Are You Guilty of Misplaced Frugality?

Let’s start things off with a story about a former boss of mine, a small business owner who was just trying to make ends meet.

He knew I was a fellow cheapskate, so he’d tell me all about the things he’d do to save a buck. He would add water to the liquid hand soap in the bathroom. He bought desks and chairs from businesses that went under. He insisted on a scrap paper pile that people could use for notes, rather than throwing it out. We each had a long-distance code; those who made too many calls on the company dime were reprimanded.

He didn’t stop with just office supplies. He constantly would ask ladies around the office if his clothes were nice — not to brag, but to make sure his thrift store finds were presentable. Whenever he’d find a deal on something, he’d excitedly tell all of us. It got so we started to (good-naturedly, of course) kind of make fun of him about it.

Most of the reason why we made fun of him is because his frugality was obviously misplaced. He’d worry about bathroom supplies while driving a leased luxury vehicle. He stressed about recycling while spending thousands per year on the latest electronic gadgets. His life was a constant whirlwind of restaurants, travel, and activity, all of which cost a lot more than a few long-distance calls.

It was a classic example of caring too much about the little things while the big things pile up.

Don’t fall victim to misplaced frugality

For lack of a better term, I’m going to call my former boss’s inability to focus on his big expenses misplaced frugality.

It isn’t just him that’s guilty of it. There are thousands just like him, willing to crunch the numbers on things like furnace efficiency, stove warm-up times, or the optimal placement of food in the refrigerator, while ignoring huge other potential problems.

Your biggest expenses are likely shelter and your vehicle. If you can find a way to save 20% on those two things, you’re on your way to saving close to 10% of your total income.

Yeah, I know that it’s tough to cut major things. You probably like where you live, or else you wouldn’t live there. And everyone has a car payment, right? You’re just doing what everyone else does.

Okay, but keep in mind it’s gonna cost you.

Say you currently live an hour drive from work, commuting each day because you were attracted to the extra space you could afford in the suburbs. The extra gas alone adds up to $50 per week.

We can’t stop there. How much is two extra hours worth every day? That adds up to ten more hours per week. Suddenly, a job that pays $25 per hour worked really only pays $20. Add on additional wear and tear on your car, and we’re looking at a number closer to $18 per hour.

By cutting down your commute from an hour to ten minutes, you’re looking at increasing your wage by an easy $5 per hour. Does it really sound like such a big change now?

Spend money to make money

The other mistake I constantly see people make is refusing to spend money to make money.

Bank fees are the prime example of this. In both Canada and the U.S., options exist so the average consumer can avoid bank fees. The most common solutions are to leave a certain minimum in an account (usually $5,000), or switch to an online-only account. That’s all fine and good, but it neglects the relationship you can build up with your local bank.

By just asking my bank, I’ve gotten better GIC rates and qualified for a mortgage that another lender probably wouldn’t have agreed to. I’ve received a second opinion on investments, and once had a $30 NSF charge reversed because they realized I kept the funds for the cheque in the wrong account.

I’ll gladly pay $5 per month in exchange for all that. Over the years, I’ve easily saved enough to justify paying the fees. Besides, I value having a relationship with my bank, and I think many of you reading should too.

A smart consumer questions every expense. But in the scheme of things, some are important and some aren’t. Cut the big ones first, and then move onto the small ones. Yes, I know the small ones are easy, but ultimately they don’t really make much difference. Misplaced frugality could be your downfall.

 

How We Paid Off $110,000 of Mortgage Debt Over 14 Months

mortgage debt

We took on risk on a very large mortgage debt load, and subsequent financial gamble in the summer of 2013. We were looking to move to a rural property. Our desire to live in an urban centre (Peterborough, Ontario), over time, transitioned to a desire to live in the “country” with all that “country life” has to offer.

So, in June of 2013 we purchased our dream home. Our property sites on just over an acre of land on a lot that is partially treed and provides plenty of space for our kids to play outside, to raise a garden and to relax in the solitude of the country side.

The downside?

We bought our new home before we sold the previous one. A big financial burden that limited our financial growth. Our  previous home sold in December of 2013 so we carried two homes for 6 months.

During this time, aside from our amortization choice, we paid the minimum on both mortgages.

One of the biggest expenses you will ever have is your home. By the time you pay off your mortgage debt over a period of two or more decades, you will pay tens if not hundreds of thousands of dollars in interest. If you’re looking to reduce your debt, and save thousands, paying off your mortgage debt quicker can be one of the best ways to proceed. For our American readers, in Canada we can not claim mortgage interest as a tax deduction in most circumstances (a few exemptions apply).

