Canajun Finances Home » The Principal is always Your Pal

# The Principal is always Your Pal

Written in the days of very cheap interest rates. Note this is still true today.

Last week I wrote a very flawed post about What would Happen if Interest Rates doubled. Luckily my sharp-eyed commenters called me on it. Principal pay down is an important part of your debt repayment plan.

First point, like in school the PrinciPAL in your Mortgage is your Pal, not principle, as I originally wrote it. Someone commented how would anyone take me seriously if I was unable to discern the difference, I pointed out as the “Clown Prince of Personal Finance” respect isn’t really that high on my list.

The other major blunder I made was in my spreadsheet. Let’s have a look at my first assertion from my mortgage table. What’s wrong here:

Take a look at the PrinciPAL payment column, somehow my weird calculations have the amount you pay down on the principal each payment, decreasing, which is just SO wrong (even wronger than saying Principle of your Mortgage (in my subtle opinion)). What was wrong with me? I don’t usually screw up that many things in one article (that often).

The mistake I made was relying on the Excel PPMT() function to figure this out, instead of doing a simple calculated version based on the Interest payment from IPMT()

Principal Payment = Monthly Payment – Interest Portion
Principal Payment Â = \$ 1319.59 – Â \$ 831.71 = \$487.88  (for Month 2) (it got Month 1 right)

So really what this should have looked like was:

Thus the table for the end of the 5 year term would look like this:

More importantly, the overpayment option now looks much better too:

Remember, it’s OK to point out my mistakes but don’t be a comment troll about it. Thanks to Michael James for pointing out the folly of my arithmetic.