The final two things I want to talk about are paying off your mortgage before the end of the term, and then accelerate your savings.
Pay off Your Mortgage
For most of us, the biggest debt we’ll ever have is our home mortgage. Not everyone buys a house of course, but if you aspire to do so, you’re going to end up in a boatload of debt, albeit good debt, according to our earlier definition.
Mortgage interest rates are generally cheap, and especially so in recent years. I don’t see that changing much any time soon. I get asked all the time whether it makes sense to pay off a mortgage, with interest rates so low – wouldn’t it make more sense to invest for the future instead, where you’re likely to get a better return?
Financially that’s almost certainly the case. But debt, even the good kind, can impose a heavy psychological burden on many people and the magic of having it paid off is worth more than any investment return. I don’t say that from experience, not yet.
I’m still just a few years from paying off my own mortgage, but we’re nearly there and I can’t wait for that day! But I’ve watched plenty of my clients hit that milestone over the years and there’s always a real sense of relief that you finally own your own place and no-one can kick you out if it.
So paying off the mortgage becomes a question of head vs heart, maths vs emotion. Yes, you could make more money by investing any surplus rather than overpaying your mortgage, but is that ‘better’ than the emotional benefit of moving more quickly towards being debt-free? That’s a very subjective thing.
You can either overpay your mortgage a little bit every month – you’ll be amazed at the different just £100 per month extra will do to your term and the amount of interest you pay. Or you could make 13 payments a year instead of 12, perhaps.
You can use the mortgage overpayment calculator on the Money Saving Expert site to find out more. Have a play with your own figures – you may just get excited and inspired to pay off your mortgage early.
Accelerate
Finally, the trick is to take all these things and gradually accelerate them over time. How do you do this?
Well, once you get into the savings habit, try to increase the amount you save every few months, even if it’s only by £10 per month. Try to get the savings rate to a place which hurts slightly. I’m not saying you need to eat baked beans for 15 years to be financially independent, though that is an option if you want to pursue it.
The aggressive followers of the FI movement are able to save massive proportions of their income, sometimes up to 60-70% by radically trimming all expenses. If that floats your boat, then more power to you; embrace it and go for it.
Most of us aren’t able to aspire to that level of saving, so we instead need to get it to a point where we can feel the pinch of putting money away, but still enjoy life to a degree in the present. It’s a difficult balance to strike, very often, but it’s worth finding that sweet spot for yourself by nudging your savings rate up until you get to that point.
Resisting lifestyle creep is a really powerful way to accelerate your wealth-building efforts. Whenever you get a pay rise or bonus, resist the temptation to spend all of it. Instead, pay yourself first and identify how much of your new, higher monthly income you’re going to put away for the future and how much you’re going to enjoy.
Waiting until your earnings hit a certain level before you begin saving and investing for the future is a sure-fire way to make sure it’ll never happen. Starting with £25 per month savings and gradually increasing it by £10 per month every few months is a much better approach.
Before you know it, you’ll get bitten by the bug and start looking for more money that you can invest – it’s addictive, in a good way hopefully! Continuing to learn about how money works and how people work in relation to their money is a field known as behavioural finance. Refine your investing chops and look for efficiencies in your portfolio.
That’s really all there is to the process of building wealth. There will always be opportunities to build wealth in other ways too, such as the incredible rise in cryptocurrencies. If you manage to grab these opportunities then you’re lucky – well done, and more power to you. These are the exceptions rather than the rules though.
But building wealth in the way I’ve described over the last few posts is guaranteed to succeed. It’s not often you’ll hear that in my world, but if you follow these steps consistently over time, you will win with money.
Notice I didn’t say anything about getting financial advice. It’s my belief that most people don’t need to seek advice. Oh, everyone can benefit from a relationship with a decent adviser, but in the accumulation phase of life, it’s absolutely possible to go it alone, if you have the time and will to learn what it takes.
