70% of your wage
No, I didn’t accidentally type “30%” as “70%”… I mean 70%.
Too many simply just do as others do. Well starting now, “what others do” is now 70%. When you think to yourself “Hmm… I reckon we should be paying off our loan quicker… I wonder by how much though?” Think 70%. When you look at your mortgage repayments or your income statements think 70%. It is likely a shocking thought for most at first, but if you are here reading this blog then it’s clear you want to do something serious to mutilate your mortgage, so consider this me raising the bar.
That means if you are an average Australian full time worker and there are two of you in your first home (2 people earning $70,000 each = $140,000 household income) you should be aiming to get 70% of your after tax wages into paying off your mortgage. Lets run some numbers here:
|Jack’s Base Income: $70,000.00||Jill’s Base Income: $70,000.00|
|Jack’s Current HELP Debt: $0.00||Jill’s Current HELP Debt: $0.00|
|Jack’s Annual Tax: -$14,550.00||Jill’s Annual Tax: -$14,550.00|
|Jack’s Take Home Pay: $55,450.00||Jill’s Take Home Pay: $55,450.00|
Total Income After Taxes: $110,900.00
Mortgage Repayment = $110,900 * 0.70 = $77,630 = $2,985.77 per fortnight
If you were to hit that 70% savings rate and pay this exact amount each fortnight, you’d pay off a $400,000 loan @ 7% in 6.5 years! Now that’s mutilation!
Now I can already hear the thoughts going through the heads of those complainypants people. “Jesus that’s unpossible!” (as Ralph Wigum would say…) Well it’s not (assuming you have no other debts). Most do have debts though and depending on the interest rate those debts are at, you might want to deal with them before dealing with your mortgage, however the 70% number is still an excellent target. Also keep in mind that it is a target. If you’re not there yet that’s fine, but it’s something to aim for and a good kick in the ass reality check for most people. I often hear the target people set for saving to be 5% or even *gasp* 10%! Well I’m here to crush that shit into the ground. Think 70%.
If you’re in debt with a mortgage of $400,000 or even $200,000 you are NOT rich. You may think you are with that big ol fancy house you now own, but it doesn’t actually belong to you and it doesn’t change the fact that you’re in debt. You should NOT be planning on buying a new car or refurnishing your house every year. You are in debt, and you need to act accordingly. As Mr. Money Mustache puts it, Your Debt is an Emergency!!
The correct response to this sort of debt is, “AAAAAUUUUUUGGGHHHH!!!! THERE IS A CLOUD OF KILLER BEES COVERING EVERY SQUARE INCH OF MY BODY AND STINGING ME CONSTANTLY!!!! I NEED TO STOP IT BEFORE I AM KILLED!!!”
If you think it’s extreme to save 70% of your after tax wage, try a savings rate of 80%.
Getting To 70%
So now that I have your attention and that you’re aware that you really should be paying more off into your mortgage, you might ask how does one get to putting 70% into it? For our average couple it’d mean living off $33,270 a year which may (or may not) sound hard to do and as I’ve said before, this isn’t a frugality blog so I’m not going to go into all the various ways of saving money. What I would like to do is simply turn on the light bulb.
Too often people (especially first home buyers like we were) are told of the magical “30%” rule. The one that says something along the lines of Your loan repayments shouldn’t be any more than roughly 30% of your income, otherwise you might not be able to pay the debt off safely. Now this is actually quite good advice as it does set you up to be tolerant to things like the loss of a job, a long term injury, general bad luck and so on that does happen in life. When bad times call, you are still able to cut the loan repayments back to their minimums and service the mortgage meaning you don’t end up out on the street. What it also seems to do though is take the place of what constitutes how much “extra mortgage repayments” should be.
When most people aren’t sure of something they’ll often go to the experts instead of properly researching and figuring it out themselves. I quite often do this too, however I’ve begun the habit of trying to do proper research with important things like earning money or building a happier life. It is this tendency to easily accept what others say, along with the almost uniform belief that paying 30% is “good enough” that makes almost everyone just accept the advice and never look at it again. Now as I said in The Secret To Beating Long Term Problems, paying off your mortgage is a long term problem and once you have the system described in that post setup, you should be slowly increasing it over time. Gradually building it up so that you simply don’t notice that you’re indeed mutilating your mortgage.
Now you might not be able to get to 70% straight off the bat. In fact, I’d say for most people it’d be extremely difficult and require a very big shift in ones lifestyle. One of the main factors will be if you have any existing debts such as car loans, HECS/HELP debts, credit card bills or simply a smaller than average salary. However you can easily find out how much you are currently putting towards your mortgage by just dividing your payments by your entire after tax income and that’s exactly what your task is for today!
Here is an example from our average couple above if they only paid $1,400 a fortnight:
% = ($1,400 / $4,265.38) * 100 = 32.8%
1. Do this same calculation with your own figures and possibly even start tracking this percentage in your tracking spreadsheet you should already have. [5 mins]
2. Post a comment telling everyone else of your percentage rate along with what you reasonably think it could be in 6 months. [2 mins]
Over time, as you pay off your debts, increase your salary or simply get more efficient this number will rise and with it, so to will your mutilation powers. As each small debt is cleared or part of your life is made more efficient, you will see that percentage grow making your repayments more powerful. Eventually you will stand tall next to your debt and automatically rip unholy chunks from it. And it will be a site that will amaze all that look upon it.
The benefits include: 1) How to pay off your mortgage faster than 99% of people with one hour a month of work 2) How to get rid of your debt and have the freedom to spend money on the things you love, guilt free 3) Clear outline of how to setup your expenses, mortgage and general finance 4) How offset accounts work and how to get the same result without being gouged by the big banks 5) How to cut through the crap and focus on the things that truly matter when taking down a mortgage 6) How to adjust the strategy so it works for you, even if you have kids, even if you only have one income 7) How to do all of these things and maintain a normal social life (and never be cheap).