Get Financially Fit!

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I was talking with a friend the other day and he asked me if it was better to pay off the mortgage first or focus on retirement savings.  My personal preference is to save 15% toward retirement savings and then use incremental money to pay off your house.  My post titled, Create a financial plan, outlines my 10 recommended steps to retirement security.

If you have incremental money to put toward your mortgage here is a strategy to pay off your mortgage in half the remaining time of your loan.  In brief you create an amortization table and double up on principal payments.  The accelerated payment method that I’m describing worked for fixed loan mortgages. 

Step one of the process is to create an amortization schedule for your mortgage.  An amortization schedule details your principal and interest payment for each month.  I found a good amortization calculator at Bankrate.  Simply enter the loan amount, number of payment periods (in years or months, the interest rate, and the starting date of the loan.  The calculator will calculate both your monthly payment and the principal and interest payment for each month.  The Bankrate calculator also has the option of adding an incremental payment each month, adding an incremental payment each year, or adding a one time payment. 

To cut your mortgage payment time in half, simply send an incremental payment each month that matches the principal payment corresponding to the month that you are in.  Here’s an example:

Loan amount:  $200,000
Loan term:   30 years
Interest rate:  6%

The calculator determines that your monthly payment is $1199.10

In the first month, $199.10 goes to principal and $1000 goes toward interest.  In month 1 then send in an incremental $199.10 and your loan duration will shrink by an incremental 1 month. 

In the second month $200.10 goes to principal and $999.0 goes toward interest.  In month 2 send in an incremental $200.10 and your loan during will shrink by an incremental month (your loan will now end two months earlier). 

In an alternative scenario if you are 10 years into this same loan and want to begin this process, the incremental payment would be $341.20.  Simply print out the amortization schedule and begin paying the principal payment amount. 

The great thing about this recommended process is that you can send in incremental money and quickly determine the decrease in the loan term.  One way to apply this process is to print out the amortization schedule for your mortgage.  Whenever you send in an incremental principal payment for the current month then you cross off the last month on the schedule.  This has the benefit that you can visually see the the progress that you are making toward eliminating your mortgage.

One of my  motivations for writing this post is to warn you off of expensive software packages ($1000 to $5000) that supposedly help you pay off your mortgage faster.  You are much better off putting that money toward your mortgage payment. 

Follow your dreams, Achieve your goals! 

Help others!  Spread the challenge to Get Financially Fit!   

 Modern man drives a mortgaged car over a bond financed road on credit card gas
- Earl Wilson

I recently watched the documentary, Maxed out, which is about predatory practices of the credit card industry. 

I highly recommend that you watch the documentary if you use credit cards and especially if you carry a balance.  Once you see some of the agressive strategies that that credit card companies employ to prey on weak borrowers, you will be motivated to pay off your credit cards quickly.  I don’t want to give to much away incase you want to watch it. 

 Here is a preview to the documentary Maxed Out

What is your feedback on the documentary?


How do you feel overall about your personal finances?  Are you in shape to hike up Mt Retirement? Could you survive in the financial wilderness if you had a setback such as a job loss?  I have created a financial fitness survey to help you assess different areas of your personal finance.  Please take a minute and complete the financial fitness survey on the next page.  The purpose of this survey helps you identify areas both where you are doing well and areas of improvement for your personal finance life. This survey should take less than 5 minutes to complete.

A complimentary PDF version of this test post at book resources 

How did you do on the survey? The purpose of the survey is to show you areas where you’re doing well and areas where you can improve. If you got good scores (4 or 5) on most of the questions then you are in good shape - congratulations!  If you got low scores (1, 2 or 3) on the majority of the questions, don’t feel despair. Through focus and continuous improvement you will become financially fit. As you become more financially fit, you will experience less stress and be able to pursue your passions and live your purpose.

Follow your dreams, Achieve your goals!

