mortgage

An Example of the FI Mindset: The Mortgage

Hi Pocket Changers! We’re jumping back on the FI bandwagon, and in lieu of us closing on our first ever home next week, we’re going to talk about a mortgage today! I recently had a discussion with a good friend about the ways of FI and our journey thus far. We’ve been friends for a few years, and we’ve seen each other walk through some challenging circumstances within the realms of both health and finances. In our discussion, I laid out what financial independence meant for us. We talked about ways to save money on phone bills, medical expenses, and even our plan with our mortgage.

Work. Jobs. Career.

You see, we’re all on the same highway, headed towards that big “R” word down the road… retirement. I don’t personally care for that word. The first thing that comes to mind is an old man laying on a beach getting wrinkled and probably getting skin cancer. This is NOT my idea of retirement.

In my mind, Financial Independence, or Financial Freedom speaks more clearly to the end result.

[bctt tweet=”The purpose of retirement is to reach a point when it is no longer necessary to work to support yourself and family. Rather, your savings and investments will support you. ” username=”jczellar”]

That’s what we’re all working towards! As I mentioned before in our Quick Detour post, it’s NOT about laziness but about freedom.

We all have our own paths towards that end goal, each filled with big decisions such as buying a house or cars, saving for college or weddings, spending on medical bills, and so much more. There are an infinite number of decisions to make, and each person decides based on their personal circumstances what would be best. However, the end goal of reaching retirement, whether consciously or sub-consciously, still comes into play. At some point, we all want to reach that freedom where we can choose to do what we want (work a job we love, not work a normal job, take vacations, pursue our hobbies full-time, etc.), when we want. 

A DIFFERENT MINDSET

Why doesn’t everyone pursue FI? Great question, and really it boils down to our mindset about our finances. Mrs. Pocket Change and I are looking for different avenues to hit that goal — Financial Independence — as soon as we can. We’d rather sacrifice a few comforts now in an effort to reach the point where we don’t need to be chained to a desk job for another 30 years. That being the case, we don’t want to tie up our income with car payments (cars ALWAYS depreciate) or on frivolous expenses that don’t contribute to our goal.

Here’s a quick comparison of the mindset shift. Let’s say over the course of the next 5 years you have a $100 monthly car payment and you invested $100 with a conservative rate of 4%:

CategoryPrincipalRateMonthly PaymentTotal
Car Loan$6,0001.99%$105.14$6,308
Savings$6,0004%$100$6,783

I’m sure you guessed this number would be different. Over that same 5 year period of time with compound interest, you’d not only have your principal saved, but an additional $400. Using the same conservative investment calculation rate and $100, over a 30 year period of time (you know, saving for your retirement), you’d end up with roughly $70,000! Having a car payment not only costs you with the interest ($308 in our first example), but also long-term savings.

BACK TO THE MORTGAGE

Heading back to our discussion from earlier, our soon-to-be mortgage came up since Mrs Pocket Change and I are about to close on our first house. I mentioned to my friend the fact that we’re planning on (for now) making bi-weekly payments to cut off chunks of the interest over the life of our loan, and this got him thinking. Just switching from one monthly payment to a biweekly payment structure (assuming the mortgage company allows this) will cut off $17,000+ from interest over the life of his loan, and shorten the loan by 5 years! This isn’t even adding extra money to the mortgage payment, just splitting it in half! What could you do with an extra $17,000? Hopefully save it!

Here’s an example so you can visualize these numbers. Let’s take a mortgage for $120,000 at 5% interest, and $1,200 in property taxes. No PMI, or extras. Just the loan, and taxes to keep it simple:

120M mortgage

As you can see, this has a monthly payment of about $724.86. The end result is that we’d be almost buying another house at this same price JUST IN INTEREST! Now, let’s take a quick look at the same information, except changing the payments to a biweekly structure.

120B mortage

Just by changing the payment scheme from monthly to biweekly, the math shows we just cut off $25,794.24 in interest! One more example:

120B100mortgage

Same info as above. Let’s say you get a raise, switch jobs, or pay off that pesky car and can devote an additional $100 dollars a month (again, paid biweekly) to your mortgage. That reduces your total payments to $207,985.52 saving you almost $44,000 in interest over the life of your home loan. Crazy right!?

This is just a taste of the mindset of FI! Looking at a situation differently, and trying to make the most out of your money with what you’re given. I’m not knocking on folks who prefer having a newer car or a bigger house. I’m saying look at what you’ve got currently, and see how you can do better with it!

Yes, Financial Independence involves math, but don’t let that scare you (or bore you)! Do some research, and consider ways to cut costs and increase savings instead of paying for two houses! Link to calculator used above!

CAVEAT

There’s a caveat that exists in the FI community specifically with a mortgage. Instead of paying extra towards your loan at the 4.5% rate, some invest it into an account that has a history of greater returns (8-9%, netting 4-5% interest). We’ll get into that later as we look at investments. This is JUST an example of thinking about things differently with a FI mindset. Understand your situation and make the best decision for you and your family! Follow along and we’ll keep you updated as we move along in our journey!

 

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