A few days ago, I made my very first mortgage payment.  It felt so good, today, when I logged on to our mortgage company’s website and saw that the payment has posted.  It felt not-so-good to see just how much of our payment was applied to interest – and how little was applied to principal.

If I continue to make our mortgage payment, as scheduled, we’ll own our home in 15 years.  Each month, as we slowly chip away, a little more will be applied to principal and a little less will be go towards interest.  My goal?  To speed up that process – so that I can pay off the mortgage in less than 15 years.  Every extra dollar that I send will go directly towards the principal balance, build equity, and reduce total interest paid.

Towards that end, today I sent my first extra principal payment.  When making extra payments towards any loan, I always like to write “apply to principal” in the memo-section of the check.  In this case, I used online bill pay and instructed my bank to do the same.

The amount wasn’t much, but if I make an equal extra principal payment just once a year for the next 15 years, I will reduce the term of the loan by 5 months – and save over $2000 in interest!  Not bad – and that’s if I only made one extra payment per year.  Imagine the power of making an extra payment – each month!  Debt reduction rocks!

Here’s a neat little mortgage payoff calculator from the folks over at Dinkytown.  It’s simple, easy to use, and provides instant motivation.  Check it out.

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First Extra Principal Payment Has Been Sent

My wife and recently purchased our first home.  Here is my plan to pay off our 15 year mortgage in 10 years – or less!

Opening Fire – We will us online bill pay to make our regular, monthly mortgage payments.  I have already scheduled for our monthly payment to be sent from our bank to our mortgage company on the 15th of each month, the day after I receive my monthly paycheck.  The mortgage account number is listed in the memo section of each payment check.  Even is we do nothing else, we can be confident that our monthly payment will be made early, and on-time.

Steady Assault – I have scheduled an additional monthly payment, designed to reduce mortgage principal, to be sent on the 20th of each month.  I included the 5 day buffer, just to keep things nice-and-neat.  This additional payment is above-and-beyond the regular monthly mortgage payment and is a fixed monthly-amount.

Sniper Attack – I am a big fan of micro-payments – those small, irregular payments that can be made throughout the month.  Just as I did when I was reducing my consumer and credit card debt, I plan to use micro-payments, this time to reduce my mortgage principal.  Throughout the month, if I see that I am spending less in a particular budget category than I had originally planned, I will use this leftover money to make a micro-payment.  The first types of payments, the regularly scheduled monthly payment and the regularly scheduled extra payment, are hands-off.  Once they’re set, they pretty much work on their own.  These micro-payments, however, keep my head-in-the-game and really create a sense of accomplishment.

Secret Weapon - I make a little money from my blogging activities.  Over the past few years, this money has gone towards “extras” for around the house.  From now on, any money earned from blogging (or other side jobs) will go directly towards mortgage principal reduction.  The more I make from blogging – the faster we own our home!

There you have it – our plan of attack!  We are super-excited about our new house and ready to start paying it off.  With three kids and modest income, it’s not going to be easy, but we are determined and we have a plan.  Rock on!

Image by - Danny Fowler

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The Plan Of Attack – How I Plan To Pay Off My Mortgage Early

In a few weeks, we will make our first mortgage payment.  Our mortgage is a fixed-rate 15 year mortgage.  Obviously, I’m not a fan of debt – and I’m going to work very, very hard to pay our mortgage off early.  Using a mortgage calculator I calculated the following the scenarios for paying the mortgage off early -

15 years and zero months = mortgage payment + $0 extra per month

12 years and 3 months = mortgage payment + $250 extra per month

9 years and 3 months = mortgage payment + $500 extra per month

7 years and 9 months = mortgage payment + $750 extra per month

6 years and 8 months = mortgage payment + $1000 extra per month

5 years and 10 months = mortgage payment + $1250 extra per month

Looking at our present financial situation, and keeping our retirement and education savings goals in mind, the $750 extra per month appears to be the most reasonable amount for which to shoot.

Here’s my current plan -

1.  I will make regular monthly mortgage payment each month.

2.  I will make an extra payment, each month, with a minimum goal of $750 extra per month.  Apply To Principal will be in the memo line of each check sent for extra payments.

