This question was sent in by one of our readers, Jean Gallagher:

I recently had to take out a $15 k loan ($500 a month payments), for attorney fees and to get my daughter a car. My air conditioner / condensor unit went out and I had to finance $6200 to get it replaced. My husband and I both had surgery done so we are drowning in medical bills. My mortgage is $1000 a month (this includes escrow).

Both our income combined is $2500. I have a $2500 cc that is maxed out, a $3000 limit on a credit card that is cut up and thrown away (as instructed by Wells Fargo to do). I just got another credit card in the mail from the company I bought my air conditioner / consdensor from because my credit is very good (according to them). We are are living like spartans now because we can’t make ends meet and this $7500 credit card looks pretty enticing as far as my doctor bills are concerned.

I am in debt but don’t want to create anymore….how do I take care of all out outstanding doctor bills with out having to use the $7500 credit card? Should I transfer the balance of the $2500 credit card to the $7500; cut up the $2500 one but keep it active and then pay my past due bills on what’s left of the $7500.00? Help!!
Thank you
Jean Gallagher

Thanks for your question Jean!

If it were me (and this is what I would really do – but understand that I am not a financial adviser.)
I would take the $7500 card, balance transfer the $2,500 card to it if you can. Then I would use the $2,500 card to absorb some of your medical bills. There are several important things to remember though:

1) You would be balance transferring your card because it will lower your debt ratio back down to around 30 percent (as far as your credit cards are concerned.)

2) I would make sure that I did not go over 30% of the 2,500 card either. Once you start putting medical bills on it.

3) Go ahead and start an emergency fund. Even if you can only put in $20 every time you get paid, it will still be there when you need it.

4) If your $3,000 card is only cut up and not maxed out, you could consider re-ordering the card and using it for your medical bills as well.

Now, if I understand correctly you guys are making about $30,000 a year and you are $23,700 in debt before your mortgage and your medical bills.

Were I in your shoes (and I have been very close) I would also do the following things:

• Contact the hospitals and doctors you owe money to. See if there is any program you can get into to reduce the bills based off of your income. I believe that $30,000 is right around the cut-off, so you will probably qualify. Especially since you have a child. This could cut your debt considerably.
• Make sure your daughter is the new owner of that car payment. Even if she is making the payment to you each month. If she is old enough to drive, then she is old enough to pay for the car and insurance, at least in part. Trust me when I say you are not doing her any favors by giving these things to her. My parents did this for me. Instead of appreciating it, I abused it, and I never learned how necessary it was to keep a job to pay your bills until I got in trouble.

  Now, I doubt your daughter is like me. However, the time you have remaining with her in your home is limited. Don’t be afraid to talk to her about your financial situation, and why it is necessary for her to work. This will be a far greater gift than the car ever was. It would be an excellent time to talk to her about credit cards too, before she has credit card companies giving away free iPods and T-shirts on her college campus in return for applying for a credit card.

• Pay down as much of your credit card balances as you can each month. Start with the one that has the highest interest rate first, even if it is not the lowest balance. This will save you money over the years it may take you to pay the cards off.
• Make sure you do not charge anything on those cards but your medical bills, and only after you try to get them lowered.
• Try looking for ways to increase your income. If you enjoy writing, try heading over to Freelance Writing Gigs They put up lists of on-line writing jobs early each morning. This is something you could do from home, no matter what your medical condition may be. You or your husband could also consider having one of you take on part time employment at a job close to you.

It will be a struggle to pay this debt down, but if you are determined enough, you will be able to do it. You also sound like you have an excellent credit rating. Unless you are forced to go delinquent, I would not work with a credit counseling agency, or consider bankruptcy. In fact, you would probably do better to simply have a free consultation with an accredited financial advisor or an accountant. Get your paperwork together, and take it with you. I know that you will be able to work out a budget that will get everything re-paid on time! I would avoid taking out new loans to pay everything back – with the exception of the new credit card.

Well, it’s July. And you know what that means? It’s all downhill to Christmas from here!

Since major retail stores feel it’s appropriate to begin celebrating Christmas in July, I thought we could have a quick conversation about some of the common store credit offers, and what they could mean to your credit score.

