I talked myself down from that ledge. I'm the kind of person who gets fixated on certain things, and I've been practicing self-talk to keep my more obsessive side in check. Dividend growth investing does sound awesome. But so does paying off my student loans, and so does paying off my mortgage early.
I specifically brought up paying off my mortgage early. Now that I've read all of Dividend Mantra's posts, I looked for another Mustachian-flavored blog and happened upon Death to the Mortgage. I started reading it from the beginning. It's really inspiring, and I think one of the coolest parts is that they actually paid off their mortgage. Like, they're done, success, the mortgage is dead.
Naturally, Death to the Mortgage has gotten me excited about paying off my mortgage early. But I've already committed to vanquishing my student loans first. The question became: should I switch my goal?
My first consideration was that my mortgage is way bigger than my student loans, so it's a much longer-term goal. But past that I didn't have a good way to weigh one option versus another. So I fired up Excel and started playing with numbers. I was looking for a metric to help me decide where I should focus my early-payoff efforts. Here's the result, explanations to follow:
|Loan / Target||Principal remaining||Monthly payment||"Payoff cost"|
|Mortgage||$ 407,716.50||$ 2,176.63||$ 187.32|
|PMI||$ 42,116.50||$ 147.39||$ 285.75|
|Sallie Mae (before)||$ 5,883.18||$ 69.88||$ 84.19|
|Sallie Mae (after)||$ 3,883.18||$ 69.88||$ 55.57|
|Federal||$ 25,957.91||$ 192.85||$ 134.60|
|Both student loans||$ 31,841.09||$ 262.73||$ 121.19|
Here I'm listing various expenses that I can eliminate by paying them off early. PMI isn't a debt but we can remove it when we have 20% home equity (that's where that "principal" number came from). I included two numbers for my Sallie Mae loan, since this weekend I sent a $2k payment to pay it down early. And I lumped both student loans together as the last line-item to offer additional perspective.
The last column is "payoff cost", which I got by dividing the principal by the monthly payment. Basically it's the average cost of decreasing your monthly expense by one dollar. For any given amount of money you want to use to reduce your expenses, you get the most bang-for-your-buck by going after the lowest "payoff cost" item first.
Notice how my Sallie Mae monthly payment is the same in both rows, but after I decreased the principal by making a big extra payment, the "payoff cost" number dropped. This illustrates that, now that I have less principal remaining on my Sallie Mae loan, it's cheaper for me to get rid of the Sallie Mae loan expense.
A downside to this "payoff cost" metric is that it doesn't consider term or total interest paid. That's fine because it's not meant to. What I'm looking at here is: how can I allocate my scarce money to best reduce my monthly expenses?
It's clear from the chart that paying off my student loans is a more effective way to reduce my monthly expenses than paying off my mortgage. What amazed me was how ineffective going after PMI is. I mean, $285 for each dollar per month of expenses saved? Expensive! Though, as a side note, a Safe Withdrawl Rate (SWR) of 3% corresponds to a "payoff cost" of $400, so there's another perspective for you.
Of course this isn't an apples-to-apples comparison. PMI isn't a debt, it's akin to throwing money away, and since by going after the mortgage I'll also be going after PMI, etc etc. But in terms of lowering my monthly expenses, targeting PMI should be at the bottom of my list.
I'm glad I did this exercise because it vindicated my focus on paying off my student loans. After my Sallie Mae loan I'll go after the federal loan, and after that I can worry about the mortgage. And some time in there I'll get started on dividend investing :)