Every Mickle Makes a Muckle
Posted by Gail | Filed under Saving
Usually when we think about cutting back, we target stuff like coffee, lunches out and cable television. Wasteful, pointless things that simply bring us pleasure but no long-term payback. You probably get tired of hearing people say, “Skip lunch and you can save $10 a day, or $50 a week. That’s $2,600 a year.” Who wants to skip lunch every day? Besides if I skip lunch for a month and save $200, and then turn around and buy two tickets to see Jersey Boys, I’ll blow through my lunch savings in one sweep of the credit card…k’ching! Which is exactly the problem people have “saving” money.
Mentally, we perceive our various pots of money as having different values, and we react to them in different ways. The money we’ve committed to our Super-de-dooper cable package is “spent” money, even though with one quick call, we could cut our costs in half, and slam $50 a month more against our mortgage every month. The money we blow on our cell phone is “sunk” money… we’ve already spent it by the time we get the bill… even though a call to revamp our plan, and a commitment to using the phone only within the parameters of our plan could save us hundreds of dollars every month. We think switching banks is too much trouble. Gosh, just think of all the auto-debits you’ll have to change. We think of switching telephone providers as a major pain in the butt, even through we could reduce our long-distances charges significantly. We think of switching from Buying New to Buying Used as just plain yucky.
We have a saying in Jamaica: Every mickle makes a muckle. It’s much like the saying, “Take care of the pennies and the pounds will look after themselves.” If you even remember what a “pound” is.
Whenever I start telling people to find ways to save, they start finding ways to tell me why they can’t be bothered. “Sure, I can give up eating lunch out and save $25 a week,” they say, “but what’s that really going to get me?”
If I could show you a way to save $30,000 off your mortgage and cut three years off your repayment, would you be interested?
On a $250,000 mortgage at 6% amortized over 25 years, if you find a way to add an extra $100 to your monthly payment, you’ll save $32,640 off your mortgage and chop 3 years off your amortization. Want to see how you’d do on your own mortgage. Head to Citizens bank’s mortgage payoff calculator and let it do the math for you.
Most people never realize the gains they could make because when the do something to “save” money, they leave their “savings” in their wallet, where it eventually vanishes into a cup of coffee, a new magazine, or a DVD for the kids.
If you want to make your “savings” work as hard as you do, then you’ve got to apply them somewhere important quick, quick like a bunny. Let’s say you do decide to trim your lunch habit by $25 dollars a week, or $100 a month and use that money to pay down your credit card balance. Each time you don’t spend that money, take it home and put it in your Credit Card Jar. When you get to the end of the money, apply it to your balance, and watch your interest costs drop.
“Saving” doesn’t have to mean giving up everything you love to do. It just means looking for ways to take the money you may be spending unconsciously, and finding better uses for it. It’s moving from the routine spending we do habitually, to purposely deciding to buy that beautiful bunch of flowers, that warm, delicious muffin, or that cozy new pair of gloves. And if we decide we’re going to cut back on something so we can have something else – OMG, you mean prioritize?! – then we’ll apply those savings to our big goal before we have to chance to blow them.
I’ll bet there’s a bucket-load of ways you’re spending unconsciously… blowing money that could better be used to pay down credit cards, get rid of big, fat mortgages, build up emergency funds. I’ll bet you can find the $100 a month that’s gonna save you $30,000 off your mortgage. Why don’t you take a look?
March 23, 2009 at 7:53 am
I guess my perspective is skewed, because 80% of my budgeted items MUST be on sale to fit within the parameters of my budget amounts, especially groceries. I don’t consider the difference between the regular and sale prices as money to be put elsewhere, just a fact of life to make ends meet. I can’t remember the last time I paid full price on any item of clothing (most come from Salvation Army). I switched banks to cut the bank fees, but have not re-implemented that $12/month as ’saved’ because my budget was so tight that every penny counted. To me, cutting costs in one category just means that another has a chance of having enough to cover my needs. Maybe it is time for another ‘think’ and session with the Interactive Budget, but for now, this is the only way I can make it.