From here on out, you can expect to be deluged with 90 days same as cash, zero money down, “Save 40% if you apply today!” offers.

So, they’ve got you there, at the checkout, already worrying about how you are going to pay for all these expensive gifts, when they spring it on you: Just fill out a quick application and you can save as much as 40 percent on your total purchase!

“Yes! “ You think,” I’d love to save 40% today! That sounds great.”

Well, if you fill out that application, several things are going to happen:

1. You get an inquiry on your credit report. In some cases, this alone can lower your score up to 12 points.
2. You get rejected for the card because you don’t know your credit score, and whoops, now you have an inquiry and a rejection.
3. Or, you get approved! You save 40 percent, and eat the inquiry cost to your credit report. You are now the proud owner of a credit card with a 24% interest rate!

So, before we gear up for the spending season, let’s take a little bit of evasive action:

• Pay down or pay off a Visa or MasterCard with a reasonable interest rate.
• Set an amount you are comfortable charging. Hopefully it will be an amount that you can pay off within the first month, or no later than the second.
• Designate that card for your Christmas expenses.
• If possible, make it a cash back card so that you at least get some reward for charging.
• If you do plan to apply for store credit, pick your stores carefully. Don’t just jump on that spur-of-the-moment offer. Make sure that opening that retail account is what you really want to do.

  Most of all, remember that before you apply for any sort of credit, it never hurts to get a copy of your credit report, and check your credit score.

  What about you? Do you think it’s too early to start thinking about Christmas? How do handle your Holiday budget? Do you ever regret what you charge, or do you have it well in hand? You can give us your opinion below.

The funny thing about bad credit is that it’s a slippery slope: the more trouble you get into, the more expensive everything gets, and the harder it is to manage it all. One of the ways the credit industry balances itself out is by charging higher fees and interest rates to people with lower credit scores.

So what do you do when you’re on the bottom looking up? When we hit bottom I knew that we had to do something to re-establish our credit rating. We were driving a car that was falling apart, renting our home, and had no real assets to speak of. So how did we come back from the abyss?

First, I sat down and took a long hard look at my finances. Then, I choked and accepted one simple truth: It was going to be expensive to raise my credit score back up. That’s where the finances vs. credit battle began.

The only way to raise your credit score is by getting and using credit properly. The only companies that were willing to lend me money all wanted to charge upwards of $250 worth of fees just to give me the privilege of paying better than 19% interest. So, I plucked up my courage and launched a multi-part attack on my bad credit score.

1) I invested a small amount of money into an Orchard Bank secured credit card. I started with $200. They paid a pitiful rate of interest (.02% If I remember correctly) on my savings account. But they did report monthly to all three credit bureaus. The other main benefit to getting that card was that I could simply make an extra deposit into savings any time I wanted, and it would raise my credit score. The icing on the cake was a very reasonable 9% interest rate.
When you have bad credit, an interest rate that low is unheard of.

2) I went ahead and applied for a high fee-unsecured credit card. I chose the Rewards 660 Visa largely because they report to the credit bureaus and they automatically raise your credit limit $75 each time you make three on time payments in a row and don’t go over the limit. The problem is, they had $250 worth of initial fees, and then an annual fee well over $100. As well as a 19% interest rate. I no longer carry a revolving balance on either of my cards though, so I was not really as worried about that.

3) I started monitoring my credit scores, and my credit reports. This cost an average of $30 a month.

4) I challenged incorrect items on my credit report. That was free and it did raise my score.

5) I sent $100 a month extra to my secured credit card to raise my limit. I did it for 5 months in a row.

6) I paid off my credit cards every month, on time, without fail.

So, all in all I figure raising my credit score from the mid 500’s into the high 600’s cost me around $1200 when I counted all the card fees and the credit monitoring service.

At first glance, that appears to be a terrible financial decision, I know. But the truth is, raising my score more than 100 points was worth every penny. And, as long as I keep managing my credit well, that improved credit score will continue to save me thousands of dollars on our home (by being able to periodically refinance), on our next car if we have to finance it, and on every better credit offer that comes along.