If you don’t know where you are going, you’ll end up somewhere else.
-Yogi Berra

Once when hiking in a wilderness area, a tired and weary hiker approached me and asked directions to the trailhead. I pulled out my hike book and showed him the trail map. Quickly he identified the route back to his car. He thanked me, and with new energy he hiked off. I felt a great sense of satisfaction helping the hiker get back on course. I then thought, “How could he have gotten lost, there are only two turns that he had to make?” Later that day as I headed back toward the trailhead it became evident how the hiker missed a key turn. The path to the trailhead was so faint and the main trail was so dominant, you would have guessed it was a game trail. My thought at that point was, “Who would walk in the wilderness without a map?”

Do you have a financial plan? A clear map to help navigate you to retirement security and financial independance? I have created the following financial steps to to guide you through the finanical wilderness.

A complimentary PDF version of this test is posted at book resources 

1. Define your goals
Write down your dreams. Identify, clarify, and prioritize your goals. For each goal track the next actoin step that you can complete. Keep your goals visible and review your goals weekly.

2. Live within your means
Pay as you go! Spend less than you make every month. Maintain a balanced checkbook, put your credit cards on sabbatical, eliminate impulse purchases, save up for large purchases, detail your monthly cash flow, and reduce fixed and variable expenses. Achieving your goals is the motivation to reduce your spending.

3. Create and emergency fund
Create an emergency fund that is one-quarter of your montly living expenses, then gradually increase to a full month of living expenses. Only use the money for true emergencies such as medical expenses and car repairs.

4. Eliminate high interest debt
Eliminate all credit card and consumer (i.e. auto loans, student loans, etc) with greater than or equal to 6% interest. Attack outstanding loans with the highest interest rates and lowest remaining balances first.

5. Contribute 10% to retirement savings
Save 10% of your salary for retirement. Use automatic deductions and payments to contribute to your 401k/403b or a Roth IRA. If you can’t immediately save 10% of your income then take advantage of any matching available from your employer in your retirement plan. Increase your contributions both when you achieve pay increases and when you eliminate debt. Commit to save for the long haul. When changing jobs, roll your retirement plan to an IRA - avoid the temptation to cash out the money.

6. Pay off credit card and consumer debt
Attack and prepay all debt greater than 4% interest. Debts lower than 4% interest rates can be paid on the regular schedule. Do not incur any new consumber debt (i.e. auto loans, home equity lines of credit, etc). If you use credit cards then pay off the balance every month.

7. Fully fund your rainy day fund
Be prepared for the loss of a job or a serious medical event. Rainy day reserves help make lifes difficult transitions manageable. If you’re under 30 years old, save 3 months worth of living expenses. If you are between 30 to 40 then save 6 months of living expense. Above 40, accumulate 12 months of living expense.

8. Maximize retirement savings contributions
Fully contribute to your 401k/403B plans and Roth/traditional IRAs. Continue increasing your contributions until you reach 15% of your income. Either invest in index funds to keep expenses low and achieve market performance or invest in no-load mutual funds that outperform index funds.

9. Continuously build equity and then pay off your mortgage
Purchase a home with 30% down and fixed 15 or 30 year morgage. Do not take out home equity line loans. Pay off your mortgage to reduce your living expenses and achieve peace of mind.

10. Achieve retirement security / financial independence
Financial independence is the point at which your assets provide the necessary income to cover your expenses. You are now in the position to pursue your passions full time. You also can increase your giving.

Follow your dreams, Achieve your goals

How is your journey going?  What step number are you on?

Liberty, Sancho, my friend, is one of the most
precious gifts that Heaven has bestowed on mankind.
-Don Quixote

I once went on an Outward Bound backpacking trip. On the first day of the trip the guides distributed the gear and food such that each of our backpacks weighed 40 pounds. Each day as some people got blisters or became fatigued; the guides redistributed the weight so that the entire group could travel the fastest. Since I didn’t experience blisters or fatigue, my backpack became a little heavier each day. Within a week I was a pack mule with a 60 pound pack. The lesson I learned on this trip was that as the weight of the backpack increased, my speed and enjoyment of the experience decreased.

