Well here we are at Step 4 of our Total Money Makeover. (If you missed the previous steps, you can find them here: Step 1; Step 2; and Step 3). So far we have built a small emergency fund, attacked our debt with the debt snowball, and then built our larger 3 to 6 month emergency fund as well. Now it is time for Step 4: Pay Off The House!
This step in my total money makeover, is where I deviate from Dave Ramsey in his steps to a total money makeover. If we were following his steps exactly, this part wouldn’t come until step 6 (after investing for retirement and saving for the kids college). The reason for my deviation is twofold:
- I don’t believe our economy is strong enough to sustain our dollar for much longer and I want to be completely debt free before the ‘poop hits the fan’. I believe my money will serve me a lot better by paying off the house and allowing me to be financially self-reliant than by sitting in a very fragile stock market *hoping* that it will make some money instead of crashing (which I’m betting will happen again soon).
- I’m taking my order of priority from a different source. I am choosing to listen to the counsel of spiritual leaders who have repeatedly told us to get out of debt and live within our means. Based on that, I do not feel it is appropriate to keep myself in debt simply so that I can work on giving my kids a free ride through college (they can definitely work their way through if need be!) nor to give myself a cushy future. I can work my way through life if need be too! It is more important to me to work on ridding myself of any debt so that I am not beholden to anyone. Then I can work on securing a cushy future for my children and myself.
So now that all other debts are paid and we’ve got a little nest egg set aside to save us on those rainy days, any extra money at this point goes to paying off the house! Let’s get rid of that mortgage!!
A few things to consider to move this process along:
- Would it be wise to refinance? There are some super low interest rates available right now that may make refinancing a wise decision. Just remember that it costs money to refinance (they add the cost back into your total home mortgage amount), so make sure that you’re saving enough to counterbalance the costs of refinancing. We refinanced a few years back and figured we would need to live in our house for at least 5 years in order to make that money back (which we anticipated doing). So make sure you weigh the costs versus the benefits.
- Pay something extra each month. Try getting in the habit of adding an extra principle payment each month. It could be $10 or $1000. But the habit of adding extra principle will help to keep your goal fresh, keep your motivation up, and it will keep you aware of the progress you are making. I do not have my monthly payments set to auto-draft from my checking account because I want to have to think about this payment each month. I want to remember that it is my goal to pay off this debt and then I can add any extra payments for that month that I am able.
- There may be some whose home mortgage is crazy out of reach. Perhaps ‘we’ weren’t quite in our best financial state of mind when we purchased a mansion on a teacher’s salary (no, I didn’t do this… I’m just sayin!). Perhaps we bit off a bit more than we could chew. For those in that situation, it would be wise to refocus and start again. Sell the house, and buy one that is affordable. Yes, it is hard to sell a house in this economy. Yes, you will likely take a hit on your home. But it still may be the best thing to do (again, this is for if you are wildly out of your league). Talk with a financial advisor to find the best option for you. Your monthly home mortgage payments should not be more than 25% of your monthly take home pay (not your gross pay, but your net pay).
- OR, if you’re feeling REALLY ambitious about having no debt, sell your house, move into a rental property and then just SAVE until you can pay CASH for a home! (You may even be able to pay cash for a home right NOW if you were to downsize!) Remember, your first home does not have to be your dream home. It just needs to be something affordable. And as you save more and more, you will eventually be able to move up to your dream home.
Remember the financial golden rule: If you will live like no one else, then later you can live like no one else! Make the sacrifices needed now so that you can enjoy wonderful financial freedom in the years to come!
Good Luck and Happy Savings!