I’m sure I’m not the only one around here that gets a lot of benefit reading the great tips and insightful behavioural issues that we all have with money on various website.
However over the course of many years I’ve talked to a number of friends and family in confidence as well as read a lot about how people handle their finances and there is one huge pitfall that I’ve noticed almost everyone has.
They all have tunnel vision.
Most people are so busy, so concerned, so consumed with the immediate things in front of their eyes that they completely ignore everything else. For example stop and think about what money related issues you might have dealt with this week.
- When you needed to fill up the car with petrol did you hunt around to find the cheapest price?
- Did you go food shopping and made sure to buy the no named brand things or only certain products because they were on special?
- Maybe you made a special effort when you went out not to order alcohol and thus make the meal cheaper?
These are day to day, immediate money related problems that we encounter and whilst I’m not one to tell you to go around wasting your money, I want to try and make it clear today that focusing on these types of problems is basically pointless unless you get your mortgage well and truly sorted first.
If you shop carefully every time you do food shopping you could save hundreds of dollars a year, maybe even a thousand which is great… but let’s compare that to your mortgage:
A $250,000 loan at 3.5% paid off over 7 years vs 30 years will save you roughly $120,000. $120,000!!! And that’s a generally “small” loan these days. If you have a bigger loan like $350,000 the difference is even more ridiculous at $170,000! It’s pretty clear isn’t it?
Being frugal is pointless unless you crush your mortgage first.
When you spend all of your time being frugal and paying attention to the immediate things that happen every day like buying petrol or doing food shopping it’s all for nothing, you’ll still be going backwards to the tune of hundreds of thousands of dollars over the long term.
Financial sites often tell you to “start with your biggest expense” when budgeting but then go on to completely miss the biggest expense of all, mortgages!
So if you only take away one message from this article today make sure it’s to always, always have your mortgage paid off as quickly as possible.
So how can you pay off your mortgage over 7 years instead of 30? For us it took around 6.5 years and we paid down a $400,000 loan which saved us over $300,000 in interest. To do this in such a short time frame took a lot of discipline and work but after going back over it all I’d say about 99% of it boiled down to doing three things:
1. Set your repayments high and make them automatic. The single biggest thing I learned is to ignore virtually all the “experts” tips and instead focus all your effort on finding all available extra money and pushing that to the mortgage.
I’m not talking about that once off $2,000 bonus or tax return or whatever, I’m talking about looking at your income and setting up an automatic, reoccurring payment to your mortgage that is made up of a sizeable chunk.
Think $1,000, $2,000, $3,000 on top of your normal mortgage payment every fortnight. There are many ways to get this extra money which is something I cover in detail here at Mutilate The Mortgage, but for now I’d just like to focus on the mortgage part.
This extra repayment should also be automatic. With online banking these days it’s super easy to setup recurring automatic payments and once it’s done it happens every fortnight without any effort or thought on your part. This is exactly how good finance should be done. Saving huge amounts of interest becomes the default option and you can just get on with living your life instead of worrying about it all.
2. Stay motivated. Find out why you want to pay off your mortgage faster and put that reason in a very visible spot so you never forget it. Then keep reminding yourself of that reason every few months by imagining what that future will look like.
This is critical as although 7 years is much shorter than 30, it’s still seven years that you will have to remain disciplined and keep chipping away at your mortgage. Maybe use that reason as your “transaction description” so you see it each time the money is automatically transferred.
3. Cut costs and increase efficiency. Initially your automatic additional mortgage repayment might only be $200, but after setting it up your main focus should be on finding more available income by cutting costs, earning more income and increasing efficiency.
When you trim or save on your bills, up the amount of your automatic payment. When you get a raise or new job paying more, up the amount of your automatic payment. I encourage most people to strive for pushing 70% of their after tax income towards their mortgage and a number of people even go further than that.
I know putting 70% of your income towards the mortgage might initially sound ridiculous and impossible but it’s actually quite attainable. Experts always throw lame figures like “5%” or “15%” savings around but you can do better! Much better! We’re past 70% and there are many other examples of people who even get to 80%!
Put Frugal On Pause
The important message for today though is that you should make sure you’re addressing your biggest expenses first which is your mortgage. Stop spending all your time worrying about the small things and instead focus your effort on the big, giant elephant in the room first.
A common saying that fits this problem is “penny wise, pound foolish“. Don’t be wise with your cents until you’ve fully analysed and accounted for all your dollars first!
So are you sweating over the small things and ignoring your mortgage? Why haven’t you addressed the bigger issue yet? Or do you focus on something else instead? Let us know in the comments below!
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).