In other words, it was a temporary financial sacrifice for my greater financial good. And the most valuable thing I took away from the whole experiences was that I really and truly learned the ins and outs of my credit score and reports. I learned to manage my money. However much that lesson cost me, the rest of my life will be better because of it.

What do you think? If you were in my position would you be willing to pay all of these fees just to raise your credit score? Would you forgo repairing your credit altogether? Would you have explored other options and tried different methods of raising your score? Leave me a comment below, I’d love to have your opinions!

Today we have more opportunities than ever before to manage our finances and, if need be, consolidate our debt in order to pay it down. If you are feeling stretched by too many payments, or having trouble managing your various accounts, then debt consolidation can definitely be a smart financial move. The only question is, how will it affect your credit score?

Balance Transfers:

Who wouldn’t want to transfer the balances on several cards with various interest rates to one card with a low, or even 0% interest rate? Before you do this, just keep in mind the golden rule of balance transferring: Keep your accounts open. Closing your old accounts after you transfer the balance off of them can hurt your credit score.

Just like in part 1 of our series, closing those old accounts hurts you in two ways:

1) By lowering the overall amount credit you have available. (30% of your credit score)
2) By lowering the average age of your accounts. (15% of your credit score)

If you need to close those old accounts because they have high maintenance or yearly fees, then make sure you aren’t going to apply for a home or auto loan in the next six months to a year. Keep making on time payments to your new card, and your score will go back up.

Also, remember the second rule of balance transferring: Keep your old accounts open, but do not charge them back up. Unless you’d like to double up on your debt!

Debt Consolidation Companies:

Consolidating your debt through a debt management company does not necessarily hurt your credit score – but it can. It all depends on the company.

What happens when you make an agreement with a debt consolidation company:

Once you decide on a company and agree to a debt management plan, the company you have chosen will begin to negotiate with your creditors on your behalf. You will write a monthly check to your debt consolidation company, and they will disburse it to your creditors.
There will be a notation made on your credit report that you are repaying the loan through a debt management company. At this time, that notation does not hurt your credit score.

Here’s the problem:

Many credit card companies will not negotiate things like settlements or reduced interest rates until you are past due on their account. Unscrupulous debt management companies will allow your accounts to go past due for several months so that they can negotiate new terms with your creditors. This will hurt your credit score. The solution? Choose your debt consolidation company wisely. You can read more about how to do that here:

Have a question for us? Leave a comment below!

What is a FICO® score?

A FICO® score is a credit score that was developed by Fair Isaac and Company. Lenders use this number in part to decide whether or not to give you a loan. Most lenders offer different interest rates to you depending on how high or low your score is.

Your FICO® score:

All FICO® scores range from 300-850. The higher your score is, the more likely you are to get a loan. The lower your score is, the less likely you are to get a loan.

If you have a low FICO® score and you do manage to get approved for credit then your interest rate will be much higher than someone who had a good FICO® score and borrowed money. So, basically, having a high FICO® score can save you hundreds, if not thousands of dollars over the life of your mortgage, auto loan, or credit card.

What is considered a good (or bad) FICO® score?

• Scores between 720 and 850 are considered a good credit risk. They normally qualify for the best interest rates on a loan , and can receive instant credit approval nearly anywhere. This is the ideal range for your credit score to be in.
• Scores between 600 and 720 are considered a moderate credit risk. People who’s scores fall into this category will not normally have trouble getting a loan, but they will pay more in interest than people who have score above 720.
• Scores between 500 and 600 are considered poor credit. If you fall into this category, you will have difficulty getting a loan. If you do manage to get a loan you can expect to pay double digit interest until you manage to raise your score and refinance.
• Scores below 500 are considered a terrible credit risk. If you fall into this range you will most likely not be able to get a loan of any type, although you may qualify for a secured credit card.

How is my FICO® Score Computed?

Your FICO® Score is computed using all of the following things:

(Photo from www.MyFICO.com)
For more information on exactly how your FICO® score is calculated you can visit MyFICO.com

How can I check my FICO® score?

You can check your FICO® score by paying to see it at any of the three credit bureaus, or you can check your FICO® score for all three bureaus at once by going here.

