There’s an eternal debate about whether you should use an unexpected amount of free cash, a bonus or inheritance for example, to either pay down your mortgage or invest in a retirement investment account. The results on a spreadsheet tend to favor investing the money if the investment returns are higher than the mortgage interest rate (currently in the 3.5% range). But, as with any numerical calculation there is absolutely no guarantee that this will happen. And, there are some people who feel more content and sleep better when they’re debt-free. While you cannot put the value of well-being on a spreadsheet, we note its relevance.
A more interesting conversation to us is whether you can use some of your lifestyle expenses to pay down your mortgage, even minor amounts. We wondered about the value of even small budget cuts over time. You can explore this surprisingly fascinating subject on a new website: www.mortgagenudge.com, which lets you look at relatively modest shifts from the expense side of your ledger to your mortgage, and view the long-term results.
As an example, suppose you have a $250,000 mortgage at a 4.5% interest rate. You enter this information into the website, along with your monthly principal and interest payment.
Then you move a little slider that determines how much extra you might be willing to put down on your mortgage each month. For instance, you discover that you’re spending $60 a month at Starbucks, when you could be brewing moderately decent coffee at home before your commute to work. Let’s say you want to kick the habit gradually, so you begin putting $20.29 extra on your monthly mortgage payment. You agree to find an additional $20.29 a month the following year, which means a little over $40.50 will be paid monthly the next year. Your Starbucks habit will be eliminated in the third year, when you find those same additional savings to pay down your mortgage. If you get a raise the following year, some of that is added to this payment, and so forth.
When the slider moves, you discover that this modest diversion of lifestyle dollars, over time, pays off your mortgage 7 years and 9 months early, saving you $48,531 in total interest. If you want to be more aggressive, and start off with $26.29 a month – with graduated increases thereafter – your mortgage is paid off nine years and a month early with an interest savings of $57,131. The slider takes you all the way up to an aggressive $64.29 additional monthly payment in the first year, with increasing payments thereafter. These actions cut the 30 year mortgage almost in half, saving more than $92,000 in interest.
The key to making this interesting exercise a reality in the practical world is discipline. Would you be willing to consistently make those additional payments each year like clockwork?
Other options for extra money sources are: regular casual eating out, or a cable TV premium channel that you never watch, or other services you no longer use. Or, consider when you receive an increase in salary, allocating the increase to the monthly mortgage check.
The fascinating teaching point for your reflection and understanding is to note how substantial smaller incremental adjustments can become over time; a few pennies saved can become big dollars later on. In the financial world this is called compounding, where time becomes an elegant booster in achieving your financial objectives.
