Updated on 01.22.16

Building Momentum

Trent Hamm

Just one extra debt payment can help you make more progress faster. Keep it up, and the results will amaze you.

I want to start off by sharing two stories with you that might not seem to have very much in common, but they actually turn out to have a lot in common.

Let’s roll the clock back to the middle of 2006. Back in about that timeframe, I launched the “beta” edition of The Simple Dollar on Blogger, which was probably the best free blogging platform available at that time. The initial design, which I made myself, made the site look sort of like a dollar bill.

Anyway, right off the bat I started writing a few short articles a day on personal finance topics. The articles were very brief, usually a few paragraphs long, but I posted multiple times a day back then. The articles mostly focused on money-saving tactics that were working well for Sarah and I as we turned our financial lives around.

When I launched the site, I sent a link to the site to a bunch of friends and the first day saw a lot of traffic… that dwindled to very little on the second day. And the third day. And the fourth day.

The site simply didn’t get much traffic at first. A day with five visitors was pretty sweet for the first month or so. It was kind of disheartening, actually.

But I kept writing. Once or twice a week, I would write a longer article that really expounded at length on something specific, and I’d share that article on websites where frugal people hung out (back in those days, it was mostly on individual message boards that are now largely defunct).

Slowly, ever so slowly, the traffic started building. During the second month, I was getting maybe 20 or 30 visitors a day. During the third month, I was getting about 100 unique visitors a day. And as long as I kept writing, the traffic went slowly up and up and up.

Eventually, after I had a few thousand articles written and had shared many, many links in many, many places, the site was popular enough that I felt okay making the leap into full-time writing. For the first half of that journey, the site basically made no money at all. That’s more than a thousand articles from which I made pennies. But the momentum slowly built from there until it was bigger than I could have ever imagined.

Let’s turn the page and look at another story.

As I’ve mentioned many times, Sarah and I started our financial turnaround in 2006. It was that turnaround that was the reason for starting The Simple Dollar, after all.

We had a nice big burst of success right at the start. I sold off a bunch of vintage trading cards (baseball cards and Magic: the Gathering cards) as well as most of our DVD collection in order to pay off some of our credit card bills quickly, which took some of the edge off of our financial situation.

After that, though, progress was slow to say the least. Even though we were living very frugally, it still took months to pay off each debt and it took more than a year before we reached a point where we had no student loan, credit card, or automobile debt.

Then we decided to buy a house, which meant that we took on a lot more debt. Again, we inched along, paying off that debt as fast as possible, and paid off our house in full by 2011.

What happened along the way, though, was that our progress slowly started going faster and faster and faster. Every time we made a big payment on a credit card and then avoided adding to that balance over the next month, the minimum payment the following month was much lower and thus more of the next big payment went to the principal of that loan.

This was especially noticeable on our mortgage, as we made triple payments most of the time as we were paying off that debt. Each month, our statement showed that the interest we owed that month was lower than the month before, which meant our triple payment saw even more of that money go straight to the principal than had occurred the month before.

Our net worth didn’t improve in a straight line. It improved in a curve that was angled upward.

This trend continued when we had all of our debts paid off in 2011. At that point, we started socking away money like mad into retirement accounts and even into taxable investments.

And our curve kept on curving upward.

In other words, our continued commitment to frugality and doing productive things with our money didn’t just cause our net worth to plod steadily upwards. Instead, our efforts created a kind of momentum, where success built on top of success.

Momentum. It’s the word that both of these stories have in common. It’s also a word that has a lot to do with success in practically anything you take on in life.

Momentum and Debts

I want to stop here for a second and look very specifically at what I mean when I connect momentum and financial success. As I mentioned above, every time we made a big payment on our mortgage, we noticed that our next statement indicated that we owed notably less money in interest and that meant notably more of our next normal payment went toward the principal.

In other words, paying off our debt actually accelerated with each big payment.

Let me show you what I mean with a specific example. Let’s say that today you signed off on a $200,000 mortgage at 4.5%. Such a mortgage would come with a monthly payment of $1,013.37.

If you made normal payments on that loan – $1,013.37 each month – it would take you 30 years to pay off that loan. The first payment would contribute $263.37 toward paying off the balance of the loan and $750.00 in interest. At the end of that first month, your balance would be $199,736.63.

