Should You Pay Off Your Mortgage Early?

I often find myself in long conversations with my borrowers over the best way to pay off mortgages early.  Do I recommend the “Bi-Weekly Payment” plan, the “Extra Payment Each Year” plan, or the “Pay A Little Extra Each Month” plan?  Since it is “assumed” that paying off a mortgage early is a smart financial strategy, people are often surprised when I don’t have a favorite strategy to recommend. 

When I get this question, I try to shift the conversation away from “Which strategy is best?” and towards “Are you sure you want to pay off your mortgage early at all?”  While I think it’s admirable to get out of debt and stay out of debt, I don’t believe “paying off your mortgage early” should be your number one financial priority.

Instead, I believe you should use your financial resources to prepare for the future and all those mean, nasty twists and turns that life can throw at you.  I’m not suggesting a gloom-n-doom approach to the future, but we just don’t know what will happen, and paying off your mortgage early may NOT be the smartest financial strategy for you.

My advice is to focus first on building safe liquid assets (resources you could access with little difficulty to pay for stuff) vs. paper wealth (resources that cannot be accessed easily but look really cool on your financial balance sheet).  Equity in your home falls under the “paper wealth” category because it is difficult to access in an emergency and you may not be able to access it at all when you really need it.

An example of what I’m talking about came across my desk recently.  The applicant wanted to refinance his home to access some of his paper wealth.  For several years, he had been paying extra on his mortgage and only owed about $70,000 on a home worth around $400,000.  On paper, things looked good, but...

I’ll leave the gory details of his set-backs out of my story, but when he came to me for help, his wife had left him and the divorce had drained his liquid assets after he paid her half their paper wealth out of his savings and retirement; he had lost his ability to work due to an injury and lost his business;  he was 6 months behind on his mortgage payments;  and he was facing total financial collapse.  He needed me to help him access some of his $330,000 in equity (paper wealth) to live on. 

But because his credit scores were bad and his income was gone, he didn’t qualify for a new loan.  The bank who owned his mortgage – that same bank he had been paying extra to all those years – wouldn’t help him.  I’m sure they saw his home as a great foreclosure opportunity – all that “paper wealth” made his home an enticing target.

His only solution was to try to sell the home before it was foreclosed on in order to keep some of his “paper wealth”, but since he had been so determined to keep his home – not wanting to uproot his children whose mother had just abandoned them – he failed to act quickly enough and now it was too late.

I wish I could tell you his story had a happy ending, but it didn’t.  What I can tell you is that if this man had had $330,000 of “liquid assets” instead of $330,000 of “paper wealth” – his story would have turned out much differently.  So if you are prepaying your mortgage now, but don’t have enough liquid assets available to handle life’s emergencies, please remember: 

You cannot go grocery shopping and tell the cashier, “I don’t have any money, but my

mortgage is paid off”.  Even on double coupon day, that won’t buy you any fruits or veggies.

- Bank Owned Photo by Mike Licht, NotionsCapital.com 

- Onion Photo by Vancouverbcfoodbank

Follow Margaret Steiff’s Example

Born 1840, Margaret suffered from childhood Polio at the age of One.  She could not walk and had limited use of her right hand.  There was no “social safety nets” – no welfare or disability programs - and her mother lamented she would have to care for Margaret the rest of her life "because she had no chance for a bright future".

But Margaret decided she would have a bright future and at age 16, she begged her parents to let her go to sewing school.  If you know anything about sewing, you know that you have to be able to feed and control the fabric with your right hand and sewing machines were operated with foot peddles.  She had no use of her legs and her right hand was useless too.  But she wouldn't give up on the idea and she convinced her parents to let her try.  I don't know how she managed to work the machines, but after a few years of school, she became an expert seamstress and opened a little dress shop in her parent’s home. 

One day she saw a pattern for a cute elephant-shaped pincushion so she made 8 of them to give away as Christmas presents.  At the family party, she noticed her nieces and nephews playing with the pin cushions like toys, and she got an idea.  Margaret started selling these elephants and many other animal creations in her dress shop as toys.  The toys were soon outselling her dresses and she couldn't keep up with the demand.  Her business started growing fast and she hired many of her family members and neighbors to work for her.  This "no chance for a bright future" woman was now employing friends and family and running a successful buisness.

In 1902, a big celebration was being planned for the President, Theodore "Teddy" Roosevelt.  Teddy had a reputation as a rough-n-tough outdoorsman.  One of his campaign posters featured him holding his rifle and standing with one leg propped up and a large bear he had shot (my, how times have changed in politics, eh?).  In honor of the celebration, Margaret got the idea of selling a new design - a "Teddy" Bear.

