posted 03-11-2003 02:24 AM PT (US)
I just wonder if any of you have ever thought about what effect spending money has on your future if you have a loan. I'll use my own home loan to illustrate what I'm getting at:
The principal and interest portion of my payment on my home amounts to $1064.06. On my next payment, $166.21 will go toward principal, and $167.13 will go toward the principal of the next payment; the rest, of course, is the interest.
Now here's what's important about this: If, instead of just paying my normal $1064.06 payment, I decide to add $167.13 to my payment (making my total payment $1131.19), then I will have made not just one, but TWO complete payments toward my home loan. But, while the first $1064.06 pays my current payment, the other $167.13 removed a payment from the END of my loan. Meaning, that's one less month, when I'm in my 60s, that I'll have to come up with $1064.06 to make a house payment.
And that, my friends, is one hell of a benefit. Not only does spending that $167.13 on my home loan save me from having to make a full $1064.06 payment later on, but it's saving me from that payment at a time in my life - my 60s - when (statistically) I'm likely to be far less capable of earning the money to make that payment.
So, now, consider a hypothetical choice that I may make; I can either:
A) Spend $167.13 on 9 or 10 new CDs, resulting in me having to pay even more in my 60s to the tune of an extra $1064.06 house payment, or
B) I can spend the $167.13 by putting it on my current house payment as extra money toward the principal, and thus save myself from having to make that last $1064.06 payment in my 60s.
What's important to notice about those two choices is that, in either case, the $167.13 is gone, and the only difference between the two choices is that with choice (A), I have 9 or 10 CDs which I'll pay for later by making an extra $1064.06 in the future (my 60s), while with choice (B) I won't have any CDs, but I'll have saved myself $1064.06 in the future.
What this means is that if I make choice (A), then those $167.13 CDs actually cost me $1064.06 (but I don't have to pay for them until later).
So, doing some quick division, every dollar that I spend not on my home loan actually costs me (at this particular time):
$1064.06 / 167.13 = $6.37
So, if I go into a record store and I see a CD that I want and it's on sale for $10.00, the accurate question for me to answer is not "Is this CD worth $10?" but rather, "Is this CD worth $63.70?" And not only that, but "...and worth it at a time when I'm far less likely to be able to earn $63.70 than I am now?"
(Now this situation is the truth for my home loan which carries a relatively low interest rate. The case would be far more dramatic if we were talking about high interest credit card debt.)
Now, someone might say (my mother said this a couple of days ago), "You've got to stop thinking like that - otherwise, you'll not be able to live right now."
Well, there's something neat about this scenerio: the more of my loan's principal I pay off, the less dramatic the multiplying effect is. For example: If I want to knock off not just one payment off of the end of my loan, but twelve payments, I'd have to add $2067.79 to my current payment (I used an amortization table to find this amount). If I were to have a windfall of $2067.79 before my next payment and I were to apply it to my loan, the result would be that when my next payment is due in a month, fully $178.59 would be going toward the principal, and if next month I wanted to knock off an extra payment, I'd have to add $179.58 to my payment (not $167.13 from the previous example). So at that point in time, every dollar that I'd be spending would be costing me in the future:
$1064.06 / 179.58 = $5.93
That's $5.93 instead of $6.37 So the multiplier keeps going down as your loan amount goes down.
So, back to that $10 CD, at that point in time the accurate question to ask myself would be, "Is this CD worth $59.30?" Now, the answer to that question is probably still "No", but as time goes on (and this happens particularly quickly as more and more extra payments are being made), that "No" keeps becoming more and more of a "Yes".
So, you do get to live - you're just putting it off a bit until it costs you less (MUCH less) to do so. And, what's especially important, is that this "cost" is in real human terms - specifically, you can quit your damned job much earlier in life and be able to enjoy life, retired, while you're still young enough to get the most enjoyment out of it.
And, here's another extra bonus: Most of our spending (admit it) is just unconscious lazy spending on impulse to make us feel better in the moment. We buy a hot dog when we're not really hungry, for example, which just detracts from our health and makes us fat. If you ask yourself, "Is this $2 hot dog REALLY worth $12.74?" you'll probably answer, "No", and you'll keep yourself from eating that terrible food, you'll be more healthy, AND you can apply that $2 extra to your mortgage to get your loan paid more quickly.
Another example: You're walking thorough some dumb store and you see a little decorative item that you think is "cute" - and, gosh, it's only $5! So, you buy the damned thing, take it home, then you stick it on an already crowded shelf where it then starts interfering with your life by making you have to dust around the damned thing. Further, because you've bought all of this crap, you've made it so that you actually have to have a LARGER HOUSE to store all of it - you're now paying for extra floor space for that smeggin' thing, OR you're cramping your lifestyle. Everything you own, owns you.
However, if you use your multiplier, and you ask yourself, "Is this thing REALLY worth $31.83?" You'll probably answer, "No", and you'll spare yourself from all of that.
And, you'll feel SO good every time you make that extra payment on that loan.
Anyway - I just wondered if any of you have thought of that.