3.  I will make additional extra payments, throughout the year, as I earn and / or save extra income, with a stretch goal of $1250 in total extra payments per month.

Hopefully, we’ll be able to turn our 15 year mortgage in to a (less than) 7 year mortgage.  Obviously, situations change, priorities shift, and life happens, but, as of today, this is our plan.

It’s been a long time since I typed this, so here goes – Debt Reduction Rocks!

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What Will It Take To Pay Off Our Mortgage Early?

I once sent a credit card company $5 per day, every day, for a month.  Seriously.

The year was 2005 and I was in full on debt reduction mode.  Pumped up by the comments left by my readers – and ready to be debt free – I spent most of my waking-hours thinking about ways to reduce my debt.

Somehow, the thought struck me:  What if I manage to save $5 a day – say by skipping my morning trip to the convenience store or brown-bagging lunch – how quickly could I put that $5 to work?

I decided, just to see if it would work, to use online bill-pay to send a series of $5 payments to the credit card company.  I scheduled the payments, one right after the other, for each day of the month.  Every other day or so, I would check my credit card balance (online) and, sure enough, my balance was going down, $5 a day.

At the end of the month, I managed to reduce my credit card balance by an “extra” $150.  The silly little experiment worked!

Now, am I suggesting that anyone else do this?  Not really.  In fact, I’ve heard that some credit cards actually limit the number of payments that they’ll process during a billing period.  Nevertheless, I do think that my silly little experiment was valuable, in that it taught me the power of micro-payments.

I’ve mentioned micro-payments before – those small payments, sent throughout the month, which help to reduce the average daily balance in your account.  These payments are made after regular minimum payments and are in addition to the extra payment one might send while getting out of debt.

Not only did I learn the value of micro-payments, but I also learned that money management is about much more than just dollar signs, percentage points, and mathematical calculations.  Money management is about keeping your head in the game and staying focused on specific goals.  Each day, as I logged in to my checking account and scheduled another payment – that was one more day where I had successfully saved $5.  This $5 was above and beyond my regularly budgeted-for debt reduction payment.  This $5 required a change in my habits.

For thirty days, instead of focusing on the big-picture, I focused on the very, very small things.  If I wanted a soda, I had to remember the $5.  If I wanted a newspaper, I had to remember the $5.  If I wanted to rent a movie, I had to remember the $5.  This silly little experiment (which, in the end, wasn’t really all that sill), helped me learn the value of every dollar that comes in to my life.

If I had it to do all over again, here’s exactly what I would do – and it’s what I do when making micro-deposits to my savings account:

1.  I would set a goal of saving $5 each day.

2.  At the end of the week, I would send a micro-payment (or micro-deposit) of $35.

3.  A couple of days after sending the micro-payment, I would check my credit card balance, just for that emotional boost that comes with seeing my debt reduced.

The month after my silly little experiment, I went back to my standard practice of making my minimum payments to all accounts, making an extra payment to the first account on my debt snowball, and then I made four micro-payment throughout the month.

Micro-payments rock and they really kept me motivated. Have you used micro-payments?  If so, leave a comment and let us know about your experience!

One final note – All of these payments were initiated by me, using online bill-pay.  I never game the credit card company access to my checking account.  In other words, my bank was sending a payment to the credit card company.  The credit card company was not “pulling” money from my checking account.  And, obviously, this micro-payment thing probably won’t work if you are sending payments via paper check from your house.  The postage cost would be too high.

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How A Silly Little Experiment Helped Me Get Out Of Debt

1.  Create a list of your credit cards.

• Include account balances, interest rates, due dates, and minimum monthly payments.

2.  Make minimum payments to all credit cards, on time.

3.  Make an additional payment to one of the cards on your list.

• If you make an extra payment to the account with the smallest balance, you can quickly eliminate an entire card balance from your plan.  This may provide a much-needed emotional boost and keep you motivated.
• If you make an extra payment to the account with the highest interest rate, you guarantee that you will be paying the least possible amount of interest.  This is a mathematically-sound approach.

