Looking at the title, you may think I’m crazy, but I really think that it’s possible to pay off our $70,000 loan in 4 years! You might think, “Why not just do like everyone else and pay your loan over the course of 30 years? It would give you a lot more cash flow. Plus, you could afford a much larger house with the low mortgage rates!”
The main purpose of this post is not to defend my debt-free beliefs, but just think about it for a moment! If you were completely debt-free by the time you were 30 years old and could invest heavily and bank loads of cash into your savings for the rest of your life, you’d have enough money to either retire 20 years early, or you could have your choice on where you’d like to retire: Tahiti, Bora Bora, the Bahamas…ANYWHERE! Paying off our house in the next 4 years would really put us in an amazing position with seemingly limitless options!
Only 2 Years Ago
When my wife and I first got married, I was in a dead-end job that paid only $40,000 a year (this isn’t terrible I know, but I lived in a very expensive area, and it was honestly difficult to make ends meet) and my wife was finding it difficult to locate a decent job. Our cash savings was depleting and our stress level was through the roof! It was a terrible feeling.
We began to cut every possible expense to keep our heads above water, and luckily, my wife was able to find a job that allowed us to start paying off our debts.
Rather than depend on my wife’s job to carry us through life, I decided to start an online business of my own (mainly this site) to produce extra income. A few months down the road, my wife decided to start a business of her own too (photography)! Today, our expenses are still low, and we have increased our earnings dramatically!
Our Basic Plan
I actually haven’t fully discussed this plan with my wife yet, but we are both in agreement that we’d like to get rid of our mortgage ASAP! Hopefully, she’ll like the details that I laid out below! 😉
The Basic Needs and Extra Income
Since we have decided to live quite frugally, my wife and I can actually survive on my income alone! This leaves my wife’s job income, her photography income, and my website income as discretionary. All of this gives us about $2,000 extra per month.
I know some of you may be saying, “I don’t have an extra $2,000 per month! So, I can’t possibly pay my house off in the next 4 years!” Well, if you recall, we didn’t have any extra money either. We decided to change our sitation by living frugally and building businesses to increase our income. Because of these good decisions, we’re now able to have this as an option! If you’d like to earn extra money, browse through my site. I’m sure you’ll have a few ideas spark in no-time. 🙂
Future Savings and Expenses
At this point, my wife and I have about $4,000 in our emergency savings (since we are renovating our house, we have decided to keep this amount a little lower than normal and use the excess on our house). We plan on bringing this back up to about $10,000 once our house is fully renovated.
In order to complete our house renovation, I think we’ll need to spend another $3,000, plus another $5,000 in order to furnish our bedroom, the living room, and our office.
I’d like to think that our house will never cost us a thing, but unexpected expenses are going to happen. I’ll figure on $5,000 over the course of the next 4 years.
Here are the above points in summary:
- Need another $6,000 in our emergency savings in the next year
- Need $8,000 to complete our house renovation and furnishings in the next 2 years
- $5,000 in unexpected expenses over the course of 4 years
Here’s a graphical representation of these expenses, stacked on top of one another to show the total expense for each year:
Extra Mortgage Payments
Based on the above graph, I have concluded the following:
- We can pay an extra $1062.50 each month for the first year – We made $24,000, but had only $11,250 in expenses, which means there’s an average of $1062.50 extra per month.
- We can pay $1,562.50 extra per month on our loan in Year 2 (same logic as above, but no longer needed to put money into our emergency account)
- In the last 2 years, we can put $1,895.83 extra per month toward the house loan – again, the same logic as before, but now we’re only putting money aside for unexpected housing expenses.
Cutting Down on the Principle
By paying the additional $1,062.50 each month in the first year, our principle will be cut down to $53,484.39.
Upping our payment in the second year to $1,562.50 (on top of our regular mortgage payment), our new principle amount after Year 2 will be $30,338.68.
Then, by paying $1,895.83 from the beginning of Year 3 on, I can actually get rid of my mortgage with 9 months to spare!!
If this whole mortgage payoff goes according to plan, my wife and I could be completely debt-free by November, 2014!
Do you think this plan will work? Can you think of anything I might be missing in my estimates?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.