How Many Paychecks?

The Big Man was looking at our mortgage statement and happened to mention how much interest we’ve paid in 2011. Taking an idea from a few finance blogs I read, I did a quick calculation: how many paychecks did we spend this year on mortgage interest? The answer? Roughly seven. And that’s just the interest — doesn’t count principle.

Ugh.

The exercise in its entirety is usually to calculate how many days’ work it takes to pay for each expense that you have. Some recommend separating interest out from principle in any payments where that applies as well (which I definitely recommend!).

Then the question becomes — it is worth it?

From that perspective, you can start shifting your spending (and saving!) to things that are worth it.

For us… we have only two debts: my student loan and the mortgage. If I had been wiser at either point in time, these would be less of an issue, but I wasn’t, so they are. The interest rates on both are close, though the mortgage is a bit higher. But in this case, we definitely fall into the “debt snowball” mindset: pay off the smallest debt first. So The Big Man and I made a plan last night to try to hack away at the student loan. I don’t know how to calculate how soon we’ll have it paid off with these extra payments, since it’s amortized, but regardless, it will be in less than ten years, which is what the payment schedule says.

For those of you playing at home, I went to teaching part-time a year and a half ago to open Second Chance FitCenter. Since about half-way through my pregnancy, there hasn’t been much action at the FitCenter, though I’m working on picking that up in the coming weeks. A couple of months ago, we added a baby which, contrary to what we were warned, hasn’t been terribly expensive so far … except for insurance. That’s taken another 1/3 out of my already paltry paycheck.

It would be easy to say, “We can’t afford to try to pay this off.”

But we can. We’re not trying to pay off the whole thing right now. We’re not even doubling payments. But we came up with an amount that, short of a financial emergency, we should be able to afford every month. And sooner rather than later, the student loan payment will be gone.

And then we’ll tackle the mortgage.

For now, we’ve been rounding the mortgage payment up to the nearest hundred, so we toss a few extra bucks at the principal every month.

In the mean time, we’re saving money as well, in hopes that we’ll have enough saved for a new car (outside of the emergency fund or the summer expenses fund) before one of ours — probably mine — dies.

This doesn’t leave much room for, well, anything. (Our weekly cash has room for a little fun money if we spend it right.) But if we can get rid of the student loan AND not need a car loan, it will be worth it. And I think we can do both.

How many paychecks do you spend on interest? Or on anything? Does this exercise make you rethink where you’re spending your money?

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3 responses to this post.

  1. Posted by Steve C on 29 December 2011 at 15:33

    Do you itemized your deduction on your tax return?
    If so, how many paychecks if you subtract the amount that the interest reduces your taxes? In other words what is the real cost of your home loan interest.

  2. To ease into paying it off here is an idea…double up only the principal, every 4 months up it a little bit.

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