If you are planning to apply for a credit card, or especially a mortgage or auto loan then it is vital that you know your score before applying. Every time you request a loan it can lower your FICO® score, so you need to know where you are starting from before you apply for credit.

How can I raise my FICO® score?

There are several simple ways to raise your FICO® score:

Pay all of your bills on time, every time. This includes your utility bills, mortgage and auto payments, and all of your revolving lines of credit like credit cards.

Check your credit report at least once a year – You can find out how to get your free credit reports here. You can find out how to challenge bad information on your credit report here.

Do not charge more than 30% of the available balance on any of your credit cards. Banks like to see a nice record of on-time payments, and several credit cards that are not maxed-out. If you are carrying high balances on your credit cards, then make paying them down under 30% a priority.

Do use your credit cards – Many people who make mistakes with their credit believe that the best way to fix things is to never use credit again. If you are afraid that you cannot handle your credit cards correctly then the best policy is probably this one: Run only your utility bills on your credit cards each month, and then pay the balance in full by the due date. This ensures that your utility bills get paid on time automatically, and as long as you keep the habit of paying off your credit card balance each month your score will continue to go up. Leave the credit cards locked in a safe or drawer at home.

Keep your accounts open as long as possible – Even if you are no longer charging on the card. The best policy is to keep those unused accounts open, blow the dust off your card every few months to make a small purchase, then pay it off. How long each of your accounts have been active is a major factor in your credit score.

Remember that it will take time – Following the above steps consistently over a long period of time will repair your FICO® score and allow you to qualify for better loans and interest rates. Repairing your FICO® score does not happen overnight though, so if you do these things for a few months and do not see a large increase in your score, do not give up. They are all habits that you will want to maintain throughout your life to be sure that you keep your finances and lines of credit under control.

Have a question for us? Leave a comment below!

This is the time that I’m supposed to rounding up what has been going on around the blog world. But I am now watching a CNN program : Special Investigation Unit, and I’m intrigued. There is a round table on the mortgage sub prime crisis and the mess we are in right now. The show essentially explains the events that led to the present situation. As I am watching this, a few things spring to mind.

1. Unintended Consequences - One of the things about this show that really intrigued me was this phrase called “reverse red lining” - which is a term used to describe mortgage lending to people like minorities and people with low credit. In 2002, President Bush announced his intention to help more than five million minorities to own their homes.

Great intention, but unfortunately, this ended up with disastrous consequences as we are witnessing right now. But this has led me to challenge every good intention that the three political candidates are proposing now. For example, is “universal health care” really great? Great intentions certainly. But just like the mortgage situation, is “universal health care” really desirable? I don’t know, but I’m looking to see the press ask tough questions about how the democrat ideas will be funded? Are there any “unintended consequences” we are not considering?

Beware of common assumptions - One of the common assumption on why we got into this whole mess is because of this common assumption - that housing prices will always go up. Well, unfortunately, because most people rely on leverage to buy a house, it does not take a large decline before everyone gets into trouble.

Another assumption common in the financial world - invest for the long run, stocks always go up. This may be true, but many people do not have the long run. For example, a 55 year old who is planning to retire in 8 years does not have time on his side. He or she needs a certain degree of protection against portfolio volatility.

Most people will never be financially savvy - CNN interviewed a lady who had her home foreclosed. Inevitably, the reporter asked if she knew that she was taking out an adjustable rate mortgage. Her answer was obviously NO! I’m pretty sure most people who took out interest only or adjustable mortgages will not know what they have gotten into. I can only shudder to think the majority of individual investors don’t know what to do and get scammed.

Alright, back to some tributes here. I participated some carnivals which you should check out :

Carnival of Personal Finance 150th Edition at Lazy Man and Money

Carnival of Personal Finance 149th Edition at The Happy Rock

carnival of Everything Finance #17

carnival of money stories

Carnival of Debt Management #49

Alright - good night and have a great week ahead.

I’m not going to write a post on why or how people got into debt. But having spoken to some people who carry credit card debt, here are some of the reasons people get into credit card debt and the type of expenses that got them to where they are.

1. Job Loss - Job loss was one of the reasons folks get into credit card debt. From the people that I spoke to, this normally came about after using up their emergency fund.

