Mock Portfolio: The Importance of Patience and Results So Far

I started the mock portfolio challenge on February 18th of this year to demonstrate that it doesn't take a lot of money to make money and slowly build wealth over time. With an initial account balance of just $500.00, I wanted to show that a long-term strategy of patience, research, and discipline can build wealth.

Results So Far

This past week, I sold the one stock I purchased in the account. After a little less than four months, we have a gain of 17.82%, having turned our $500 into $589. For comparison the New York Stock Exchange Composite Index (according to Yahoo!) was $10,826.59 on February 18th, and has risen to $10,968.50 as of June 8th. That's a gain of about 1.31%. That's our benchmark. Any good managed stock portfolio should outpace the broad market after commissions and fees, or you might as well just buy index funds. At 17.82% for less than four months, we have done extraordinarily well.

What Many Investors Do Wrong

Unfortunately, all the others competing in the contest (It's not too late to join in at at Marketwatch.) have lost money in the same period. If you look carefully, you'll see a strong pattern. the dollar ranking from top to bottom is inversely proportional to the number of trades the player has made. I bought one stock and sold one stock, the second place player has also made just two trades. At the bottom of the stack, the last place player has made 17 trades. Next to last, 9 trades.

A high number of trades indicates a lack of patience and a short-term, gambler's mentality. They seem to be playing for a quick hit or the chance of a sudden windfall. That's not how successful investors approach the market. The successful investor is patient. I don't buy companies because I think they will go up next week and I can sell for a quick profit. I buy companies that I feel have a strong business position and which I think are undervalued by the investment community.

The Importance of Research

The stock I bought for example, SFL, is one that I have watched for many years. I know that it generally trades between $15 and $17.50 with rare periods where it may go a dollar or so to either side of that range. I know that it pays a regular dividend of 43 cents per share per quarter (regularly increasing over time) that is supported by free cash flow. I know their business model, I know their management by their actions over time, and I know what factors would materially affect their business prospects.

Personally, with a dividend of roughly 10%, I think the stock is undervalued even at $17.50, but based on history, the rest of the market does not agree. So I can safely buy this stock as it approaches $15/ share and sell it when it passes $17/ share. There is always the chance that this time the market will recognize its value and push it into a new higher range, but that's a chance a gambler might take. It is important to know, when you buy a stock what your expectations for its performance are. In other words, when you buy the stock, you should have a set criteria that will cause you to sell it.

Always Have an Exit Strategy

These criteria should span several possibilities. If all goes as planned, I will sell at price X. If the stock does not perform according to my expectations or if new information comes to light, I will sell at a loss at price Y after giving it a specified amount of time to make sure its not just a normal market fluctuation.

Once you know everything you can find out about what you're buying and have set specific goals for getting out of the investment, either profitably or if need be at an acceptable loss, you are ready to buy. Then stay patient, stay up on any news that might have a long-term impact on your stock either expected or unexpected. Adjust your goals as conditions change, but don't react to the daily whims of the market. You are not day-trading or playing blackjack. You are investing for the long term based on solid research, patience and discipline.

Disciplined Saving is Essential to Building Wealth

Of course, to really build a prosperous future, you have to save as much as you can to build the investment account balance. Whether it's $15 each week or 15% or more of your gross pay, putting aside as much as possible on a regular basis is absolutely key.

As an example, if you put $50 into your stock account each month and averaged a 1% gain per month, then in five years you'd have contributed $3000 in savings, but would have $4083 total including your earnings.

The Power of Compounding

If you stopped contributing any new savings at that point (not recommended), then by the end of the second five years, that $3000 investment would grow to $7418. It would be growing faster and faster over the next years, so that it would reach $13,477 by the end of the next five year period. At that point, you could withdraw $134 every month forever without touch the $13,477 at all.

If you continue contributing and increasing your contributions over time throughout your working life, you can build a comfortable investment pension income, and have a large chunk of money sitting in the bank.



