Last year I wrote the piece called: Paying Off Your Mortgage is Like Working a Second Job, but I think I confused some folks so I thought I’d try to explain it more thoroughly this time around. I’m going to show off my geeky spreadsheet side which is very much a part of most of my financial calculations.
Below I’ve included some quick spreadsheet calculation:
| Working a 2nd Job | |||
| weeks | 52 | ||
| hr/week | 40 | ||
| pay rate | 7.50 | ||
| 15,600 | |||
| Money Not Spend on a Mortgage | |||
| month | 1,300 | ||
| months/yr | 12 | ||
| 15,600 | |||
In the spreadsheet above, I paid off my previous $15,600 a year mortgage! That’s works out to be $1,300 extra dollars a month that’s available for me to invest, spend, burn, whatever… So if you look at my calculations for working full time at $7.50 per hours, it seems to be equivalent, but it’s not… The thing is that the money from the working full-time at $7.50 is before tax is taken out versus my mortgage saving (which was paid with after tax money, which is commonly called discretionary income).
Cousin’s Dream House
So based on my own personal scenario, I’m really averaging the equivalent of working a second job at $10.50/hr (see calculation below), but obviously without working… While this isn’t obvious at first, if you consider all of the various forms of taxes taken out of your paycheck, it makes sense. So the calculations below is based on the number that I would have to make (gross income) to have an equal amount of discretionary income.
| After Tax Calculation | |||
| Working a 2nd Job | |||
| weeks | 52 | ||
| hr/week | 40 | ||
| pay rate | 10.50 | ||
| 21840 | |||
| Money Not Spend on a Mortgage | |||
| month | 1300 | ||
| months/yr | 12 | ||
| 15600 | |||
| 6240 | 40% | Taxes | |
| 21840 | |||
I think some people think that once the house payment goes away, the previous mortgage owner is now only breaking even, but what really happens is the previous loan payment flips to the positive side by an equal amount that was being spend on interest and principle (all my numbers above doesn’t include my real estate tax and insurance payment since the don’t affect my calculations).
So after I paid off the house, I went from paying $15,600 on the mortgage to investing, saving and a little bit more spending of the extra $15,600! There is no subtle transition, the jump to positive side was immediate!
Anyway, I thought that it would be worth analyzing a bit further than I did late time. Please leave any questions in the comments below!
Tell me if you realized all that I mentioned above,
Thanks,
MR