March 23, 2009 at 7:57 am
Thank you Gail for always remaining us the little things that we can do to help better ourselves and not the financial institutions. We as consumer MUST put ourselves first. We work very hard for our money, so it’s essential we just make sure that THEY (all our suppliers of services) work for US. Just last week (on my mortgage anniversary) I was able to increase 10% of the payment. With RBC 10% of the payment will go towards the principal (every week). I have a conventional mortgage that I got back in 2006. The mortgage was for 25 years at first. After a few weeks, I changed it to weekly accelerated, and that reduced it to 21 years. Right after, I increased the payment 10%, and that reduced it to 18 years. Since then, I have increased 10% of payment in 2007, 2008 and 2009. My mortgage now will be paid off in 11 years. So just by increasing 10% on the payment in the last 3 years (and by switching it from Monthly to Weekly accelerated, I reduced my interest rate by a lot, and the amortization by 14 years.
Now, when you call RBC, they are going to tell you that you can do a lump sum, of course, that’s nice if you have a big chunk of money to put towards it… BUT, tell them you want to increase the “regular” payment by 10%. That does not require a credit check or anything, it is just a change on the system that needs to be done over the phone. Another thing that they are going to tell you you can do double ups whenever on line… that’s OK to do when you have the extra money, but by increasing your regular payment you are making sure that the extra 10% goes towards the principal and you can budget your regular payment this way. All the reductions, as you can see, are EXTREMELY beneficial to your household and not theirs.
March 23, 2009 at 8:05 am
Gail, what’ I’ve been trying to do for the last several years is to kill two birds with one stone … building up an emergency fund *and* making extra payments on my mortage. I’ve identified a monthly amount that I would like to add to my mortgage payment, but rather than send it to my mortgage company, I send it to an ING online bank account that has a higher interest rate than regular banks. I call this my “Extra Mortgage Payments” account. The plan is to use this fund to pay off the mortgage about 6 years early. Also, should some *true* emergency happen, these funds will be available to me rather than being tied up in my house. What do yout think? Good idea or just dumb? Love Ya!
March 23, 2009 at 9:07 am
I need to own a house before I can make those ideas work for me (except the credit card part), but I love the idea of shaving that much off the mortgage. It’s sad that banks don’t help their clients do what’s best but I guess at their heart they’re still a business.
March 23, 2009 at 10:05 am
Want to pay things off faster without feeling a BIG pinch? Take after-tax pay increases and used them to pay off mortgage/debt or save for a down-payment.
After that, start pinching the rest of your budget.
I said it before: If big debt can accumulate in small amount, big saving can accumulate in small amounts.
March 23, 2009 at 10:06 am
I’ve found that putting away the extra money I save on sale items, discounts, etc. is difficult for me to do…SO, I just started putting the money away right off the top. 10% extra off of each cheque to the emergency fund at first. Then 10% of my cheque to my LOC on top of my already above minimum payments (LOC just hit $9999, first time I’ve been below 4 digits in YEARS, btw). It’s doesn’t seem like much at first, but it keeps accumulating. Plus I changed jobs and increased my income by $20/week, so guess what I get to do with that?
LOC is my main priority at the moment, but as soon as that is done, I will be increasing my monthly mortgage payments by at least half of my LOC payment–the other half will go to a desperately needed newer work truck for DH. We only hope the old truck doesn’t die before then!
March 23, 2009 at 10:43 am
@ Kim U
Why wait until you own a house?
You could totally apply such savings techniques to accumulating a down payment, building retirement savings, an emergency fund, etc.
That way, you’re already in a very good habit when you do decide to take on a mortgage.:)
March 23, 2009 at 1:10 pm
I love what you have said here Gail!
