by then? Also, who’s to say interest rate won’t go up by then? Just get rid of that house now and you’ll enjoy three things. 1) No more negative cash flow from the house so you’ll have more cash to invest with. 2) Invest that 100k into 401k/IRA instead. Remember, there are annual contribution limits to 401k and IRA so you should maximize those as much as you can. 3) No more stress about this underwater house.

    There are moral reasons for/against strategic default and that’s a whole different topic. I strongly recommend you consider this option.

    • MMM June 29, 2011, 8:28 pm

      It’s always good to consider the options, and it’s always fun to run away from our obligations.. but I’d still never do it myself. What if you bought a house with 0% down, then took out an extra line of credit to buy some leather couches and big screen TVs. Waaah! My house is underwater now! Should you default in that case too?

      What if I paid 100% cash for a house, and the value went down? Should I go rob a bank for an amount equal to the purchase price, and then abandon my house? That is also the same thing.

      I would take these steps and many more if they were needed to somehow protect the lives of loved ones. But to do it just so I can have a bigger 401k? Beh.

      My own point in putting out the advice in the article is: strategic default is a wussypants move to make, it has severe credit consquences, and a hundred grand is easy money for a Mustachian to make in order to do the right thing. In fact, the practice that you get from saving that amount of money and using it to pay down debt will grow your frugality muscles so quickly, that the next hundred, and all subsequent ones, will be even easier to earn.

      But I still agree that it is worthwhile for people to at least research exactly what is involved in being a strategic wussypants, at least so you can accurately make fun of other people who do it.

      • April October 17, 2011, 1:34 pm


      • steveinfl January 25, 2012, 3:08 pm


        Thanks for this reply. I am trying to refi my house in FL right now to take advantage of lower interest rates and got some unpleasant news.

        Purchased for 275k in 2008
        Paid balance down to 215k in last 2 years
        Appraised today at 172k
        So the 60k I worked my ass off for and applied to my mortgage has gone into negative equity that may take decades to recover ( if ever).

        Although I like the house and can continue to put more cash to payoff the mortgage early I have this nagging feeling that I should walk away and put my hard earned cash to use buying a cheaper home. Your line “100k” isn’t much to Mustachian provided a much appreciated boost to continue my plan of staying put, paying off the mortgage and then building up a real stache.

      • chopperdave June 1, 2012, 12:46 pm

        A mortgage is a legal obligation, not a moral one. If it is legal to stop making the payments and send the keys instead, I’d say go for it.

        Just make sure you’ll never need to borrow money again. Ever.

        • Nate November 20, 2014, 6:58 pm

          I would say that any type of debt is also a moral obligation, especially if you can pay it, but you choose not to pay it. The bank loaned the money with the expectation that they would get paid back. It kind of feels like stealing if the money isn’t paid back to the bank.

          • eric November 27, 2016, 6:08 pm

            You write “The bank loaned the money with the expectation that they would get paid back.” This is almost always untrue. In fact, the bank loaned the money with the expectation that it could sell the mortgage to another institution, which makes a business of betting that people will not go underwater and not pay back the loan. And those institutions will definitely NOT feel any moral obligation to pay any other institution back. In fact, they will feel a moral obligation NOT to pay back other institutions if they can get away with it. So there’s quite a good case to be made that walking away from an underwater mortgage in today’s world is really not immoral. I have never done it and would be kind of horrified to be in that position, but the moral obligation argument based on the bank is weak. If you are going to make a moral obligation argument, it has to be based more on the kind of person YOU want to be. But even there, I’m not sure…

        • Greg November 3, 2015, 12:31 pm

          But laws are morality based – otherwise what is “right” and “wrong”? Plus, I agree with Nate – a debt is a moral obligation. You have made a promise to someone.

  • Here to Help June 30, 2011, 10:55 am

    MMM – Total agree with you on paying down this debt will grow frugality muscles. Building character and discipline is very important in achieving overall goal.

    Lost at Sea – There are moral reasons for/against strategic default. There are reasons against it as MMM stated. Surprisingly, there are moral reasons for it too. I won’t go into it but I strongly recommend googling on this topic and go the route your comfortable with. Good luck to you.

  • October MacBain January 23, 2012, 3:00 pm

    “The good news is, a hundred grand is pretty easy to come by when you have two people working.”

    *instant disconnect*

    My partner and my combined take-home is about $50,000-$55,000 per year, providing one of us doesn’t lose their job. When I’m all caught up on this blog, I’m going to ask about advice for those of us with more modest means.

    Really, seeing statements like this is very disheartening for we who do not make shitloads of money.

