Hitting the Principle on Debt

January 12th, 2009

I’m sure most people know about this on some level in the back of their head. I was actually quite surprised when someone articulated it differently to me that I had a wake up call. Obviously the best way to pay off debt, is to pay more each month. Simple and logical. The reason it is so powerful is that you get much more bang for your buck because you’re hitting the principle on the debt.

I’ll explain with simple. Let’s say you have the following credit card…

Balance: $1000

Interest: 20% APR

Minimum Payment: $20/mth

I’m just going to take very rough calculations, but the compounded interest every month is around $16. That means if you make the minimum payment, most of it will go to pay the compounded interest each month and only $4 will pay the principle.

That’s sort of sad in away. If you pay an additional $4 ($24 total for the month), you essentially made 2 months worth of credit card payments for only an extra $4. That extra money will go directly on the principle, instead of next months compound interest.

The lesson to be learned here is to pay extra every month, even if it is just a little bit because it all goes on the principle. You may pay a few hundred dollars a month on a car payment, but if you look at the interest you’ll find most of it goes to pay the compound interest. $50 extra isn’t much compared to what you’re spending each month, but it hits the principle completely.

If you ever come into some money from a tax return or an inheritance put it directly on the debt. I used to think that if I got some money, I’ll just put it in an account and make my payments each month. No. Lump sum kills the principle and that’s what will inevitably get out of debt. If you don’t, you’re going to be buried in interest payments.

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Do You Have Emergency Savings?

October 5th, 2008

I think it is so important for me to talk about this during this economic uncertainty. If you talked to me a year ago, I wouldn’t of had any emergency savings, let alone a personal finance problem. I’d still be sitting on credit card debt with a bank account that would disappear at the end of each month.

Emergency savings are important to have. I’ve never really been a big spender myself. I typically left money in my bank account, but it was never “savings”. For it to be savings, it must be put in a different bank account. It has to be separated from your day to day account or it will end up getting spent.

Obviously, we don’t always have lots of money sitting around each month and that maybe an excuse not to save. Everyone can save if they really want to. It doesn’t matter if it is just $50/month. It should be saved. Sell some stuff on eBay if you have to, just to generate some more money for your savings.

I know this can be a bit tough since we want to spend our money. I think it is important to make a game or challenge out of it. At the end of each month, I calculate my net worth. For most people, this number doesn’t mean a thing to you. It didn’t mean a thing to me when I first started doing it. But I noticed that each month I started thinking about it. I started to think about what I was doing with my money. Was I using it in a way to increase my net worth or was I just wasting it?

As you can probably guess, this turned into a competition. Each month I wanted to make sure my net worth was improving. That means money was going to pay off my student loans and my emergency savings were growing. It’s really an amazing feeling having this happen.

When I first started with my emergency savings account and put my first $100 in it, it looked so small. I could see the account balance online and it didn’t seem significant. I just kept adding to it each month and it started to grow.

I’ve been sort of lazy, but I need to actually get this money put into a high interest savings account. You don’t actually want to have it locked into something like a bond. You want the money to be very liquid. Liquid means as close to cash as possible.

Basically a high interest savings account is what you want. It’s liquid and it has a pretty good interest. If you’re earning 4%, that means $1000 will earn you $40/year. Doesn’t sound like much, but you might as well be paid for saving.

Save your money. Don’t be some moron that is one pay check away from failure.

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Rapidly Paying Down Debt: The Mental Battle

July 12th, 2008

I thought I’d share a bit of what I’m going through as I try to rapidly pay down my debt. I guess it would of been about a month and a half ago that I decided to start taking action on my debt and get it paid down. I’ve noticed some very odd mental things coming out that I’d never expect or that I was critical when it happened to other people.

There are two theories of thought on how to pay down debt:

  • Put all extra money on the highest interest, make minimums payments of others.
  • Put all extra money on the smallest debt, make minimum payments of others.

I’m a very logical person and the math says it all; pay the highest interest off first. The reason is that you have to pay back less money. Depending on how much debt you have, you can finish a few months early because you avoid a lot of the extra interest.

I realized something, the vanity of paying off your debt disappears probably a week after you make your first over and above payment. The problem is that you don’t receive any short term gratification until the debt is paid off. I’ve been training myself to ignore the need for gratification in the short term, so I can continue working for the more long term gratification, but that really is a losing battle.

There has to be a reward in the short term of paying down debt. This is why I think going after the smallest debt is the best. Before I would of said tackle the highest interest. Finishing off a debt is just a great feeling because than you have extra money sitting around each month. You can take that money and put it against your next debt. It’s almost like a snow ball effect to debt payments.

Lucky for me, my lowest debt is also my highest interest. I’m hoping by the end of August to have no credit card debt. Yippie. Than it is onto a more long term student loan repayment plan. I will be paying it down as fast as I can, but there is just so much of it to pay back.

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Awesome Speech On Success

May 16th, 2008

I was doing a little research on public speaking because I’m planning on joining Toastmasters and I found this speech. It was basically for a demonstration on a speech with energy. The topic was on success and I found it very powerful, so I thought I’d share.

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Too Much Self-Help is Bad

May 14th, 2008

We all at one time in our life have read a self-help/self-improvement/personal growth book. There is absolutely nothing wrong with it and I think the world would be a much better place if people did. I started into this genre with Napoleon Hill’s “Think and Grow Rich“. From than on, I noticed that it was a quest for the next self-help book to read and I think I finally figured out why people get stuck in this pattern.

All self-help books give pretty much the same message: set a clear and defined goal, set a plan, follow plan and there might be extra stuff like auto-suggestion, affirmations, etc. If they’re all typically the same, than why do we keep find new ones to read? I used to think the root lied in procrastination, but I think it falls much deeper than that.

What do we associate with ourselves when we get a self-help book? We associate that we don’t like who we are or where we are in our lives. We get this book to change ourselves. Change is a verb, it’s an action. I always thought that getting the next self-help book was the way to procrastinate and delay the work, while still thinking you’re accomplishing something by reading it. I’m not convinced by that argument anymore because it never really applied to me.

Change also has another association to us: pain and struggle. Change requires us to step outside of our comfort zone. If you get a book on public speaking, it’s not going to get you on a stage speaking in front of an audience. You’re going to have to do it, eventually. I’m no longer convinced that excessively reading self-help literature is an act of procrastination. I think it is a continued search for something to numb the pain.

I think most people understand and have accepted that change requires some sort of pain or struggle. Continuing with the public speaking example, you know you’ll need to get up on the stage and speak while you’re nervous, while you bumble through sentences, while you sweat, while you umm and ahh your way through it. It’s a struggle. I think most people that excessively read self-help books are looking for something to the numb the pain. I’ve looked for self-hypnosis and NLP books with the hope that I could some how numb the pain or make my mind like it better.

The thing people seem to miss by this is that the act of getting on a stage to do public speaking isn’t what ends up changing you. It’s the pain and struggle that changes you.

I’m convinced that pain and struggling is a currency for change. To be a different person, you’re going to have to pay the price. It doesn’t matter if you’re starting your own business, public speaking or trying to pick up chicks, you got to struggle through the pain. You need to be embarrassed. You need to screw up. You need to have exciting highs and crashing lows. It is what is required to build this new person.

Pain and struggling is change. Put down the book and go feel the pain.

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