That year, her company sold over 3,000 Teddy Bears.  Popularity and reputation spread and by 1907, her company sold 974,000 stuffed animals!  Today, the company is still going strong, selling high priced, high quality stuffed animals, all with the trademark button sewn in one ear.  Old ones sell at auctions for hundreds and thousands of dollars, one recently fetching $125,000 at an auction!

Margaret's Motto:  "Only the best is good enough for children".  "Only the Best" is a great way for you to approach what you do for a living too.  You can never be faulted when you continually provide "only the best" in whatever you do.  And people notice - they really do.

Margaret Steiff decided that in spite of her circumstances, she had the option to chose something better - to have a great life - to create something beautiful and live a life of meaning and purpose.  If she could do it, so can YOU!

- Photo by Dierk Schaefer

Time Budgeting

Who is that fat, happy man in this black-n-white photo?  Show this photo to 100 people today and probably none of the 100 will know who it is.  Do you?  I seriously doubt it.  And why should it matter?  Anyone who can’t afford a color photograph probably doesn’t have much to teach us about building wealth anyway, right?

That fat, happy man happens to be the 2^nd richest person in modern history.  Know who he is yet?  Probably not.  (If I asked you who the #1 richest person in modern history is, would you know that?  If you guessed “Bill Gates” – you’d be off by about 19 spots on the list.  The #1 richest person in modern history was John D. Rockefeller.  So who is this #2 person that we’re talking about and why does it matter?)

First, the reason this person is important to you is this:  If the 2^nd richest person in modern history offered to teach you the secret of success, do you think it might be worth your time to listen?  Please say “YES!!!”  Because that is exactly what Andrew Carnegie did.    

At the height of his success, power, and wealth, Andrew Carnegie wanted to teach the masses how to become successful – something the wealthy and powerful of the world typically frown on.  “Keep the masses dumb and dependent and you can control them forever” has been the mantra of many powerful people throughout the ages.  For Andrew Carnegie to purposely offer his wisdom and secrets to ordinary people was and is a BIG deal!  And he also opened the door to the secrets of other wealthy and powerful people.  His efforts probably helped create more millionaires than any other person in history by providing know-how and promoting the idea that ANYONE can become successful!

It was 1908 when a young, unemployed reporter by the name of Napoleon Hill was summoned to meet with Andrew Carnegie.  Carnegie offered to introduce Hill to the world’s most powerful and wealthy people if Hill would agree to compile their collective wisdom and write “a new philosophy of success” using all he would learn.  Though almost penniless himself, and with no promise of financial help from Carnegie, Hill jumped at the opportunity to work on this project and promised to complete it—which he did.

Over the next 20 years, Hill interviewed over 500 of the most wealthy and powerful people in the world to find out their secrets.  From these interviews, Hill wrote and published several books and became a multi-millionaire himself.  His most famous book was titled, “Think and Grow Rich” – published in 1937, this is still one of the best selling success books on the market today.

One of the first interviews Hill conducted for his research was with Andrew Carnegie himself.  During this interview, Carnegie introduced Hill to the concept of Time Budgeting – which Hill credited for much of his own success.

Here was Carnegie’s daily schedule – can you do something like this yourself?

8 hours a day for Sleep

8 hours a day for Work

4 hours a day for Recreation & Health

2 hours a day for Extra Service to Others

2 hours a day for Study and Prep

Are you getting enough sleep every night?  Are you out of balance with work vs. fun (I know I am right now)?  Do you serve others and spend time improving yourself through reading and education, etc.?  Carnegie didn’t have more hours to work with than you do but his Time Budget helped him get a LOT accomplished! 

Photo by:  Monrovia Public Library - Monrovia, California

Are Your Whistles Stealing Your Future?

In the post, “The Cost of Whistles”, (below) I shared with you a story about how Benjamin Franklin once bought an overpriced whistle from a peddler at a fair, and regretted it all his life.

What Franklin was trying to teach us with this story was that purchases based on emotion – desire & want – are almost always bad purchases.  Whenever you emotionally pass the point where you   can no longer “walk away” from the purchase, you are going to make a bad decision. 

Franklin knew in his head that the whistle was overpriced and not a good deal, but he became emotionally attached to it and couldn’t walk away – and he regretted the impulse buy for years.  One of the wealthiest men in the world regretted buying an overpriced whistle as a kid.  Why?  It wasn’t the whistle that was bad, it was the loss of self-control that was bad.

“Beware… a small leak will sink a great ship!” (Another Franklin quote)

The whistle story is a great example of how to evaluate everyday “minor” purchases – the ones you hardly notice yet are draining money from your wallet at an alarming rate.  I’m sure the whistle didn’t cost Franklin very much all by itself, but the lesson it taught him about spending money wisely was priceless. 

“Anything is costly, no matter what its price, if it purchases nothing of importance!”