    • FreeUrChains March 28, 2012, 10:08 am

      You can actually work on a very early retirement while currently not making a lot of money, by not only focusing on increasing your incomes and reducing your expenses, but by creating more self-sufficent systems for your needs. Example a watering greenhouse system, that waters, takes in sunlight, and grows itself, it can even can and freeze the veggies and fruits itself, and box up extras itself to sell and send away, once the order is placed. (think about it we live in the 21st century with all these advanced machines being thrown out in working order by consumerist for newer upgrades). Power the machines via wind, solar, geothermal, etc that you can create from a scrap yard with enough Time and Knowledge. Autonmous Buildings are starting to become more popular and stylish (except for the Oil and Utility companies whom may hate you forever). So watch some Youtube vids, read a book from the library, increase your education for free, after you have reduce your wants and expenses, and gone as comfortably as you can to increase you incomes.

      • Mr. Money Mustache March 28, 2012, 10:15 am

        Wow, that sounds quite neat. There are already machines you can buy that do that for you – they are called “shares in agricultural companies”.

        The great benefit of a capitalist system is that you can own productive businesses and get the dividends that stream from them, and use them to buy food or whatever you like. Of course, being self-sufficient is fun too, and for some things (like home maintenance), the hourly return on your labor is immense. But when growing your own food, you have to do the math: for certain crops and in certain climates, it may be more expensive to do it yourself. But still more fun.

  • Joe May 17, 2012, 3:30 pm

    People who live on boats should not be saying “Our house is under water.” Just putting that out there…

    • InDifferentCircumflexes April 16, 2013, 4:20 pm

      “We all live in a yellow submarine”…


    • JMK May 30, 2014, 11:19 am

      When I read that line my thought was “my house is underwater, and my home is on the water”.

  • Danielle May 22, 2012, 8:28 pm

    You said:
    ” a couple with no kids should have a house no bigger than 2500 square feet (ideal size is 1500 sf), that costs no more than three years of their combined salaries put together (ideal ratio varies widely depending on your city). Instead of size, focus on quality, like big windows with nice views, open floorplan, big fancy kitchen with a nice island for entertaining people and cooking at home, in a walkable and bikeable neighborhood that will free you from car dependence. And of course, with a minimal or zero commute to work.”

    I’m so excited that my husband are moving into a home just like this! Plus, we sold our second car and I will continue biking/busing to work. This lifestyle feels so honest and good! I’m a bit smug because I feel like I’ve learned a huge life secret here, that no one else seems to “get” (at least no one around me). Thank you for your blog!

    • Derrick November 6, 2015, 11:09 am

      I’m currently looking to buy my first home with my partner. I was a bit shocked by the “cost no more than three years combined salary” I’m assuming that is income before taxes. Our’s would be 125K. So that means my limit would be a home worth 375k?! I’ve been cringing at the idea of spending more than 230k. Am I possibly more frugal than I thought?

      • Matt M January 1, 2017, 8:41 am

        Dude, I bought a 1056 sq ft house in North Raleigh for 150k. Based on my income, I was approved for a loan for well over $200k. I also got a roommate over the last year to pay off the rest of my student loans, plus she had a dog. Three fairly large mammals living in a 1000 sq ft house is pretty doable, but of course prices vary depending on location.

        • Flow Focused October 1, 2017, 6:59 pm

          Matt, I moved to north Raleigh a month ago!!! Great price on that house I’d say.
          Does anyone know how this story turned out? I’m guessing if they kept their house it’s well above what they owe at this point being 6+ years later.

  • Tom October 18, 2013, 2:32 pm

    That was really good advice, MMM.

  • Amazing Alice May 15, 2014, 1:51 pm

    Ok I am late to this post but I have to comment because this whole situation just pisses me off. Why the f@$k aren’t you just selling the bloody house???? Sell it at a small loss if you have to!!! Start saving again and buy a nice cheap house. I mean you are in America, there a bargains in abundance with housing are there not????? I just get annoyed when people buy posh over priced houses for no reason other than to impress people they don’t like. Any way, it’s an old post so perhaps this whole situation is now awesome. I am totally in love with this site by the way, you rock MMM!!!!

    • Kira July 8, 2014, 2:19 pm

      I see you’re in Australia so you probably aren’t aware of how common underwater mortgages are in the U.S. Unfortunately, many “normal” people have this issue (not just people who “buy posh over priced houses”) because of the recent housing bubble/bust — even people who made 30% down payments at the peak. As for the “bargains in abundance”, that varies by region; based on friends’ recent experiences in my region, buying a starter home is still difficult due to investors driving costs up.

  • Chad July 9, 2014, 10:06 am

    MMM – Have you received any updates from Lost At Sea? I’m curious to see what they ultimately decided to do about the house…

  • Dave April 21, 2015, 4:05 pm

    Dear MMM,
    I love the blog so far. I’m reading all articles from your first post till one day I catch up to the latest. As an engineer, I can certainly relate to you. I have a question about my mortgage.

