One of the accomplishments of 2008 that I’m most proud of is that my wife and I paid off and extra 15% of our TOTAL mortgage last year. One of our big goals is not to spend our life paying off debt.  For most people the debt they are left with for the longest is their mortgage.

Because of the size of a mortgage, early on in the life of your mortgage regular payments pay very little beyond the interest.  That, plus the fact that the average person moves to a new house (and usually a bigger mortgage) every seven years, means that most people have a mortgage for most of their lives.  As such mortgage fits the words origin: mortgage comes from the French word “mort” which means death, and “gage” which is pledge. As such a mortgage is debt until death.  Unfortunately for many people this rings true today.

Thankfully, it doesn’t have to be that way. The more you pay extra on your mortgage the quicker it will go away.  Extra payments can significantly accelerate your mortgage.  Putting extra on your mortgage early lowers your principle, meaning that you will always being paying less interest because of that extra payment.

Here are the six things we did in 2008 to pay an extra 15% of our mortgage:

1. Set a goal

The starting point for achievement is setting a worthwhile goal that you are truly motivated to accomplish. Our broad goal of paying off our mortgage quickly is a result of our desire to be debt free.  From our broader goal, it was important to set a goal for the year.  In our case the goal was set for us.  Part of our mortgage agreement allowed us to pay up to 15% of our mortgage extra each year as prepayment without penalty.  With 15% being the maximum allowed, it naturally pushed us towards reaching that limit.  Thankfully the 15% was both challenging and yet realistic.  We had to work hard to reach that as a goal, but we were able to do it.

2. Be Frugal

A second tip that helped us pay off our goal was to be frugal. While compared to some we never went to extremes in frugality (we still traveled significantly and enjoyed great vacations), we did make some important steps.  One example is that we did not eat out a lot.  In particular we took our own lunches to work, rather than having to purchase lunch.  We also made very few purchases of “extras” thus saving significant money on the little things.  Further, we never purchased wants impulsively; rather, we let some time go by to see if we still want the purchase.  We also saved a lot of money by buying things used.  We purchase things from garage sales, online classified ads and friends are all great sources for discount purchases.

3. Sell Things

A third thing we did is to sell things.  There are many ways to sell things.  You can clean out your garage or storage room and sell things you aren’t using. You can have a garage sale or sell through Ebay or Craig’s list.  You can also get rid of assets such as a second car that you don’t use very often.  This year, we paid off a mobile home that we had been renting out intermittently.  We were able to use some of the proceeds from that sale towards of our mortgage.

4. Pay off other debts

Another thing that helped us to pay off more on the mortgage was to pay off other debts. Over the past couple of years we have focused on paying off other debts as well as the mortgage.  In 2008 we also paid off my student loan, leaving us with only or mortgage remaining.  Each time we paid off a debt, we would add the previous payment to our extra mortgage payments, thus creating a debt snowball. Dave Ramsey, in his book “Total Money Makeover” (one of my top 10 books), recommends paying off your debts smallest to largest to create momentum for your debt snowball.

5. Find Secondary Sources of Income

A final big factor in paying 15% extra on our mortgage is the flexibility that comes from adding an extra source of income. Our home business affiliate program makes a significant difference.  We build our home business on a very part-time basis around our full-time work schedules.  That of course, means that the money we earn is extra, and is something we are able to use for achieving our goals such as paying off our mortgage!  There are many secondary sources of income that you can find, whether it is by taking an extra job, or starting a home business.

6. Have a Simple Budget

Finally, it is important that in order to achieve a financial goal such as paying off a debt, that you have a budget.  Unfortunately, most budgets don’t work, which is where my simple budget technique comes in.  By having a simple budget you are able to make wise decisions with your money because you always know where you stand.  You are able to make decisions based on what you have and the goals you want to achieve.
What are your goals?  Do you want to pay off extra on your mortgage, or pay off other debts?  What are you doing to make that happen? Share your goals and thoughts below to keep yourself accountable, and for the encouragement of all readers.

Written by:
The Success Professor – Danny Gamache
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In his new book, “Hot, Flat and Crowded”, Tom Friedman shares the following thought:

In some ways, the subprime mortgage mess and housing crisis are metaphors for what has come over America in recent years: A certain connection between hard work, achievement and accountability has been broken. We’ve become a subprime nation that thinks it can just borrow its way to prosperity – putting nothing down and making no payments for two years. Subprime lenders told us that we could have the American dream – a home of our own – without the discipline or sacrifice that home ownership requires.  We didn’t need to save or build a solid credit record.  The bank around the corner would borrow money from China and lend it to us – with a credit check no more intrusive than the check you get at the airport when they make sure the name on your airline ticket matches the one on your driver’s license.

This quote can remind us of some simple success principles.

1. Hard Work is Key -

Society has become fixated on easy ways to wealth.  People everywhere are looking for quick fixes to their problems.  The lesson in this is that hard work is key.  That doesn’t mean you need to spend time doing things that aren’t important, or that you can’t be more productive at times working less.  What it means is that achievement is contingent on working hard (and smart).

2. Debt is not the Answer –

The focus on using debt as a form of leverage has failed.  Corporations leveraged to the max have failed.  Individuals intent on turning the realestate boom into instant wealth are now stuck with properties they don’t want and can’t afford.

