Along about the first of the year, I framed a goal to set aside enough to pay off a small second mortgage I took out to renovate the Investment House. At that time, about $23,500 was owing on the original $25,000 loan, which has an interest rate of 6.5 percent. I would like to have this loan paid off by the time I retire, in three to seven years.
The loan’s monthly payments are small and easily affordable on my current salary. I decided that rather than paying directly toward principal, I would save enough to pay it off in one swell foop when I retire (or have the equivalent amount in savings should I sell the house before paying off the loan). I created a second income stream by taking on a couple of classes at one of my beloved employer’s satellite campuses. Because those courses were double-enrolled and I threatened at the last minute (when I learned about this) not to accept an FTE workload in addition to my real full-time job, the university agreed to pay me for four sections. This serendipitous fiasco added $1,676 to my monthly take-home pay!
Hence, the strategy: deposit $838 per paycheck to Vanguard’s Prime Money Market Fund, plus the $250/month I figured I could spare from my regular income. Add my income tax refund to it. Label this money the Renovation Loan Fund, and set it aside to pay off the loan and to double as an extra emergency fund. Meanwhile, snowflake down the principal with budget underruns and any small windfalls.
With the final $838 of the semester winging its way to Vanguard, we can see that this scheme is working nicely.
The principal itself is now snowflaked down to $$22,583, an $880 improvement.
The Renovation Loan Stash is up to $17,119. So, if I wanted to pay off the second mortgage today, all I’d have to come up with is about $5,465. If pushed, I could do it. If I sold the house today, the entire amount of principal could come out of the sale price, and I’d still have a substantial part of that amount in savings to put help buy another house.
While snowflaking is very nice-the $880 principal reduction is way better than a hit on the head-clearly the key to effective savings on a modest salary is to establish a second income stream!
If you rally need to pay down a loan or put money aside in savings (and who doesn’t?) and your salary is pegged firmly in the middle to low range, the fastest and most efficient solution is to get a second job or start a small enterprise on the side. Then apply all the net income from that second income stream to your goal.
Now that the teaching gig is over, I’ve picked up a little freelance proofreading job. Pay is low, but hey: I’m getting paid to read detective novels! By the end of 2007, that should pay at least $4,000. If I can also spare $250 a month from my paycheck, the resulting $5,500 stash will be enough to pay off the loan.