I don't know how to be a badass - face punch me!

[psu256]

I just sent ~4000 split between my car payment and my mortgage, which leaves me about 5 months expenses in the bank. Sounds like I did a good thing, right?? that 4k was doing NOTHING for me in my bank account where it was earning nothing.

Then why do I have this horrible feeling in the pit of my stomach watching that huge drop in the balance sheet? Intellectually, I know it was the right thing to do, so why am I being such a wimp emotionally? Shouldn't I feel *happy* I did that? Perhaps I need to figure out how much interest that 4k is going to prevent me from paying to make me feel better. How can I do that?

[Zaga]

Easy, add your debts to your balance sheet!  They really should be on there, in that case you would have no net effect on your net worth.

[psu256]

Well, I am using Mint, and yes, it will have that on there. But, I guess to me that not having cash on hand is a risk. And I guess to feel good about that risk, I need to not just *know* there is a reward, I need to *calculate* that there is a reward, namely the interest I won't have to pay. But I don't know how to calculate that number and would like to be able to see it. Do you know how?

[Lans Holman]

Also, next time you get a mortgage statement, check out how much of it is going to principal.  Compare that to before you sent in that extra money.  That's where you see your money working for you.

[Zaga]

I agree with you, an emergency fund is necessary for many circumstances.  We keep 3 minimal months of expenses.

With that said, use Excel to calculate how much interest you are saving by paying extra to debt.  There are a ton of spreadsheets and other tools already out on the web that already do this.  However the basic calculation is - the interest rate on the debt.  You will immediately no longer be paying the interest on the amount you have paid off.

One thought - have you looked into debt snowball techniques?  They vary by which debt to pay on first, but they all agree to pay extra on only one debt at a time.  This could be the lowest balance debt or the highest interest rate, or even one that has some sort of baggage like a family member, child support, or the IRS.  By focusing on one debt at a time, you will improve your cashflow faster than you will be spreading out your efforts.

[psu256]

Searching around, I found:
http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx?

Using it, I see that the extra payment to the car has me saving $244.94 and paying it off 5 months earlier - not a lot of interest money saved there, but yeah, I'll take 5 months early :)

And the mortgage... three months earlier and $3,246.10 in interest saved! Looks like the mortgage is the place to go for the bang for the buck.

[AccidentalMiser]

If you're using Mint, you need to put EVERYTHING in there, there should be no immediate change to the all-important "Net Worth" graph if you take 4k out of checking and pay off a debt.

Over time, your "Net Worth" graph will change in the positive direction by paying off that debt because you will never again pay interest on that 4k worth of debt that you obliterated.

My DW and I discussed this during a recent car trip.  If a person has 10,000 in cash and a 10,000 dollar debt, they feel pretty good (if they're not savvy) because they have ten thousand bucks!  You can SEE money, but you can't see debt.  So, what happens now is that they go BUY SOMETHING with that ten thousand bucks.  Then they have a toy they can SEE and still have that debt.  They play with their toy until it breaks, then they pay to have it fixed and eventually sell it for half (or less) than what they paid for it.  Most of the time, that debt is still hanging around, invisibly ruining their lives.

You get my point.  Smart money people know an empty wallet with no debt puts you miles ahead of most sheeple.

[hybrid]

There are plenty on these forums who will argue (more effectively than I ever could) that paying down your mortgage is not the best use for your money, and someone will give you that face-punch in a comment or two.  But it's going to be a pretty small face-punch, more like a love tap, because you are pointed in the right direction.  Everything else is just optimization.

Me, personally, I have two mortgages on a primary and rental house.  And I am eager to bury the mortgage on the rental (smaller of the two balances) and improve my cashflow.  It may not be the most optimize option for me, but it's the one I am most comfortable with.

Maybe it doesn't feel right because you transferred a chunk of your liquid capital into illiquid parts of your balance sheet?  Shouldn't be a problem if you have enough liquid capital on hand, and it sounds like you do.  No face punches from me, sorry.

[AccidentalMiser]

I forgot to add this (thanks, hybrid, for jogging my memory).

I wouldn't pay down my mortgage early unless it was at an unreasonable rate (like over six percent) unless I had every other debt retired, all my emergency funds in place and planned to stay in the home for a good long time.

