When it comes to personal finance, I’ve always believed that as long as I followed a firm set of “money rules”, things would pretty much work out in my favour. I believe it’s like creating a fabulous meal; that anyone can (and should) be able to duplicate a specific (and fabulous!) dish by following a specific set of rules to an exact tee. As you know, when we do it with food, it’s called a “recipe”; when done with money, it’s called a “financial plan” or “strategy”.
But whether we’re talking food, money or a great way to learn how to tango, pretty much any desired “end result” can be achieved by following an exact set of pre-determined rules / steps that have proven to be successful – makes sense, right? (Disclaimer: “should be” successful, but isn’t always!) Okay, so getting back to the topic at hand, my personal “money rules” were:
- Don’t buy stuff / crap / junk I don’t need – be frugal and aware of any ways to save money
- If I ever wanted something worthwhile, (car, computer, appliance, traveling, etc.) then save up enough money and buy the best, (Prius, Mac, Dyson, Month in Europe) and pay in full at time of purchase – never finance, or pay with credit
- Mange my money every single day; know exactly where every penny comes from and goes to, check all bank accounts every day, etc. to be on top of them all
- Use my credit card (note: singular) wisely (meaning collect Aeroplan miles) and pay off the balance each month to avoid ever paying interest
- Never, ever, ever give into impulse buying or instant gratification; at least not when it comes to buying stuff. Eating potato chips or quaffing an “extra” beer, no problem!
- Stay out of debt – except for a mortgage – because everyone who owns a home has a mortgage, right? Financial “Experts” actually have a name for this: It’s called “Good Debt”
Pretty standard stuff, right? I’m sure much of my philosophy was developed in my naval upbringing, one that included very little – if any – disposable income, and then carried on through the years afterwards; oh, and I’d be lying if I didn’t concede to learning some pretty valuable things from The Wealthy Barber as well. But here’s the thing: After living by these steadfast rules for so long, I was stunned about a few ago when one of these key money rules – specifically “Everyone who owns a home has a mortgage” – was turned on it’s head. But more importantly, what I learned that day changed my financial view – and ultimately my life – forever. In a nutshell, here’s what happened.
One Sunday morning in early 2010 I was sipping my first cup of coffee and surfing the net, when I stumbled upon a video called “Why Average People Don’t Become Wealthy in Today’s Abundant Society” – a title that caught my eye, since I never wanted to be poor and living in a gutter. So I clicked on it, and listened to a chap who said the biggest barrier people face in becoming wealthy these days is that they spent all their “potential wealth dollars” on interest charges – student loan interest, credit card interest, car loan payment interest, consumer debt interest, etc. – you name it. Since we’ve all heard this before, I lazily went down his checklist, being very pleased with myself for not having been suckered into any of these financial traps: “Not me, not, me, no, not me, and… not me! Woo Hoo!” Feeling very smug at how clever I was, I almost broke a limb patting myself on the back.
Then the interviewer asked “But what about mortgage interest – that’s actually “Good Debt”, right?” Having a mortgage, I again reached around to congratulate myself for being such a financial rockstar, when the guy said “Absolutely not! Mortgage interest is the biggest killer of wealth there is today!” I skipped a breath, and he continued: “Break down any mortgage between principle and interest, and you’ll see this: The more you owe, the more you pay – period. The interest you pay are real dollars that you get absolutely nothing for, and is where the majority of people’s potential wealth is lost!” And there you have it: In two brief sentences my entire financial philosophy crumbled before me, and I was visibly shaken… WTF just happened?!
The interviewer then countered with “But what about interest rates? They are historically low, so money is cheaper than ever, right?” to which our guy very correctly said “Yes, it’s true, borrowing rates are at an all-time low; but the bottom line is regardless of wherever they are, they are still being paid in real dollars – dollars that you will never see again. I’m not saying you shouldn’t have a mortgage (as most people need one to afford a house) but what I am saying you shouldn’t have one longer than you need to pay off your home”.
So much for “Good debt” – I felt stupid, taken advantage of and like a financial fraud. I’d been duped for the past few years into believing I was acting like a financial rock star, but the truth was I was as big of a sucker as anyone. *Groan*
In order to survey the actual damage I pulled out our last couple of mortgage statement, ran the numbers and couldn’t believe my eyes: In the two years since we took it out ($240,120 at 5.49%) we’d paid grand totals of $15,203 in principle, and – wait for it – $31,368 in interest! In 2 simple sentences this guy forced me to see how we were being fleeced by our mortgage company, and thereby forced me to take action to find ways to stop giving away our future wealth. I was gobsmacked, and when Paula woke up a couple of hours later I ambushed her with this horrific news. We both agreed we needed to make BIG CHANGES if we were to ever own our home, and not be slaves to a mortgage for the next 25 + years – the single thought that has become our greatest motivation in this quest.
Although few, his words caused us to turn our mortgage repayment plan into
priority one an obsession; and from that day forward, we learned and applied every tactic known to man to work on decimating our near $225 K debt.
It’s just over 4 years later, and by all accounts we are in the home stretch. In 2009 approximately 200% of our payments were interest, (see above) whereas today, due to an aggressive re-payment program they are less than 6%, with the other 94% going towards paying off the principle. I won’t get into specifics, but will say that by this time next year we will be mortgage free, having paid our (original 35 year amortized) debt off in just over 7 years. And while we’ve been forced to be very, very tight with our money in a lot of ways and definitely have sacrificed quite a bit, we’ve still managed to live well, including doing some traveling and have gone to Mexico on holiday each year; heck, we even bought our Prius (for cash) and outfitted ourselves with the other toys mentioned above, all while sticking to the plan.
But the biggest lesson I’ve learned from this is that mortgage re-payment is like a fly-wheel; it takes a bit of time (and money, and sacrifice and commitment, etc.) to get started, but once it gets going, spinning faster and faster, it becomes sort of self-propelling – and as long as you keep at it, and make it routine, the principle rapidly melts away, and you begin to see something – debt free home ownership – that is just a dream for 90% of the population. And let me tell you, it’s an awesome sight, and one that opens a whole lot of new doors.
The Moral of The Story
I tell our story for one reason, and one only: To PROVE that none of us have to be tied to long-term mortgage debt. I strongly encourage anyone who feels “stuck” financially by their own mortgage to take this strategy seriously by first looking at what they are paying in interest – lost potential wealth – and then look for ways to cut years (and thousands of dollars) off of their term. Do this and you’ll be stunned at how much money you can keep for yourself.
And being so close to the end of our own mortgage, I can tell you that the feeling of (potential) freedom is incredible. I can’t wait until that final payment is made in a few months, and look forward to just how no longer having those bi-weekly payments will change our lives. Why not give it a try yourself if a “mortgage free” future sounds appealing to you?
And just to think that all of this freedom and a new lease on life came as a result of surfing the right channel that Sunday morning – Who’da thunk?
Readers: What do you think of this strategy? Do you like it, or do you think it’s too much “short term pain and sacrifice”? Please let me know in the comments.