Recently I posted an announcement on the Living in Israel-Debt Free Facebook group I started with my friend and fellow personal-finance junkie, Ahuvah Berger Burcat. I had just made my third Monster Mortgage Payment, that is, a pay down of the loan principal. With this payment, I’ve paid off 42% of my mortgage balance. In four years. (And no, my mortgage was not some cute little thing I took so I could up the type of tiles I would use in my shipputz (renovation). No no, I’ve got a beast). Naturally, since this is the type of group that’s way into this type of news, I received a lot of likes, loves and “Mazal Tov’s”. And one request: could I write a little post with some tips on how to crush one’s mortgage?
And then it occurred to me: maybe there are people in the LinkedIn universe that would like to do the same? If so, enjoy!
First, addressing the elephant in the room
Whenever I mention my plans to pay off my mortgage as quickly as I can, I invariably get at least one person who tells me that (1) the interest rate on my mortgage is low so what’s the big deal if I just continue to pay on it and (2) if I were to have invested that same money in a mutual fund I would have so much money now. Here’s what those people are forgetting:
- Risk. Just because the debt is on something of value (a house) as opposed to an unfortunate addiction to online shopping and restaurants, that doesn’t mean that it doesn’t bear risk. One solid recession complete with job losses and drops in investment values can turn your home sweet home from a lifeline into a noose.
- Flexibility. Housing costs tend to be a huge portion of our monthly budgets. What would your life look like if that budget line-item went away? What would you be doing differently with your money? With your time? With your career?
- Red Herring. Seriously, you think I’d be investing all that money if I weren’t putting it towards my mortgage? Yeah, I’d invest some but a lot of it would have gone towards vacations and funding my yarn addiction. The sacrifices I’ve made—everything from getting a roommate and a side-gig to the purchases and vacations I’ve eschewed—that’s all because I have a defined goal. I mean, the yarn purchases have stayed. One must have clear red lines and lots of pretty yarn.
- Hello, I am investing. In real estate. In the form of my home. I now own a lot more of it. 🙂
Second, a PSA
Before you start the process of paying off your mortgage faster, make sure you have a fully-funded emergency fund of 3-6 months of expense and stick it in a safe, no risk savings account and not an investment vehicle. Its job isn’t to earn money, it’s to cover your a**.
Now, let’s get it done
Here’s how you do it.
- Collect information. Speak to your bank to find out the applicable rules and processes for making principal payments. In Israel, for example, you generally have to make a payment of at least 10% of the loan balance. In the US, on the other hand, one can generally just add on to each monthly payment (though you’ll want to confirm that these are applied against principal).
- Define your goals and make a plan. Not just “I want to pay off my mortgage early” but “I want to pay it off by X date”. I recommend starting out by creating alternate amortization tables, as this allows you to translate a fuzzy goal into numbers. Not only does this allow you to craft a realistic plan but breaking things down into numbers can allow you to visualize how a seemingly impossible goal may actually be achievable. I created my schedule in excel but the internet abounds in free templates and tools.
- Build a budget and stick to it. This is the heart of it all. Turning your goal into mortgage-obliterating reality requires action in the form of a budget and ongoing following of your actual spend to ensure you are staying on track. Without it? All of your intentions will remain just that, intentions. There is a huge variety of methods, resources and tools for both the building and tracking stages; I’ve listed several below and, of course, you can find innumerable other options online. While not every system requires this step, I’m a big fan of the Paamonim method which starts out with a shikuf (review), in which one goes back and analyzes all of one’s spending for the last year in order to understand where one’s money has been going. There’s nothing quite seeing that you are spending NIS 800 /month on restaurants and take-out to realize that, gosh, maybe I do have a bit of room in my budget to make some cuts.
With all of the different tracking options out there, it can be hard to know which one is “best”. My rule of thumb is that the best tracking method is the one you can and will stick to, so take a look at the options and see which one fits how you and your mind works. And if you’re old-school and into collecting receipts and tracking them longhand in a little notebook, well, rock that notebook and you do you!
- Get help if you need it. If you’re overwhelmed by the initial budget building and tracking process, consider bringing in some outside help. This can be free (e.g. Paamonim) or a paid class or advisor. If you do go with a paid option, put an emphasis on finding someone who specializes in helping people learn how to budget and manage their money, as opposed to one focused on investing it. You can always get a separate investment advisor later. And if your advisor won’t get with your program and hounds you with “oh, but you should be putting that in a mutual fund?” Find a new advisor. This is your plan and your money, not theirs.
- Find your people. Whether it’s a personal finance Facebook group, a passel of friends who are similarly budget-obsessed or fellow followers of a personal finance blog, having a few other people in your life who will cheer you on is a huge advantage. For instance, my friends all know that they can call me with any financial management win, no matter how piddling, and I will just praise them to the skies. J There are tons of options out there, so whether you’re into hard-core frugality or something a bit more relaxed, you can find your personal finance posse. Here as well, I’ve listed a few options below.
- Watch the money grow. I mean this literally. If you’re in Israel where one has can generally only pay down mortgages in amounts of 10% or more of the balance, the process of saving up that 10% is really tough—lots of work and sacrifice with no progress to show for it. But stick the money you are saving into a pikadon (savings program) with monthly add-withdraw tachanot (stops) and voila! Progress that can be watched! Every month, as you add money, you see that money grow! This can be a surprisingly effective motivator to stick to and even ramp up the plan (see the money grow even faster!) not to mention an equally effective means to prevent you from using the money for other stuff. 🙂
- Be obsessed. I don’t mean “use old newspaper for toilet paper” obsessed, though you can certainly do so if that’s how you roll. But a wee bit of obsession can go a long way in helping you keep to a goal that requires long-term commitment and/or significant lifestyle changes. I use this tool all the time to great effect.
- Don’t despair! At first blush, paying off a mortgage faster can seem like an impossible goal. Once you start, however, you may be surprised to find how much faster you progress than you originally expected. I thought my first Monster Mortgage Payment would take 18 months to build up. Instead, it took me eight. As of now, I’m 26 months ahead of my original plan.
I’ve listed a few items below but please feel free to add additional suggestions in the comments, in particular free and community resources. If you want to list a resource in which you, a family member or your company/employer have any financial interest, please so state.
Budget building and tracking (information and tools) : Paamonim, Dave Ramsey, HaShekel , Mint.com, Finance Ministry, MyFinanda, YNAB (You Need A Budget)
Find your people: Living in Israel-Debt Free (we be Dave Ramsey groupies), HaSolidit, Mr. Money Mustache, Michelle Singletary