Our Second Mortgage is Toast – Now What?

by Kevin on August 5, 2010

Now that we’ve paid off our second mortgage — woohoo! — it is time for us to decide on what financial issue to tackle next.

For those of you that haven’t been reading No Debt Plan very long, let me fill you in on our stance on personal finance.

Don’t Hate on the Financial Nerds

I am what Dave Ramsey calls a nerd. I’m actually a very big nerd. I’m a big believer in planning ahead for both the hiccups and the enjoyable moments of life. Things like emergency funds and saving up for vacations rather than relying on emergency credit cards to handle these life issues.

Also, I love spreadsheets.

Here’s a snapshot of what we believe:

  • We live a debt-free life (except for our first mortgage). That means no credit card debt, no student loans, and no car loans.
  • We believe in having a 12 month emergency fund specifically for unexpected illnesses or being laid off.
  • We maintain (and continue to build up) separate maintenance “emergency funds” for things like cars, home appliances, etc.
  • We aim to maximize the return on the money that has been graciously placed under our control. That means using things like reward checking accounts and a credit card with a strong cash back program.
  • We will pay cash for all vehicles for the rest of our lives (barring any amazing 0% financing deals on new cars that have been heavily discounted to make it worth not buying a used car).

Note that this is exactly how we live, too. I’m not sitting up on my blogging pedestal telling you how to live your life while living completely opposite of what I tell you.

We live it. Daily. It can be done.

One day, long in the future, I plan to turn my No Debt Plan into a book or eBook or program of some sort. I want to help you change your life by making smarter financial choices.

You can do it. Just like I did.

Where to Focus After Paying Off Second Mortgage?

Looking at our list we’re still living a debt-free (except the mortgage) life. And we recently topped off our emergency fund to a full 12 months!

So where are we placing our financial focus next?

When we paid off our second mortgage two great things happened.

First, we paid off the mortgage. That frees up a monthly payment that was a couple of hundred dollars. That is now free cash flow that we can use elsewhere.

Second, it allows us to move the focus of the income stream that we were pointing at the second mortgage to pay it off faster. This was about three times larger than the actual second mortgage, so you can imagine the money we’re now able to point toward something else.

Our home and car repair funds are funded monthly and we’re content with their current levels.

There are several options we are considering for this extra cash:

  • increasing how quickly we are saving for vehicles to replace our current cars
  • developing a “my wife gets to stay at home once we kids” fund
  • developing a “covering the costs of selling our home whenever we decide to move” fund

Let me walk you through our thought process as we make this decision.

Option One: Save for Cars More Quickly

Currently we have a set amount that we set aside each month for new vehicles. Back when we first started budgeting we laid out our “master plan” for the next several years. Replacing our vehicles is on the schedule for 2012 and 2014. (I told you I was a nerd!)

We are on pace to hit those goals as we have been consistent with our saving each month. (We’ve also been blessed to have the income to set aside each month to do that.)

We could take the extra cash and start saving for our new vehicles. We could really bring this goal to be completion a lot faster than we are currently are.

This is appealing in that my wife’s car is getting up there in mileage, and I’d like to get her something more comfortable.

The downside is it moves up the timeline in the future when we would need to replace the “new” car. For example if we wait until 2012, my wife’s car will be 10 years old. If we buy a “new to us” vehicle in 2012 then we can anticipate replacing that vehicle in the 2021 to 2022 time frame.

If we buy that “new to us” vehicle before 2012 that just pushes up the timeline for the next vehicle from 2021 to 2022 to somewhere around 2020.

I told you I was a nerd.

Where Would You Put Extra Cash?

I’ll go into the other two options in my next post.

But first a question for the readers: what would you do with a few hundred extra bucks per month? What would be the most effective use of that free cash flow for you?

{ 5 comments }

Jim Rueff August 5, 2010 at 8:03 am

“Show me a man who is not in debt and i will show you a man who is not in busienss.”

Budgeting in the Fun Stuff August 5, 2010 at 1:20 pm

We just paid off our (hopefully) last car loan ever and are in your position.

All of your options entail saving your money in a liquid state (ING, Smarty Pig ,etc), so I wouldn’t overthink it. Set up a fund called Extra Cash or whatever and save it up. You’ll be able to use it for all 3 of your plans depending on which one needs it first. Plus, it gives you time…if you make up your mind, simply rename the fund. 🙂

We are putting half of our new cash flow towards the next car fund and the other half to paying off our mortgage faster.

Good luck!

Bruce August 5, 2010 at 6:15 pm

I was in a similar situation a year ago. (Feels good dosn’t it!)

Being that our monthly amount was earmarked for debt anyway, what my wife and I did was put it all towards our first mortgage (we were able to put any additional money up to the amount of the mortgage payment towards the principle of the mortgage without penalty) and kept our budget plans the same. (they seemed to be working) That allows us to be completely debt free that much sooner. We are still happy with our home and will likely be here for a while.

When the mortgage is up for renewal, we will still try to negotiate a payment based on half what we have ear marked for debt repayment and make the double payment. This will allow us the flexability to have that amount accessable for any unforseen expenses (just by stopping the extra payment) and still be putting it towards paying off a debt that I don’t want.

Bruce

Financial Samurai August 8, 2010 at 10:12 am

Whatever you do, don’t buy a new car, or for that matter a car if you are spending more than 1/10th your gross annual income on it!

Rob Ward August 17, 2010 at 5:54 am

We still have a decent amount of debt to pay off, so that’s where it would go!

But…assuming we had no debt other than our mortgage, I would definitely be saving up for a car (whether new or “new to you”).

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