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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Welcome to another Sunday Browsing! Here are some great articles from around the web.

1. Financing Your Freedom asks, “What is the Meaning of Money?”

2. Pick the Brain shares about “How to Find and Develop Your Own Internal Motivation”.

3. Financial Expert Dave Ramsey has an article in the Bay Area Business Magazine sharing “8 Action Steps to High Performance Achivement”.

4. Seth Godin asks, “Is Effort a Myth?”

5. Read about “How New Rules of Work are Changing the Game” at Zen Habits.

Finally,  I had a guest post on Alex Shalman’s blog entitled:

How to Conduct a SWOT Analysis of Your Life.

Have a great week!

The Success Professor – Danny Gamache

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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Each Sunday, I share some of my favorite articles from the past week. This week’s list has some excellent ones.

Seth Godin has a great little post about being Irrationally Committed to your goal.

In one of my favorite posts ever, Zen Habits shares why Success Isn’t a Competition. This article comes with a powerful offer of support for other bloggers.

Pick The Brain has a fantastic creative article using characters from The Matrix to teach about How to Survive in Troubled Times.

The financial blog No Credit Needed shares great ideas about Savings Account Allocation.

Finally, the blog LifeDev shares some thoughts on Generating Ideas and Inspiration from Social Media

Speaking of social media, you can find me on Facebook here: http://www.facebook.com/inbox/?src=fftb#/profile.php?id=826085649&ref=profile

From the Archives:

How a fishing contest showed me lessons about how to act When Others are Absent

How a trip to the musical Wicked showed a powerful example of customer service (both good and bad)

Have a great week!

The Success Professor – Danny Gamache

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If you are looking for a way to earn extra money, click here!

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Do you have a budget?  Perhaps you’ve tried setting a budget only to find that you are not really following it.  Having a budget is the first step towards improving your financial situation and moving towards financial freedom.  By establishing a budget, you are able to have a clear understanding of how much money you have coming in, how much you have going out, and where that money is going.  A budget allows you to follow the primary rule of a debt free life – spend less than you make.

Unfortunately most budget systems are very complex. They require you to itemize every category of spending and keep track of where every item you spend goes.  While this system make work for people with strong organizational skills or those who have the time to track every cent, most people just end up frustrated.

Traditional budget systems are also very restrictive. Having every category scheduled to the precise amount you will spend doesn’t allow for the fluctuations that naturally occur in life.  Life doesn’t always flow on an exact monthly basis.  Perhaps during one month you purchase more groceries; the next month you may need less.  One month you may not have time or desire to spend much on entertainment, but the next month your favorite band may be in concert in your area.  When this sort of situations come up you may feel handcuffed by your budget.  It is often when this happens that people will start making exceptions and eventually abandon their budget.

Another reason that many budget systems do not work is because they are not prepared for the unexpected.    Let’s face it, life brings many unexpected events our way, and they often cost money.  An emergency fund is the ideal way to protect you from most of these; however what do you do while you are working to establish your emergency fund?  Also, many unexpected expenditures are small and hardly worth breaking into an emergency fund.  It may be an unexpected $30 because your good pair of pants developed a rip in them, or an unexpected tank of gas you need because you had to pick up your son or daughter from a friend across town.  These expenses may not be planned and in fact they may occur after you’ve already spent your budget for these areas.  It is hardly worth breaking into the emergency fund, but you also don’t have any budgeted space for them.

The end result of traditional budget systems is that most people don’t follow them for long.  Because the budget is so complex, feels restrictive, and does not allow for the unexpected, it is very easy for people to get off budget.  Once someone is off budget it is often easier for them to stay off than to start over.  And so people quit.  People start with good intentions but then end up leaving their budget behind and get back into the same financial traps they were in before.

That is why people need a simple budget system.  You need a system that will be easy to use, give you some freedom in your monthly spending, and has an allowance for the unexpected.

Steps in Developing a Simple Budget

1. Start a spreadsheet – at the top, write down your forms of income.

Write down all of your family’s forms of income (net take home pay).  For example, on our budget we have my paycheck, my wife’s paycheck, and our expected business income.  If you get paid monthly you will have one column in your spreadsheet.  If you get paid twice monthly you will have two columns.

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2. Record all of your bills payments and anything you need to pay on a monthly basis.

In this step you should simply list everything that is a MUST pay each month.  These would primarily be your bills and debt payments, not variable expenses like groceries.  Call these your fixed expenditures. On this list you should include:

• mortgage or rent
• all utility bills
• phone bill and cell phone bill
• cable or satellite bill
• car payments
• student loan payments
• minimum credit card payments
• house and car insurance
• monthly giving
• any other debt payments

This list should include everything you are committed to.  If there is something on this list that you don’t want to be committed to cancel that service, or pay off that debt.  If you have two columns after step 1 because you get paid twice monthly, you should place these bills and payments in the proper column based on when they become due.  Assuming you are paid an equal during each part of the month you should try to balance out the payments.

You should also look to automate as many of these payments as possible.  Use your bank account to set up automatic bill payments so that the fixed expenses are paid without any conscious effort on your part.

3.  Total your fixed expenditures and calculate your income minus your fixed expenditures so you have your amount remaining.

After step 3, your budget should look something like this:

4.  Set a budget for your variable expenses.

Your variable expenses will be all of the other types of expenditures that you may make in a budget period (ie. a month if you are paid monthly, or ½ month if you are paid twice monthly).  This will include your groceries, clothing, gas, entertainment and any unexpected surprises that may come up.  Your goal is to estimate a reasonable amount for these variable expenses, but to keep it as low as possible.

The process of finalizing your variable expense section of the budget will take time.  You will have to play with it over the first few months of using the simple budget system.  But once it’s complete it will give you flexibility and freedom in your spending.

5. Withdraw cash each budget period equal to your variable expenses.

Studies have shown that people who spend cash instead of debit or credit cards on average spend 18-28% less.  That is true of every category of spending, even clothes and groceries.  By spending cash you have to think about making each purchase, and have the emotional response of giving up cash.
Because of this fact, you should withdraw your variable expense budget at the start of each period.  This is what you will use for every variable expense.  The important thing to remember is that once the cash is gone – it’s gone.  You need to make it last for the entire budget period.

Because the variable budget is grouped together, you have a new found sense of flexibility.  You can spend more on groceries if there is a fantastic sale.  You can spend less on entertainment if there is nothing of interest to you this month.  You can easily flex between one type of variable expense and another.  It also gives you some leeway for unexpected events.  Certainly you have to keep within your overall variable budget but you can easily flex from one area of spending to another.

6. Use the remainder to accelerate debt payments and/or to save for the future.

The money you have left by this point in your process should be used to payoff debts or save for the future.  For most people, the best first step is to pay off debts as quickly as possible.

To do this, pick one of your debts and put all of the remaining money directly on to that debt.  This is known as a debt snowball and is recommended by financial experts such as Dave Ramsey.  Some experts suggest that you start with the debt with the lowest balance (in order to create some quick success), while others argue to attack the debt with the highest interest rate (in order to save more money in the long-term).  Either option can be successful, just make sure you start paying down debts right away.

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.

Now your completed simple budget should look something like this:

This budget system will simplify your financial life.  It sets all of your fixed payments on some form of automatic payment schedule so that you don’t worry about them.  It groups your variable expenses together to give you flexibility in how you spend them.  It can lower the stress that comes from trying to fit make every budget category equal and trying to keep track of every purchase.  By using cash you will spend less, and by following the debt snowball you will pay off your debt more quickly.

The Success Professor – Danny Gamache