4.  Continue to make minimum payments and the extra payment until the first card on your list is paid off.

• If you have the chance, make additional extra payments – micro-payments – throughout the month.  This reduces your average daily balance and really speeds up the debt reduction process.

5.  Continue to make minimum payments to the other cards, and take the additional amount you were paying on the first card plus the minimum you were sending to the first card, and apply that total to the second card on our list.

6.  Repeat this process of eliminating balances until all credit card debt has been eliminated.

This debt reduction process works with any types of debt and is especially effective when dealing with credit card debt.

This week I will be writing a series of Back to the Basics articles.  I encourage you to subscribe to No Credit Needed via RSS or Email.  Also, if you liked this article, please consider promoting it via the social network buttons below.  Comments are always appreciated – and don’t forget to follow me over at Twitter.com/NCN.

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How To Eliminate Credit Card Debt

After digging and pouring the footer for our house, it’s time to set our foundation.  Our financial foundation needs to be solid, stable, and able to support the weight of our financial house.

Three components of a solid financial foundation -

Insurance

At present, my wife and I have health insurance, term life insurance, disability insurance, automobile insurance, dental insurance, and renter’s insurance.  We also have an umbrella policy that protects us from events not covered by our renter’s or automobile insurance.  In the future, we plan to purchase long-term care insurance.

Ever few years, I review my policies with a qualified professional.  My wife and I believe in several ounces of prevention.

Debt Reduction

My wife and I really enjoy living debt free.  (It rocks!)  Our hope is that we can live the rest of our lives without borrowing money.  (We might make an exception for the purchase of a house.  At present, we live in a house provided by my employer as part of my compensation.  If I were to change jobs and we were to move, we would either rent or take on a mortgage, depending on what was right for our family at the time.  For the sake of this article, I’ll be speaking of non-mortgage debt.)

If you have high-interest debt, it’s time to get angry and do something about it!  Making minimum payments and dealing with credit card companies isn’t any fun.  Make a plan, eliminate your debt, and then move on to the really important things in life.

Emergency Fund

My wife an I have an emergency fund (roughly) equal to six months worth of expenses.  We built this emergency fund immediately after paying off our last debt.  The peace-of-mind it provides is priceless.  (While we were paying off our debt, maintained a smaller emergency fund between $800 and $2000.)  The amount in an emergency fund will vary, depending of family size, location, employment situation, and comfort level.  We sleep better at night, knowing that we have an emergency fund in place.

Pouring and setting a solid foundation can be back-breaking work.  Dealing with a financial foundation can be extremely taxing – mentally and emotionally.  I know, for me, it was overwhelming when we first began the process of getting out of debt.  I was embarrassed by many of the financial decisions I had made in my past and I felt somewhat lost as to where to begin.  Thankfully, I was able to connect with some good friends who had good advice and, little-by-little, I was able to make some very positive changes.

Go slow.  Understand what you are doing.  Keep things simple.  Move forward.

Start with a good, solid foundation – and the rest of the building will (almost) build itself.

Image by barron

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Our Financial House – The Foundation

For those who are ready to get our of debt, here’s a list of debt reduction resources -

Debt Snowball Calculator over at What’s The Cost – This free online tool will help you quickly create a debt repayment plan.

iPhone and iPod Touch Debt Snowball Application – Created by Blunt Money, this application, which sells for $2.99, will help you create a debt snowball using your iPhone or iPod Touch.

Debt Reduction Guide – I created this step-by-step guide to show folks how my wife and I got out of debt.  The guide is available online – and you can also download a copy of it as a free E-Book.  It’s easy to read and free to share.

When Will You Be Debt Free? – This calculator from CNN Money is very simple to use.  Simply enter your current credit card balances, your interest rates, your minimum payments, and the date you want to be debt free.  The calculator will calculate how much extra you need to pay, each month, to achieve your goal.

Microsoft Excel or OpenOffice Calc Debt Reduction Calculator – If you prefer to work with Word or Open Office, here’s a free debt reduction spreadsheet.

Mortgage Payoff Calculator – I love all of the calculators over at DinkyTown.  This one will help you calculate the impact of extra mortgage payments.

