Baby Step Six – Pay-Off the House
April 13, 2010 by: Dave Ozment
Welcome back to my continuing break down of Dave Ramsey’s Baby Steps. These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.
I personally find these steps simple and easy to follow but also elegant and effective.
In previous installments I covered:
Baby Step 1 – $1000 Emergency Fund
Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball
Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses
Baby Step 4 – 15% Earnings Invested for Retirement
Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)
Today, we’ll examine Baby Step Six.
Baby Step 6 – Pay-Off the House
I find there is an elegant symmetry in Ramsey’s Baby Steps. In step 2 you use a snowball principle to eradicate your debt. You deploy minimum payments in multiple directions while focusing your heavy firepower against a single target.
The second half of the Baby Step set works in much the same way. You see, Steps 4 and 5 and 6 are meant to be exercised concurrently. A portion of your income is directed against your retirement – consider it a 15% minimum payment. Similarly your college savings are incremental deposits against a future need – the age of your children and the amount already saved will help inform that ‘minimum’ payment.
That should leave you with a hearty sum that you begin to focus against what is often considered an unthinkable goal – paying off your home mortgage.
Granted, paying off your mortgage will not happen overnight. That is why you need to engage the retirement and education savings at the same time. But it is an attainable goal.
Consider some popular strategies for attacking a home mortgage:
- Make half payments every 2 weeks rather than a full payment monthly. The trick here is that a 52 week year has 26 two week intervals which equates to 13 payments. One payment more per year than the 12 month calendar. On average, this approach will shave 6-7 years from a traditional 30 year mortgage.
- Many folks are electing for a 15 year mortgage rather than the traditional 30 year term. Given how mortgages are amortized, cutting your term in half does not equate to a doubling of your monthly payment. Often it is only a couple hundred dollars. An easy increase to handle if you’ve eliminated your consumer debt.
- Extra payments are valid if you have an irregular income stream or are unable to refinance into a shorter term. Pay raises, gifts, bonus payouts, etc are easy ways to ply additional dollars against your mortgage.
- Tag Team… imagine paying half payments every 2 weeks against a 15 year term loan and tossing a healthy chunk of your annual bonus into the mix as well. Suddenly 30 years looks like 15 which looks a lot like 9, which can begin to look even smaller.
In reality, if you’ve eliminated your consumer debt, it may not be unrealistic to shave your mortgage payoff down to a 7 or 8 year term. When I consider that we’ve already been in our current home for nearly 5 years, I wish I had applied some of this thinking back in the day.
But the beauty is that rather than lamenting previous decisions, I have the freedom to embrace a new decision today. And I’m certain that once I finish step 2 this spring and then step 3 over the summer, I’ll be excited to start pushing my snowball to where I want to take it rather than to where I have to take it.
Paying off the house… now that’s just cool!
Stay tuned for the final installment in this series:
Baby Step 7 – Save, Invest, and Get Rich
Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well. While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.
Read, Enjoy, Comment, Subscribe!
Photo By: chrisinplymouth
These look a little more like aggressive steps rather than baby steps. But I agree with all of them.
Travis Vayssie@mortgage rates´s last blog ..Benefits of a Refinance
I love Dave Ramsey’s principles. If everyone would follow them it could change the country.
I am still working towards my financial freedom, taking the baby steps.
The cars are paid off, half my consumer debt is paid off, when all that is complete I will work on the houses.
My wife and I have just paid off our debt and currently done with our 3-6 month ER fund. We are currently implementing steps 4&5 – Retirement and College Fund, however we currently rent. We have rented over the last several years to focus on our debts.
What would be the recommendation if we are wanting to get into a house? Pay cash? Obviously live within our means and budget, but how about financing it? What plan, etc?
Thanks
There seem to be a LOT of people (not necessarily in this post) who don’t read TMMO very carefully, or at least not the way I read it.
Having already paid off all debt, by the end of 2009 I reached my goal of accumulating a 6-month cash reserve of living expenses (I don’t call it an emergency fund) last year. My plan for 2010 & the next few years is to work diligently on the next TWO Baby Steps (I don’t have any kids)—(a) putting money into retirement savings (15% of income = IRA max + remainder into increasing emergency fund to 1 year of living expenses) in the first part of the year; then (b) shifting that amount into paying down my mortgage principal for the rest of the year. It isn’t either/or. You do the retirement part in the first few months of the year (to whatever your personal max is) to get the money invested and working for you over time, and you spend the rest of the year focused on the mortgage.
And even though I’m kind of late getting started on any serious financial plan (I’m a woman in my 50’s, but with a long life expectancy), it’s absolutely worth it to me to pay off the mortgage. For one thing, I’m not currently living where I want to spend the rest of my life. Paying off the mortgage on my current house will yield the entire net equity to me when I sell, which will be reserved for the hefty down payment (estimating as much as 75%) on my next & final house. Also, the cash freed up between paying off the mortgage and finding (& moving to) my final house can be set aside to cover moving & closing costs on the next property. So I anticipate having 1 more mortgage in my life, but much smaller and easily handled on 15-year-mortgage-size payments. And I also plan to do what I did with my first mortgage–only take a mortgage with no penalty for pre-payment, and make extra payments as much as possible, now that I have the TMMO habit pretty well developed. In only a few years I should have my final house completely paid for, and all of the former mortgage payment can then be poured into savings, investments, and cash expenditures (car, vacation, etc.).
Hey Dave,
These kind of tips on budgeting need to get to more people.
My mom is in nursing and I remember her telling me about this old man who came in to visit his wife in the hospital and about how excited he was. He had just finished paying off his mortgage.
How old was he?
Wait for it.
70!
In the richest most educated continent in the world, this shouldn’t happen.
Keep up the good work,
Guy
Guy G.´s last blog ..Grocery Saving Tips – Tips on Budgeting
Thanks Guy… I bet that old man wondered why he had not done is years before…. but that’s not how our society is wired. That needs to change!
Thanks!
Dave
Great post brother, and close to my heart! I’m burning on a five year plan to pay off the remainder of my mortgage. When I meet my goal, I will have built and paid for a $450K house by 35…a personal life goal.
Peace,
TAM
The Almost Millionaire´s last blog ..Is Astonish Results a Scam?
That’s one heck of a plan TAM. Good luck!
Dave
What a coincidence!!! I just made a post, asking people’s opinion on whether I should pay off the mortgage with money in my investment acct. Is it a sign? Everywhere I turn this morning, I’m finding people saying “pay off the mortgage”…
Jersey Mom´s last blog ..A Disorder I Live With
Very funny…. it may well be a sign.