This is the first of several posts describing “Strategies of Abundance” for ecopreneurs and green business owners.
Even in financially tough times, these Strategies of Abundance reflect interrelationships between personal finance and business, especially for small business owners. The key for ecopreneurs is how they use their business to make the world a better place. Profits from a green enterprise are the catalyst for ecopreneurs to achieve their Earth Mission, whether to restore ecological integrity or make photovoltaic systems affordable to all.
STRATEGY #1: Stop paying the banker.
The longer you hold a mortgage, the more you work for the bank and the more profitable you make them. For comparison, below is a chart from our book, ECOpreneuring, reflecting how interest can pile up on a $100,000 mortgage at 7 percent interest for terms of 15 and 30 years. While the monthly payment is less for the 30-year mortgage (the primary reason many of us choose it), we end up paying more than double for the use of the same pot of money.
By accelerating our mortgage payments on our 30-year fixed mortgage by paying down the principal when we could, we have the ability to earn less income to pay the bank than if we did otherwise over the long-term. Prepayment on principal is usually acceptable and completely legal. Every time you pay down the principal, the remaining interest and balance is recalculated, meaning that more of your regular monthly payments go to the principal and not interest payments.
For example, in our very first homeowner mortgage payment of $722, only $7 went to principal and the remaining $715 went to finance charges. After the interest rates plummeted in the early 2000s, we refinanced the 30-year mortgage when we were able to secure a significantly lower interest rate, reducing the monthly payment to $653. Ten years later, after we realized just how much we were working for the bank and were well into our accelerated paydown of the principal, $610 of our monthly mortgage payment went to principal and $45 to interest. We paid off our farmhouse mortgage about two decades early, saving the need to earn about $95,000 in future income and freeing us to focus on the issues we cared about most, not making already profitable bankers wealthier.
The bank owns your house for many years before you have much equity (paid-off principal). By the end of a $100,000 mortgage, your $100,000 actually ends up costing you $239,508. As Rob Roy, author of Mortgage Free: Radical Strategies for Home Ownership, says, “If there is any question as to who owns your house, stop making your mortgage payment.” He, and we, suggests owning the house without the bank owning it for you. After all, the word “mortgage” is from the Old French, mort gage, or “death pledge.” We agree with Roy that prepayment of your mortgage is among the best investments you can make, the quicker the better.
Those who argue for the mortgage interest deduction benefit of holding a mortgage, they must regularly itemize their federal income tax return. If, on the other hand, you do not itemize deductions and take the standard deduction on your federal income tax return, having a mortgage serves no taxation benefit. For most Americans, you will come out ahead paying off the mortgage rather than saving a few dollars on your federal income taxes.
Mortgage interest, however, may help reduce your taxable burden on investment property where you have rental income, a topic for a future blog. In this case, an income producing asset (say a recreational cabin you rent out, proceeds from which pay the mortgage and support sustainable forestry) could be considered “good debt” since it generates positive cash flow and provides a good ROE, “return on environment” at the same time. A CPA and tax advisor can offer professional guidance.
Dumping debt also applies to credit cards, college or car loans and other consumer loans. Just one credit card debt with a balance of $15,000 and a monthly minimum payment of $300 based on an interest rate of 13 percent would take nearly 20 years to pay off, amounting to nearly $9,000 in interest, according to the website Cardweb.com. What good are contributions to a 401(k) or IRA with a stock portfolio earning 10 percent a year when you’re paying credit card debt at 16 percent? The same holds true for vehicle financing, especially if the financing offered is stretched over six years. Recent college grads don’t set out to be poor savers. On average, they’re saddled with a median undergraduate student loan debt of over $19,000.
How have you broken free from the financial stranglehold of our present debt-focused financial system?