Calculating Average Daily Balance Spreadsheet – I created this spreadsheet so that I could calculate how the timing of payments determines the amount of interest charged.  The spreadsheet works Microsoft Excel or OpenOffice Calc.

These are just a few of the debt reduction resources I’ve found (or created) over the past few years.  If you have a resource that you think would be of value to others, leave a comment and let me know about it.  (Obvious spam comments will be deleted.)

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Debt Reduction Tools And Calculators

I am a big fan of micro-payments. If you are unfamiliar with the term, a little background information might help.  Back in 2005, while working to pay off my debt, I decided to try a little experiment.  Instead of sending just one payment to my credit card company each month, I started to send several.  I called these small payments micro-payments.  At one point, I actually sent $5 a day (via online bill-pay) to one credit card company, just to see if the system would work.  (I don’t recommend sending micro-payments quite that often, and I only did it for one month, as proof-of-concept.)  At the end of the month, my balance was reduced by an additional $150, above and beyond the amount of my regular payment.

Throughout this article, whenever you see the word month, feel free to substitute the words billing cycle.

Micro-payments are simply extra payments, made throughout the month.  They are designed to reduce a credit card balance and to keep one’s mind focused on the debt reduction process.  These extra payments are additional payments, and are only made after minimum monthly payments are made (on time), to each and every creditor.  Also, micro-payments are not intended to replace debt snowball payments, but are intended to compliment those payments.

Perhaps an illustration is in order -

Assume that you have three credit cards that you are trying to pay off -

Credit Card A with balance of $5000 @ 10%

Credit Card B with balance of $6000 @ 12%

Credit Card C with balance of $8000 @ 8%

Further assume that you are using the debt snowball method to reduce your debt -

You will make minimum payment + extra payment to Credit Card A

You will make minimum payment to Credit Card B

You will make minimum payment to Credit Card C

Remember, if you use the typical debt snowball, you will pay off debts, starting with lowest balance first, regardless of interest rate.  If this method does not suit you, you might consider the debt deluge – a modified version of the debt snowball.  Use online bill-pay to simplify the process and save on postage.  When making minimum payment and extra payment to Credit Card A, feel free to send one payment, equal to their combined total.

After making all minimum payments and your extra payment, it is time to focus on micro-payments.  Throughout the month, look for opportunities to send in micro-payments, as you earn additional income, receive monetary gifts, or spend less than anticipated in certain budget categories.

Assume that in Week #1 –

You receive $25 as a birthday gift

You sell a few books online, netting $15

You ride to work with a friend, saving $10 in gasoline

At the end of Week #1, you have the following options -

You could spend the $50

You could save the $50

You can could send the $50, as a micro-payment, to Credit Card A

Since you have already sent in your minimum payments (on time) to all creditors, and you have already sent your scheduled (and budgeted for) extra payment, any of these options is available to you.  (We will assume that you already have a small cash reserve set aside for small emergencies.)  And, if you are uncomfortable sending the entire $50 as a micro-payment, you could send just a portion of the $50.

By now, you might be wondering -

Why worry with micro-payments in the first place?

Why not just one, larger, extra payment at the beginning of the month?

Why not send just one, larger, extra payment at the end of the month?

Not only am I a rational being, but I’m also an emotional being.  As such, it’s important for me to remain engaged – focused – on any project on which I am working.  When it comes to debt reduction, this was doubly-important.  Not only was I trying to do away with 15 years of negative behaviors, I was also trying to replace those behaviors with positive behaviors.  By constantly looking for ways to save money – I remain engaged.  By thinking about ways to earn additional income – I remain focused.  Just thinking about ways to save a little more or earn a little more, so that I could make a micro-payment, kept me emotionally involved in the debt reduction process, in a way that the one-payment-per-month-method never would have.

There is also a mathematical reason for sending micro-payments throughout the month.  Most credit card companies use the average daily balance for calculating how much interest they charge.  Making payments as soon as is possible will lower the average daily balance, thereby reducing the amount of interest owed.  If you save up an additional payment and the send it when you get your next bill, you might be paying unnecessary interest.  In other words, if you receive $50 as a birthday gift, and you have no real need for it, send it in as soon as is possible, thereby reducing your average daily balance.