    I bought a place for (gasp) 0% down in 2013 November. Originally I bought it as a way to generate some money from a roommate, and I was. I reduced my monthly living cost because I had a roommate paying 3/4 my monthly expenses to me. I then lost my job in 2014 February and found a new job in a different state in 2015 May which involved moving. All said, I only lived in the place for about 6-7 months (with a roommate to save money) before moving. I was not able to sell the place so after about 5 months I rented it out to ease the monthly pain. I rent it out at a small loss (but it feels huge to be losing money). Here are the numbers:

    Original mortgage amount: 149,000

    Mortgage (1,090) plus homeowners dues (275): 1,365

    Rental Income (1,100 – 10% property management fee): 990

    Deficit: 375

    I gain 200 in equity every month on my house.

    So I am effectively losing: 175 per month.

    -Is it best to hold onto this place and keep renting it at a loss?
    -Would it be better to sell the place for a 20k loss and find the money to account for that loss?
    -I use the management company at a 10% fee since I’m out of state to lower my risk. They will make sure people pay on time and take the renter to court if they don’t pay, take care of repairs quickly with people they know in the area, etc. Would it be better to rent it out directly to a tenant not through a rental company?

  • Michael September 4, 2015, 1:06 pm

    I’ve lived on a sailboat for the last two years while finishing my undergrad. Boat life is great! and Cheap! My slip fee is $250/month and that includes electricity/water/storage space/wifi. I may move out to mooring, which would cost even less! The inconveniences are trivial to this kind of life.

    While reading your blog, I have been planning all the ways I am going to save enough money for a down payment on a house nearby, fix it up, rent it out, save for another downpayment, and repeat. I’m graduating with an enology degree(winemaking), and much of the jobs that are available in the area(San Luis Obispo and Paso Robles, CA) don’t pay well starting out(35k-50k), so the only way for me to save enough for a down payment is follow all your advice on saving money. Fortunately, I’ve taken so long to finish school I’ve avoided student debt.

    There’s a great book I think you would really enjoy, “Sailing the Farm.” It’s about a young man’s journey on the seas and how he built a sustainable fortress from a 30 foot fiberglass boat. He lived off of fresh sprouts, nuts, yogurts, cereals, fruit that he would pick on deserted islands in the Caribbean and dry in his solar drier, veggies he grew in his greenhouse, fish he caught, and what ever else he could barter with the native people. The MAN LIVED.

    I want to do something similar, and become a winemaker as well. The money I make, I will save and eventually invest. In the next couple years, I am going to fit my sailboat, Beverley J into a sustainable fortress and become free.

  • Matt August 19, 2016, 2:26 am

    Very interesting article, as usual! Just to put things in perspective, a 1500 sqft place to live is a good problem to have if one’s considering a downsize for a couple. We are a family of 4, living near Paris, France and we’re happy in our 60m2 flat (645 sqft). Of course, we would be very happy to have a few square meters more, but I doubt we would need to exceed 90m2 (968 sqft). I think that space is like time : we tend to “occupy” what’s at our disposal. If you have a lot of time to complete a task, you’ll tend to use all of this time, even if the task could be completed in much less time. I suspect it’s the same with living space. Which leaves a lots of room (hum) to spend much less on a house/flat and invest more :)

  • Jason February 17, 2017, 11:48 am

    “Mr. Money Mustache feels that nobody with less than a million dollar net worth should even consider buying a new car (and even then, you must pay cash of course), and even then it must not be a car over $20,000, and even then they must punch themselves in the face after making the purchase to acknowledge the unnecessary expenditure”. Classic!

    MMM, I am hooked on your blog. I’ve been a saver since childhood and thought I had the savings thing pretty mich figured out, but you have opened my eyes to the possibilities of saving the MMM way. Early retirement is staring me in the face, so I also need to get much smarter on investing; the 2009 crash, pulling out late and also getting back in late really chewed up a large chunk of retirement savings and has increased my fear of loosing it again to unhealthy levels. I have missed out on a big percentage of S&P 500 gains over the last year because of this fear; currently a bit heavy in bonds and have a few choice stocks (mixture of winners & losers). After reading some of your investing articles, my goal is to gradually move funds I will need within the next few years to a 50/50 bond/stock or less agressive ratio and the remaining funds to a more agressive mix, say 25/75. Thoughts?

  • Anonymous February 5, 2019, 5:21 pm

    MMM, I am really loving your blog. Thank you for continually reminding me how dumb I am for buying a new vehicle : ) I will redeem myself by never buying new again!


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