People will drive miles to go to a sale where they will save a few bucks on miscellaneous crap, but reviewing an existing expense is just too much effort!
I am presently seeing if dropping our big-bank chequing account will be worth the hassle of moving all the pre-auth stuff (They don’t offer any free accounts, and I think the rate they are charging is kind of ludicrous and their customer service is very impersonal). We also have a credit union account that is really excellent and FREE with a $1000 balance. There are some services that the big bank offers that my CU can’t so it’s not as cut and dried as it would seem. I have really weigh whether I CAN realistically drop the big bank account, but at least my wonderful CU one isn’t adding more expense.
My phone company actually CALLED ME to offer lower rates! They reviewed my usage and said I was paying too much. In 10 minutes my phone bill was cut in HALF (now it is even cheaper than the other guys for the features I actually want and a really cheap long distance rate). I almost fell off my chair at how accomodating they were.
Am I right in assuming all the benefits of working these techniques to save on the mortgage are most effective at the BEGINNING of the mortgage? When we bought ten years ago it was financially a low-income phase of our lives. Now that a decade of payments have gone by, we have put down a couple of lump sums when we could and still have about ten more years to go. The sheet says we are now paying more principle than interest now (FINALLY!)…. so is it better to keep it going as it is and invest in other stuff more heavily like long term savings and emergency funds, or does it still make sense to accelerate our payments this late in the loan?
March 23, 2009 at 1:28 pm
Pol*:
Is it necessary to give up the bank entirely? Is it possible to use what suits you best from each FI?
March 23, 2009 at 1:28 pm
We’ve been doing this, starting this month.
Moved our home phone to another provider – check!
Got a home equity line of credit in case we lose our jobs – check (because it’s easier to get credit now when we’re not in trouble)
Reduced number of channels on TV – check!
Picked a cheaper cell phone plan for both of the adults of the house – check!
Cooking every week – check! (and now the food is getting more palatable, woo hoo!!)
March 23, 2009 at 1:29 pm
Oh forgot one – as part of the HELOC negotiations, I negotiated for us two years of NO BANKING FEES for each of our bank accounts
March 23, 2009 at 1:30 pm
@ Pol — you pay the most interest when the sum of your loan is highest — so yes, the early years are when making prepayments count the most. (think of it like if you put in an extra $1000 in year 2, then there’s no interest on that $1000 in years 3 – 25 to be charged on). Instead of lump sum payments, you might consider raising the amount you pay each period instead.
your other question is larger — do we pay off the mortgage first, invest, do a little of both, build emergency fund… unfortunately there’s no one size fits all question. What you should do is look at your investments and your interest rates and see what makes sense the most to you mathematically and emotionally. For instance if you have a 5% mortgage and pay it down, you are in effect earning 8% return on your money versus keeping it in an RRSP account (due to money that’s paid on mortgage interst is paid with after tax dollars). But if you are confident that your investmetns can return 10% in after tax dollars in the same time frame, it may be better. But a lot of people sleep easier if their house is paid off cause you can’t hide from the rain in a balance sheet. Pros and cons, pros and cons….
March 23, 2009 at 2:07 pm
Pol*: I am always suspicious of the phone company calling to offer me a cheaper rate. In my case they are also my ISP. I’ve been with them for many years, so many that I still have uncapped usage on my account. They frequently call and suggest that I move to a new plan, which of course, is capped. The offer is not a discounted rate but the regular rate, for a plan that will borderline meet my needs. I’m not posting this a a slam against the phone company but more as a Make sure you are getting what you need and not giving up something that you want in exchange.
March 23, 2009 at 2:17 pm
Excellent Post Gail. In the vein of reviewing household expenses I have been trying to convince my dear wife that we should go out and buy a new answering machine and get rid of the call answer service from our phone company that keeps charging us almost $10/month for the service, and increasing every year.