2. Medical Expenses - yes, sad as it may be, I know of a couple of folks with no medical insurance and had to charge their bills to their credit cards. Now, to be honest, the bill was probably lower for someone with no insurance!

3. Daughters Wedding - We all talk about saving for your kids college education. Nobody talks about their daughter’s wedding! And they do cost quite a bit (depends on the wedding obviously). But someone I know carried a balance because of this.

4. Start a business - Yes, many people do max out credit cards when they start a business. Guess the most important thing is to make sure you succeed in your business lest you be stuck with tons of credit card debt!

5. Buying Stuff on the Internet and QVC - Yes, there is true. But I guess they are people who are always buying stuff they do not need. And because there is a GREAT DEAL!

6. Taking Advantage of 0% Teaser Deals - Well, how can you resist it when it is 0% for 12 months! I guess that as long as you really have the ability to pay it back, then it is OK.

7. Buying Furniture - Yes, when we fulfill the American Dream of owning a house, it actually comes with increase expenses. We need to fill it with furniture. Hence, the expenses pile up and they go to the good old credit card.

8. Clothes, Shoes and Jewelery - Girls stuff I guess. But I guess that I would classify this as uncontrolled spending.

9. Tech Gadgets - Guys stuff. But a couple of guys told me that they got into carrying a balance when they started to put their Apple iMac on the credit card and other gadgets. I guess the people who got into this situation are “innovators”, always buying the latest stuff.

Well, this is what I got from my friends who have credit card debt and may not be representative of the average person with credit card debt. If you happen to carry a balance, I would love to hear the reason and the expenditure that got you here!

In my last post, I talked about credit card debt and lifestyle sacrifice. On a related topic, one of the real question that has always been bugging me is why does our expenditure always go up with our income?

One of the effects of the weakening of the economy is that we are going to see people and household cut back on expenditures. For example, we are now cutting back on our Starbucks Coffee, purchases of SUVs are down, we are eating out less.

But then the question becomes why do we always increase our discretionary spending when our income goes up or if things feel better? Why do we not think about always being frugal? Mrs Credit Card and myself are always wrestling on this issue. For example, one of my goals is to pay off my mortgage as fast as I can. But I would also like to fund my retirement much earlier. While I have started putting extra money aside a month to pay off principal on my house, I have also recently just bought a new Lexus. I have noticed that we each out more often when our income goes up. I think part of the problem is that deep down inside, we always have a dream as to our ideal lifestyle. So a couple of nights ago, I sat down and took down some notes as to how I want my lifestyle to be if I had all the money I wanted.

Ideal Lifestyle

1. Job - Probably volunteer for a non-profit full-time plus maybe be a full-time blogger (if I’m any good at all). - Yes, that would be my ideal lifestyle. No more having to worry about putting the bacon on the table everyday or dealing with 9 to 5 corporate politics.

2. Car - Guess after my latest car purchase, I already have my dream car. (I’m not a very huge car fan!)

3. House - Oh, the house. I don’t know where to begin. Dream kitchen, dream master bedroom, dream fireplace. Guess I would like to have a Mansion with a pool, some expensive artwork around the house, acres of space (more like acres of land).

4. Have a personal fitness trainer - I know that I should be working out everyday to keep fit. But I really lack the discipline to do this. Ideally, I would like to be able to hire a fitness coach.

5. Have a massage twice a month - How nice would that be if I can pamper and indulge myself! Good for stress management as well!

6. Hire a full-time chef - how nice would that be? Mrs Credit Card would sure love that!

Consequences of living a larger lifestyle than you can afford

Part of the reason why I think people have credit card debt is because we choose to live our ideal lifestyle before we can actually afford to.

One of the biggest culprit is the desire to “renovate our house”. I know so many cases of folks who have credit card debt (or any other debt) and still are pretty relaxed about taking out a home equity line of credit to do some home renovations!

I guess living in a nice environment is important. But a home renovation can get really expensive and so this can really put a dent on your finances.

I also know many people who are in debt and drive an even more fancy car than myself. Or doctors who pull in seven figures every year and still have a six figure credit card debt.

