The Financial Epiphany
I recently interviewed my nephew James about building wealth. His experiences were similar to mine, explaining wealth accumulation can be accomplished by paying off your debts; not only high-interest debt, but also paying off your mortgage as soon as you can.
I was in my late 40s the first time I filled out a Retirement Plan Income Calculator. After carefully following the instructions, the conclusion was painfully obvious: I was in trouble and would never be able to retire unless I changed my spending and saving habits radically. I called it my “financial epiphany.”
Webster defines epiphany as:
- an intuitive grasp of reality through something (such as an event) usually simple and striking
- an illuminating discovery, realization, or disclosure
- a revealing scene or moment
The real challenge was building a workable plan to get out of debt, and to accumulate and compound wealth. It’s pretty hard to save when the majority of your income is spent on monthly payments for borrowed money. That had to stop.
As he emphasized, building a financial plan, and having it work means both marriage partners have to buy in and work together – or it flat won’t work.
James and his wife managed to pay off their home mortgage in their late 30s and will have the mortgage paid off on their summer cabin in a few short years. He encouraged me to help his generation understand the details of home mortgage interest, and how much interest you actually pay.
UNDERSTANDING A HOME MORTGAGE
I like the Calculator.net loan calculation tool which allows you to work with all the variables.
Let’s take a hypothetical couple, Sam and Suzy Jones, both age 28, with a combined gross income of $100,000. They want to buy a $300,000 home, 20% down and qualify for a 30-year mortgage at 6%. To simplify things, we will assume their first payment is January 2024. Their monthly payment is $1438.92/month before taxes and insurance.
They understood that paying the mortgage as scheduled will last until age 58; and their accumulated interest is more than their mortgage principal. The amortization schedule showed, for the first several years, they were paying a lot of interest, while their mortgage balance barely moved.
It wasn’t until payment 223 (18 years and 7 months) that the monthly principal payment would be more than the interest.
How could they have more of their payment go for principal?
The calculator allows testing different options. For example, if they paid their mortgage bi-weekly instead of monthly, they would knock almost 6 years off their mortgage.
Bi-weekly would mean one extra payment per year. They didn’t feel that would work for them so they looked at other alternatives. Their student loans will be paid off in four years, saving $250/month. What would happen if they increased their payment $250/month beginning in January 2028?
Sam and Suzy felt saving $71,203.32 in interest and paying off the mortgage in under 23 years was a high priority.
Other options would include changing the terms to a 25-year mortgage, which would increase their monthly payment to $1546.32, per month. Should interest rates drop, they could refinance at a lower rate, and keep their payment the same. If interest rates were to drop to 4%, they could refinance and pay their home off in 20 years or less.
They also agreed, whenever they got a raise, no matter how small, they would increase their monthly payments, knocking years off the life of the mortgage.
Most importantly, while they took out a 30-year mortgage, they both agreed to stay focused and pay it off well in advance.
My financial epiphany was similar. The financial planning conclusions scared me; a real wake-up call. I was on the road 40+ weeks annually and the constant travel was wearing me down. I wasn’t sure I could continue working as I was, get out of debt and retire without major changes.
Something clicked when I realized interest is really the cost of renting other people’s money? Once you spent the money, you had nothing to show for it. I needed to get out of the debt hole. I remember thinking, “How cool would it be to get to a point in life where you could pay cash for everything.” That became the goal….and it would take some time to get there.
We began paying off high-interest debt; credit cards with double-digit interest rates. Credit cards began paying rebates if you paid them off each month. We kept those with good rebates, and cut up the rest.
Our biggest dollar interest cost was our mortgage. We had to ask the bank for an amortization schedule, they never gave us one when we got our mortgage. Like Sam and Suzy, we were shocked at how much interest we were paying and how slowly the mortgage balance was coming down.
To complicate matters, I was paid straight commission and my income varied from month to month. I took a monthly draw against commissions and would settle up each quarter. I wanted low monthly mortgage payments; what if I had a bad couple of months?
When the end of the quarter came, it felt like a bonus. Too many times I spent way too much of it on the hottest, newest toys or whatever suited our fancy.
It was time to grow up and get serious about getting out of debt and really saving money for retirement. My biological clock was ticking. Once the credit card balances were gone, my wife and I agreed to take large portions each quarter and apply it to our mortgage.
