Earlier this year, my wife and I decided that we would make the push to pay off our home as quickly as possibly. This is one of the benefits to having extra cash after paying off debt, you need to figure out what to do with it. Of course we have money set aside in our regular work investments (e.g. 401k), but we figured the next step was to pay off the house.
This was more of an “insurance” decision than a “wealth building” decision, but the great thing about it is, it may turn out to be both. The way we figured it, if the home was ours, we wouldn’t have much to worry about should something bad happens to one of us (e.g. one of us “kicks the bucket”, severe accident, etc). If the home was paid off, it would be one less thing to worry about knowing that at least, we had a roof over our heads. We’ve also started dreaming of what it would be like to not have a home mortgage payment. Can you imagine how much more money would be freed up if your home were owned “free and clear”? That must be an amazing feeling and one which I hope to report on within the next six years.
Six years you say? Yes, I think we can reasonably have the home paid off in six years from today. We’ve been in our home since 2014, so that would mean we’d pay the home off in 9 years. Not bad. How did I figure this out? Well, you’ll need to use an amortization calculator that allows you to enter extra payments. You can simply Google “amortization calculator” to find one. This will allow you to see how fast you can payoff your mortgage with extra payments. I was able to find an amortization calculator spreadsheet someone built for Google Sheets, so I used this spreadsheet to make my initial calculations for paying off the mortgage. If you are using Google Sheets, here is a link to an amortization calculator similar to the spreadsheet I use. Here is the result:
As you can see, I simply entered an extra $16,000 principal payment for each year until the mortgage was paid off. At that pace, we should have our house paid off by the end of 2023. Another interesting thing to note is the amount of interest we will save by paying off the mortgage early, approximately $78,000. Wow! So how are we going to do this? Well, here’s the plan we set for 2017.
Current Salary: $100,000
Current Mortgage: $133,000
2017 “Big Rock” Expenses: The following is a list of known expenses we projected through the year. You can find this information on your pay stub. We simply calculated the expenses on my pay stub for the year. It’s kind of eye opening to see how much Uncle Sam takes and how much is spent on insurance, but all this is necessary. Here is the break out.
Estimated Govt’s take: Uncle Sam needs his take. Fortunately in Texas, we don’t pay state tax.
- Fed tax ~ $7,000
- Medicare ~ $2,000
- Social Security ~ $6,000
- Total ~ $15,000
Estimated Non-tax (retire, med, etc): Since we have a family, we need to cover our medical expenses.
- Dental Insurance ~ $30 / paycheck
- Medical Insurance ~ $145 / paycheck
- Retirement ~ $260 / paycheck
- Total ~ $435 x 26 (pay periods per year) = $11,300
Extra “Fixed” deductions: Here are our costs for mortgage, retirement home loan, and life insurance for 2017.
- Kids ~ $8,800
- Home loan ~ $2,700
- Mortgage ~ $14,520
- Life Insurance ~ $910
- Total – $26,930
Optional “Must do” allocations: Finally, here is what we set aside for our kid’s activities and our emergency fund.
- Kids Fun ~ $90 / paycheck
- Emergency ~ $80 / paycheck
- Total ~ $170 * 26 (pay periods per year) = $4,420
Total 2017 Expenses: Now we add up all of our expenses.
- Est. Gov’t Take ~ $15,000
- Est. Non-Tax ~ $11,300
- Extra “Fixed” Deductions ~ $26,920
- Optional “Must-do” Allocations ~ $4,420
- 2017 Expenses ~ $57,650
2017 Cash-to-Live on: So, now that we know how much our expenses will be for this year, we can determine how much money we’ll have left over to “live on” by taking our salary and subtracting the expenses. We also add $1,210 for an extra payment we have scheduled on our automatic home payments. Since we automatically deduct our home payment every paycheck, we wind up with an extra payment due to the 26 pay periods:
- Cash to Live on: $100,000 (Salary) – $57,650 (2017 Expenses) = $42,350 + $1,210 (extra home) ~ $43,560
So, for 2017, we have $43,560 to buy food, pay utility bills, have fun, and make extra principle payments. We’ve tracked these expenses for years now, so we have a good idea of what we need be get by. Here is our estimated expenses per paycheck:
- Bills ~ $300
- Food ~ $700
- Fun ~ $205
- 2017 Living Expense ~ $1,205 * 26 (pay periods per year) = $31,200
2017 Extra Principal Payment: We can now figure out how much extra we can realistically apply to the principle of our home:
- Extra Principal Payment: $43,560 (Cash to Live on) – $31,200 (2017 Living Expense) ~ $12,360
So, after some math, we can probably add an extra $12,000 a year toward our principle for 2017 from my salary. That means, we need an extra $4,000 to get to $16,000 this year, so I’ll need a “side hustle” to get to our goal. Fortunately, I have recently started teaching IT courses at an online institution of higher learning, so, with that extra income and our current savings plan, I think $16,000 this year is doable. My wife is also planning to work this year. If and when that happens, I will factor that in and update the plan.
As you can see, with a goal, dedication, planning, and some simple math you can figure out your expenses for the year, and in our case, how much extra can be paid toward our principle.
Are we going to stretch ourselves to meet this goal? Yes!
Is it doable? Yes!
Is it worth it? Yes!
Wish us luck!