Eliminate the leaks and the “purchases of nothing of importance” from your spending and you’ll be well on your way to the debt-free reality you long for.  It is rare that debt problems are caused by   lack of income.  Instead, debt is caused by not spending the money you have wisely.

Are Credit/Debit Cards to Blame?

Is it too easy for you to spend money?  Maybe you’ve simply lost the connection between income and out-go?  Mentally, you may no longer grasp that the purchases you buy with a piece of plastic are actual out-go’s of cash.  You look in the wallet and see there’s not enough cash to complete the latte, the fast food, the “Honey, stop on your way home and pick up a few things from the grocery store and I don’t feel like cooking tonight” purchases, so Plastic to the rescue! 

Swipe and forget – and the balance due on your credit card statement grows larger and/or the amount set aside in your checking account to pay the credit card bill grows smaller – and you didn’t even notice it.  Does this describe you?  Be honest.  Are you reading these blogs to find some miracle way to get out of debt?

Got news for you:  There ain't no miracle coming.  You’re just buying too many whistles every day – those purchases of “nothing of importance”.  Those purchases of “convenience” are making you poorer, shackling you in debt, stealing your future – and you don’t even notice it.

“A CHECK???  Let me see if I can find a pen – Geesh…”

Maybe what you need to do is start making it harder to buy things.  Keep the plastic at home.  Start writing checks.  Nothing will dampen your spending habits faster that the pain of trying to buy things with a check these days with all them “friendly” merchants sneering at you and making such a show of letting you and everybody around you KNOW what a big jerk you are for trying to actually write a CHECK?  

Or try paying actual “cash” for things.  Keep a twenty in your glove box for emergencies (and forgetting to fill the gas tank should NOT be an emergency – but it often is, so now you’ve got enough cash to get you home) and keep the plastic at home.  Painful?  Yeah.  Embarrassing to have to tell your co-workers that you can’t go out to eat with them because you don’t have any way to pay for it?  You bet.  But if you’re truly serious about getting out of debt – an absolute necessity!

Photo by stevendepolo  

God's Page-Turners

When the choir director at our church resigned, my wife and I were blessed with the opportunity to take over the ministry for awhile.  It was great fun and we enjoyed it immensely.  I got to wave my arms at people while she played the piano.  She covered up most of my mistakes and kept everyone together in spite of me – she is absolutely amazing!  My children are all very talented musicians and we often utilized then as page-turners for Mom when she needed that. 

At a Wednesday choir rehearsal, one of our choir members handed me a copy of the writing below.  Her friend had come to our church one Sunday and felt moved to write this.  I found it very sweet and thought I would pass it on.

God’s Page-Turners

One Sunday I was attending Bethany Baptist Church in Puyallup with our children.  Led by their director, the small choir slipped onto the risers on the stage during the singing of the last hymn.  The attractive pianist confidently arranged her music on the piano as a slender young lady sat down on the piano bench beside her.  At first I thought they both were going to play for the choir.  Hmmm, I thought, I’ve never seen this done before.  Then the director raised his arms, and the pianist began playing the awesome, complicated accompaniment.  The young lady sat still and erect.  Then it became quite clear – the young lady was the page-turner for the accomplished pianist.  Not missing a beat, she quietly turned the pages as the exceptionally talented pianist rendered the beautiful music for the choir.  When the piece was completed, she gracefully left the stage and sat down beside the pianist.

As this was unfolding before me, the thought occurred to me.  We can’t all be amazing performers, but we can be accomplished page-turners enabling others to use their talents to the fullest.  As we travel along in life, it sometimes seems that we aren’t blazing any new trails or doing anything wildly significant for God, or the world around us.  Yet, I wonder, how many times we have turned the page for someone else?  A helping hand or encouragement to another is sometimes the greatest gift we can give.  We may never see our name up in lights, but I believe faithful page-turners will one day hear our Father’s “Well done, good and faithful servant.”

                                                                           - By Jean R. Norton

I've never met “Jean R. Norton”, but what an encouragement it was to read this – a perfect stranger noticing the work of others and taking the time to write it down.  I don’t know if she intended on having this find its way to me and my family, but I’m glad it did and I hope she won’t mind me sharing it further.

