The attorneys I can understand as profiled in the Millionaire Next Door.  They can be under pressure in their field to consume, wear and exhibit high-status artifacts.  Whether they have the means to do so or not is irrelevant.  

Now, college professors on the other hand is a different story.  My inclination is to believe they are so educated in their chosen field or area of research that they may not have learned basic money skills.  If you think about it, a college tenured position is recession-proof, layoff-proof and has nearly guaranteed annual raises.  A professor may be inclined to have no fiscal restraint in tough economic times because he or she knows a pay increase will be coming each year regardless of the economy.    The longer you are in that “ivory tower” environment the less knowledgeable you become on the perils of high-interest loans and spending more than you make.  

My experience in meeting people in life is that advanced formal education although generally helps your money skills, it’s no surefire way to accumulate wealth.  As a matter of fact, for most college graduates the degree itself is initially a significant hindrance to the graduate early in life.  Also, I have met plenty of business owners who exceled financially with no college degree and barely any other formal education.  

Bottom line:  formal education is no guarantee of financial success.

• had more credit cards (we have none)
• had more balances on those credit cards (no cards = no balances)
• had any other consumer loans over the past recent years (we have none)
• had borrowed money more regularly

I completely understand how a FICO credit score works.  The lender needs to see some kind of track record showing how good you are paying back your loans.  Who wants to take a risk on an unknown quantity, right?  I guess what really sunk in for me was how completely obsessed society is with debt.  This credit score would have been higher had we swam with the sharks more often.  This in itself is almost a paradox.  Put more risk to your credit score by financing more purchases and it will go up assuming you pay them in full all the time.  However, if you put more spending on credit your actual risk of paying it back is higher.  So, by risking your credit score more it could go up…or down!  Sounds like gambling to me and that’s why I continue to strive to reach a FICO score of zero.

Why did you pay off the mortgage early?

Chris:  Intuitively, it just felt right.  For a few years there, we were a bit flush with cash, with two of us working and zero to one kids.  Looking forward, I knew eventually the economics would dictate that one of us should stay home.  I like to keep things relaxing, and counting on the market to grow our wealth while carrying debt was calculus that made me uneasy.  Maybe you can boil it down to a low degree of confidence in corporate America, which I knew pretty well.

Marta:  The plan originally was to pay off the mortgage while we still had two incomes, before our first child was born.  That way I could quit and be a stay at home mom and with the loss of income we would also have less debt.  Yes, I grew up with Depression era parents who always encouraged saving, and I’ve never liked any kind of debt hanging over my head.

How long did it take from the time you decided to do it and when it was paid off?

Chris:  It’s a bit hard to remember, but I’d guess about the 5 year mark, we started to see that we could do it if we really wanted to.  I think we had it paid off by the 8 or 9 year mark.

Marta:  I bought our first house in 1992, on just my income, even though we knew we were getting married soon.  We didn’t want to have too much of a house to pay off.  We got married in 1993, and every month put extra on the principal.  Also around that time my mom gave me a sum of money from my late father’s estate that I put on the principal and we refinanced to a 15 yr mortgage.  We continued to pay a good amount on the principal every month and in January 1998 we paid that mortgage off.  John (Marta’s first child) was born in April 1998 and I quit my job.

Did any friends or family members think you were nuts?

Chris:  There were probably people who thought we were nuts.  But if they knew me well, they knew I was nuts already.  I think after the fact when people found out (and we didn’t really advertise the fact) they’d say ‘man, wouldn’t that be nice.’

Marta:  My brother-in-law especially thought we were nuts.  He thought we should invest the money we got from the other house.  But then we would still have had a house payment.  And also he doesn’t have any kids and I tried to explain how my situation was different from theirs, and that the peace of mind from no mortgage was priceless when you want to stay at home with your three kids.  I also told him that if, for some reason, Nick (Marta’s husband) lost his job, it wouldn’t be so devastating financially.  Ultimately he didn’t understand my point of view.  My mother was very supportive, she thinks it’s what everyone should strive for, since they never had a mortgage!

Would you do it again?

Chris:  In my mind, life without debt is a better life.  So yes, we’re always going to be working to lessen or eliminate our debt load.

