Why Being Frugal Is Pointless Unless You Crush Your Mortgage

The-Street

I’m sure I’m not the only one around here that gets a lot of benefit reading the great tips and insightful behavioral issues that we all have with money here on Enemy Of Debt, 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 dealt with today.

Did you need to fill up the car with petrol and hunted 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?

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.

Why?

If you shop carefully every time you do food shopping you could save hundreds of dollars a year 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!!!

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.

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, mortgage payments!

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 sizable 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 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 set recurring automatic payments up and once done it happens every fortnight without any effort or thought on your part which is exactly how easy good finance should be. 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%!

The important message for today though is that you should make sure you’re address 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 analyzed 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?

Today’s post comes from Alex. He blogs over at Mutilate The Mortgage and is giving away a few free gifts just for Enemy Of Debt readers. Head over to www.MutilateTheMortgage.com to find out how to pay off your mortgage in under 10 years.

14 Responses to “Why Being Frugal Is Pointless Unless You Crush Your Mortgage”

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  1. We also paid off our mortgage in about 7 years. I don’t know that I 100% agree that the mortgage should be the #1 priority. I personally would at the very least get an employer match on retirement accounts and would probably max out tax advantaged savings before paying off the mortgage. However, that is nitpicking about details and I think your overall point to choose a mortgage you can pay off quickly and reject the assumption that a 30 year mortgage is “normal” is a great one.

    As far as motivation, we used an Excel spreadsheet. It is incredibly motivating to see that by applying a double payment early in the mortgage payoff and then scrolling down to the bottom of your spreadsheet you have eliminated multiple months of future payments. It is really eye opening to the negative power of compounding interest working against you with a mortgage and highly motivating to pay that sucker off quickly.

  2. I definitely agree with you on the importance of paying down your mortgage early. I mean the savings can be enormous! However, if you manage to get one with a really low rate (possible in today’s world, at least in the UK where I’m from) would the money spent on overpaying actually be better put into investments with the potential to yield more than the rate on your mortgage? Just a thought, be interesting to see what you think!

    • Iposs says:

      Yes, in my opinion. This article doesn’t really take into account the opportunity cost of overpaying your mortgage. I’m in the process of remortgaging to a 2-year fixed rate at 0.99%. At such low rates it makes sense to me to effectively borrow at that rate and invest the money rather than making additional mortgage payments.

  3. Ben says:

    Sure, you could “save” significant sums over 30 years using this simplistic view by paying down a mortgage quickly, but 1) that’s not inflation adjusted (the inflation adjusted amount will be much smaller), 2) that’s not adjusting for the tax benefit of mortgage interest deduction (again, much smaller), and 3) it ignores that you could have potentially had significantly more had you invested instead of paying down your essentially free money loan (opportunity cost). More likely, you are costing yourself significant sums over 30 years by paying down your mortgage quickly rather than investing.

  4. Linda says:

    Good article! We planned to pay off our mortgage in 10 yrs vs 30. We did it before retiring! No mortgage, no car payment. Life is good. It was definitely worth paying down the extra money towards mortgage while we still had a high income.

  5. I think this is a good strategy if it works for you. I don’t believe you stated if you had any additional savings or if you put all of your extra money toward mortgage reduction. The challenge I have with this philosophy is that when rates are so low and you annualize the interest cost, you are paying a relatively low price in opportunity cost. For instance… My math shows a $250000 loan at 3.5% for 30 years to cost about $1125 per month. In order to pay it off in 7 years it would cost you about $3360 per month. If you invested that difference at a conservative 5% rate of return you would have about $230000 in 7 years which far exceeds the interest savings by paying the loan off early. Furthermore, a house is a very illiquid asset and will barely grow at the rate of inflation. I respect your opinion and don’t believe it is “wrong” but there are many ways to look at housing costs and opportunity of liquid savings that may grow faster than the rate of return of prepaying a loan. – much respect to you – read about my real life example of this here>>
    https://blogsofstuff.com/2016/05/04/personal-risk-management-and-liquidity/

  6. Kurt says:

    Couldn’t agree more. I’m a big advocate of pre-paying mortgage debt, even at the low rates that have prevailed since 2008. I think of it this way: Mortgage debt is an investment opportunity offering a risk-free, guaranteed, pre-tax annual rate of return equal to the mortgage’s interest rate, and this return on each pre-payment accrues every year until the mortgage is paid off. I believe such an opportunity has a place in every person’s investment portfolio.

  7. Yetisaurus says:

    Ditto what Kurt said. I know a lot of people who say to let the mortgage ride and let inflation take care of it, but I’ve always been a mortgage debt crusher, and always will be. Apart from the guaranteed (compound interest!) return, it just gives you so much flexibility later on. I recently bought a fourplex and needed to remodel it. Because I was aggressive about paying down my house debt, I had plenty of equity and was able to get a HELOC to help cover the remodel. If I had instead paid just the normal payment on my house and invested the difference in the stock market, I might have had the money to cover it, or I might not. It would depend on the wildly fluctuating stock market. No thanks! Instead, I knew I had the money in my HELOC to cover even the worst case scenario, and now that the rents are rolling in again, I’m crushing the HELOC.

  8. How about investing in an index fund instead of paying off a super-low interest rate mortgage?
    You could’ve made a lot more than $120,000 over that time period (according to historical averages).

  9. Scott W says:

    I agree 100%.

    I understand the math behind the argument that believes investing the money and keeping a mortgage could be better but I prefer to kill the mortgage. I’m convinced the best way for me to be financially free and happy is to start with a nice house that I own free and clear.

  10. Mr.CBB says:

    Great post,
    We paid our house off in 5 years before we turned 40 and had our first child. We are debt free and you are right focusing on the little things doesn’t help the big things. What we did was balance it out with being frugal and investing in our retirement while paying off the mortgage. We paid x amount extra on the mortgage via lump sum which was money we saved from being frugal. The more we saved on the little things the more we had to slap down on the house. Win-Win. Now we have been boosting our retirement savings as much as we can and who knows what else is in store for us. Life is good debt free.

  11. I don’t think this necessarily has to be about a mortgage; it can really apply to any large loan with a high interest rate. As long as the benefits of canceling out the debt are higher than the benefits of saving/investing an equal amount of cash, it’s worth it.

  12. ZJ Thorne says:

    My plan is to acquire a mortgage for under $150K in the next year when interests rates are low. Then to accelerate payments, but not to throw all non-essential money at it, because interests rates are very low and I want to build up my actual nest egg. In my area, having a mortgage that size will be less than rent payments. I need to live somewhere.

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