 

Mock Portfolio: Digesting an Earnings Report for SFL

Ship Finance Limited, (NYSE: SFL), the company whose stock I purchased in my mock portfolio released its quarterly earnings report today. The earnings report of companies listed on major stock exchanges, especially those under the auspices of the SEC in the United States, are the investor's guide to the financial health and quality of their investments or potential investments.

The link to the full quarterly presentation from Ship Finance can be found here. I particularly like the quarterly reports from Ship Finance Limited because they include details on the vessels that they own. This adds depth to the financial details and allows a deeper understanding of the business. With any earnings report, however, the numbers are generally the most important thing (with the exception of strategic direction).

So let's digest a bit of the SFL earnings report. First off, we own SFL because it is a stable high-yield dividend payer. So let's make sure that is still the case. This quarter, SFL increased its regular dividend by a penny to 42 cents/ share per quarter or $1.68/ share annually. Increasing dividends are a good thing, especially in light of 44 consecutive quarters of dividend payouts. Note that shareholders who buy SFL before March 6 (and hold it past that date) will receive the dividend. Since paid out dividends directly reduce a company's assets (cash), the value of the company drops by a corresponding amount often resulting in an offsetting share price drop on the ex-dividend date. With continued positive financial performance (or expectations of the same) the share price should recover that drop in relatively short order.

Of course, dividends are only as good as a company's ability to pay them and keep paying them for the foreseeable future. So, we'd like to see earnings per share in excess of the dividends- at least on an annual basis if not every single quarter. That's were SFL looks a little dicey. With a dividend of 42 cents/ quarter, they only earned 27 cents per share this quarter and $1.32/ share, they are paying out more than they are earning... How is that sustainable?

We have to look at the components of those earnings. Net earnings includes things like depreciation. In the latest quarter, depreciation was equal to very roughly, 19 cents/ share and amounted to over 62 cents/ share for the year. By itself, removing this from the net income equation means that the company would be able to cover the dividend IF they didn't need reserves to eventually replace those ships as they age to obsolescence.

Of course, the ships, although they may be quite long-lived, do need to be replaced. Ship Finance Limited, generally secures third party financing for its new ships. This means they need to meet regular loan payments against that financing, but don't need to amass huge amounts of cash to buy ships outright. With the value of the ship itself as collateral against the loan, base charter incomes which cover the loan payments and operating expense of the vessel, and vessels that outlive the term of the loan (or are sold at or above prices that cover the remaining loan balances before end of life) then each vessel acquisition can be incremental to net income without negatively impacting the ability to pay dividends.

When charter rates drop below expense costs (exclusive of depreciation), then we have a problem. That can and does happen in certain segments. Diversifying their fleet composition across sectors helps ensure that as a whole, charter income remains above threshold even if not for each ship.

In order to secure third party financing, SFL must meet certain financial requirements on a continuing basis. Those requirements are imposed by the financing contract in order to ensure that SFL will remain capable of making loan payments over the life of the loans. These covenants ensure that cash flow, liquidity, and other financial measures point to continuing solvency. A commitment to an unsustainable dividend would cause these financiers some considerable angst. If it came down to SFL failing to meet the requirements of their financing agreements, they could either secure new financing to retire the old debts, cut "optional expenses" like future dividends, or perhaps sell assets or investments.

If we ever saw SFL cut dividends, we would expect the stock price to fall dramatically since the value of the company's stock is largely based on its dividend yield, which at today's close is 10.6% annually.  For dividends to be cut, we'd need to see a sustained drop in free cash flow. I don't see anything pointing to that at the present time or foresee any trends pointing in that direction.

Other danger signs would be increasing levels of debt without corresponding increases in assets. SFL's balance sheet is essentially flat year on year.

We also look at trends. For example, SFL's net income for 2014 was $122 million versus $89 million for 2013. With a prospect for increasing oil tanker rates in early 2015, we might expect this year to get off to a good start...

All in all, after the release of the company's quarterly report the stock price rose by 3.5% today. Generally after an SFL quarterly report, people notice the dividend yield and shares rise, at least through the ex-dividend date. We'd look for it to top $16 easily in the next two weeks. On the other hand, at $18/ share the dividend yield is still over 9%...

