Progress to Date

  • Original Loan Amount: $204,000.00
  • Balance at Beginning of 5-year Goal (1/1/08): $188,983.82 @ 6.00%
  • Balance at Refinance in February 2009: $148,000.00 @ 4.625%
  • Outstanding Balance: $0.00 (PAID IN FULL!!!)
  • Latest Payment Date: April 2011
  • Latest Additional Principal Amount: $17,623.22
  • Amount Ahead of Schedule (since refinance): $121,462
  • Time Ahead of Schedule (since refinance): 7 years 10 months
  • Interest Saved Last Month: $23,972.48
  • Total Interest Saved: $28,435.55 ($1,037.74 on original mortgage; $27,397.81 on current mortgage)
  • Months Remaining in 5-year Goal: 20
  • Average Monthly Principal Needed to Meet Goal: N/A (Goal achieved)
  • Progress List Explained

Friday, February 29, 2008

Monthly Summary: February 2008

The mortgage payment we made in February was the 22nd of 180 scheduled payments on the 15-year loan.

At the beginning of the month, the outstanding balance was $185,207.27. We made a total principal payment of $2,795.43, which included a $2,000 extra principal payment. The ending balance is now $182,411.84.

We are over $5,318 ahead of our scheduled principal balance at this point. Our total interest saved over the life of the mortgage is $18 (this month's savings was $16.50).

The average principal payment required to pay off the mortgage in the remaining 58 months rose slightly from $3,139.11 to $3,145.03. I expect this average number will continue to rise throughout the next two years or so before it starts to fall each month. This should happen as the principal portion of our required monthly payment increases over time.

Here's hoping we can keep this momentum going into March. Spring is not too far off!

Tuesday, February 26, 2008

Monitoring Expenses

I just tallied all of our expenses for February, since all of our bills have closed for the month. Despite our efforts to contain our spending, we incurred some unexpected costs, including bills for the dishwasher and some dental work. We also made a reservation for the one long vacation we're allowing ourselves to buy this year, which required a deposit up front (even though the trip won't happen until summer). Thus, our discretionary spending was over $1,000 higher in February than it was in January. However, when excluding the one-time expenses like the dishwasher and the vacation, I see that our spending was down this month. This is encouraging to me.

During the initial planning stages, my wife and I realized that our biggest obstacle to paying down our mortgage early was our spending. While we are not high earners, we do make a comfortable combined income and have no trouble paying our bills each month. However, we had been in the habit of dining out frequently, taking lots of trips, and shopping on a whim. Our entertainment expenses were pretty high. We would withdraw cash from the ATM each week and then wonder where it had all gone.

My wife suggested that she set a limit of $100 in discretionary expenses for herself each month. This covers all entertainment and shopping. I thought $200 sounded like a more reasonable number, but she was determined to take a more aggressive approach to saving money. So far it seems to be working. She has been carpooling to work, so our gas bills are down from a year ago (despite the higher cost of fuel). We ate at a restaurant only once this month, and still managed to keep up with friends on several occasions doing less-expensive activities (like snowshoeing with our dogs, or inviting people over for drinks and soup). We also haven't made a single ATM withdrawal in 2008.

I've set up a host of spreadsheets to help track where our money goes each month, including the cash that we get from time to time (payments from friends for gas, etc). In addition to keeping a close eye on our discretionary expenses, budgeting for the unexpected is going to be a big challenge. I'm sure we'll have more unexpected repairs, medical bills, and so on. Keeping the discretionary costs under control will be key. If we are fortunate enough to make it through a month without a surprise expense, the extra money can be funneled into the mortgage payment. Otherwise, we have a built-in buffer to help take care of those unexpected costs.

Monday, February 18, 2008

For Sale

At the beginning of this experiment, my wife and I brainstormed a list of ways we could cut our spending and free up additional money to put toward the mortgage payments. We decided to try selling our unused and unwanted possessions to raise modest amounts of cash. I know this is not a novel idea, but we've never been in habit of selling in any format (including eBay, consignment stores, or the traditional garage/yard sale). Instead, we've usually donated our extra items to charity, or stored them throughout our house. We knew that we had accumulated a lot of stuff that, while still useful and in good condition, was stuff we could do without. Instead, we hoped to reduce the clutter and reduce our debt in one fell swoop.