Motivation
The amortization printout was on several pages of computer paper with perforations on the sides for the printer sprockets. It showed a breakdown of each monthly payment – interest, principal and the remaining mortgage balance. When I made our first extra payment, I was excited, I paid off over two years of the mortgage with one check. I marked it on the paper and each quarter thereafter it was an exciting event to see how far ahead we could jump.
When James mentioned his excitement when they realized over half of their monthly payment was going toward principal, not interest, I could relate. It was a symbolic moment!
Making extra payments, marking up the amortization schedule, while jumping months and years ahead on the mortgage was a true motivator.
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Lucky timing
We started this process in my late 40s and I was moving into my peak earning years. With my wife Jo’s help, I went into business for myself and our income increased nicely, speeding up the progress.
Once we were debt free, we vowed to remain that way – forever. We shifted our focus to accumulating wealth for retirement. Each year, our first task was maximizing our retirement plan contributions. A personal observation…. The old adage, “pay yourself first and learn to live on the rest” is true. By limiting spare money, and paying credit cards off each month, my impulse buying was limited – a good thing.
| “Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves.”
— Norm Franz |
Tying it all together
Nephew James suggested young people should be educated about debt costs and interest. When they obtain a mortgage, the lender should be required to provide a complete amortization schedule with a full explanation. The term “debt slaves” is a lot more relevant than they may realize.
The government bombshell….
Baby boomers experienced an unexpected, game-changing event when the government bailed out the banks at the expense of seniors and savers.
Our financial calculators relied on historical estimates; primarily investment returns and the inflation rate. The goal is to protect your lifestyle so you can retire without constantly having to worry about money.
Baby Boomers were guided to historic norms, 6% return on your investments (You can always earn 6% from a Certificate of Deposit) and an expected 2% inflation rate. Social Security and pension income estimates were based on the current plan in force.
With the bank bailouts, the (safe) 6% earning assumptions and 2% “Fed targeted” inflation disappeared – likely forever. Social Security as we know it today will not be there for Generation X. It is mathematically impossible for the government to keep its promises.
James’ most important point, “Retirement is your responsibility!” should be on top of the list. If you are counting on the government for your retirement, you are likely to be very disappointed.
Generation X faces huge challenges – which can be met with some financial discipline.
- Your financial future is YOUR responsibility.
- Get out of debt.
- Pay off your mortgage as soon as possible.
- Build a plan and stick to it.
- Live within your means.
- Focus on accumulating and compounding wealth.
- Buy hard assets that rise in value with inflation; including gold.
- Forget keeping up with the Joneses; needs and wants must be kept in perspective.
Our government cannot afford the interest on the accumulated debt, nor can they keep their retirement promises to their citizens. Accept that and look after your future for you and your family.
Hang on, fasten your seatbelts, the bumpy ride will be exciting….
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On The Lighter Side
I’ve mentioned several times how much I love rural America. When we turned out of our little subdivision, we were greeted with some good old Indiana folks making a statement.
In a span of about 100 yards, the road is full of American flags. We captured a few with this photo. Indiana folks are not flag-waving zealots, just down-to-earth, hard-working folks who know right from wrong – and blessed with some good common sense.
Friday night the stands are filled with families watching high school football, something they have done for generations. This is indicative of what we see each time we drive across the country. Despite what we are forced to see on the mainstream media, these folks have good values and are not happy with a lot of what is going on.
This is where the work gets done, and a lot of the food is produced to feed the world. Hopefully the political class will start listening to them as opposed to big-money campaign donors.
Quote of the Week…
“The ability to discipline yourself to delay gratification in the short term in order to enjoy greater rewards in the long term, is the indispensable prerequisite for success.”
— Brian Tracy
And Finally…
Subscriber William T. shares some clever observations:
- Gold is the only metal that doesn’t rust, even if it’s buried in the ground for centuries.
- Your tongue is the only muscle in your body attached at only one end.
- Nine out of every ten living things are in the ocean.
- Airports at higher altitudes require a longer airstrip due to density.
- A tooth is the only part of the human body that can’t heal itself.
- Caffeine increases the power of aspirin and other painkillers, which is why it is found in some medicines.
- The military salute is a motion that evolved from medieval times, when knights in armor raised their visors to reveal their identity.
- In ancient Greece tossing an apple to a girl was a proposal of marriage. Catching it meant she accepted. (Is this accepting Apple’s terms and conditions?)
And my favorite:
- When a person dies, hearing is the last sense to go.
Geesh! Jo likes to joke, when she married me, she didn’t realize ears came separately….
Until next time…
Dennis Miller
“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken
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