As an aside, I’ve noticed on the show that you tend to highlight shopping trips. Have you ever run into a couple where the problem hasn’t been shopping but it was because their household bills were out of control (i.e. heat, water, electricity, phone, net, cable, long distance, Cellular)
March 23, 2009 at 3:16 pm
Kevin, I very often meet people who are overspending on “fixed” expenses like communications. Kelly and Gerry had to bundle to save a bundle. Others have had to seriously cut back to get expenses in line. One couple I told to sell their condo did… while another couple who had never made a mortgage payment from their cash flow (they all came off their line of credit) decided to keep their home and come up with more money. As for heat, water, electricity, I worked with a family that had to find $1,000 a month for long-term savings, and the whole family (kids included) chipped in to find the money.
March 23, 2009 at 3:40 pm
Kevin — check out primus dot ca and their talkbroadband functionality if you have high speed internet. I don’t work for them but have had this service for several years. The savings are significant and the phone features are awesome. Keep in mind it’s not as stable as a traditional phone line but I’ve found it to be 99% as good at 30% of the price. One selling point with your wife could be that you keep the same number + voicemails that get left at home get copied into a .wav file and emailed to her at work.
March 23, 2009 at 4:28 pm
We gave up our 2nd car and I switched to public transit. By doing so we immediately saved $2000 (insurance, upkeep, gas), I got more exercise (walking from the subway to work and back), read on the average a book every week and a half (read 26 books from Sept to June my first year using public transportation), have made 2 bus buddies and polute less.
We also save $225 per month in our high interest savings account. When the total hits about $1000 I temporarily park the funds against our line of credit (which charges us more interest then we make on the high interest account) saving interest charges.
March 23, 2009 at 9:06 pm
So smart, Doreen! Just wondering, (being nosy actually)..did you take that car payment$ and insurance pmt$..the $2000 and apply it to somewhere else like the mortgage debt or did you eliminate the 2nd car out of need=way too tight budget?? so there really is no $2000 extra similar to what Suzanne pointed out at the top of these comments?
I find for us, when we cut stuff out of our budget, it’s because of need. If we could “afford-with ease” the item being cut we wouldn’t cut them out & we’d keep them & enjoy them. We cut when it’s necessary not just ‘cuz we want to move that money to our savings account. ~sigh
March 23, 2009 at 9:32 pm
Hi Gail ….. from another very money-savvy Gail in the GTA!
Thank you for a wonderful show – I watch regularly with my daughter and she’s getting wise to all this money stuff as well. She wanted to know tonight if we were going to watch the “stupid people on the money program”. LOL – it’s working and she’s only 9!
I love this Blog entry and must tell you that I’m doing everything humanly possible to pay down our mortgage before it needs to be renewed in 29 months. I have a Variable 5 year Mortgage Rate-Capper with RBC ….. the rate is capped at 5.25% and with the recent drops in interest rates I am currently paying 1.75%. I have additional payments on each and every bi-weekly debit (and have been doing this for the last 5 years) and I’ll have my 20 year mortgage paid off in less than 10 years! The only thing I need to do very soon is see if it is viable to take a lump sum from our savings to get the principal down quicker. I know in the long run it’ll be better and we’ll be saving so much more interest, but I like the “emergency/savings” balance to be healthy ….. thinking carefully about that one.
Thanks for a wonderful program.
March 23, 2009 at 9:43 pm
all the suggestions…..check
worth everybit of the ‘effort’
thanks Gail.
i’m loving the show and this blog.
March 23, 2009 at 9:45 pm
” “Take care of the pennies and the pounds will look after themselves.” If you even remember what a “pound” is. ”
The pound is still around, as are the pennies. It was the shillings that went. Although, it must be said the pound isn’t worth a pound anymore.
March 24, 2009 at 2:44 am
Just fyi: There is a new study about money and how the brain views it – the money illusion.
http://www.independent.co.uk/news/science/why-spending-money-is-like-a-drug-1652597.html