SFL is, in my opinion, undervalued. That plus the dividend yield is why I purchased it for my mock $500 portfolio to demonstrate that investing even a small amount can yield a substantial return. It doesn't take money to make money. It takes hard work, discipline, and perseverance.

Disclosure: SFL is a component of my own personal real-life investment account and/or one or more accounts that I manage for others.

The Only Real Get Rich Scheme

I've been focusing on investing and stock market issues in this blog lately, and it occurs to me that maybe I'm giving the wrong impression. Making your money work for you is a good thing, and it can certainly help, but by itself that is not the way to wealth. There is only one tried and true path to wealth that consistently works and can work for anybody.

The three steps to achieving your financial dreams are simple: work hard, save regularly, and spend less than you earn. It takes discipline to build wealth. No matter how much or how little you earn, you can easily spend yourself into the poor house. Likewise, you can save yourself into prosperity.

The earlier you start saving, the easier it is. The power of compounding over time will multiply your early savings. It's much harder to catch up later because you don't have as many years for your money to gather interest and more interest on the interest.

That's not too say that it's ever too late to start saving. The important part of the plan is to make saving a habit. Set aside money every time you get paid that goes directly into a savings account. Whether it's your 401k, a brokerage account, or some other savings fund, make sure it is segregated from your regular bank account so that you're less tempted to dig into if things get tight.

Most companies will split your direct deposit paycheck between two or more banks or bank accounts for you so that you can direct a certain dollar amount or percentage from your paycheck directly into a separate savings account while the remainder goes into your checking account.

The more obstacles you put between your savings account and your wallet, the less likely you are to spend it. A brokerage account is going to take three days to settle a stock before you can access the cash. That certainly reduces impulse spending, while still allowing access in the event of an emergency.

Start immediately with any amount you can spare, just a few dollars a week on a regular basis will add up and help develop the habit of spending. Increase the amount you set aside when you can and resist decreasing it.

If you have trouble finding money to set aside, think about an expense you can cut out and put that money into savings instead. Instead of buying a $6.00 cup of Starbucks coffee each day, buy a $1.00 at McDonald's, or make it at home and take it with you.  There's as much as $25 or $30 a week if Starbucks is a daily habit. If that doesn't seem like much, consider that it's over $1200 every year.

Maybe Starbucks isn't your thing, but chances are there's something you can eliminate or reduce in order to divert the cash toward a savings plan or toward the reduction of high interest rate debt.

Start saving now, be disciplined. Making regular contributions toward your savings is more important by far than where you park the money. While it is possible to multiply your savings over time with the right investment vehicles, the first step is to save what you can from your existing income.

If you're already struggling or failing to make ends meet, consider a second job on the weekends or a couple of evenings each week. Nobody said it was going to be easy. Well, some people say it'll be easy, but they're lying.

Seven Basic Rules for Investing

Yesterday, I said that investment strategies can and should vary based on one's investment goals, one's financial position, and a host of other factors. I'm a firm believer in the fact that there are many paths to the same goal and that rules are made to be broken creatively. On the other hand, rules can be helpful guides for people until they learn whether they should be broken or not.

Toward that end, here are seven rules for investing in the stock market and building an investment account.

1.) Don't invest with borrowed money. OK, there are exceptions to this rule for advanced traders using margin accounts, but for almost everyone it holds true. If you are paying interest on the money you have invested, then you're rowing your boat against the current. There is no investment that is so good you should use your credit card, a bank loan, or money borrowed from friends or family in order to get in on "a sure thing." Never make an investment that will leave you in debt if it doesn't work out. Why?

Because 2.) There is no such thing as a sure thing (except as noted in rule number 7 below). Any investment you make is a potential loser. With proper research you can choose investments that are less likely to loose, but there are no guarantees. Surprises happen, and they can negatively affect almost any investment you might make. Losing money is bad enough, but if that loss leaves you in debt, it can be financially crippling for a very long time.

3) Never invest in a stock based on a hot tip, no matter where it comes from. By all means, use a hot tip as an excuse to begin researching a company if you like, but never as a factor in your investment decisions.