How much can we upgrade our lifestyle when our income increases?

Here is the six million dollar question. When you get a raise or increase in your income, how much can you “upgrade your lifestyle”? Or rather, should you even upgrade your lifestyle.

Here is how I think most of us do it. We get a raise, so we eat dinner out 2 times a week instead of once a week. We get more generous with paying for kids activities. We spend more on organic food! We get a bigger car. We take a more fancy vacation.

But if we really think about it, if we use the extra income we have and put that into our retirement account, we will probably reach our retirement goals earlier. Or perhaps you can pay off your mortgage early, or fund your kids college education.

But What’s The Point Of Being So Frugal That You Do Not Enjoy Life?

That is such a valid question. Especially when you have kids. You are always tempted to get things for them, whether it is a book or a little treat or a vacation that they will enjoy. So what gives?

Your Ability to Upgrade Your Lifestyle Depends On Your A Few Things

Specifically, I think several factors affect your ability to live it up when you get a raise or when you fortune turns for the better. It really depends on

1. How reliable is your income?
2. What is your fall back when you lose your income.
3. Your potential income growth.

Let’s take a look at some examples.

Couple are teachers

I know of friends who are teachers (both husband and wife). In this case, we have a couple who are making a decent salary, but will never really be super wealthy. Yet, they have stable jobs. Hence, when they get their salary raise (can’t imagine it being much), this couple would probably well increase their quality of lifestyle modestly.

Couple who work on Wall Street

I do have friends who both work on Wall Street. They make lots of money. Having said that, they have very high risk as they could easily be laid off at the same time and they face the same industry risk. Folks like them can probably increase their lifestyle when they get their huge increase in bonus but would be wise to set aside lots of emergency cash. Many folks on Wall Street live on their base salary and save their bonus (very wise).

Couple who are both real estate agents

Almost the same situation as the above Wall Street example. But in this case, their incomes are more unstable (at least you get a salary on Wall Street and some bonus every year). When such couple have bumper years (like the first part of this decade, they should always save for the rainy day (like now).

Couple - One is a teacher and one is a doctor! - This may be the ideal situation. Teacher has a safe job and his or her salary can be base to set their basic lifestyle standard. When doctor earns more, they could conceivable feel free to increase their standard of living as the teacher has a safe and stable job.

THE TOUGH BALANCING ACT

When we get a raise, it is easy to simply “upgrade your lifestyle”. Yet, deep down inside, we know that “delayed gratification” is probably the better path to financial freedom and security. So what gives? I think due to human nature, it requires a tough balancing act on our part. When our economic circumstances improve, it is only natural and probably sensible that we reward ourselves a little but yet at the same time take advantage of it and set aside more money for the rainy day.

Steps I have taken to help control expenditure increase when my income increases

Here are a couple of preliminary steps I have taken to help me be a little more systematic about this thought process. I have written down how I will spend if I get more money every month. So here goes.

1. Put more payment to mortgage payment - if I manage to do that then perhaps I could give ourselves a treat and having a couple of extra nights out for dinner. (already doing this).

2. Put extra money into the 529 College Savings Plan (perhaps I should be doing this before the weekly dinners!)

3. Only start our kitchen and backyard renovations when we have cash to pay for it.

4. Live my ideal lifestyle only if we had $10mm!

So what did your expenditure increase when you salary last increased?

I have been thinking about a few of my friends who have credit card debt and a couple of things spring into mind. Firstly, they seem to be living a very decent middle class American Lifestyle. By that I mean a nice house (most around $250,000 to $500,000). I also observed the following :

1. Many are in the process of some major decorations on their home - whether it be doing their yard, installing a patio. And some are certainly taking out a home equity line of credit.

2. Many have either bought or lease a new car - Here is another observation : Many of them are leasing new cars. I just wonder why don’t they buy a second hand car and take a loan? I’m sure it’s cheaper that way. And many of them are fancy foreign luxury cars as well!

3. Most take “normal vacations” like renting an apartment at the beach or shore for a month.

4. Many of them make purchases every month that goes into decorating their homes.

So here’s what I’m wondering? - If they are all have credit card debt, why don’t they make a little sacrifice and taking a less expensive vacation, get a second hand car or put off decorating or doing something with their homes?

