Best Way to Save Money Is Through Interest Cancellation
It appears either by choice or necessity, Americans are starting to save more money. In May 2009, the government reported the savings rate had jumped to 6.9% over the previous year but also noted that April of 2009 the savings rate was still zero. Savings rate is defined as personal income minus spending.
It is too early to call it a trend but the Wall Street Journal is predicting the savings rate will end up be somewhere between 3-5% in 2009. People from investment bank Goldman Sachs predict even higher at between 6-10%.
Ever since the last recession of the early 80’s, an unpresidented housing and stock market boom in the United States had changed a large percentage of Americans to feel like they did not need to save additional money over and above their double digit yearly increases in home equity and investment account values. Over the last two years, these bubbles have defintely burst and caused many people to seek more stable and safer ways to increase net worth.
Many people are now using an age old method of using some of their discretionary income to accelerate the pay off of their mortgage and or consumer debt rather than count on the growth potentials alone of what most people had considered havens like real estate and balanced equity portofilios.
The first step in this money saving process should be to eliminate the high interest charges and monthly payments of their credit card and revolving debt. Nothing prevents Americans from accumulating savings and hurts the overall quality of life more than the negative compounding interest effect of credit card debt.
The next step that should not be overlooked by home owners, is the savings that can be achieved from the interest cancellation effect of pre-paying their mortgage. Because most home owners amortize their mortgage over a 30 year period, their monthly payments start at a rate where interest charges are 80% of their payment. Even after 10 years into a 30 year amortization, the home owner is still paying interest at a rate of 70% of their monthly payment. Tremendous savings can be derived, especially in these early years of the amortization, by making extra payments to the principle balance to advance the schedule to a lower level. By advancing the schedule the home owner leaves behind or cancels out the scheduled interest payments that they will never have to be make at those payment levels. They accelerate the mortgage and constantly pay higher and higher portions of principle each time they make a mortgage payment. It is not unusual to save ten of thousands and sometimes hundreds of thousands of dollars of interest charges and be able to pay off a mortgage in 10 to 15 years using this concept.
Once the mortgage interest cancellation effect catches on with more and more home owners, we will once again see the savings rate and net worths of millions of Americans continue to rise.