Some stores will attempt to sell your goods on eBay for a small fee. This fee is usually a percentage of the sale proceeds (if the item sells). Since we were not eBay experts, I decided to try this method of selling first. It seemed like a good idea: the store had an excellent reputation on eBay (which is key to selling successfully), the equipment and expertise to pack and ship the items, and the know-how to photograph and describe them in a way which would attract buyer interest. At the same time, I wouldn't be bothered with these tasks myself. So about a month ago, I took a box of assorted items down to the store and let them try to sell our stuff for us.

The outcome was slightly positive. The store listed six items for me (after rejecting at least six other items that they decided weren't worth their trouble), and three of those six items ended up selling. One was an item I was definitely not interested in packing and shipping myself, but the other two were items that I feel would have sold equally as well had I listed them on my own. So I started doing some research online about ways to successfully sell on eBay. Since then, I've started listing my own items, without the help of the middleman. However, since I am a novice seller, I need to earn the trust of the buyer community. This means selling items of low value first, getting positive feedback (hopefully), and working my way up to larger and more expensive items as time goes by. Much like the process of paying down the mortgage, this is going to be a process that requires some patience. However, I'm willing to put in the time and effort if it gets us closer to our goal of being debt-free.

Some things that don't sell well on eBay may still have potential for a garage/yard sale. My wife and I started a collection of things to sell this way once the weather gets nicer. Our neighborhood has a community yard sale once or twice a year, so we'll try to coordinate with that so that we can take advantage of the free advertising and get the most visitors possible.

Although I don't expect to earn large sums from selling items secondhand, even $50 a month would help the bottom line in the long run. And ultimately, we do hope to sell some higher-priced goods which will make a more significant dent in our outstanding principal balance. I'll update this periodically as I get more adept at selling.

Sunday, February 10, 2008

Predicting the Future

Although we have not completed even two months of this experiment, our progress is being challenged by unexpected events. I've already described the major appliance replacement (the dishwasher) in January, and the surprise tax bill in February. I tend to be optimistic about any plans I make. Thus, I'm disappointed that we haven't been living out my best-case scenario so far.

When I recently mentioned my frustration to my wife, she responded by predicting that unexpected events will continue to occur. We'll have to monitor our status each month, and make the most aggressive extra principal payment we can. She also reminded me that our goal of five years is arbitrary, and may need to be modified if we discover that we're stretching ourselves too thin in this first year.

I realized that part of my frustration came from not knowing how a sudden change in plans might affect our ability to pay off the mortgage in the original five-year period. For instance, if I had been hoping to pay $4,000 extra in February because of an anticipated tax refund, and then learned that we could only afford to pay $2,000
(due the absence of the tax refund), how would that impact the mortgage balance in four years? I wanted to know, but didn't have any way to find out.

To help answer this question, I created a hypothetical model spreadsheet in Excel which allows me to enter payment information over a 60-month span. It reduces the ending balance each month, and uses that new balance to calculate the next month's interest payment. It also displays the necessary average principal payment needed to reduce the balance to zero by the sixtieth month.

I set up a few some sample scenarios and learned that we didn't need to come up with quite as much extra principal each month as I had originally thought. Because regular payments made toward the end of the mortgage term include a much larger percentage of principal than those at the beginning, it's possible for us to meet our goal by making payments below average for the first couple of years.

For example, let's say we decide to pay $2,000 extra each month starting in February (month two). Our current required average principal payment amount is $3,139.11 (a balance of $185,207.26 divided by 59 months). February's payment would amount to $2,795.43 ($795.43 representing the principal portion of the regular payment), which is $343.68 below average. Furthermore, the shortfall means that the average in month three increases to $3,145.03. It doesn't seem like $2,000 per month is going to cut it.