[psu256]

Well, I don't have any credit card debt, so it is only the house and the car that need paying. The car is  @ 4.29%, the house at 4.75%.

(Yes, some might say to get rid of the car, but I am not going there... it is a 40mpg one, and as I stated on the latest "ride a bike to work" post, there doesn't appear to be any way to get there on a bike lest I take about a 11 mile detour each way.)

The Financial Engines retirement calculator at work tells me that if I quit making contributions today, with an average market, when I hit 60 in 23 years, I'd be bringing home 41500 (and I am actually still making enough of a contribution to hit the company match.) So, as far as I am concerned, the 401k saving is done.

The only reason I can think of *not* to pay the mortgage is that I can maybe do better than 4.75 elsewhere?

[dragoncar]

I'd pay the car first.  You might not see it now, but you will once you pay it off and see improved cash flow.  So that advice is a combination of debt snowball and also the fact that your effective mortgage interest rate is lower.

[psu256]

I'd pay the car first.  You might not see it now, but you will once you pay it off and see improved cash flow.  So that advice is a combination of debt snowball and also the fact that your effective mortgage interest rate is lower.

Can you explain why the effective rate is lower?

[Rebecca Stapler]

I'd pay the car first.  You might not see it now, but you will once you pay it off and see improved cash flow.  So that advice is a combination of debt snowball and also the fact that your effective mortgage interest rate is lower.

Can you explain why the effective rate is lower?

I'm going to take a stab at this one and say that it's lower because you can deduct your mortgage interest on your taxes.

The reason why I would prioritize car payoff over mortgage payoff is because your car is definitely a depreciating asset, whereas your house might actually be appreciating (eventually). Also, once you get rid of your car loan you can take collision off of your insurance, which might save you some money, and you won't need to pay any gap insurance (if you currently have it).

[psu256]

I'd pay the car first.  You might not see it now, but you will once you pay it off and see improved cash flow.  So that advice is a combination of debt snowball and also the fact that your effective mortgage interest rate is lower.

Wow, that is pretty stunning. I ran the numbers using that bankrate site, both with
1) paying the normal car payment and starting to pay an extra $1200 a month to the mortgage now
2) paying that money to the car first, then plauing $1575 extra a month starting in March 2014 when I have the car paid off.

It doesn't seem at all intuitive to me, but paying the car off first and applying that money to the mortgage, even though I start 9 months later, has me paying off the mortgage 13 months sooner and saving 10k in interest. Amazing. Would have never imagined it.

[Luck better Skill]

  I read, (I think the book was "Switch"), There are to parts to paying off debt, the interest and the psychological.  Paying off the highest interest debt first is the Vulcan logic.  The math says that is more likely to save more money in the long run.  However humans have emotions about money and debt.  So debt counselors found that it was easier to stick to the plan if you paid the smallest debt first.  Use the feeling of accomplishment to keep up the motivation plus the extra cash flow to pay down the next debt. 
  I like to keep some cash reserves, then pay off debts to increase cash flow.

[Rollin]

Much good advice above.  I would add that sometimes you just need to trust that things are going to go well while you have this temporary dip in your stash (used to pay off the mortgage and car).  You'll come out the other side fine.  In other words, the likelyhood that you'll need that $$ in the short time it'll take you to make that up are probably slim.

At least you are not reducing your net worth in the process, like as if you were to take the $4,000 and blow it on a vacation, or other expense that you may not need.

Relax, you're on a clear path now - a Mustachian Pathway!

[psu256]

Thanks all - I really needed the emotional support!

P.S. I am a martial artist so I've been literally facepunched on occasion. I think I really like the "facepunch" terminology because it is quite easy for me to visualize. If I get facepunched I never blame the opponent, it is my fault for not defending myself correctly. Likewise, if I do something financially stupid, it is my fault, and I deserve a good facepunch.

If you haven't ever been literally facepunched, get a friend and a boxing glove, and let them do it to you once (RecSpecs and mouthpiece are a good idea...)

I guarantee you it will make you appreciate the figurative facepunches here all the more. :)

[Luck better Skill]

I will pass on real face punch.  Also keep collusion on the car for a few years after you pay it off.  Not sure if it was this thread or somewhere else.  While the vehicle has a high blue book value I think insurance is worth it.  After FI is achieve that is a different story.