Last year I wrote the piece called: Paying Off Your Mortgage is Like Working a Second Job, but I think I confused some folks so I thought I’d try to explain it more thoroughly this time around. I’m going to show off my geeky spreadsheet side which is very much a part of most of my financial calculations.
Below I’ve included some quick spreadsheet calculation:
| Working a 2nd Job | |||
| weeks | 52 | ||
| hr/week | 40 | ||
| pay rate | 7.50 | ||
| 15,600 | |||
| Money Not Spend on a Mortgage | |||
| month | 1,300 | ||
| months/yr | 12 | ||
| 15,600 | |||
In the spreadsheet above, I paid off my previous $15,600 a year mortgage! That’s works out to be $1,300 extra dollars a month that’s available for me to invest, spend, burn, whatever… So if you look at my calculations for working full time at $7.50 per hours, it seems to be equivalent, but it’s not… The thing is that the money from the working full-time at $7.50 is before tax is taken out versus my mortgage saving (which was paid with after tax money, which is commonly called discretionary income).
Cousin’s Dream House
So based on my own personal scenario, I’m really averaging the equivalent of working a second job at $10.50/hr (see calculation below), but obviously without working… While this isn’t obvious at first, if you consider all of the various forms of taxes taken out of your paycheck, it makes sense. So the calculations below is based on the number that I would have to make (gross income) to have an equal amount of discretionary income.
| After Tax Calculation | |||
| Working a 2nd Job | |||
| weeks | 52 | ||
| hr/week | 40 | ||
| pay rate | 10.50 | ||
| 21840 | |||
| Money Not Spend on a Mortgage | |||
| month | 1300 | ||
| months/yr | 12 | ||
| 15600 | |||
| 6240 | 40% | Taxes | |
| 21840 | |||
I think some people think that once the house payment goes away, the previous mortgage owner is now only breaking even, but what really happens is the previous loan payment flips to the positive side by an equal amount that was being spend on interest and principle (all my numbers above doesn’t include my real estate tax and insurance payment since the don’t affect my calculations).
So after I paid off the house, I went from paying $15,600 on the mortgage to investing, saving and a little bit more spending of the extra $15,600! There is no subtle transition, the jump to positive side was immediate!
Anyway, I thought that it would be worth analyzing a bit further than I did late time. Please leave any questions in the comments below!
Tell me if you realized all that I mentioned above,
Thanks,
MR
I love this illustration, and I think I would choose the same route, but… I can’t help but ask what about not paying off your mortgage early and investing the money that you would have invested. While it prolongs your mortgage, you would hopefully be getting a better return than the interest rate on your mortgage. At least, that is how most people justify it.
Yeah, it’s different now these day. My interest rate back when I got my loan as around 7%. These days the interest rate is soooo low that I wouldn’t pay off a mortgage either. But it worked out great for me, especially when the market crashed and most people lost a lot fo value in their brokerage account anyway (unfortunately including me too).
I don’t understand — who has 40 EXTRA hours per week for a second job?
What I mean is the increase in my income is like working a 40 hr job at $10.50 per hr.
I’m not working anymore hours. But I’m not spending my money either so it’s all gravy! 🙂
I personally like using the leverage of a mortgage but can appreciate the point you are trying to make. If your goal is to have no mortgage you will definitely free up some cash flow.
Actually in some ways I got lucky. The financial mix worked out great for me, but only because the stock market got hammered. So I was able to increase my contributions while the market was low… I just hope it comes back.
yes paying off debt means you have extra money to spend/save. Nothing like paying off debt by working at a second job and then continue with the second job after paying off. like triple jobs, isn’t it?
yes. With my income stream free from my previous mortgage payment, income from blogging, and still working a full time job, It is like having three streams of income. Now if I could just get the real estate stream working, I’d be really flowing 🙂
Yeap. $1 post tax is worth more than $1 before tax. I can’t wait until our mortgage is paid off, it will be a while though…
At least you are leveraging debt in a good way! I bet your rental unit is killing right now!! Nice job!
Great post! I’m dying to own a home. Good for you for having paid it down-such an accomplishment.
Great illustration of the concept! This is exactly why we are making overpayments.. After we get over the first hurdle of owning a home, we will be almost rich!
Hmmm, I was going to call into question your use of a 40% tax rate, however if you’re treating this all as dollars on the margin, then it would be appropriate.
I can’t wait for the day we break on through to positive! There’s this little image that plays in my mind of a line all of a sudden shooting sky high into the air out of water. (no, we’re not underwater… that’s just the random image in my noggin.)