4) If you don't have time to get all the facts before you have to make an investment decision, then don't buy. If you don't "pull the trigger," the worst that can happen is you still have all your money. As a corollary to this, don't be afraid to keep cash in your investment account for a while. Sometimes, the time is not right to buy anything you know well enough to consider.

5) Most investment analysts (especially those with large investment houses) are liars. It seems to me as if at least half of their recommendations are designed to influence stock prices in their favor: they upgrade stocks when their investment arm is already fully invested and downgrade when their investment arm is getting ready to buy. It's market manipulation, pure and simple, designed to help them make money at the public's expense. That's just my opinion, not making specific or actionable allegations against any one in particular, but watch them carefully... Treat professional analysts' advice like a "hot tip." Use it as a catalyst to begin researching or following a company, but not as a reason to invest.

6) Save regularly. If you can put $10 aside in Al Gore's proverbial "lock-box" each week, then by the time my mock portfolio game at MarketWatch.com ends, you'll have your own $500 ready to start an investment account. Whatever your financial situation, put something aside every time you get paid. $1, $10, $100, 10%, or whatever you can do without unduly burdening your ability to pay bills.

7) If you've fallen into credit card debt, do everything you can to pay at least the amount required for a three year pay-off. You'll find that amount on your bill near the estimated pay-off time for minimum payments. Paying extra on your credit card gives you a guaranteed return of whatever the interest rate is. If you're paying interest of 9%, 13%, 17% or more, then paying extra principal on that debt is about the only "sure thing" you'll ever find.
 

Mock Portfolio: 1st purchase, Dividend Paying Stocks

If you're competing in a fictional stock portfolio challenge with fake money, you should take big risks to try to outscore your opponents. If you're investing real money, even if it's a small amount, you should play by different rules. In my mock portfolio at http://www.marketwatch.com/game/little-steps-to-wealth , I'll only make trades that I would make with real money in my own account, or that I would make on behalf of those who have entrusted me with handing their investment accounts.

Over the course of a short "game," taking chances on high risk/ high reward stocks might pay off, over the long haul it will not. If you're playing along with your own mock portfolio, use whatever strategy you like. A year, however, is a very long time.

What kind of return should you expect in your own real investment account? Well, it depends on your strategy which may vary as we discussed the other day. At an absolute minimum, if you are simply trying to preserve your existing wealth, you need to outpace inflation. In 2014, the US inflation rate was 0.8% according to usinflationcalculator.com . If your investment account made just a one percent gain and had no downside risk, you'd have successfully preserved your wealth.

Most of us are not rich enough to be at the point where breaking even is an acceptable investment goal. The truth of the matter is, most people, even professionals, suck at picking stocks for a variety of reasons. Greed is one of those reasons, lack of patience is another. The biggest reason is that we can't know everything about every stock, and we certainly can't predict the future. So, when the economy, or at least the stock market, is in a period of growth, a good rule of thumb is that your investment account gains should match or exceed broad stock market gains.

As reported by CNN Money, in 2014, the Dow (a more conservative assortment of big, generally safer stocks) rose 7.5%. The S&P 500 (a broader selection of 500 large companies traded on the major US indices) rose 11.4%. The NASDAQ (a market consisting of a very broad collection of stocks of all sizes and risk levels) rose 13.4%. For most people not approaching or already in retirement, your 401k, IRA or other investment account should be meeting those returns.

If your investment account is professionally managed by an investment adviser, ask him or her why he or she didn't at least meet those returns, chances are she or he didn't. When choosing an investment, don't just look at its historical returns, compare them to the returns of the major indexes for the same period. If it consistently underperforms the market, but carries risk roughly equal to the broader market, you be better off just buying an index fund.

Index funds, especially if you own several different ones, such as a Dow Jones Industrial Index Fund, a NASDAQ index fund, and maybe a smattering of foreign index funds from various parts of the world, are just about the highest level of diversification you can get in a stock portfolio. If you have a long investment horizon, then that's not a bad way to go.