However, as the balance falls, the principal portion of the regular payment steadily increases. By the end of year two (month 24), the total principal payment is $3,119.63 ($1,119.63 plus the extra $2,000). This is still less than the constantly-changing required average principal payment of $3,253.21, but this time the shortfall is only $133.58. The break-even point occurs between months 34 and 35. The highest required average payment amount of $3,276.34 comes in month 34, but because the total principal payment that month exceeds the average for the first time ($3,295.56, with $1,295.56 coming out of the regular payment), the required average payment falls, and continues to fall throughout the remainder of the scenario. By the end of year four (month 48) the total principal payment is $3,516.32 ($1,516.32 from the regular payment), which is $360.12 more than the required average principal payment of $3,156.20. Continuing on with this $2,000-extra-per-month scenario, the balance falls to zero in month 59 (one month early).

This new knowledge allows me to understand that falling short of the required average payment amount won't necessarily keep us from meeting our goal in the long run, so long as we keep making significant payments to principal as often as possible. Going forward I'll update the hypothetical model over time to make sure we're still on track. I'd love to tidy it up a bit more and post the spreadsheet here at some point to more clearly illustrate how it works.

As I mentioned in the previous post, my early prediction for February is a $2,000 extra principal payment. I won't pay the tax bill until April (and even then I'll use a credit card, meaning we'll have an added grace period which should extend into May), so we'll gain the extra two or three additional months of compounded interest savings by delaying that expense until then.

Monday, February 4, 2008

Tax Blues

I used TurboTax to run through our 2007 federal taxes over the weekend, eager to learn the size of our refund. To my surprise, it looks like we owe tax this year. Fortunately, the amount is not excessive, so it won't put us into financial trouble. Still, I was disappointed because I had been hoping to apply the refund amount to our additional principal payment in February.

This is the first time I can remember owing year-end taxes since I started filing federal returns back in high school. By comparing our 2006 return to the numbers from 2007, I can see that our combined income increased this year, but our deductions decreased. I think there are at least two reasons for this.

First, we had to pay mortgage interest and property taxes on two residences for about three months in 2006, which meant a higher total deductible tax/interest pool to draw upon. That didn't happen in 2007, because we lived in our current house for the entire calendar year and didn't buy any new property (though we had our eyes on Marvin Gardens and Boardwalk).

Second, I made a bad assumption that we wouldn't need to adjust our W-4 allowances after we married in 2006. My reasoning was that we were still both working full time, and still supporting ourselves, so we kept our allowances at one per person. After doing some additional research into the W-4 form, I discovered that married couples in our situation (two full-time workers without any dependents) are advised to claim zero allowances. In 2007, we simply didn't have enough money withheld from each paycheck to cover our year-end tax bill. In 2006 we both spent part of the year working as single people, which meant that we didn't run into a shortfall when filing last year's taxes. I don't know whether this is because single people have more withheld proportionally, or whether married couples are taxed at a different rate, or some combination of the two.

As a result of this new information, I've adjusted our allowances to zero going forward. However, since this won't help us in the 2007 tax year, we'll need to incorporate the cost of the tax due into the next three months' budget (February through April). I'll wait until the first week of April
to pay the taxes so we can maximize our additional principal payments for February and March, compounding our mortgage interest savings over time.

I estimate we'll be able to add about $2,000 extra principal to this month's payment, which is at least $1,000 shy of what I had originally hoped for February. Even still, I can see that we have a reasonable shot at reaching our goal.
I created an Excel spreadsheet which allows me to run some hypothetical scenarios over a 60-month period. It calculates the average amount of principal needed each month to reduce the balance to zero by the end of the five-year window. Although the average monthly amount obviously would be less if we could contribute $3,000 instead of $2,000, we should be able to make up the difference during the next few months without too much difficulty.

I'm going to do some more research and find out what additional deductions we can take advantage of (if any) before finalizing the tax return. I'm usually eager to file as early as possible, but since we'll owe tax for 2007, I'll take my time and make sure we haven't left any deductions on the table.