Sometimes, it's the little things that add up to the big things. or perhaps better put, what Henri Fredric Amiel suggests much more aptly: "What we call little things are merely the causes of greater things". So it goes with most of what we consider personal finance. It is mostly a collection of little things, some missteps, some untapped with potential, others forgotten. So in a season where most of us toy with the idea of cleaning out the garage, I thought we'd look at a few personal finance tips to clean up those accounts.
Who are you?
One of the first things every self-help book will ask you for is some sort of self-assessment. Which is fine but in almost every instance, you already know what is wrong.
You want to know how to fix it with the least amount of effort and perhaps embarrassment. If you cringed when I made the off-handed remark about "cleaning the garage", you probably have pockets of money laying around you didn't know you had.
Take out your utility bill and read it. Why start there? Because if you're the type that simply pays every bill without so much as a question as to how much this really costs and how can I trim this, you know who you are. Money is somewhat an inconvenience.
And then there is the you who believes in this cycle: You made it, you spent it and you went back to make more. Granted some of you whipped out your credit card, and that's worse - and a much bigger problem than what we're discussing here, but the point is, do you like being the person who simply, blindly and willfully pays for what they don't need?
Do you pay your mortgage?
Of course you do. Most of us do. Mortgages are actually not what you think they are. They are the best forced savings plan ever and an opportunity too few of us take.
Yes, your home is like saving. For a couple of reasons not the least of which is that it isn't an investment, at least in the classical sense of liquidity. You put money towards the eventual ownership of the place an believe it or not, the vast majority of us never move. Statistics have shown that in ten years, 80% of you will be right where you are now.
But there is the question of what are you really saving in your home? Yes, you pay interest and yes, you get a tax deduction and sometimes, once upon a time, we saw the value of our homes increase with each remodel. Which made us feel good even if we didn't move. And that's all well and good. But in the mean time, you are paying a portion of that mortgage payment to debt service. A big portion with most of it piled into the first years of the loan.
To get the most bang for your buck, you need to put a little bit more into this plan called home. The numbers are relatively simple and I've discussed them before. But they bear repeating. Suppose you had a $200,000 mortgage with a 6% loan. Your payment would be about $1200. If you found an extra $100 each month and directed it toward the principal, not only would you trim about five years from a 30-year mortgage, but you'd save about $48,000 in interest over that time - most of it paid in those early years.
Yes the numbers get better with each extra payment you make to the principal, not tagged onto the house payment, but directed at the loan. Some banks will offer you bi-monthly payments attempting to do the same thing. Problem is that you will pay the interest off quicker but not eliminate quick enough to make the switch - which you are locked into - worth it. Trying to make two extra payments a year will turn a traditional 30-year loan into something lasting barely over 20-years. And save almost $80,000.
Next up, we'll take a look at what you are missing in your retirement