Budget. Many cringe at the sound of the word. But most recognize that a budget is crucial in achieving financial independence. Most budgets look at necessary expenditures versus optional expenditures. Mortgage? Necessary. Utilities? Necessary. Fast food meals? Optional, if you can plan a more financially efficient alternative. While most recognize the mortgage as an essential part of the budget, few realize the power that the mortgage holds. The mortgage is typically the 1st consideration in the budget. If you manage the budget first, everything else will fall into line.
Default monthly mortgage payment budget
For the typical homeowner, the mortgage is probably the single biggest element of your monthly budget. Typical homeowners factor the mortgage into their monthly budget, then add all other monthly expenses: utilities, car payments, credit card payments, etc. What is left over is then typically consumed by optional spending and saving. In that order.
Typcial monthly budget:
Mortgage payment → Utilities → Insurance → Car payments → Credit Cards → Food → Clothing → Entertainment → Saving → Investing.
That is all good! You’re taking care of the most important things first. However, look at what gets left to the very end: Saving & Investing.
The automatic mortgage budget
Let’s look at the psychology of the previous model. After all necessary expenses are met, you can spend or save or invest what is left over. Now apply what you know about paying off your mortgage early into your monthly budget. If you were to add $100 to your monthly mortgage payment, then everything else falls into line. You might have less for some of the options at the end of the spending chain, but you are also taking care of first things first.
Action: Set up automatic payments including a prepayment for an extra $100/month.
Result: You will have $100/month less to spend, but that $100/month is automatically investing itself into paying off your mortgage. This family would save over $33,000 in interest, and they would save over 4 years of mortgage payments. Your total savings (P&I) would be over $64,000. Wow.
Conclusion: $100/month will affect your spending ability this month, by it will save you a ton.