April 19, 2003

Using Your Cash Flow to your Best Advantage
span style="font-family: 'Times New Roman', serif">by Marcel Chartier

I find it easier to understand the need for appropriate allocation of free cash flow in regards to debt management and investing, by thinking about expenses and investments as extending into the future in an inter-related way. What may benefit you, depends on what provides the best return at the time.

Right now, for example, the markets are sluggish, inconsistent and troubled. I have found that looking at paying down my mortgage appears to pay the greater dividend.

For example, lets look at the savings I can generate in avoiding future interest payments through mortgage debt reduction. In the following example I have started with a 305, 000 mortgage at 6.85% with a 5 year amoratization (variable monthly payment).

A 305,000 mortgage includes $56,068 in interest payments.

A 205,000 mortgage includes $37,685 in interest payments.

A 155,000 mortgage includes $28,493 in interest payments.

A 105,000 mortgage includes $19,302 in interest payments.

A 85,0000 mortgage includes $15,626 in interest payments.

A 65,0000 mortgage includes $11,949 in interest payments.

A 45,0000 mortgage includes $8,272 in interest payments.

A 25,000 mortgage includes $4,595 in interest payments.

In the current environment, if I am lucky, I can earn 3.0% in a high interest account , bonds may average 4-7 %, and equities are now averaging close to minus 25%. But, I can effectively "gain" double digit "returns" on my money by slicing debt. If I reduce my mortgage debt by thousands, through extra payments to lower my principle, I am effectively gaining thousands of dollars over the life of the mortgage.

Lets look at the example above and look at the the difference in interest to be paid between the 85,000 and 65,000 mortgage. The interest difference is $3,677. That is an 18% "return" on $20,000 placed against the prinicple. Where do you get that kind of return nowadays?

Right now, that is where I am getting return on my "investment", so it is becoming a priority for me. Maybe it should be for you too!