In personal finance, having debt is similar to the weight of a backpack. When individuals incur increasing debt it’s difficult to achieve goals and stress levels go up. I challenge you to eliminate all of your consumer debt so that you can enjoy life more fully.

Here are the essentials to eliminating debt:

1. List your debts in descending order of interest rate
2. Live within your means
3. Cut spending and increase income to accelerate debt elimination.
4. Establish an emergency fund
5. Attack the high interest debts first
6. Make the challenge fun; reward yourself
7. DO NOT incur consumer debt again

List all of your debts in descending order of interest rate

The first step in eliminating debt is to take inventory of all of your loans, credit card balances, and account balances due.  Starting with the highest interest rate debt, write down the interest rate, minimum monthly payment, and the total amount due in the first line. Successively add each debt until you have written down all you’re your loans, credit card balances, and accounts balances due. Congratulations! You have now successfully defined your goal by writing down all of your debts that you want to eliminate.

A complimentary PDF debt elimination worksheet is posted at book resources 

Live within your means

Once you have listed your debts you are ready to begin the trek to eliminate debt from your life once and for all. The next step is living within your means. Living within your means requires that you pay as you go. Stop using your credit cards, purposely spend your money each month, and save up for large purchases. all of your debts current by making the minimum payments on time.

Cut spending and increase income to accelerate debt elimination

By living on less than you make you will free up money to reduce debt each month. I recommend that you further increase your available money by both decreasing your living expenses and increasing your income.

Evaluate all of your expenses and determine where you can save money. Can you cut back on eating out? Can you postpone going on vacation? Are you willing to temporarily reduce the quality of your life in order to get out of debt faster? For example, are you willing to turn off cable TV for the next 6 months?

The fastest methods to increase income are to work overtime or take on a part time job. I also recommend that you sell things that you no longer need or that you can’t afford. For example, you can sell a luxury items such as an additional car, boat, motor home, or motorcycle. Also consider selling your primary car and purchasing an inexpensive reliable car if your payments are keeping you from getting out of debt.

Establish an emergency fund

Once you are living with your means, you will want to establish an emergency fund. I recommend that you save up 25% of your take home pay so that you are no longer need credit cards for emergencies. This will be $500 to $1000 depending on your income. I recommend that you establish your emergency fund in a separate credit union or bank. Use discipline to only use emergency funds for true emergencies such as an auto repair or medical expense.

Attack the highest interest rate debt first

Once you have set aside your emergency fund then begin attacking your debts. Start first with the highest interest rate debt. Each month make the minimum payments to all of your debts then apply all of your extra money to the debt with the highest interest rate. Once the first debt has been eliminated, then work on the debt with the next highest interest rate. Within a short period of time you will be able to determine the amount of time that it will take to eliminate all of your consumer debts.

When you get to debts with interest rates of 4% or lower, you can go back to making regular scheduled payments on these debts. Say for example, you have an auto loan with a teaser 1.9% rate. I recommend that you not pay off this loan ahead of schedule, instead continue on the financial steps journey fully fund your rainy day fund. The rainy day fund which will be invested in money market, certificate of deposits, or I bonds will yield a higher return than 4%.

Make the challenge fun; reward yourself

As you eliminate each debt, reward yourself.  Taking a moment to celebrate each success, will invigorate and energize you for your journey.  The reward does not need to necessary cost any money. For example, you may take a walk on your favorite path or allow yourself to enjoy a TV show.  The reward process is important because while you are attacking your debts you are sacrificing your quality of life.

DO NOT incur consumer debt again

Once you reach the successful milestone of eliminating all of your debts, I challenge you to swear off of all future debt (with the exception of a house purchase).  For example, the next time you buy a car, save up and pay cash. Save by setting aside the amount of your car payment after your current car loan has been paid.  In time you can transition from buying reliable used cars to new cars that you can drive many years.  Always save up to purchase luxury items such as a television, a couch, a vacation, a boat, a motor home, etc. When you avoid loan payments you decrease your stress and increase your ability to build wealth.

 Follow your dreams, Achieve your goals!What is your debt elimination success story or advice?