Next month, your $1,013.37 payment would knock $264.36 off of the balance after paying $749.01 in interest – about a dollar better than the month before. The new balance would then be $199,472.27.

The progress is slow, but it’s still accelerating a little bit. Each month, a little more of your payment is going toward the principal instead of the interest, which means the equity you have in your home is going to grow faster and faster, little by little.

Each month, the money going toward interest would go down by $1, and that number would slowly grow. After several years, it would be dropping by $2 per month, then by $3 per month. That money represents your equity in your home growing faster and faster as you move toward the actual payoff date.

Now, what if you made double payments? Instead of paying $1,013.37 each month, you paid $2,026.74 each month. Instead of waiting 30 years to pay off your mortgage, it would actually be paid off not in half the time (15 years), but in 10 years and four months.

Your first payment under this faster schedule – $2,026.74 – would contribute $750.00 toward interest just like the normal schedule, but it would also contribute $1,276.74 toward the principal, leaving you with a balance of $198,723.26. The next payment, then, would contribute $1,281.53 toward the principal – an improvement of about $4.75, rather than the $1 during the normal payoff schedule – and the interest would drop by $745.21, leaving you with a balance of $197,441.73.

Again, momentum is on your side. Each month, the money going toward interest would get smaller and the money toward principal would get bigger, but it would happen much faster in this case. Within a year and a half, each month would see $5 more going toward your home equity than the month before. Within six years, it bumps up to $6 each month, and so on.

These effects are small, but they’re cumulative. Whenever you make even a single extra payment on a debt, you’re ensuring that every subsequent payment of even just the normal amount will contribute more toward the principal than before, making the debt pay off faster and making sure less of your money goes toward interest.

That’s momentum at work.

Momentum and Investments

A similar phenomenon exists with investments, but in that case it works even more in your favor.

Let’s say you contribute $5,000 to an investment earning a 7% return on your money. During the first year, you would earn $350 in returns on that investment, bringing your balance up to $5,350. Sounds good, right? The next year, you’re going to earn money on that original $5,000 – another $350 – as well as earning a return on your $350 in returns from the first year – $24.50. Another way to look at it is that now you’re now going to earn a 7% return on your $5,350 rather than just $5,000. Your total would now be $5,724.50.

Of course during that second year, you would have deposited another $5,000 and, over the course of that year, the new $5,000 earns a 7% return, giving you another $5,350 to work with. Your total balance is now $11,074.50. You deposited $5,000 at the start of one year and $5,000 at the start of the next year and you’ve already earned $1,074.50 in returns by the end of the second year. The best part? Those returns will start earning returns themselves.

In year three, your contributions – totaling $15,000 ($5,000 each from year one, year two, and year three) – will directly earn $1,050 in returns, but your returns from year one and year two – $1,074.50 – will themselves earn $75.22. So, your balance at the end of year three is now $15,000 (your contributions) plus $1,050 (your returns from $15,000 during year three) plus $1,074.50 (your returns on $5,000 in year one and $10,000 in year two) plus $75.22 (your returns from that $1,074.50 during year three). That’s a new balance of $17,199.72.

Over the course of those three years, depositing $5,000 at the start of each year, your money would have earned $2,199.72 without you lifting a finger – and that money is only going to accelerate in future years, even if you stop contributing.

Let’s say in year four you contribute nothing. You’d still have $17,199.72 in that account and it would still earn a 7% return. Your balance at the end of the year is $18,403.70 – you made $1,203.98 just by sitting on your duff. In year four, your $18,403.70 would grow by 7% to $19,691.96, meaning that you made $1,288.96 just by sitting on your duff. Notice that even if you don’t contribute a dime, your investment earned more in year four than it did in year three. It would continue to earn more and more and more each subsequent year.

And if you keep contributing, it accelerates even harder and faster.

Momentum is at work here. Your efforts keep paying off down the road.

Combining Investment and Debt Momentum

Obviously, these two pictures – momentum in paying off debt and momentum in investing – combine together incredibly well.

Let’s look at scenario one, where the person uses $1,013.37 each month to make normal payments on their mortgage ($200,000 at 4.5%) and then decides afterwards to invest that much each month (to make math easy, we’ll assume that when the person invests, that person is investing a year’s worth of money at the start of each year).

At the 10-year mark, this person still owes $160,178.87 on their mortgage and has no investments.

At the 20-year mark, this person still owes $97,779.45 on their mortgage and has no investments.