If you have very little to invest, and need to make bigger gains in order to reach your financial goals, then you might want to take a more aggressive approach. A more aggressive approach generally entails bigger risks. You might be more likely to lose money over a period of time than you would with a more diversified approach. That extra risk should be offset with a better chance for bigger gains. That's not always true, but, in theory, it should be.

Personally, I'm not a big fan of broad diversification. Diversification generally protects you from big losses, but it also generally insulates you from big gains. I prefer to own a relatively small number of investments each of which I know very well.

For example. Ship Finance Limited (SFL) is a company that I have followed for years. It closed today (2/19/2015) at $15.46. That's a pretty good price for this stock, especially when one considers that it pays a quarterly dividend of 41 cents/ share. That works out to a 10.6% return exclusive of any changes in the price of the stock.

Buying a dividend paying stock gives you an advantage since you will be getting regular cash payments regardless of the performance of the stock price. A large, stable company that has a long history of stable or increasing dividends might pay something like 1.5-4.0% and be considered an excellent income stock. Let me remind you that SFL pays out 10.6% and has a consistent history or increasing dividends over time. It is a stable company, though not without some risk. According to Yahoo! Finance, 7 analysts who follow SFL have an average stock price target of $18.93/ share, with a high of $23 and a low of $15.

The truth is, this stock trades in a range generally from $15- $18/ share although it sometimes exceeds that both higher and lower. If one can buy it at the lower end of that range, one should. If it gets into the $19 range (with no major changes in their business), one might consider selling and waiting for it to fall back a bit.

Ship Finance is company that buys ships such as oil tankers, deep water drilling ships, container ships, bulk freighters, and chemical carriers and then leases them out to other companies that operate them. They generally get a flat daily rate, plus a share of the profits made by the lessee. The relationship with many of the lessee/ operating companies is somewhat incestuous. A controlling interest in SFL is owned by Hemen Holding or directly by Jon Frederiksen and family. Not coincidentally, the same principals own large stakes or even controlling interest in Golden Ocean, Frontline Shipping, Golar LNG, Seadrill, as well as significant stakes in a number of others. Hemen Holding, by the way, is a Frederiksen-controlled investment company.

What that means is that SFL is the financial lynchpin of the entire shipping empire. Through this arrangement, SFL is able to hand off the majority of the financial risk to these other companies while enjoying a large share of the profits. If a ship is sold, profit goes back to SFL. If one of these shipping companies has financial difficulty, SFL can just take back its ships and lease them to someone else or sell them outright for a windfall. Free cash flow is very good for SFL enabling it to make these large dividend payments.

I could go on about the global shipping market in general, but suffice to say that SFL is to a large extent insulated from the biggest risks while enjoying large upside potential when things are booming. It provides a significant amount of cash in the form of dividends to Hemen Holding and to Jon Frederiksen who controls the aforementioned companies. It is essentially the cash funnel from these companies to him (and other stock holders).  That's a good part of the reason why the dividend is safe.

So, right now, if I buy SFL at $15.46, I'll make 10.6% in dividends  (or more if the dividend is raised yet again) over the next twelve months. Without a penny change in the stock price, that beats the Dow gains for last year. That's a good place to park money in my opinion. I'll talk in more detail about dividends, ex-dividend price drops, and other complicating factors in a future post. For now, buying and holding a good dividend paying, stable company is generally a good thing -Note: I am NOT including real estate trust or commodity trusts in this group even though their dividend payouts may look extremely high, there are other complicating factors that make them much riskier and offset the value of the dividend (or return of capital as the case may be...). I'll talk about why in a future post as well.

So the first investment in my mock portfolio will be to place an order tonight to buy SFL tomorrow (2/20/2015). I will place an order for 60 shares because the accounts in the game have margin trading privileges. That means that the value of my investment account is used as collateral to allow me to essentially borrow the equivalent amount (up to another $500 -the exact amount depends on your investments) at an interest rate (for this game) of 8%. because SFL pays 10.6%, that means I get a net of 2.6% -ish (compounding aside) on the borrowed money. The downside is that if the value of my portfolio drops, I have to immediately sell off stocks to allow for the reduced borrowing ability even if its not a good time to sell. Bad calls on margin trades can devastate your account quickly.

