Tag Archives: mortgage free

Earning 25 Percent On My Previous Mortgage Payment

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Occasionally I write about being totally debt free (no mortgage, car loans or credit card debt), but I had one problem with being debt free that took me a while to solve, and that was “What do I do with the extra infusion of cash each month”?  Such an increase of cash by paying off my mortgage was like getting a second job on the side!  In fact paying off my mortgage has cut my annual expense by more than 25%!

Back to my problem!  Obviously I don’t want to incur lifestyle creep since I worked so hard to pay off the mortgage early.  To spend more just to increase my lifestyle would have meant that I basically sacrificed for nothing because I really wouldn’t be getting ahead!  But what to do that extra money?  I didn’t want to put it in a savings account that would earn less than 1%…

Here’s What I Did!

It turned out that my employer offers an ESPP (employee stock purchase plan) that enables me to get a 15% discount on the purchase price of my employer’s stock.    Obviously, 15% beats less than 1%, but it gets even better so that option is a winner if I cash out the stock immediately after it get’s in my account.  But in addition to the 15%, I’ve been putting the money into a (what I consider) safe dividend stock and making over 10% there too.  So that effectively give me a return of over 25% for that each year of participating in the ESPP.

Next Step:

Why not use the money for future real estate investments?  Believe it or not, but often I experiment with working on the best financial strategy until I get the best mix, much like I did with the combination of ESPP and dividend investing.

Bests,

MR

Mortgage Free versus Paying For 30 Years

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Today I’m going to talk about why I believe paying off your home mortgage early makes more sense for us middle folks (and probably the upper folks too) instead of investing all of your extra money into the stock market.

From some financial advisors, we hear advise such as paying off your mortgage is a bad financial decision if not down right stupid.

But unless you are a robot, I don’t believe this is true!

Let’s looks at the argument for not paying off your house early.  The typical argument goes that if you take the extra amount that you would pay on your house and invest it, you’ll end up rich some day!

The problem with that argument for the majority of us is twofold:

  1. That extra money that you were (in theory) to invest somehow gets spent  in a moment of weakness or financial strain during your life. 
  2. The standard deduction is so high that sooner rather than later the itemized deduction for a mortgage is not worth it after 5 or so years (Unless you have a $300,000+ house)

Another problem is what if the market tanks like it did in 2008?  Investment returns aren’t guaranteed, but the lack of a house payment is forever (at least until you upgrade to a larger house…)!

Financial strain happens, and that is why it’s wise to have an emergency fund during this process.  While I didn’t have a dedicated emergency fund per se, I had money in diversified portfolio (including fixed income) that I could hit if such a need came to surface.

Since I am mortgage free, and no longer have a mortgage, saving is much easier for me now (after a period of adjustment).

-MR

Financial Planning Isn’t Really A One Size Fits All Model

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There isn’t a “One Size Fits All” model for financial planning.

 

Credit Cards

I love credit cards, no wait, I love reward credit cards!  But this is my one exception where I deviate from the norm with respect to my friends and their spending habits.

I have a few friends that have gone bankrupt (in 1 case a few times) and so I will never say “I love credit cards” to them.  I don’t want them to think that it’s okay to spend so easily.  We have to know our limitations and weaknesses.

However, for me, credit cards are a wonderful discount on my purchases.  Sometimes, I use the reward points to splurge and buy a nice gift that I would have had to spend money on.

Mortgage Pre-Payment

I took a path that I know isn’t considered the best for most, but it was the best for me.  You see, I pre-paid and them totally paid off my mortgage early.  I know that from a mathematical perspective it makes more sense to put that extra money in investments.  But I couldn’t stand the debt hanging over my head, and I doubt I would have consistently put the extra money into investments, thus defeating the plan.

I very proud of my accomplishment with my house, and if I had to do it all over, I’m pretty sure I would have done it exactly the same.  I especially like that fact that the money that I don’t have to pay anymore is like getting a 2nd job in many ways, especially with respect to cash flow!

While mathematically it makes sense to put the extra money into investments, missing in the formula is the human element.  The equation is mathematical but the human element takes away some of the straight math properties and adds emotion and impulse buying elements.  Shoot, I consider myself good with money, and even I sometimes have problems controlling my spending, especially when it some to my kids!

Investments

I tend to invest in stocks, but most of my money is in the mutual funds that are included within my 401(k) plan at work. 

In my stock dividend “Lunch Experiment“, I run a high beta investment portfolio.  This isn’t advisable and I’m only running such a portfolio because the money was money that I would have spent.  I don’t advise anyone to follow such a risky portfolio, but it’s still fun to play with!

Conclusion

So what I’m really trying to convey is that there isn’t a single generic “one size fits all” type of model to follow when it comes to financial planning or advice.  Perhaps start with one of the three financial advisors and then customize it after you find one that mostly fits your goals.  Personally, I’ve always liked David Bach with just a slight hint of Robert Kiyosaki.

-MR

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I Am Debt Free, My Mortgage Countdown #1 – Equilibrium

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I’m Debt Free!  I don’t have credit card, car, mortgage or any other type of debt!

At Equilibrium

 

On the Wells Fargo website I selected the send “Payoff form” option for my last mortgage payment.

I filled it out and printed it so that I can have Wells Fargo to pay our real estate taxes from our escrow.  Now that they did that, I still have to pay our house insurance at the beginning of March, but… I sent in my last official mortgage payment!

Actually the check is sitting on my kitchen counter downstairs, waiting for me to put it in the mail. Tomorrow, I will drop it off at the post office, and then I will be finished with it!!!  (Booyah)

I ended up paying off my house in 10 years.

So how did I do it?

Well, first I created an excellent excel spreadsheet to do some analysis on an amortization schedule.

Primarily, I used primarily 2 sheets in my spreadsheet:

  • The actual payment was recorded to a sheet.  This sheet was the real deal!  As soon as I made a payment on the house, it was recorded in this sheet.  Not much to this one, pretty cut and dry.  At the top, I calculated the reduction in interest paid by pre-paying, the shorting of the life of the years of the mortgage by prepaying, and the total cost of the initial mortgage plus the interest.
  • The “What If” analysis sheet. I used this to create a strategy to pay my house mortgage off early. I was able to calculate how different extra payments would affect the duration of the mortgage and also calculate the reduction in interest paid for the entire loan. I used this sheet so many times to calculation my payment schedule! It might not be obvious, but this was a great tool for wealth accumulation for me.

Next for the first year of the mortgage, I made double payments on the mortgage amount, with the excess going toward paying down the principal.  Then later after my son was born, I lessened the payment amount to only 1.5 times the original payment amount.

I’m still in disbelief!  I’m at a point of balance and having an “equilibrium moment”, so to speak!

As of this point forward, I will be solidly marching on a wealth-building path (or at least I hope, life sometimes throws some wild pitches at you…).

As the last phase of this final numbness wears off, I’ll tell you what it feels like being debt-free in a future post!

-MR

Update:  An equilibrium moment is when something is in perfect balance!  I don’t owe any debt anymore and nothing is owed to me either!  With the “debt phase“, I’m in perfect equilibrium.  This phase is over!  I don’t plan on ever going into debt that I can’t pay in a month’s time again!

Here are some links to former post in the Countdown series