Watching my parents struggle with mortgage debt instilled in me a desire to avoid similar problems in my own life. You never know when interest rates are going to start rising again, and paying off your mortgage quickly can help you avoid that uncertainty. Mrs. SPF had similar experiences watching her family struggle with mortgage debt, so it was easy for us to agree that we wanted to do things differently. For Canadians, there is an argument for a guaranteed return on investment that paying off mortgage debt can provide.

Mrs. SPF and I created a plan to reduce our mortgage quickly when we bought our current home. In fact, over a period 14 months, we paid off almost $111,000. When we really started focusing on our efforts in December of 2013, our mortgage balance was $292,145.94. On January 30, 2015, after 14 months, our balance was $181,158.46. Here’s how we did it:

Structuring Our Mortgage

Here in Canada we have a range of somewhat flexible mortgage products so that you can mix and match your payment abilities. The key to our success is amortizing over 15 years, rather than sticking to the “usual” practice of amortizing over 25 years which the banks seem to promote whenever people move. We also make bi-weekly accelerated mortgage payments. This means that we end up with the equivalent of an extra payment every year, speeding up the debt repayment process.

Not only that, but our mortgage product allows us to increase our bi-weekly mortgage payments by 10% each year. This means that we can boost our regular mortgage payment each year without refinancing. As our income increases and our finances improve, we increase our monthly payments which we we have done each year from 2013-15. Our mortgage product also allows us to make lump sum payments of up to 10% of the original principal amount each year. This means that if we get a windfall, it’s easy to take the money and apply it to our mortgage balance.

While our five-year fixed rate of 2.84% is great, and means less paid in interest, our real advantage is the flexible mortgage product that allows us to change things up in favor of accelerating our payoff. As a result of our strategy, we expect to be mortgage free by January 2020, instead of continuing to pay until June 2028 which was our original final payment date.

Frugal Living and Making Mortgage Debt Reduction a Priority

Our frugal and sustainable lifestyle allows us to make mortgage debt reduction payments on our mortgage. Because our lifestyle is simple and inexpensive, it means that we have enough money to aggressively pay down our mortgage, even as we fund our emergency, retirement, and kids’ college accounts. Some of the ways that we live simply and frugally include:

  • The kids and I get DIY haircuts from Mrs. SPF
  • We don’t have cable TV.
  • Almost all of the clothing we buy for our children is used. We hope to use all of it.
  • We use Android instead of Apple products which are less expensive and use a pay as you go plan for our cell phones.
  • About three quarters of what we buy at the grocery store is on sale.
  • Because … growing some of our own food is important to us.
  • And … we purchase organic veg baskets from a neighbour as a member of their CSA
  • We buy used online with Kijiji when we can.
  • Our meals are mostly prepared at home -we don’t dine out often.
  • We buy when we need, not when we want, based on family priorities

We also save by thinking of out-of-the-box ways to accomplish our goals. When we bought our Subaru Outback, we did our research and imported the Outback from the United States, saving us more than $9,000 compared to buying the same vehicle north of the border. The Outback is built in Indiana so we avoided import duty (almost 7%) while taking advantage of the skewed markets for consumer products between the U.S. and Canada while leveraging strong Canadian dollar in the Summer of 2010. We plan to drive our Outback into the ground before replacing it.

Not only do we have a generally frugal lifestyle that allows us to handle higher monthly mortgage payments, but our focus on debt reduction as a priority means that we already know what to do when we have a windfall. A recent pension adjustment allowed us to make a lump sum payment (~$21,000) in October 2014, and an inheritance also provided us with the means to make a lump sum payment ($29,990) not too long ago. After carrying two homes, when the first sold we were able to apply almost $30,000 to the principal.

Because our priority is reducing our mortgage debt as soon as possible, it’s easy to consider that money earmarked. When our current five-year fixed mortgage situation expires in June 2018, we will be interested in raising our bi-weekly payment amount for the final stretch, which would accelerate our payoff even faster. When we are mortgage free we will change our focus to investing in order to supplement our defined benefit pensions. At this time we do not see a need to prioritize investing as we already sock away close to 10% of our income in the DBPs (where our employer matches the contribution). We will focus a now freed up ~$3000 per month on investing for our retirements and to save for our kids’ schooling if they choose post secondary education.

Finally, we make it a point to use our income generating web properties to help us make payments. This extra money coming in allows us to continue to pay down our mortgage without the worry of interfering with our regular finances.

In the end, it’s about priorities and a little ingenuity. We have set up our finances to take care of our major goals (retirement, college for our children) at a more relaxed and moderate rate – we fund our kids’ RESPs annually and contribute to our DBPs while paying off mortgage debt instead of investing in the markets.  Lessons from our parents still make sense to us when we examine our family financial planning. We are committed to becoming completely debt-free in less than 5 years.

Our choice and we are comfortable with it.

What are your thoughts on your mortgage debt?