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If compounding interest is the eighth wonder of the world, I think principal only payments are the ninth.
Let me explain.
Our mortgage company loaned us $130,000 to purchase our home in 2016. If we don’t pay any extra on the loan, we’d be in debt for our entire daughter’s childhood and young adult years. We’d still be in debt after she’s left home for employment, love, and babies of her own. I might have grandkids by the time that $130,000 is paid off. That astounds me.
Franky, it’s unacceptable. I want something different than the work-until-you-die plan.
The battle that we’re facing as I see it is our mortgage is holding us back from ultimate freedom. The interest on $130,000 is about $86,000 if we never made principal only payments on the loan.
The rules of play are that the bank gets as much as they can in interest unless we pay the balance down aggressively. This is how compounding works in the bank’s favor. It’s pretty profitable since 2/3 of our minimum payments went to interest in the first few months of our loan. The following month, a few pennies more would go to principal while the majority goes to the bank’s coffers.
Rather than stay on that path, we’re using principal only payments to buy our freedom early before I’m in a nursing home.
Why the rush to pay off so quickly?
I want the freedom to cross country ski with James on Tuesdays. Drink iced teas with my best friends during a hot summer grill out. Watch our big fat hens prance around our yard. Occasional travel to learn how to make pastries that would make a French chef jealous. Time to write in a sunroom with mountains in my view.
All of these things can be done while working a full time job, yes. But, to live that lifestyle, I’d not be able to do it whenever or as much as I wanted. I’d be at the leash of a job where the salary is bribe they’ve given me. I’d have to work when I didn’t want to on ID10T reports 😉 that no one will read. I’d have to spend time away from Kirstin when I really wanted to watch her soccer match at school. #Truth
Life minutes are precious and I don’t know how many of them I have left.
Progress not perfection
When we started making principal only payments, we started to see our loan drop. Some months, if we paid $1,000 as a principal only payment, the loan would reduce by more than $1,000 because of the interest savings. #cha-ching baby!
Using this strategy, we paid off $50,000 + delivering Kirstin’s delivery + home renovations in 17 months.
What’s worked for us?
1 | We stick to a budget and have a special line item for principal only payments.
Before kids, I was guilty of creating these “idea” budgets and then researching what our spending was after the month ended. When I got pregnant, the jig was up. I had to grow up and follow what we planned.
I made a line item for our principal only payments and figured out how I could make that number as big as possible. We also separated out our minimum payment (principal + interest) so I could see how much our work was saving us in interest.
Following our budget was a huge confidence builder. When I saw the budgets working and the debt lowering, it made a huge difference in my motivation to stay the course.
2 | We created an amortization schedule with an area for principal only payments in Excel.
In the beginning of our journey, I kind of saw our amortization schedule as an unsolvable Rubicks cube. I didn’t know how the bank made money off of our loan each month. I didn’t pay attention to how much of my payments went to interest.
To understand our particular journey, I created an amortization schedule in Excel with an area for principal only payments. This helped me know months in advance, how much interest we’re paying. Yes, it’s nerdy – but I also verified that the bank applied the right amounts to principal and interest each month. More often than not, the bank’s statement was incorrect.
We started out with an estimated $86,000 in interest owed to the bank. Now, we’re estimating we’ll pay $8,000. I wouldn’t have known this was possible unless I understood how the bank makes money and how to hack it with principal only payments.
I think Excel is the best tool because I could link my budget to the amortization schedule. There’s plenty of online calculators though that do the job.
3 | We avoided spending bonkers on life changing moments.
I mostly only spent money on what baby’s immediate needs were: nourishment, diapers, and sleep. Many used baby items are very affordable. Some of my mom friends were super motivated to loan out their stuff, too.
Many of the baby products out there are to make the parent’s lives easier. That’s not all bad. It’s just more expense when we have a goal to crush. That mixed with living in a smaller home and hating clutter, I wanted to avoid buying crap I didn’t need that I would later have to sell or donate.
I also waited to spend any money until I was about 6 months pregnant. I did buy some decorations on Etsy for around $100 (derp) for her room, which I admit helped me bond with baby more. But, in general, I waited to buy items until we actually needed them versus buying them outright. This helped us avoid a lot of clutter and spendy, needless purchases.
4 | We’ve monitored cash accounts and lowered once we know we can live on less.
In the newlywed days, we were naturally more frugal than most. We just didn’t have a plan for our money. Once we devised a plan, we saved up a non-frugal 3-6 months emergency fund that earned almost nothing in interest.
After paying off debt religiously every month, I realized that we could “right size” our emergency fund to reflect our current 3-6 months worth of expenses. This freed up money to put on debt.
I think that having some cash is good for us because it’s easily available and is a safety net. There’s definitely a balance to strike with having enough to cover emergencies and also investing that money. It’s not a one-size-fits-all amount. Having the right amount of cash for us has made our debt progress a little faster.
If you’re paying off a home, what’s working for you? I’d love to hear in the comments.