The Afterburn Effect Applied To Personal Finance | Money Beagle

One of my favorite episodes of Seinfeld involves a plot where George puts in a furious workout which leaves him still sweating after he gets back to the office.? This leads to him being accused of stealing from his employer, as they figured he was sweating from being nervous.

In reality, this type of sweating is actually a good thing when it comes after working out.? It?s known as the afterburn effect, and basically says that after a rigorous workout, your body will still burn extra calories for several hours following a workout in addition to the calories expended during the workout itself.

I?ve actually applied this to my workouts, trying to work out harder for a slightly shorter amount of time versus a moderate workout.? After the moderate workout, your body basically wraps up, whereas after the rigorous workout, additional calories will continue to be burned.? So, even though the calorie meter might read the same, the net calories could be wildly different based on the type of workout you do.

Did you know that the afterburn effect can apply to personal finances?

I think that it can!

Let?s look at an extra mortgage payment.? If you take part of your tax return and make a 13th payment on your mortgage, you?ll see an immediate decrease in your balance, which is the equivalent of the calories burned during a workout, but the afterburn kicks in when you look at the interest payments moving forward.

Let?s look at a hypothetical mortgage for six months.

Without an extra payment, the portion applied to interest might look like:

Month 1 ? $500
Month 2 ? $498
Month 3 ? $496
Month 4 ? $494
Month 5 ? $492
Month 6 ? $490

This would total $2,970 in interest over the six months following the extra payment.

With an extra payment, it would probably look something like this:

Month 1 ? $497
Month 2 ? $495
Month 3 ? $493
Month 4 ? $491
Month 5 ? $489
Month 6 ? $487

This brings your total to $2,952 over the next six months.

That?s an $18 ?savings? over the six months.? That isn?t money in your pocket, because your payments will stay the same, but it will grow your principle balance (and thus your net worth) by that amount.

Now, you can say, ?But, Money Beagle, what?s the difference? It?s only $18?

This is true, but I have two things in reply to that:

1. The net effect is greater than $18.? I only showed the first six months, but in reality, an extra payment will affect every mortgage payment for the rest of the length of the loan.? This could really work out to an extra couple hundred bucks.
2. On top of that, the effect adds up quickly.? What if you made a second extra payment split up through the year?? Suddenly you?re looking at $36 over the next few months and probably could be $1,000 savings over the life of the loan.

Bottom line, pennies can add up to dollars which can add up to lots of dollars.

It?s not just debt.? Add an extra 1% to your retirement 401(k) contribution.? $20 per paycheck might not seem like a lot, but that?s $500 a year which can be worth $10-20k in a few years, and could add a couple of hundred thousand dollars or more to your retirement balance when you finally decide to call it quits.

Plus, it ties back to the workout analogy.? You?re not going to lose 10 pounds with one intense workout, but if you put in an intense workout three days a week for a few months, you?ll see those ten pounds work out.? Same goes with extra payments, the effects seem minimal with each individual ?financial workout? but the effects can and will add up if you apply this principle regularly.

And, I believe this can tie back to the afterburn effect?

Do you or have you exercised to the point where the afterburn effect was noticeable?? What other applications in the personal finance world can you apply this principle to?

Thanks for reading! Please subscribe to my RSS feed, follow me on Twitter, or check out my Facebook page. This original Money Beagle post Copyright 2012 Money Beagle is authorized to appear only on www.moneybeagle.com. Thank you for reading and remember: It?s a great day to be alive!

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Source: http://www.moneybeagle.com/2012/03/the-afterburn-effect-applied-to-personal-finance.html

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