I'll talk more about the details of margin trading another time. Beginners should not trade on margin, period. It's fine for the mock portfolio, and because I'm confident in my experience, I would (and do) trade on margin and would buy SFL at this price on margin with real money.

One more thing that I'll mention, is the Free Ride prohibition. In cash stock accounts (non-margin accounts), investors like you and I are prohibited from buying a stock and selling it before the purchase settles (three days). This would allow us to buy a stock and sell it without ever having cash enough to pay for it in our account. It's ok for Wall Street types and millionaires, but the average investor without margin privileges can't do it. It's another example of rigging the game in favor of Wall Street..., but I digress. Because the accounts in the game have margin privileges, this prohibition does not apply.

OK, that's it for today. Tomorrow morning, when the market opens my mock account portfolio will show 60 shares of SFL (assuming the opening value of that purchase remains below $1000).

Disclaimer: I do own SFL in my own real account and/or in one or more of the accounts I manage for others.
 

Invest with Just $500: Mock Portfolio Introduction

How often have you heard someone say "It takes money to make money." If you think that's true, then let me remind you of the Aesop's fable: The Fox and the Grapes. In this story, the fox couldn't reach the grapes he wanted so he consoled himself by telling himself that they were probably sour anyway. It doesn't take money to make money. It takes discipline, hard work, and perseverance.

I've started a mock portfolio at http://www.marketwatch.com/game/little-steps-to-wealth to demonstrate how anyone can earn money through investing wisely, even if they don't have much to start with. For the mock portfolio, I've set the initial investment at $500 and the term of the game to one year, running from February 18, 2015 until February 18, 2016.

I know, you may not have $500, and you may not know much about investing. Perhaps you have more than that lying around. Either way, learning about investments is part of the hard work required to reach your goals. In the mock portfolio, I'll make trades based on the real market prices of stocks. In other words, trades that anyone could make with real money.

Furthermore, I'll discuss the trades here in this blog. I'll give my rationale for every buy order and every sell order. My investment strategy is probably substantially different from that of most financial advisers. It's not for everybody. When it comes to investing, there is no single strategy that is the "best" strategy. There are many very good strategies and many very bad strategies. Furthermore, a good strategy for someone trying to build wealth might be a bad strategy for someone trying to preserve wealth.

Investment strategies should be built to reflect very specific goals. If you have enough money and need to simply preserve it and draw a regular income, for example, you want to take a very conservative approach to minimize or eliminate the risk of substantial loss. Generally, that means you are limiting your growth opportunities in exchange for that low risk.

Strategies might differ based on your time horizon, your anxiety level, your financial situation, economic conditions, and many other factors. When will you need the money? Do you lose sleep if your portfolio goes down five days in a row? Is the market generally heading upward or downward? What are the consequences of losing some or all of your investment?

While investment strategies may vary, there are some hard and fast rules that make sense for almost everyone.

That's it for today. Use the link in the second paragraph to follow along with my fictional $500 investment account. It's free to follow and you can even join in with your own fictional portfolio and compete against me if you like. If I see interesting investment choices in your fake portfolios, I may comment on them as well, but I'm not going to give yay or nay advice on any stock. I'll tell you what I chose, why I chose it, why I think some investments are bad or good, and offer my opinions. None of that should be construed as me telling you what to do or advising you on specific stocks to buy or sell.

If I comment on a stock that I own in real life, I'll tell you so you know if I have an vested interest in its performance.

 Fair warning, though, Dow Jones, Inc. and affiliates may send ads to your email if you join the game; use a throw-away email account to sign up. You can look at the game accounts without signing up, but to play along with your own account they require your email address...

Save big with bi-weekly mortgage payments

I am in the third year of my 30 year fixed rate mortgage. I initially set it up with monthly payments like most people. This past month, however, I made a change that will shave $44,000 off the amount of interest that I pay over the remaining life of the loan and pay off the entire mortgage more than six years early. Furthermore, I'll be building equity faster, so that if I choose to sell my home, I'll have more cash in pocket after paying off the remaining mortgage balance. It was as easy as making a single phone call, and I'll tell you, in this blog post, exactly how I did it and how you can, too.