At the 30-year mark, that person has a net worth of zero – no debts, no investments.

At the 40-year mark, that person has no mortgage and $168,014.09 in investments. Finally, that person is really preparing for the future, but the person that started the journey at 25 is now 65 and just getting started with savings.

Now, let’s look at the same person, where the person uses $2,026.74 each month – a double mortgage payment – to make payments on their mortgage and then decides, once the mortgage is paid off, to invest that much each month into an investment earning 7% (to make math easy, we’ll assume that when the person invests, that person is investing a year’s worth of money at the start of the year).

At the 10-year mark, this person owes $7,015.22 on their mortgage and has no investments. Compare that to the “single payment” person, who still owes $160,178.87 on their mortgage at this point.

At the 20-year mark, this person has no mortgage and $341,647.28 in investments. Seriously. Compare this to the “single payment” person, who still has $97,779.45 on their mortgage and no investments.

At the 30-year mark, this person has no mortgage and $1,031,622.09 in investments. Yep, this person is a millionaire. Compare this to the “single payment” person, who has no mortgage… but no investments, either.

What about the 40-year mark? This person has no mortgage and $2,388,906.94 in investments. The single payment person has no mortgage at this point and $168,014.09 in investments – not bad, but it really, really pales to the other person.

That’s the power of momentum (and compound interest).

The Two Key Ingredients

There are two key ingredients to making this kind of momentum work in your life.

The first ingredient is a commitment to life lived a little leaner. In order to make that double mortgage payment, that person is going to have to make some serious decisions about how he or she is going to spend money in their life.

The thing is, people always think about the most unwelcome sacrifices first. They think about the unnecessary stuff that they really love and value and how they don’t want to let go of it.

Then don’t! That’s not what frugality is really about! Don’t let go of the things that provide so much value in your life that you’re upset letting go of them.

Instead, look at everything else. Live like a cheapskate with regards to everything else in your life. Unless your home energy use is vital to your life, look for ways to cut back on it. Unless the brand of laundry detergent is a big part of maintaining your self-image, buy generic laundry detergent or make your own laundry soap.

Then, use that money to start making real financial changes to your life, which brings us to the second ingredient, discipline.

Discipline is absolutely vital when it comes to making changes in your life. Discipline simply means that you stick with a positive routine even when there are temptations to do something else. You stick with it even when the rewards seem small today, because you know the rewards will be big tomorrow. Discipline means you stick with it even when it is the last thing in the world you want to do.

Many people fail at changes in life because they lack discipline in some particular area. I could write a litany of solutions to this self-discipline problem (and, in fact, I will do so in the near future), but here I’ll simply point out the single most useful strategy I’ve found for self-discipline.

I simply treat each day as an isolated event, one in which I can either succeed or fail at the entire goal. Today is the single day where I either succeed or fail at my financial plan. Today is the single day where I either succeed or fail at my exercise plan. Today is the single day where I either succeed or fail at my career plan.

It is absolutely imperative for the whole plan that I take care of what needs to be done today. Maybe it means keeping my spending in check. Maybe it means going to the gym. Maybe it means taking on some kind of extra creative task. Whatever that extra step is, success hinges on doing it today. Not tomorrow. Not next week. Not whenever I feel like it. Today.

So, if you want to build momentum when it comes to your financial life, you need to first commit to making some changes with how you spend money, then you need to have the discipline to stick with those changes through thick and thin.

If you do that, then you’ll have more resources to commit to things like paying off your debts or investing for retirement, and when you have more resources to commit, money momentum begins to really kick into high gear, as you can see in the example I described earlier.

Remember that example?

What about the 40-year mark? This person has no mortgage and $2,388,906.94 in investments. The single payment person has no mortgage at this point and $168,014.09 in investments – not bad, but it really, really pales to the other person.

The much more successful person applied just two ingredients. They used a commitment to spending less money to be able to pull off a double mortgage by cutting back on things like home energy use, the constant desire for a new car, and so on – the things that were less personally important – and paired that with the discipline to maintain those changes. The end result was a millionaire’s life, even at the 30-year mark. If the commitment were even bigger – say, a 2.5x mortgage payment – then that person is probably retiring quite early and can live whatever life they dream of.

Committing to spending less and using that money for financial change, then using discipline to stick with that change, results in some incredible financial results.

Good luck with building your own momentum.

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