Marta:  I would definitely do it again.  It made it easier for me to stay at home.  And we were able to save for the kids college and retirement and just in general, because we didn’t have a house payment.  I’m very glad for my parents influence.

Themes From Their Answers

Chris and Marta touched on so many themes with their responses.  I think they’ve covered all the major topics on this blog just in one interview with me!  Debt, paying cash for things, savings, living below your means and more.  Some highlights from Chris and Marta:

“I like to keep things relaxing”  – I interpret this to mean that Chris does not like unexpected, financial disasters.  Neither do I.   By being mortage-free, few emergencies in life could really “rock the boat” too much.

“low degree of confidence in corporate America”  – I interpret this to mean that Chris or his wife could be out of a job at any random point in today’s economy.  By having no house debt, he didn’t have to worry about dragging himself into a job he disliked just to pay the mortgage.  Ultimately,  Chris did quit his job to be at home with the kids, but that’s a whole separate story.

“grew up with Depression era parents” – Marta implies that she knows the importance of living life with no debt, paying cash for purchases and other habits we learned from her parent’s generation.  Today’s youth could learn more from Marta’s parents (and Marta!) than any personal finance book anywhere.

“John was born … and I quit my job” – well how many of you out there *wish* you could do that?  Quit your job to be at home with your kids.  It’s a positive step for nearly all families that do it.  Sadly, most couples think they need two incomes to get by today.  My wife and I took a 50% pay cut for her to stay home with the kids and we never looked back.  Smartest thing we’ve ever done.

“My mother …. never had a mortgage”  – this is totally incredible that Marta’s mother never had a mortgage.  Do you hear what I’m saying!!???  Her parents paid cash for every home they owned.  That is truly remarkable.  And although it may have occurred more  in the 1930s, 40s and 50s it’s still an impressive feat.  I would not say it was a common thing to pay cash for your home then or now.

“Life without debt is a better life”  -  Chris could not have said it any better.

“I would definitely do it again” – Marta knows where she stands in this hyper-materialistic society in which we live and she still would do it again.  But, Marta, what about you driving nicer, newer cars or taking more exotic vacations?  I already know her answer:  this plan works for her – her family and financial future.

Thanks, Chris and Marta, for letting me profile you on MattHutter.com!

Car leases. Noted financial expert Dave Ramsey mentions an astounding statistic in his book the Financial Peace Revisited. He claims that on average a car dealer makes $1200 profit from customers who lease the car, $700 profit from those who finance the car and $72 from those who pay cash for the car. The single biggest reason that leasing is so popular is that it lets you drive a car you cannot afford. I currently drive a car that is ten years old and my wife drives one that is eight years old. People who need a new car every three years rationalize it by telling themselves that older cars are unsafe. This is a load of malarkey. Both of my older cars have anti-lock brakes, security systems and more. Ideally you should pay cash or use a low-interest home equity line of credit when you purchase a car. If financing is your only option try to pay it off in two or three years.

Reverse mortgages. I truly feel sorry for senior citizens that are duped into signing on to a reverse mortage. What’s worse is that apparently the AARP endorses these products as evidenced by the site rmaarp. A quick synopis of the estimate I did for my parent’s home yields a return that royally stinks. You are basically signing over 20% – 40% of the value of the house to your lender. To add insult to injury the federal government insure some of these HECMs (home equity conversion mortgage) which essentially turns the equity into your house into a pseudo-annuity that they’d lead you to think you will get for life. However, these reverse mortgages have minimum age requirements of usually 62 years old or higher. It doesn’t take a genius to realize the actuarial tables have your life expectency nailed down as a certain level of risk based on when you’ll die. I understand why seniors opt for this product. They do it to generate cash if they did not effectively plan for retirement. That does not make it a good idea.

Warranties. As detailed in Secrets of the Big Box Stores retailers, just like reverse mortgage lenders, are playing the statistics to maximize profits on purchased warranties. As long as the repair costs covered by the warranties are continued to be less than the profits made by the warranties the stores will obviously keep selling them. I personally subscribe to the belief that most electronic products and automobiles are well enough made to outlast their manufacturer warranty which is nearly always included free of charge with the product. So stick with the basic free warranty and stop wasting money on the extended warranty. The majority of that warranty sale goes into the salesperson’s pocket anyway.

