By my calculations and over the trend of the past few months where my income has dropped, but stabilized, and after all of the monthly bills are paid, I should now find myself with roughly an additional $1500, on average, in my checking account each month for “daily life” expenses.
Prior to this month, 100% of that (and then some) went towards debt repayment.
I still have debts to repay, mortgage and auto loan, but the credit card debt is gone.
I’ve found some time to run some numbers and weigh a few different options to see what the best route to take with the “extra” $1500 would be and I think I’ve settled on one.
For all of my examples, I’m going to assume that each month has 4 weeks — it’s just easier to figure out that way.
At the start of April, I already chipped into the original $1500 dollars when I set up a weekly $75 auto-transfer into my ING account. I’m not planning on altering that right now.
$1500 – ($75 x 4 weeks) = $1200
This is where the decisions need to be made. The interest rate on my auto loan is 5.35% and I get hit for around $30 in finance charges each month. The interest rate on my mortgage is 6.735% and I get hit for around $650 each month.
Dave Ramsey would say I should attack the auto loan because it’s the smallest balance and not the mortgage. Clark Howard would probably say the same thing, though he may make note of the fact that the auto loan has the smaller interest rate.
But I’m considering going the more logical route. Yeah, the rate on the mortgage is higher, but that’s not the main reason. The Private Mortgage Insurance (PMI) I’m continuing to pay is the reason.
PMI is extra insurance that the mortgage companies require from homebuyers who obtain loans that are more than 80 percent of their new home’s value. Basically, if your down payment was less than 20 percent, you’re going to have to pay PMI until you reach that 20 percent mark.
PMI is costing me $85.15 each month. That’s over $1000 each year. I’ve paid my mortgage 66 times so far. That means I’ve paid PMI 66 times and that adds up to $5619.90.
That could have, and should have, gone towards principle. With it, I’d have hit the 20% mark long ago. In the first few years of a 30-year loan, an additional $5k thrown towards the principle would have made a HUGE difference!
Basically, PMI hurts a lot more than the monthly $85.15 let’s on.
Eliminating PMI (on top of paying down the higher rate first) would be the most beneficial route, financially, for me so that’s the route I’m going to focus on.
For the remainder of April, I’m just going to let the dust settle, just pay the mortgage and auto loan like I have been for months, and build up a bit of a cash cushion in my checking account.
This new strategy will commence in May.
I’m going to double the weekly principle payment on the mortgage, from $125/week up to $250/week.
$1200 – ($125 x 4 weeks) = $700
This will allow me to eliminate PMI (and, in turn, subtract an additional $85.15 from the principle each month) by September 2008.
It will also put me on pace to pay off the mortgage in February of 2014, though that isn’t the real goal. I’m thinking more short term just to eliminate the PMI at which point I’ll weigh my options again.
For now, this will leave me with $700 worth of “spending” money each month. I’m thinking I can throw half of that towards the auto loan with each monthly payment.
$700 – $350 = $350
This would put me on pace to have the auto loan paid off in January of 2009. Based on my goals for 2008, that’s not good enough, so any additional money that comes my way will be tossed this direction as well.
In the end, this plan will continue to pay down my debts at a hectic pace, but still allow me to have $350 worth of spending money each month — and that’s $350 more than I have in my pocket right now.
Crazy what eliminating a little credit card debt can get ya…