Escaping the Death Pledge – The Plan

theplan

Ultimate motivator – the birth of your child…

This is a continuation of Escaping the Death Pledge – The History

So here we were, a married couple in their mid-thirties living in a half a million dollar home. The house was less than 15 years old so it didn’t need much, other than adding a few personal touches like painting the walls and putting up pictures. With 5 bedrooms and over 3,000 square feet it could’ve turned into a money pit really fast, but we were lucky to inherit some furniture from family and friends. We did furnish 3 rooms ourselves: the master bedroom, the formal dining room and the sun room. I wanted to leave the formal dining room empty but that didn’t sit well with my wife who was taught that every girl should have a china cabinet to display family heirlooms. An online Costco order made that dream a reality.

After the moving dust settled one thing that continued like clockwork was the monthly mortgage bill. Two thousand dollars would automatically disappear from our checking account to pay the  bank. Just a couple of hundred dollars would go to pay down the principal with a lion’s share applied to interest. A handy counter on each statement reminded us how many monthly payments were left on the loan: 359, 358, 357, 356, 355… The Death Pledge had us locked in.

Thirty years is a long time. In thirty years we will be in our mid-60s AKA traditional retirement age. “Great timing!” most financial advisers would exclaim based on the industry-standard notion that a mortgage should be paid off right before you retire to improve cash flow.

As a side note, isn’t it interesting that most financial advice is dispensed with an implicit assumption that you will actually get to retire in your 60s? Not in a sense that you might have to work into your 70s, but that you will actually live that long. Several of our friends and family never lived to see that “traditional retirement” simply because they died before ever getting the gold watch or whatever the equivalent is nowadays.

Now obviously I hope to live to my life expectancy and beyond but hedging just in case seems logical, no? Personally, I’d like to be able to say that I lived at least part of my life without a mountain of debt tied to my social security number in some computer system out there. We’ve long said goodbye to other forms of financing (car loans, consumer debt) but our mortgage had us handcuffed for the next T-H-I-R-T-Y Y-E-A-R-S!

I had other more conventional concerns as well. What if I lost my job? What if I wanted to simply change the type of work that I do? What if my wife wanted to stay home with kids instead of working full time?

The Income side of the equation is variable while the Expenses side is dominated by this one huge fixed and recurring (for the next 3 decades, ha!) monthly expense. Kinda puts the traditional definition of a “fixed mortgage” in a different light, doesn’t it?

My wife always tells me that I can’t sit still. I’ll watch an episode of The Daily Show or a movie I wanted to see, but other than that you’ll generally find me doing something more productive. With all of these thoughts about the mortgage running through my head the only way for me to get a sense of peace was to start doing something about it.

The easiest and the most obvious first step was to begin sending additional principal payments every month. Taking action and seeing immediate results is very motivating! Although it is a double edge sword. On the one hand, your balance is instantly reduced and you see more going to your principal when subsequent monthly mortgage payments are applied. On the other hand, you might get de-motivated seeing how small those additional principal payments are compared to the soul-crushing outstanding balance.

For a couple of years I continued the slow IV drip of additional principal payments that quieted the mortgage monsters in my head. That is until one event turned our comfortable DINK lives upside down.

We found out that we were finally going to become parents! Our son was due in August 2012 and we were as excited and scared as any other first-time parents. My wife’s nesting mode kicked in and I was nominated as the right tool for the job. Somewhere between spackling, sanding, painting, assembling, hanging, lifting and hauling I started formulating a plan to get rid of the mortgage.

In the end I came up with a MAP – Mortgage Annihilation Plan.

GET FIRED UP!

Why am I doing this? What will the life be without a mortgage payment? I fantasized about the peace of mind that comes from knowing that you own the roof over your head and not the bank. Still hundreds of thousands dollars in debt I imagined the freedom to make important life decisions relieved from the pressure of meeting a certain cash flow number for the next 30 years. Stay at home parent? A new job that’s more interesting but less financially rewarding? Longer unpaid vacations? How awesome would it be to take the family to Mexico and live there like a local for a month or two instead of a 5-day all-inclusive clusterfuck of a “vacation” that leaves you more exhausted than you were before getting on that plane??