Payday loans. I would hope that no readers of this blog have ever used a payday loan. In essence they are used by people who a) have no savings in the bank b) who always seem to have more month left over than paycheck and c) who have no concept of a 200% – 1000% interest rate. Fortunately the U.S. Congress is stepping in to limit the interest rates to a mere 36%. The bottom line is that these payday loan lenders found a niche exploiting the poor and financially uneducated. This is one government intervention I endorse.

Buying more computer than you need. As a fifteen-year corporate I.T. veteran I can tell you that most people who buy a computer (without my assistance) spend two to three times what they need. Over 90% of computer users simply surf the Web, send emails and occassionally type up a document or letter. A decent computer that will last you three to five years can be purchased for $400 – $800. One the best sites to find a bargain on a new PC is here. No need exists to spend $1000, $1500 or God forbid $2000 on a computer today. Gamers, CAD users and graphic designers are excluded, but the rest of PC buyers should save their money for a better use.

Vacation Clubs The appeal of these clubs is that you are able to, in theory, budget a certain of amount of spending per year on your vacation while choosing among hundreds of destinations throughout the U.S. (or wherever you live).  Many times the entrance fee to “purchase” ownership in these clubs are $10k – $30k and that’s just the beginning.  Often a monthly maintenance fee is charged whether the property is used or not.  Also, enormous amounts of profits are derived from the companies by pushing upgrades or additional perks while on site at the vacation property.  Two acquaintances of mine shelled out $20,000 for the Disney Vacation Club and then spend around $400 a month just for maintenance.  This is neither a deal or prudent vacation budgeting.

Think twice before you plunge into any of the above financial pitfalls.

• put it towards Christmas presents?
• pay off previous debt or loans?
• finance that home improvement?
• put it into savings or investments?
• apply it to your mortgage principle?

I’d like to discuss what the possible financial benefits would be if you put that bonus money towards the principle owed on your mortgage. First some assumptions: your mortgage is $150,000 over thirty years with a 6% interest rate. Excluding real estate taxes the princple and interest payment would be $899 per month over those thirty years. Below are the possible scenarios.

Sending just one extra payment to your lender (in our example it’s $899) in December on the first year of your mortgage slices five months of payments on the mortgage. In other words, that $899 turns into five months of mortgage payments over thirty years. Put another way, you are basically turning a one-time investment of $899 at 6% over thirty years into $5169 which is between five and six months of mortgage payments.

Now let’s suppose you were discplined enough to send that $899 in December each year to your lender. It computes to $899 sent to your lender each December until the mortgage is paid off. In this case it translates to paying off the mortgage exactly five years, three months early. So, twenty-four payments of $899 (in years one through twenty-four) shave off sixty-three months of the mortage (five years, three months = sixty-three months). Wow, you turned twenty-four payments into sixty-three payments just by using time on your side.

Next let’s get a little crazy. What if you made double payments on that thirty-year loan? You’d pay off the home in a little over nine years. Of course, the average consumer would have a tough time paying double-payments on any mortgage but it’s certainly possible with a lot of discipline.

All of the above examples confirm one of Albert Einstein’s greatest quotes: “the most powerful force in the universe is compound interest.” Whether you use that compound interest with one extra payment, one extra payment per year or an extra payment every month it gathers enormous momentum over time.

In my case, I am currently in year four of a thirty-year mortgage. When I called my mortgage lender recently and asked what effect an extra payment would have on the pay-off date of my mortage the customer service person replied that it would shave four months off the end of my mortage. Thus, the title of this article….I would get four times my money back from making one extra payment.

Let’s summarize the major points of this article:

1. As with all investments, time is your best ally. The more you have of it the more power it produces.
2. In some cases one extra mortgage payment made early enough in the life of the mortgage can shave four to five months off the mortgage.
3. One extra payment made per year can shave over sixty months off the mortgage.
4. Double payments on a thirty year mortgage can shave nearly twenty-one years off of a thirty-year mortgage.

Finally, one important note is that you may find better uses for that extra cash rather than putting it into your mortgage. Invested in a good mutual fund the money could grow twice as fast as put towards your mortage. Just another financial nugget to digest.