There is an additional reason for using micro-payments, one that was very important to me while I was getting out of debt.  I like to set goals – ambitious goals.  There are times, however, when my goals are a bit too ambitious.  For instance, let’s assume that my budgeted extra payment to Credit Card A is $500.  For some, $500 might be a reasonable amount for an extra payment.  For others, $500 might be a stretch.  So, instead of sending in $500 at the beginning of the month, there might be times when it would be better to send in a $100 extra payment, and then, throughout the month, send in four additional $100 micro-payments.

This might be true, especially, for those who are paid on a weekly basis, those who have irregular income, or those who are new to budgeting.  It is very easy, especially in the early days, to over-estimate how much money you actually have for debt reduction.  We do not want to find ourselves, at the end of the month, with a need to use a credit card.  By spacing our micro-payments out, over a full month, we can better judge if our budgeted-for extra payment is practical.  If we find that coming up with $500 was easy, then we might want to send the full amount at the beginning of the month.  If we find, on the other hand, that coming up with $500 was impossible, we might want to budget $250, and the use micro-payments to send in extra, as we save it or earn it.

Please note:  Sending in a larger amount, earlier in the month, will almost always lead to a lower interest charge (provided the credit card company uses the average daily balance method for calculating interest).  Also, no matter what method you use, it is imperative to make minimum payments on time, to all accounts.

There are a few more things about micro-payments to keep in mind -

When sending micro-payments, be sure that you can comfortably keep track of them.  Online access to both your checking account and your credit card accounts is a must.  Also, the payments that I was making were initiated from my checking account to my credit card account.  In other words, these were payments, sent by me, via online bill-pay.  I did not use the credit card companies service, whereby they will deduct payments from a checking account.  For me, I never felt good about giving my credit card company, or any other company for that matter, access to my credit card account.  Four micro-payments per month, one each Monday, worked well for me.

Micro-payments can also be sent to pay off mortgages, automobile loans, and almost any other type of debt.  Just check with your creditors and ask them where to send additional payments and how to label those payments.  I always labeled mine – apply to principal.

It’s always important to have enough money to make all minimum payments.  In other words, don’t send every extra penny that you have in August, if in September, you aren’t going to have enough to make your minimum monthly payments.

Now that I am debt free, I no longer make micro-payments, but I do make micro-deposits.  At the beginning of the month, I set aside a budgeted amount for savings.  Then, throughout the month, I look for ways to save money or earn additional income.  Once or twice a month, I make additional micro-deposits to my savings account, thereby saving more, each month, than my original budget predicted.  This also works when making contributions to a Roth IRA.

Please be aware, some credit card companies may limit the number of payments that they will process in a given month.  Be aware of your credit card companies policies.  Also, be sure that you are using a free online bill-pay service to send your micro-payments,  avoid spending money on postage, and verify that your credit card company is receiving extra payments.

I would love to hear your success stories with using micro-payments.  Also, if you have any additional thoughts or tips, leave a comment and let us know about them.  Let’s eradicate some debt – so that soon we can all enjoy being debt free!

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Maximize The Power Of Micro-Payments

There was a time when I was infected with a terrible condition – Next Month Syndrome

When my credit card bill came in the mail, I would make a promise to myself -

Next month, I’m going to do better.

When I reached for my credit card to make ends meet, I would promise myself -

Next month, I’m going to do better.

When a friend would mention that he was living on a budget, I would promise myself -

Next month, I’m going to do better.

When I would read a story about someone saving for retirement, I would promise myself -

Next month, I’m going to do better.

Here are some common side effects of Next Month Syndrome -

A failure to regularly balance one’s checkbook

A propensity to run out of money before one runs out of month

A constant worry about higher and higher interest rates

A rolling credit card balance, which rarely goes down, but often goes up

A stack of bills, unorganized, or even, unopened, piled high on the kitchen counter

A box of abandoned budgeting software and personal finance books

A growing sense of worry and fear

If any of these symptoms sound familiar, fear not!  There are cures for Next Month Syndrome!

Gather up all of your most recent bank statements, your checkbook, and a calculator.  You need to find out exactly where you stand.