3. Wealth and Success do not have to be Instant –

In a society focused on speed we have grown to cellebrate and admire the instant success.  For most succes doesn’t come in an instant.  It comes as a result of hard work and determination sustained over a period of time.  We need to move away from an instant society and reward cellebrate those who persevere.
The good news is that we can use this time as a wake up call.  We can work on cutting uneeded spending, getting out of debt, and committing to worthwhile goals.  By working hard and persisting towards the worthwhile we can all achieve true success.  It might not be in an instant but it will come!

The Success Professor – Danny Gamache

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How is your Financial Health?

Are you in a financial emergency? Do you need to dial money 911?  Certainly, our economy is, and so even if you are not in an emergency state, a full financial check up might be in order.  In times of financial uncertainty people are more aware of their money.

The issues of what to spend money on are elevated in the importance of decision making.  Because of this increased focus, it can be a great time to make life changes when it comes to how you deal with money.  Unfortunately most people make only minor surface changes and, after the storm is over, quickly change back to their previous poor money habits.  However, if you change your understanding about money, and develop new habits, the changes can result in lifelong financial peace.

Dealing With The Emergency and Developing Financial Peace

1. Assess the Situation: Be Honest With Yourself

Most people struggle with being honest with themselves about their financial condition.  It is very easy to be in denial about the need to make changes and the need for help.  Here are a few questions to ask yourself:
* Do you have credit card debt?
* Has your overall level of debt increased during the past year?
* Do you have a car payment?
* Does it ever feel like the month lasts longer than the money?
* Do you find yourself struggling to make it until the next payday?
* Are you finding it hard to save for the future?
* Do you and your spouse often fight about money?

If you answered YES to any of these questions, then you need a financial surgery.  If you answered YES to more than one of these questions (or maybe all of them!) then you are in desperate need of changes in you life.  Admit that you have financial struggles and begin to change.

2. Stop the Bleeding

The first step is to stop the bleeding.  You do this by changing your spending habits. This will mean changing your lifestyle.  Let’s face it, if you answered YES to questions above then you are living a lifestyle that you cannot afford.  You need to scale back to a lifestyle you can afford.  The longer that you’ve been living a life you can’t afford, the further you will need to cut back your current spending.

There are many common changes that need to take place in this step.  You may need to:
* Stop eating at restaurants
* Put a hold on any purchases other than food, shelter, and utilities
* Cut out a monthly expense (like your cell phone or cable tv)
* Sell you car to eliminate car payments – by purchasing a small car with cash
* Commit to not buying anything on credit again

The more difficult your financial situation (ie. the more often you answered YES in part one) the more of these steps you will need to take. You may even need more drastic measures.  Part of cutting your spending is to develop a clear, written budget.  Most budget systems are complex and set people up for failure. Here is how to set up a simple budget system.

3. Give Yourself Oxygen: Increase Your Income

Your financial equation has two sides, your expenses and you revenues:  what you spend and what you make.  Once you have stopped the bleeding in your spending you need to look for ways to increase your income.

There are endless ways to increase your income.  You can:
* ask for (and do what it takes to earn) a raise
* have a second spouse enter the workforce
* get a second job
* start a home business
* sell some of your ‘things’ on Ebay or by having a garage sale

Again, the more difficult your financial situation the more ways you will need to find to increase your income level.

4. Consider Alternative Treatments: Have a Plan B in Place

In order to find true financial peace, you will need to develop a “plan B”.  “Plan B” is the preparations you will take in case something unexpected happens to your income source.  This could mean that you lose your job, you get a pay cut, or you get hurt or disabled and are not able to work.

The first part of having your plan B is to develop an emergency fund. Author Dave Ramsey of the Total Money Makeover (one of my top 10 book choices), suggests having an emergency fund of $1000 set aside immediately, even before you begin to pay off debts.  Later you should increase this fund to covering six months of expenses.  If you are concerned about the possibility of job loss in the near future, then get the emergency fund up to six months of expenses right away.

The second part of plan B is to create alternate sources of income. This is where having a home business that allows you to create residual income (also known as passive income) comes in.  Other plan B options include developing new skills and more education or getting your foot in the door at a new company by starting a part time job.

5. Make Long Term Life Changes: Get Out of Debt

After you have a plan B established, have done what you can to increase your income, and have made any necessary changes to your spending it is time to do everything you can to get out of debt.  Again I would suggest following Dave Ramsey’s teaching here.  Dave teaches that you begin a debt snowball by paying off the debt with the lowest balance.  This allows you to gain some quick success.  The snowball effect occurs because once you pay off the first debt you add the original payment of that first debt to your extra debt payments and start attacking the second debt.  Your goal is to pay off everything other than your mortgage right away, and then over time attack your mortgage.

6. Continue to Focus on Long-term Financial Health: Save for Your Future

The next step is saving your future.  This is long-term savings for your retirement.  You need to start to do this only after you have paid off all your debt other than your mortgage.  Your goal is to fully fund your retirement account, to create extra sources of residual income, and to continue to live frugally while you save, save, and save.  Included in this step will be saving for specific purposes such as your next car, vacations etc.  You never want to use debt again.  You will also likely want to contribute to your child’s education fund.  Always buy things with cash by saving for them first.  This gets money working for you instead of against you.

Written by:
The Success Professor – Danny Gamache

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