Owing money to someone is the worst. I’m currently trying to figure out how and who I should have cover me for our first football pool of the year. I’m out of the office and the money is due… got to take out an IOU.
It seems like the small amounts are the hardest to keep track of—those times when we are in line at Shake Shack and we don’t have our wallet and our buddy covers us. Or that time we have to pay in cash and our wallets are holding only plastic.
It makes me feel guilty, and if I forget about what I owe it is even worse when I remember… weeks later.
The big amounts are easier, because they are rarer.
Maybe we aren’t to blame for having to borrow money every once in awhile… it’s not our fault, it’s our culture’s fault. We are a world that is constantly borrowing. Ever used a credit card?
No one wants to be that person that always just happens to forget their wallet during a steak dinner night… right?
Owing money in general is a burden, but we have to borrow money at times in order to afford individual investments.
What comes to mind for me is a house and that damn mortgage.
Burn that mortgage down
Hearing parents talk about mortgage burning parties never made sense, until I had my own mortgage.
I can’t wait for that day. Sit in the backyard of MY home, kick the feet up with a cold one in hand and watch that piece of paper that has hung over my head for years finally burn to ashes… a weight being lifted off my shoulders.
It takes time to get to this point, though.
To get there faster, though, we have the ability to pay some extra payments per year and really cut into our mortgage term.
Take for instance a 30 year mortgage… call it $300,000. At a 4.5% interest rate, that would mean a monthly payment of $1,520.
This mortgage could be cut from a 30-year burden to a 15-year burden if six extra payments were paid a year.
It takes a lot to expedite that mortgage burning party—that’s a little more than $9,100 a year (for this example) towards a mortgage and away from savings that needs to be spent.
But it can be done. It’s a matter of how much you really hate this type of debt….
Leverage early, not later
Usually when I think of the process of home buying, it’s the one that starts with a starter home and then progresses to that family home (or life home).
For me, I was always planning to have my starter home for about seven years, and that is looking to be on track.
When I posed the questions to Facebook friends I got a similar answer… 7-10 years.
My debate of whether or not to utilize my extra cash flow today that I have to pay down this hated debt I have has been a constant question I ask myself and am asked by friends. The answer is really dependent on one’s background and investment outlook.
3 reasons to not put cash towards the mortgage
1. It’s a cash flow game today – When we get to the point that we are able to afford our first house, it’s exciting. We are also, likely, at a point when the mortgage will take a big chunk out of our cash flow. In our early years, we need to have the extra cash flow and utilize it for savings… to help build up our financial foundation. Using the extra cash for savings and everyday cash flow early on would be a better use than trying to tackle the behemoth debt that will likely be different in seven years when you move to another house and take on greater debt.
2. The compounding effect – We’ve talked about it before. The person who is able to save and invest cash flow early is better off than the individual that earns the same rate of return, but starts investing later in life (and who invests more. Check out my compounding blog from a couple months back.). A house is an investment, but liquidity tends to be king and starting to build that liquidity early and having that nest egg to compound on should be beneficial later on.
3. Rates are low, returns are high – When you pay down your mortgage, you are really just getting the rate of return that is equivalent to your interest rate. For example, if your mortgage rate is 4.5%, then any extra money you put towards your mortgage is the equivalent of earning 4.5%. So the question is, do you think you can invest your money and earn more than your mortgage interest rate or not? If the answer is yes, then investing is better than burning your mortgage.
Today is not tomorrow and decisions now aren’t meant to be for later
Having no debt is a huge key to being able to retire happy. Oh, I know retirement is so far away and I don’t want to plan for it… I get it!
Don’t we all want to have that opportunity to kick the feet up with a cold one in hand on a chilly winter night by the fire pit using our mortgage as firewood?
Okay, then let’s get to that point, but first take a second to understand when it’s right to begin moving towards that moment.
A starter home is a big endeavor. Focus on learning what it’s like to own a home and the costs that go into it. Figure out how you can balance savings and debt payments. Realize that this isn’t your forever home. (To better understand the above try our home buying boot camp.)
The decision to get your feet under you today by utilizing extra cash flow for other things (savings, living, home improvements) doesn’t mean that’s how it should be on your next home.
When you get to that house, you plan to raise a family. It’s where you plan to plant your roots. Then it’s time to go from a starter to a finisher. Push towards getting that debt down to zero… as quickly as possible.
Set a goal… maybe it is 15 years till that mortgage burning party. Well, commit to it and budget for those extra payments.
Eliminate debt on your life house; service it on that starter home.