Have you ever heard the expression, “A fool and his money are soon parted”?
Today is April fool’s day and I am inspired to take a break from writing about sewing and homesteading to share with you a moment I had last November; when I realized how we had been taken for fools, and the changes we are making that will change the rest of our lives.
Does that sound corny? It kind of is, but I feel strongly about this.
I’ve always understood that money is a tool, and I strive to use it wisely. Hours of Monopoly have taught me well. Even though I am financially comfortable now, I haven’t always been, and I guess that fear of not having what I need hasn’t worn off. Because of that, I’ve always been frugal. I manage the money at our house and we are fortunate that we are able to live below our means. We don’t have any credit card debt but we do have a student loan, a car loan, a tractor loan and a thirty-year mortgage.
In other words, I thought we were doing great – we pay our bills on time and we have food on the table. We were content to carry on working with the idea that someday, twenty-eight years from now, when our mortgage is paid off we could retire and travel.
Luckily though, as I was browsing Pinterest last November, I came across a post titled “How to pay off your house in four years”. Sounds nice, right?
I clicked on it. The article was like wind in my ears until I came to this (free) debt calculator. I had some time to spare, so I gave it a try. It has you input your debts, their interest rates, your monthly payments and how much extra cash you have available to put towards your debts. Then, using a snow-ball method, it will tell you how long it will take you to get out of debt. The results were unbelievable.
We could be completely debt free in seven years. Including the mortgage.
What??? How is this possible? How can this be true?
But it is true. I checked the numbers.
Basically, the calculator advised us to put our extra cash towards the mortgage (it has the highest interest rate) while making our other regular payments. As soon as our other loans are paid off, we put that amount towards the mortgage too. It won’t be the same for everyone, but unlike the Dave Ramsey method of paying off debt, with this one you don’t start with the smallest debt first. You pay down the debt with the highest interest rate.
To get a better understanding of what I was looking at, I found this app (its free too) and really looked at my mortgage for the first time. I don’t think I ever considered how much we pay in interest each month. After all, we had put a down payment of 20% towards the house and I was told we had a “low interest rate”. Ha!
It turns out that over the life of our loan, we were going to pay almost $300,000 in interest. That equates to paying off the principal plus 80%! Will my home even be worth 80% more in thirty years? Doubtful.
Here I always thought buying a home was a good investment. But if you pay more than your home will ever be worth, then the only one who benefits is the bank who lent the money! The only way around this is to pay off the mortgage early, which reduces the amount of interest owed.
Using this same app, I saw that for every dollar extra we paid toward the principal, we would save $2.60 in interest. Using the pay off plan from the debt calculator, we will end up saving $186,000 on interest. That is interest we won’t have to pay.
When I showed this to my husband, he couldn’t believe it either. We created a budget and have committed ourselves to making this happen. I would have never imagined that there was a way to be mortgage free while we are young. Seven years?! Totally doable!
We’ve been following the budget for three months now. Sticking to a budget is a whole lot easier when you can see the light at the end of the tunnel.
Anyway, I just had to share this with you all, because if I had not been browsing Pinterest that day, I would not have realized that there was a better way to manage our money.
Go ahead and see what the calculator tells you. You might be surprised.