           Have you noticed the “good work” of others around you?  Have you taken a moment to share your appreciation for that good work?  Your simple act of encouragement can make a big difference in people’s lives.  I know my kids now have a much greater appreciation of their roles as page-turners.  Even “little” tasks, when done well, can make all the difference

Photo by cauchisavona

Lessons from The National Biscuit Company

In 1898, during a time of significant economic upheaval and world political turmoil, 114 independent bakeries - mostly mom-n-pop shops - all across the US joined forces and formed “The National Biscuit Company”.  The US had just declared war on Spain (the beginning of the Spanish/American War), and any conflict between these two world superpowers would surely upset trade, supplies, and manpower around the globe.  The US monetary system was facing great uncertainty as politicians debated our “gold standard”, threatening the very value of the dollar itself and economists feared the worst in terms of inflation and wealth erosion.  China was unstable with a new authoritarian leader, a peasant uprising, and violent opposition towards anything “Western”.  And a great Bubonic Plague was rapidly spreading death and fear throughout Asia and beyond, and it would eventually kill over 3 million people worldwide.  (Sound familiar?  US at war, dollar under attack, problems in China, a potential plague - Swine Flu?  Hmm...)

In the midst of this turmoil, these 114 bakeries consolidated, pooled their resources, agreed to cooperate, and determined to face an uncertain future together.  Streamlining distribution channels, combining production capacities, and using vastly increased buying power to negotiate better pricing with suppliers, the new entity was able to significantly reduce costs and increase production.  

Many of my posts here will focus on some specific strategies related to this concept of reducing costs and increasing productivity.  (Oh, in case you don’t recognize the name "National Biscuit Company", they later shortened their name to something you may recognize easier:  Nabisco.)   This post is about the formation of the company itself.  Don’t miss this lesson - it may be the most important one in the whole series!

Just like these individual bakeries, you may be facing an uncertain future.  The key to their survival was to join forces and slash costs, increase production, and work towards a common goal.  Do you have people in your life whom you need to involve in your debt-reducing / wealth-building journey?  Your spouse?  Your kids?  Your support network?  In a famous quote, Benjamin Franklin admonished his fellow Founding Fathers and patriots with “We must all hang together, or assuredly we shall all hang separately.”  Who in your life do you need to “hang together” with?

If you’re ready to make positive changes to your financial situation, start by having a frank money conversation with your significant other(s).  Realistically assess where you are currently at and where you’d like to go.  Understand that there may be sacrifices to make.  Promise to support each other.  Be excited about the future these changes will help you create.  Dare to dream big and pledge to enjoy the journey, come what may.  Together, the burden will be lighter and the rewards will be greater!

Photo by euthman

Wanna Buy a Home? Get $500 in the Bank!

You’re trying to get in position to buy a home.  You may have huge outstanding debts or serious credit blemishes on your record.  Maybe collectors are calling you and you’re afraid to answer the phone and it seems every time you get a paycheck that your immediate bills already add up to MORE than your take home pay.

If this sounds like you, or maybe your situation isn’t nearly this severe but things are still tight, the first step to financial freedom and getting yourself ready to buy a home is to start with getting $500 in the bank.  And I don’t just mean that you deposit your paycheck and then spend it.  I mean $500 that sits there, doing absolutely nothing.  Month after month, your bank balance NEVER goes below $500.

And here’s the harsh part of this lesson:  If you can’t do this, you shouldn’t buy a house and you shouldn’t even think about it anymore.

But, I’m not telling you that you have to be able to do this right this minute.  It’s okay to take a few months to get there if you need to.  But start right now getting yourself to this position.  Make it a priority.  Think of it as your first test.  If you can quickly and easily pass this test, you’ll be in good shape to buy your home very, very soon.  If you struggle to pass this test, then realize you’ve got a long battle on your hands to get yourself ready to take on a mortgage.

Sadly, You’re Not Alone…

Why $500?  Well, first of all you should realize that if you don’t have $500 in the bank, you are not alone.  A recent survey revealed that over one-third of adults under the age of 35 did NOT have even $500 in the bank (Percentages improved slightly with older age brackets, but not much).

When you live this way, you know about the devastating effects of overdraft fees, late charges, and the helplessness you feel whenever an emergency strikes – car breaks down, appliance failure, medical emergency, etc.  Any one of these things can wreak havoc on your budget for months before you can catch up again – that is IF another emergency doesn’t hit you again right away too.

We’ll look at ways to build this $500 cushion in upcoming articles, but to get you started, here’s your first assignment: 

When you get your next paycheck, write yourself a check for $100.

Don’t cash the check, but do deduct it from your registry – you’ve now given yourself a $100 cushion in your checking account – enough to prevent bounced checks.  Maybe instead of cashing it, you put it a frame and hang it someplace where you’ll see it often as a reminder of what you’re trying to accomplish?  (If you use a debit card and rely on the ATM balance, you’ll need to mentally subtract this $100 each time you see your balance.)  

Honey?  The Show Starts At 6:45 – Don’t Be Late!

This technique is the same principle my wife uses to make sure I get someplace on time – she’ll tell me something really starts 15-30 minutes sooner than it does, creating a little time cushion, and that way I always seem to show up on time.  So create a little checking account cushion and it’ll likely save you $100’s over the next year in banking fees, and it’ll get you that much closer to buying a home.