If you're lucky enough to own your own home, then you most likely have a mortgage. Mortgages come in all shapes and sizes, but let's look at the most common option, a 30 year fixed interest mortgage.

Right now, at the end of 2012, interest rates are low (under 3.5% as I write this), but for this blog post, I'm not addressing whether one should refinance to lower their mortgage interest rate. That's a topic for another day. What I am going to talk about is a simple thing you can do to save yourself tens of thousands of dollars and shave years off the term of your mortgage.

Most mortgages are set up with a single monthly payment like all your other bills. In other words, once a month, you send a check or make an online payment to the bank that holds or services your mortgage. That payment includes interest on your loan. It may also include some amount feeding an escrow fund that covers one or more of the following: property taxes, homeowner's insurance, and PMI (private mortgage  insurance). Finally, whatever's left of your payment goes toward paying off the amount you borrowed against your home when you bought it, refinanced, or took out a home equity loan.

In many cases, it is a very small amount for the first years of your mortgage and as progress is made toward lowering the outstanding principal, the amount of monthly interest payments goes down in proportion to the declining principal balance. So, in the third year of your mortgage, you might see something like 75% of your monthly payment going toward interest and only 25% being used to reduce the amount you owe.

Later in the term of the loan you'll see that ratio shift in your favor, so that eventually you might see 75% or more of your monthly payment going toward reducing your mortgage debt instead of just paying the interest. The faster you can change that dynamic, the less you'll pay overall and the shorter your mortgage term will be.

Enough background, let's get to the point. All I had to do to save $44,000 and reduce my mortgage term by more than six years was to call my mortgage bank, Wells Fargo (NYSE: WFC), with my last mortgage statement and my checkbook in hand and ask them to change my monthly payments to biweekly payments.

Since the biggest part of our family income also comes in on a biweekly schedule (receiving a paycheck every two weeks) I picked the day after each paycheck arrives as the date on which Wells Fargo would take the payment from my checking account.

Furthermore, since the amount worked out to be $996.64 per payment (twice a month), I asked them to round it up to an even $1,000 every two weeks resulting in an additional principal payment of $7.12 every four weeks. Of course, there are 52 weeks in a year which are then split into 26 two-week increments. That means that I'm making the equivalent of 13 monthly mortgage payments every twelve months, but, twice a year, when three biweekly payments happen to fall within the same month, the entire third payment is applied to principal, and goes directly toward reducing the amount I owe on my mortgage.

Your mortgage company should be able to tell you while you're on the phone, how much such a switch would save you and how many months it'll shave off the term of your mortgage. I recommend running the numbers yourself ahead of time using the handy calculators at mortgagecalculator.com.

Pros of switching to bi-weekly mortgage payments from monthly payments

• You'll save tens of thousands of dollars over the life of your mortgage*
• You'll reduce the term of your mortgage by years*
• You'll build equity faster

Cons of switching to bi-weekly mortgage payments

• Twice a year, there will be three payments in a single month instead of two (totalling 150% of your normal monthly payment)

So let's talk about the down-side. If you're running month to month barely paying your bills or falling behind, then twice each year when that third payment comes up, things are going to be extremely difficult. The bright side is that during those months when three payments are due, you're also getting three paychecks if you're paychecks also come in on a bi-weekly schedule and you set up the payments to coincide with your paychecks.

Consider your personal situation carefully and make sure you'll be able to cover the 26 biweekly payments before switching over. Falling behind on mortgage payments and racking up late fees or insufficient funds fees from your back or bill-payer service defeats the goal of saving money and can have other negative repercussions like hurting your credit score.

In my case, by tying each payment to specific expected income instead of reserving cash for a single monthly payment, it actually makes day to day budget planning easier, and I don't feel the pain when those extra payments come due.

* The amount you save and the reduction in your mortgage term will vary depending upon how much is left on your current mortgage, your interest rate. The figures given are from my own example and will vary substantially case by case.