Best opportunities in life open up to those unburdened by debt. When you don’t owe anything to anyone you can take risks and with risks, come rewards. Let everyone say that you’re lucky – you know that luck finds those who work hard to be “lucky”.

That’s just a small sample of motivational pick-me-ups I used to get fired up to pay off our mortgage. In retrospect, getting fired up was THE most important step of my MAP.

SET A GOAL!

Most people like round numbers and I’m no exception. I decided that I wanted to become mortgage-free by the time I turned 40. That meant that we needed to pay off $250,000 in 3 years. It was ambitious to say the least! Spoiler alert: I later revised the goal to be mortgage-free the same year I turned 40. Either way, the idea of having zero debt to kick off my 40s really appealed to me. A measurable goal was born.

MAKE IT PUBLIC!

The first person I shared this idea with was, naturally, my wife. Her mom took 30 years to pay off the $40,000 mortgage so my idea sounded a bit novel, to say the least. This is where the first step of the MAP comes in handy – I’ve already created an arsenal of motivational pick-me-ups. All I had to do now was to say it out loud instead of in my head. And just like that my wife was on board.

At this point I started mentioning my goal whenever a conversation would turn to mortgages (it’s amazing how much time people spend talking about mortgages if you pay attention!). Soon enough our family and close friends knew what we’re up to.

Bonus: It made it much easier to explain why we would split one entrée at dinner or get ice water instead of another round of drinks or say no to an overpriced social activity. Most people are skeptical about a 3-year MAP but they will still support you – if you give them a chance by going public.

STAY FIRED UP!

I found this to be the second most important task in my MAP. When you are sending in $4,000-5,000 monthly to the bank instead of the required $2,000 there is a lot of room for doubts and temptation. We were constantly aware that we were passing up today’s guaranteed pleasures for tomorrow’s uncertain rewards. And tomorrow was 3 years from now – that’s IF everything went according to the plan.

Social media is exceptional at providing a constant reminder of better things we could be doing with all that extra cash. Just scroll through the never-ending feed of exotic vacations, shiny new cars, house upgrades and restaurant outings enjoyed seemingly by everyone other than us. Just relapse back to a 30-year payment plan and enjoy life to its fullest today! YOLO!

But then we would look around and see how great we already had it. We did do cool things, it’s just that we didn’t do them all the time. Nothing wrong with that – just makes it more special. In the great scheme of things, 3 years is a short time to batten down the hatches with the MAP. Once we are mortgage-free we plan to stay debt-free forever! Que the post-mortgage fantasy list from step 1.

TRACK IT!

Below is the actual spreadsheet that I created to track the progress of the MAP. It should be pretty self-explanatory.

theplan2

The month-end loan balance numbers were projected into the future using a different “pay down per month” number (not shown). I found myself playing with different scenarios to see the principal-only payment I needed to target to meet my goal of eliminating the mortgage in the year I turned 40. The Death Pledge would be eliminated once the balance reached $50,000 as I could sell a bond portfolio that was yielding about the same in interest as our mortgage (~3.25%) and use the proceeds to pay down the loan. In the end, we were able to pay off the mortgage ahead of schedule when the balance reached $62,000.

As I started executing the MAP, one of the things I was really looking forward to every month was updating the actual month-end loan balance and seeing the projected payoff month move closer, especially after a particularly large principal payment. Having this simple spreadsheet went a long way in keeping me fired up and motivated.

In Conclusion

While it’s easy to say “well yeah, of course you can pay off $250,000 in 3 years if you have all this extra money”, that’s not really the point of this post. I would argue that determination and motivation – not money – are the most important ingredients in a quest to become completely debt-free. Where there is a will there is a way.

It would take a separate post to write about all the things that we did to “find” the money to reach this goal. Refinancing, insourcing with DIY, bringing lunches to work, minimizing recurring expenses like insurance, trading a sports car for a fuel-miser, cooling with box fans instead of AC, selling stuff on Craigslist, forwarding any monetary windfalls directly to the mortgage company, enjoying road trip vacations instead of flying oversees, hustling on the side to bring additional income, frugal living in general… The list goes on and on.

