Don’t Sweat the Small Stuff: The Income vs. Savings Approach to Building WealthDecember 26, 2019
By Caroline Farhat
We all remember that infamous Australian millionaire who declared that millennials can’t afford to buy homes because they’re wasting all of their money buying avocado toast. Similarly, we’ve probably all lost count of the number of times we’ve heard that we need to cut back on our Starbucks® habit in order to be more financially successful.
While buying avocado toast every morning might not be the wisest choice for your food budget, it’s most likely not going to hold you back from having a healthy bank account either. In fact, if you’re so busy pinching pennies on your daily cappuccino and not looking at how you can save and increase your earnings in bigger areas, you’re probably wasting both your time and money.
Stop Skipping Your Cappuccino and Refinance Instead
1. How refinancing can save you money on your mortgage
According to the Bureau of Labor Statistics, housing is the largest expense for Americans, taking up about 33% of income and $20,091 per year. For homeowners, these figures include the cost of the mortgage, mortgage interest, property taxes and insurance, and expenses for maintenance and repairs.
When you apply and pay for a mortgage, you get an interest rate based on your creditworthiness, the size of your down payment, loan term and type, and economic factors. For example, in 2000, the average mortgage rate was 8.05%. In 2018, the average mortgage rate was 4.54%. As you can see, market conditions can make a big difference in the interest rate you lock-in. The good news is that you have the ability to lower your mortgage rate through refinancing, well after you sign on the dotted line.
Mortgage interest, and its effect on your monthly housing bill, can be easily forgotten — until you start crunching the numbers. Let’s walk through two scenarios — one in which you don’t refinance and one in which you do refinance.
Scenario 1: No refinancing
You buy a $300,000 home and put down 20% ($60,000). You get a mortgage for $240,000 with a 4.5% interest rate. Over the first year, you will have spent $10,720.79 on interest payments alone. Over the entire 30-year mortgage term, you will have spent $197,776.11 in total on interest payments.
Now, let’s see what happens if you refinance your mortgage.
Scenario 2: Refinancing
You buy a $300,000 home and put down 20% ($60,000). While you started with a 4.5% interest rate, shifts in the economy have caused interest rates to drop and you’re now able to refinance to a 3.7% mortgage rate. By doing so, you will save over $12,000 over the life of the loan. To put this in perspective, you’d have to cut back on approximately 3,000 drinks at your favorite coffee joint to save that kind of money.
If you currently have a mortgage, put your numbers into this refinance calculator and see just how much you could save.
2. How to save by refinancing student loans
The Bureau of Labor Statistics also reports that the average American spent $1,417 on education in 2018. If you’re currently reading this blog, you are likely dealing with a much larger number than that. If you have at least $5,000 in student loan debt, student loan refinancing could be extremely beneficial for you.
Similar to mortgages, you can refinance student loans and potentially save thousands of dollars over the lifetime of the loan. ELFI customers reported saving an average of $272 every month and an average of $13,940 in total savings1.
The first step to saving money on your student loans is to determine whether student loan refinancing* is the best option for you. In a small number of cases, refinancing is not the optimal option. But for most student loan debt holders, it is an excellent way to save money both in the short term and long term. Our student loan refinance calculator allows you to see what you could save in your particular situation. Let’s walk through an example.
Scenario 1: No refinancing
You have $60,000 in student loans with an interest rate of 6.8% and are on a standard repayment plan of 10 years. You pay $690 per month and never consider refinancing. In total, you will pay $82,857 for your initial loan of $60,000. Over $22,000 of that amount will be to interest payments alone.
Scenario 2: Refinance your student loans
You have $60,000 in student loan debt with an interest rate of 6.8% and a monthly payment of $690. You’re eager to optimize your finances and decide to refinance your student loans to a lower interest rate, saving up to $18,000 over the life of the loan. If you refinance into a shorter loan term (such as a 5 or 7-year term), you will save more on interest over the life of the loan. Alternately, you may consider stretching out your terms to lower your monthly payment. This will likely still save you money over the long term, but be sure to crunch the numbers before you make a final decision on your refinancing terms.
Side Hustle or Climb Your Way to Success
Saving on big-ticket items like your housing costs or student loan debt is just one approach to building wealth. After you have taken advantage of all the saving opportunities available to you, it’s time to turn your attention to increasing your earnings. Here are a few ways you can bolster your bank account:
- Ask your current employer. If you’re gainfully employed and a top-performer, speak with your boss about the potential for a promotion, raise, or bonus. It’s best to come into these types of conversations with a concrete strategy and multiple examples of positive ways you have impacted the company. Glassdoor has a good guide on how to prepare for this conversation.
- Find a new job. Long gone are the days people spend decades at the same company. While “job hopping” may have had a negative connotation in the past, many career experts actually encourage people to switch jobs more frequently in order to get a larger salary and more advanced job title. According to this Fast Company article, “workers who stay with a company longer than two years are said to get paid 50% less.” Money, of course, isn’t everything. But if you’re feeling stagnant both in learning and money, it’s probably time to brush off your resume and start looking for a new position.
- Start a side hustle. It’s reported that more than 1 in 4 Americans currently have a side hustle. Beyond the monetary benefits of having a gig outside of your normal 9-to-5, side hustles are also a great way to hone or discover a new passion. Side Hustle Nation has an extensive list of ideas that you can start quickly.
It pays (literally) to keep your eye on the big stuff. That’s not to say that you shouldn’t ever watch your pennies. Smart spending habits still reign supreme. Just don’t sweat the small stuff so much that you miss out on potentially huge savings.
*Subject to credit approval. Terms and conditions apply.
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1Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 2/7/2020 and 2/21/2020. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.