Before starting to make overpayments on the mortgage, it’s essential to get an overview of exactly where you are financially. That’s why you need to begin with a budget. Yes, it can be exciting to rush in and throw extra money at the mortgage every month, which is what I did. But without a thorough understanding of your spending, you might end up overpaying and leaving yourself in a financially sticky situation. It’s all about balance and you can’t achieve that until you know where your money is going. To find out more, read on…
Track your spending
So, the first step in creating a budget is to track your spending. You don’t need any fancy equipment to do this, just a notebook and a pen. Then for a month (a 3 to 6 month period of tracking is ideal, but if you’re like me then you’ll want to get on and set the wheels in motion!) write down everything that you spend or any payments that leave your account. Make sure you write down what you’ve spent the money on as you’ll need this later.
At the end of the month add up the total, if you’ve spent less than you’ve earnt then happy-days, you’re in a great position to begin to overpay your mortgage! If you’ve spent more than you’ve earnt, then continue tracking your spending for at least 3 month. If this pattern of over-spending continues then you’ll need to find ways to cut back (or make more money) before you even consider trying to pay off your mortgage.
Set up your basic budget categories
So now that you know where your money is going, it’s time to put it into categories. I find it useful to think about the essentials first. By essentials I mean expenses that meet your basic needs and are likely to recur every month. Examples of these are groceries, gas and electric, council tax, water rates and your mortgage (don’t forget that one!). Don’t think about your overpayment at this point, our aim is to begin with a budget, and all you’re trying to do at this point is create a map of where your money is going.
Add the less frequent expenses
Once you have the essentials listed, begin to think about those expenses that you don’t pay for every month. Christmas and birthdays, car insurance, home and car repairs, holidays etc could fall into this category . With these, you’re going to estimate what you spend on each of them annually and divide it by twelve. This way you know how much to add to your budget for them each month. Our aim is for there to be no nasty surprises in the future where you’re leaving yourself short of money. It needs to be simple for it to be sustainable for the long-term. Make sure that you give yourself some spending money for fun things too or life will become boring. You need to decide whether extras such a gym-membership or clothing purchases will come out of your ‘spending-money’ pot or whether you need a separate category for those too. And voila! You have created your budget. Now it’s time to put it into action…
Create a monthly plan
Now you have your categories and an idea of how much money you need to allocate to each one, you can begin to plan for the month ahead. You may wish to have a few separate accounts to move the money into to make budgeting easier. Or you may prefer to use the envelope system as suggested by Dave Ramsey. Alternatively, you may feel more comfortable using a spreadsheet or app to help you keep track of your monthly outgoings. Whatever you choose, make sure that it’s manageable as this will be the key to your success. I’d also recommend continuing to track your spending for the next couple of months, as there’s always something that crops up that you didn’t think of. Your spending will also probably fluctuate during this settling in period. However, now you’ve reached this point you can take a realistic look at your incoming and outgoing funds and decide how much you’d like to put towards mortgage overpayments.
Making overpayments
If you’re not sure how much to overpay, then take a look at the Mortgage Overpayment Calculator on the Money Saving Expert website for some inspiration. According to the calcuator, an overpayment of just £50 a month on a mortgage of £150,000 with a 3.5% interest rate, could reduce the mortgage by 3 years and 5 months and save you £11,953 in interest! Now surely that’s a huge incentive for getting you to take action and begin with a budget.
Hopefully you’ve found this post useful in helping you to create your budget. I’m not a financial advisor, just a regular girl (well, thirtysomething) sharing the methods I used, so please use your own judgement on this and adapt it to suit your own needs. Also, before making any overpayments it’s useful to find out exactly what your mortgage deal will allow, as some have overpayment limits and may charge a fee if you exceed this.
Congratulations on taking your first step to mortgage-freedom! Be sure to leave a comment below and let me know how you got on.