If you  browse this site you’ll see other actions we took to save/make money. Individually they might not add up to much, but taken as a whole they gave us the boost needed to pay off over half a million dollars (including interest) in about 10 years (starting with our first house) instead of 30.

The 5-step MAP provided us with the motivation and a clear path to succeed so it was only a matter of time before we escaped The Death Pledge. There is no magic formula – but you knew that already. Determination, time and money is all that’s needed to become debt-free.

The best part is that once you’ve completed the MAP you have all the tools necessary to successfully design and execute the FIP – Financial Independence Plan. The MAP is a boot camp for FIP… and that sounds like a good topic for a future installment!

 

Read the next installment: Escaping the Death Pledge – The Reasons

 

7 thoughts on “Escaping the Death Pledge – The Plan

  1. Pingback: Escaping the Death Pledge – The History | Insourcelife

  2. Great post as always! I’m approximately the age you were when you created the MAP, although my mortgage is less than half. I’m conflicted with the great debate: early mortgage payoff vs. investing. I’ve been maxing out my 401k and stashing thousands into an index fund, but considering switching gears in order to completely eliminate debt – I can’t do both. What was your strategy for saving/investing during the MAP?

    • Excellent point and the one that I’ve debated in my head numerous times. Ultimately the desire to be completely debt free won the argument hands down. This is a perfect example where it’s not always about the numbers.

      I will say that I’ve always put the priority on maximizing savings in tax-advantaged accounts first, before doing anything else with the money. So while executing the MAP I continued maxing out my pre-tax investment accounts (SEP, 401k). You can debate whether it’s better to pay off your mortgage or use the money for additional AFTER tax investments, but maxing out your tax-advantaged accounts instead of pre-paying your mortgage almost always wins. In my tax bracket it’s a no-brainer!

      It sounds like you are in a similar situation where you are already maxing out your tax-advantaged accounts and still have extra money that you invest in an index fund. You can easily switch and put that extra cash into your mortgage first. You already know what I did in the same situation but it’s a personal decision that only you can make.

      It’s only been about a month since we’ve eliminated the mortgage but I’ll tell you that it feels simply amazing to have this burden off our backs. Would having 500K in an index fund but still carrying a mortgage for the next 30 years make me happier? Absolutely not! Plus I’ve never met anyone who regretted paying off their mortgage so there is that. Ask yourself similar questions and see where you end up.

      If you have a 30 year loan you might want to look into refinancing it to a shorter term. That was the first thing I did and it really helped to get the ball rolling. Seeing all those extra $$ going towards principal every month is very motivating, feeding the fire in step 1 of the MAP!

      I’ll be talking about at least some of these points in the Ever After installment so stay tuned!

      • Thanks for the quick response! Excellent feedback and you make some great points. I’m with you on the tax advantaged accounts, I’m planning to stay the course there.

        We’re only 6 months in on a 15 year mortgage, but I dread continuing to pay every month until I’m 52.

        Maybe I’ll split the difference for a while, half of surplus to the index fund the other half to mortgage pay off and see how that feels.

        In any case, you’ve really made me think. Looking forward to the next installment!

  3. @Insourcelife – Congrats on being debt free! I created a similar MAP that came to a sweet conclusion back in 2011. Of course, it was a bit easier for me because my house is a lot less valuable. I look forward to reading about your FIP.

    @Josh – I agree with Insourcelife in that paying off that mortgage is an amazing feeling. At that point it’s full steam ahead with saving for your freedom. Part of what keeps you motivated is seeing big fleshy chunks of debt being chopped off each month. I suspect the feeling won’t be as nice if you decide to split the difference – but you have to do what makes you comfortable. Personally, I’ve never regretted retiring a debt even if that meant reducing my investing temporarily. I can’t say the same is true with investing – seeing 50% of my portfolio vanish in 2008-2009 was not a good feeling. Good luck!

    • Thanks for the kind words! Yeh, this house is definitely not cheap but we can always downsize if we wanted to free up some cash. I feel good about what’s happening in the housing market here and hopefully it will, at the very least, keep beating inflation.

  4. Pingback: Escaping the Death Pledge – The Reasons | Insourcelife

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