Monday, January 12, 2009


When a lot of people talk about reducing their debt, they mean their credit card debt. And, by all means, that should go! Since we carry no credit card debt and no car loans, when I talk about reducing my debt, I mean paying off my house. I REALLY want the house paid off. Think about how much your monthly mortgage is. What else could you do with that money? Does the current state of the economy worry you? How much more secure would you feel if you knew the roof over your head belonged to you and not the mortgage company? While not entirely common, did you know there are plenty of instances that give your mortgage company the right to call the full balance of your loan due immediately? Unfortunately, if you're like me, the huge sum of money involved in a mortgage is completely demoralizing. What's the point in throwing an extra $1,000 at a loan 100 times (or more) that size?

Well, I have an assignment for you. Look up an online mortgage calculator. There are lots of them out there. Find one that allows you to calculate the difference in your overall payment if you pay an extra amount each month. You want something that will tell you both the change in time to payoff and total interest paid. Our loan is a standard 30 year loan---no adjustable rates, no pre-payment penalties. We have the ability to write a an extra check to the mortgage company and specify the money go towards the loan balance. We just bought the house a year and a half ago. As an example, if we start paying an extra $100 each month, we will pay off the loan 8 YEARS early and save over $38,000 in interest. If we start paying an extra $200 each month, we will pay off the loan 12 YEARS early and save over $56,000 in interest. This happens because a very large portion of each monthly payment goes towards interest. Each month that you pay, slightly more goes towards principle, but it's many, many, many years before you get to the point where the majority of your payment is used to pay down the principle. It's really quite similar to only making minimum payments on a large credit card debt. When you're paying interest on a large sum of money, bring the principle down just a little bit makes a big difference in how much you pay over the life of the loan. You may be thinking, "whoopty doo, I won't be living here in 22 years anyway". Fair enough, but the more you pay down your principle, the bigger check you'll get when you sell (and you'll use that check to put down 20% or more on the next house....right?!?).

So, $100 a month. That's a pretty reasonable starting point. Maybe you make a resolution of paying an extra $100/month this year and next year you bump that up to $150. $100 a month is doable, the trick is "finding the pennies in the couch", the little things add up quickly. Some places a typical American family might find that money:
1. Groceries--I know LOTS of families that could save $100 on groceries alone...cut coupons and learn to use them correctly, learn to stock up during sales and stop paying full price for anything, eat one or two less meat based meals each week, learn the unit prices in your area and buy in bulk when it's cheaper.
2. Eating Out--If you're grabbing lunch on the go everyday, start packing a lunch. If you typically spend $7/day on lunch, just bringing a bag lunch twice a week saves you $56/month
3. Stop the cable madness--Cable is a luxury, not a necessity. If you don't want to give it up completely, how about cutting back to the next cheapest package?
4. Movie Rentals--you might be surprised how many good movies your library has available...for free. I was shocked to find how extensive my local library's DVD section is. We're not talking documentaries and history channel type stuff (though they have that too)---there's lots of good ol' fluff there when we need a relaxing night
5. Change the thermostat--bump the temperature up 2 degrees in the summer and down 2 degrees in the winter. Put the money you save on your electric bill towards your mortgage
6. Cell phones--same as the cable. I'll count talk service as a necessity (if you don't have a land line), but the rest is luxury. Do you NEED to be able to text and send pictures? Especially if you have computer/email access at home, is the extra money you spend on this each month really worth it? If you do have the latest and greatest cell service, do you need a land line as well?
7. Gym Memberships--do you use it? If so, good for you. If not, why are you paying?
8. Coffee Shops--I know, everyone picks on the coffee, but really, if you spend $4 on coffee every weekday, that's nearly $100/month right there. Buy a good thermos, make your own. Even if cold caffeine is your addiction, $1 for a bottle of coke from the vending machine is costing you just over $20/month. Cut either one by half and you have a decent amount of money to put toward your goal

There are lots of ways to save money--cloth diapers, breastfeeding, home gardens, walking/biking, etc, etc, etc... If these ideas don't work for you, I'm sure something in your budget can be shaved down. And yes, this is easier if you have an honest to goodness budget you're working from. Otherwise, that extra $10 you saved on one thing just gets spent on something else. I highly recommend the budget technique outlined in the book America's Cheapest Family if you're new to budgeting. Make yourself an "extra principle payments" category in your budget and start shifting your extra leftover money there. You'd be surprised how quickly $5 here and $10 there adds up. If you don't already have a mortgage, use the same technique to save up a good down payment and be responsible about doing your research and choosing a mortgage that won't get you into trouble.

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