• How much money do you have in cash?
• How much money do you have in savings?
• How much money do you have in checking?
• How much debt do you have?

Create a budget.  It doesn’t have to be overly-complicated and you will struggle for the first month.  That’s okay.  The purpose?  You need to know exactly how much money you bring home and exactly how much money you spend.  Resources -

• Creating a zero-based budget
• Creating a budget if you have irregular income
• 10 things to do before you create your new budget

Develop some system for organizing financial documents.  For me, I use an expandable file box and I file bills alphabetically.  I use one file folder for each year’s bills.  At the end of each year, I simply store that year’s file box, and buy a new one.

• Set aside some time, monthly and weekly, to manage finances
• Encourage each member of the household to participate in the process

Consider reading the 33 Days Series here at No Credit Needed.  This information-rich resource should help those who are looking to save money and get out of debt.

If you are in debt, and you are ready to get out, consider the following resources -

• Debt Reduction 101 – A Beginner’s Guide To The Debt Reduction Process
• Debt Reduction E-Book – A free E-Book which will help you create your own debt reduction program

Now, I’ve saved the most important step for last.  See, when I had Next Month Syndrome, I was in denial.  I wanted to live just like everyone else and I wanted to own what everyone else owned.  Then, I discovered something, a deep dark secret – all of those people – the folks that I wanted to be “just like” – THEY had Next Month Syndrome, too!

I made a decision – the most important decision I’ve ever made.  I decided to do something about Next Month Syndrome.  I created a plan, I set myself with determination, and I turned away from my old lifestyle.  It took some time, and I still feel some of the long-term effects, but I was able to overcome Next Month Syndrome.  You can, too!

Remember – All of the planning in the world is useless, unless that planning is coupled with determination.  Make you plan – and then do all that you can to stick to it.  Don’t wait until Next Month – do something NOW!

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Next Month Syndrome

There are thousands of websites and hundreds of books about debt reduction and debt reduction techniques.  Personally, I’ve written several articles about my own debt reduction journey, a comprehensive guide covering how to get out of debt, and I’ve even created my own personal debt reduction method.

Today, I thought it might be beneficial to look beyond the methods and techniques, and really think about what keeps a debt reducer motivated.

What Works For Me – Debt Reduction Mindset

I like to keep things simple, so I like to focus on one debt at a time.  After listing my debts, and paying minimums to all creditors, I then spend my time trying to reduce the balance of the first account on my list.  As soon as I eliminate the first account, I’m pumped to move to the second account.  Focusing really helps.

I think it’s important to build community around a goal.  I like for my wife and I to be on the same team, and of one mind.  In fact, it would have been impossible for us to get out of debt, if my wife and I had not learned to communicate and work together.  We also surrounded ourselves with positive people and friends who would not cause us to stumble.

I find that I need to set an example of restraint and frugality.  It’s relatively easy to create a budget.  It’s a far more difficult thing to stick to a budget.  As a parent, I know that my kids are looking to me for advice, encouragement, and wisdom.  The sacrifices that I make today will pay big dividends in the future.

I have learned to eliminate the noise and listen to just a few, trusted voices.  Instead of trying fifteen different debt reduction techniques, or looking for a quick fix to my debt problem, I sat down, created a plan, and followed the plan.  I never pay attention to gimmicks and get-out-of-debt quick schemes.  Instead, I focus on paying the bills that I owe and following the plan that I have created.

I celebrate every success, big or small.  My wife and I have learned to celebrate our financial successes – without spending a lot of money.  We enjoy a date night or take the kids out for a day at the park.  I make a big deal out of our goals – and an even bigger deal when we achieve them.

I admit that I am human.  Here’s the reality.  Even though thousands of people visit my site each month (which blows my mind), I’m still prone to the occasional mistake.  When dealing with a setback, it’s important that I regroup, remember why I started the process in the first place, and move forward.  Even when I missed my original debt reduction goal date, I kept going.

What About You? -

I’d love to hear from you, my awesome readers.  What keeps you motivated?  What steps have you taken to keep your mind in the game?  Have you slacked off, but decided to get going as of today?  Leave comments here and / or connect with me via Twitter.

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What Works For Me – Debt Reduction Mindset