How I can save you close to $100,000
For today’s post, I thought it would be interesting to crunch some numbers…
Owing $250,000, at 3% interest over a 5-year term, amortized over 25 years, making bi-weekly payments and you’ll pay over $90,000 in interest costs over the amortization period.
The lesson: even a cheap mortgage rate will cost you BIG bucks over time. Get a good mortgage rate and make lump sum payments on your mortgage when you can to significantly reduce your borrowing costs.
Your Credit Cards
Owing $10,000 on a credit card, paying 18% interest, paying just the monthly minimum: you’ll pay almost as much in interest as the original balance. It will take you around 22 years to pay off this debt.
The lesson: credit cards are great for temporary credit, getting cash-back or travel rewards in the process. Credit cards could cost you a bundle if you don’t pay off the balance in full by the due date, always.
Your Mutual Funds
Investing in your average Canadian equity fund at ~2% management expense fee, putting down $10,000 initially and keeping that money invested for the next 20 years: should earn close to $24,000 (based on historical returns of about 6.25%) but it will cost you about $9,000 in fees during that period.
The lesson: look for active money management fees less than 1%, since almost every single mutual fund charging more than this will be hard-pressed to keep up with indexed products that charge you much lower fees for the same (or better) returns.
What does this mean to us? Our plan is to accelerate our mortgage payments where we can, avoid any credit card debt and stay out of all high-priced mutual funds for good.
I can’t promise you’ll save all this money but there are options available to all of us.
Great tips. I’ve followed 1 and 2 quite well – but I am getting screwed on 3. As soon as the “back end” fees are no longer applicable, I’ll be moving everything I have to something with lower rates!
Great to hear about #3 Cat. Sounds like you’re moving in the right direction for sure!
If you’d like to save more than $100,000 here are two more helpful hints that Mark is too polite to mention:
1) Don’t have kids! If you want financial security, kids make the equation much more complicated
2) Live like a student for the first 20 years after you graduate
You made me laugh with #1.
Excellent, practical tips! I’m glad you focussed on the biggest money leaks. These three eat up a lot of cash over time. Makes sound financial sense plugging these leaks first.
For sure Moneycone. I try to practice what I write about as well. It’s not easy though!