Now, many have told me that they are embarking on a debt reduction program - AKA - they are paying more than their minimum every month on their credit card bills and at some point in the future, they will pay off their credit card debt.

So, you can’t say that they have no plan. It’s perhaps that looking at their existing lifestyle, they could perhaps be a little more aggressive in their debt reduction plan.

So how about myself? - Now firstly, I have no credit card debt. But I do have a mortgage and have just taken out an auto loan on my new lexus! And I sure do live a “normal lifestyle”, although my home is relatively new and unlike many people, I do not have many fix ups to do.

But then, I keep wondering, if I sacrifice my lifestyle, I could pay off my mortgage faster and even perhaps reach my retirement goals earlier.

Which brings us to the $6mm question: How Much Are You Willing To Sacrifice Your Lifestyle to Achieve Your Financial Goals?

After thinking about it for a while, I realize that whether you have credit card debt or not, if you have a huge mortgage or not is irrelevant, we are have some financial goals to meet whether it is debt reduction, building an emergency fund and saving for retirement.

The more sacrifice you make (in terms of lifestyle and money), the faster you will reach your goals. But having said that, I also feel that for some people, any heavy sacrifice may not be worth it. It may be the case that unless your income increases dramatically, putting too much of a crimp on one’s lifestyle may not be worth the effort (because we may end up living too frugally for our liking).

What do you folks think about this?

I have finally decided to dramatically reduce the time I take to pay off my mortgage. But first, a little background : I bought my house three years ago and took on a $439,000 mortgage. For my last statement, it turns out that I have still over $428,000 left on my mortgage. As most would know the math of mortgage, in the beginning years of your mortgage, only a fraction of your monthly mortgage payment ends up going to pay down your principal. The rest (or rather the bulk of it) goes mainly to paying the bank in the form of interests. It is only in the later stages of the life of the mortgage that more of your monthly payment goes to your principal payments.

I clearly recalled that during the closing of my house, the mortgage person said that at the end of my mortgage payments, I would have paid an amount that was almost double the price of my house. Yikes! Even if my house value doubles in 30 years, I would have actually made close to nothing.

Hence, I decided that I am going to pay off my mortgage as soon as humanly possible. I have never had any credit card debt and I really hate having a mortgage to think of every month. So I did a bit of research to find out how I could reduce the time to pay off my mortgage short of paying it off lump sum. Here are the options that were available :

1. I could increase my payments from a monthly payment to a bi-weekly payment. - By doing so, the math works out that we can take six years off our usual 30 years of mortgage payment. However, our cash flow is such that doing a bi-weekly simply does not makes sense for us.

2. Refinance - Our mortgage is presently a 30 year fixed rate at 6.25%. Presently, the 30 year rate is about 6.17% for a conforming loan. My present mortgage is considered non-conforming ie above $417,000). Hence, refinancing does not make sense even if it were for a 15 year loan.

3. Paying a principal lump sum at the end of the year - That could work but psychologically, I do not like having to pay a lump sum at any time.

4. Paying extra principal payments monthly together with my mortgage payments - I have decided to actually take this route. Because of our situation where our income has increased, we are able to make that extra payment we want towards our mortgage payment.

This is how the math works out. Presently, we are paying :

Current Monthly Payment = $3,327
Interest = $2,236
Escrow = 560
Principal = $$491

By adding an extra $1,000 to my principal every month, my mortgage will be paid off in 2022, about 13 years earlier.

But shouldn’t I invest and save for retirement instead? - Well, that may be the correct thing to do since I’m only paying 6.25% on my mortgage. Having said that, we have enough cash to actually put to work in our retirement accounts and extra savings in the taxable account as well. So we are still saving. And here is the thought process. If I am able to save and pay off my mortgage faster, why not have the best of both world. In fact, the faster I pay off the mortgage, the more disposable income we will have after we pay off the mortgage.

But as I mentioned before, I really hate having any sort of debt and while most look at their house as an “investment”, to be, it is a place to stay. In fact, if I could pay off my debt tomorrow, I would certainly do so.