Thursday, September 06, 2007
For Bellezza . . .
My cyber-friend Bellezza writes about her teenage son and wonders about his search for independence and where it will lead him. I know all about that concern. My son is just a bit younger than hers, and I wonder too. The reality is likely that her son and mine will both grow up just fine. They may stumble along the way, as we all did as teenagers, but we all turned out OK, didn't we? Let's hope our children will too.
One thing Bellezza has brought up a time or two is that her son has taken up smoking. As any good parent would, she worries about that. As I read her latest post, I was reminded of something I used as an example in an eBook I wrote years ago. The book was titled The Success Primer, and is about money and how to deal intelligently with income and expenses. It was written when assets, including houses, where much cheaper than they are today and interest rates were a bit higher, but the fundamental ideas in the book still apply. In it, I wrote a little snippet about smoking, displayed below. If you find it interesting or useful, you can download the entire eBook for free, with my compliments, by clicking here: The Success Primer.
The SUCCESS Primer:
Financial Planning For Beginners
Quit Smoking and Save a Bundle on Your Mortgage
A young couple has just bought a house with a $110,000 mortgage, interest at 8.25% compounded and paid monthly, a 5 year term and a 25 year amortization period. Alice has just quit smoking, and figures she will save about $126.00 per month as a result.
Alice, and Ted her husband, now make monthly mortgage payments of $967.30. Alice is thinking of using part of the money she now saves by having stopping smoking to increase the monthly payment by $32.70, making it an even $1,000.00 per month. The rest will be set asideto help pay for an annual holiday.
Ted doesn’t think an extra $32.70 every month is worth the trouble.
Who’s right? Assuming that this $32.70 increase would be faithfully applied to the entire 25 year amortization period, what would the interest savings be?
Believe it or not, it’s $54,155.00! Instead of taking 25 years to fully pay off the mortgage, it is now only going to take 17 years, 3 months. Our calculations presuppose a constant rate of 8.25% over the entire life of the mortgage. Is it worth making a slightly larger payment? You bet!
Now, what would happen if Alice put the entire $126.00 towards the mortgage payment? The new monthly mortgage payment would be $1,093.30 ($967.30 + $126.00) and the results would definitely make the larger payment worthwhile. The interest saving compared to the original mortgage without additional payment would be $72,414.00 and the mortgage would now be fully paid off in 14 years, 4 months.
Now, if Ted would only sacrifice his beer budget....
Bellezza. . . I know your son doesn't have a mortgage and won't have one for years to come, but the logic of saving the money and investing it still applies. Just think of all the things he could do with the money that he is squandering. Good luck!