Which debt do I pay first? (Part 2)
The other day we laid the foundation of how different interest rates affect loan payments. Today, let’s make it more realistic. We have three outstanding loans.
Loan 1 – $15,000. 10% interest. $15,000 x .10 = $1500 in interest payments each month.
Loan 2 – $5000. 5% interest. $5000 x .05 = $250 in interest payments each month.
Loan 3 – $5000. 20% interest. $5000 x .20 = $1000 in interest payments each month.
If I had extra money to put against the principle on a loan, which one would I want to put it against? My initial reaction would be to say loan 3. The reason is that I am paying the most in interest for each dollar I borrow on that loan. How do I figure that?
Loan 1 1500/15000 = I pay 10 cents per dollar borrowed
Loan 2 250/5000 = I pay 05 cents per dollar borrowed
Loan 3 1000/5000 = I pay 20 cents per dollar borrowed
Of course, another way of looking at this is to pay down Loan 1 because you are paying the most each month on that one.
Another option to consider is to use a lower interest rate loan to pay off the higher interest rate loans. You just need to make sure that there aren’t any “set up fees” or other charges that will end up costing you more.
Solution to US Economy Troubles
I know I said the next post would be about interest but I have to take a detour for a minute. What kept coming to mind the other night as I listened to the President was Romans 13:8.
Romans 13:8 “Keep out of debt and owe no man anything, except to love one another; for he who loves his neighbor [who practices loving others] has fulfilled the Law [relating to one's fellowmen, meeting all its requirements].”
It would appear a big reason our economy is so bad is because everyone buys on credit rather than with cash. If we bought within our means and only when we had cash, we wouldn’t have this problem. If our eyes weren’t bigger than our wallets, we wouldn’t have this problem. If we weren’t in such need of immediate gratification, we wouldn’t have this problem. If people didn’t go around thinking they are owed something, we wouldn’t have this problem. If we were appreciative of what we had rather than feed the need for more, we wouldn’t have this problem.
Please don’t misunderstand. I am not saying that having wealth and nice things is bad. What I’m saying is that we need to be responsible about how we get them. If you have to get those things with credit then it isn’t worth it. I am saddened when people say “Woe is me. I’m so far in debt. The government should bail me out” but yet they created their own situation by spending money on fancy cell phones, flat screen TV’s, recreational vehicles, etc, etc on credit. Contrary to popular belief those things are not necessities. They are luxuries.
Do you know what Dictionary.com defines a luxury as:
- free or habitual indulgence in or enjoyment of comforts and pleasures in addition to those necessary for a reasonable standard of well-being
- a foolish or worthless form of self-indulgence
Interesting, eh? Doesn’t sound like smart money management does it?
There was a reason that God said to owe no man anything. I believe that is because we wouldn’t be enslaved by this world’s system of credit and debt. Think about it. If we are free from debt we sleep better at night. We have less stress. We don’t need to worry about mortgages and loans because we don’t need to use them. Our housing market wouldn’t be in the pit because people wouldn’t be taking out loans on houses that are way too expensive for them. It’s not up to the government to bail people out of their bad decisions. If people want to take out loans that are too big, then they need to take responsibility for their bad decision. It doesn’t take a rocket scientist to figure out how much you can comfortably spend on a mortgage.
Our country needs to take more responsibility for their financial decisions, stop running away from God, and start running to Him where we will find He has already instructed us how to live prosperous, abundant and enjoyable lives. We just have to take the time to study His Word and spend time with Him so we can hear what He has been so desperately trying to tell us.
John 10:10 The thief comes only in order to steal and kill and destroy. I came that they may have and enjoy life, and have it in abundance (to the full, till it [b]overflows).
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Deuteronomu 28:1-11 1IF YOU will listen diligently to the voice of the Lord your God, being watchful to do all His commandments which I command you this day, the Lord your God will set you high above all the nations of the earth. 2And all these blessings shall come upon you and overtake you if you heed the voice of the Lord your God. 3Blessed shall you be in the city and blessed shall you be in the field. 4Blessed shall be the fruit of your body and the fruit of your ground and the fruit of your beasts, the increase of your cattle and the young of your flock. 5Blessed shall be your basket and your kneading trough. 6Blessed shall you be when you come in and blessed shall you be when you go out. 7The Lord shall cause your enemies who rise up against you to be defeated before your face; they shall come out against you one way and flee before you seven ways. 8The Lord shall command the blessing upon you in your storehouse and in all that you undertake. And He will bless you in the land which the Lord your God gives you. 9The Lord will establish you as a people holy to Himself, as He has sworn to you, if you keep the commandments of the Lord your God and walk in His ways. 10And all people of the earth shall see that you are called by the name [and in the presence of] the Lord, and they shall be afraid of you. 11And the Lord shall make you have a surplus of prosperity, through the fruit of your body, of your livestock, and of your ground, in the land which the Lord swore to your fathers to give you. 12The Lord shall open to you His good treasury, the heavens, to give the rain of your land in its season and to bless all the work of your hands; and you shall lend to many nations, but you shall not borrow.
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Luke 6:45 The upright (honorable, intrinsically good) man out of the good treasure [stored] in his heart produces what is upright (honorable and intrinsically good), and the evil man out of the evil storehouse brings forth that which is depraved (wicked and intrinsically evil); for out of the abundance (overflow) of the heart his mouth speaks.***
II Corinthians 9:8 And God is able to make all grace (every favor and earthly blessing) come to you in abundance, so that you may always and under all circumstances and whatever the need be self-sufficient [possessing enough to require no aid or support and furnished in abundance for every good work and charitable donation]. *All verses from the Amplified Bible.http://www.keepinglifesimple.net/Freedom_From_Debt.html “Possible solutions to escape the burdens of debt.”
www.OverflowLiving.com “Learning to live the good life that God planned!”
Which debt do I pay first? (Part 1)
I heard someone call into a talk show recently asking which debt to pay off first. This made me realize that everyone doesn’t understand the impact of paying interest on a loan. I like examples so let’s use one for this.
Debt 1 – Owe $10,000. 5% interest rate. $10,000 x .05 = $500 interest payment every month.
Debt 2 – Owe $10,000. 10% interest rate. $10,000 x .10 = $1000 interest payment every month.
Deb 3 – Owe $10,000. 20% interest rate. $10,000 x .20 = $2000 interest payment every month.
Did you notice that the higher the interest rate, the higher the monthly payment? I used the same loan amount so that you could plainly see the affect of different interest rates on what you have to pay each month.
So, let’s say that $10,000 loan was for a car. On top of paying off the $10,000 which was the cost of the car, you are also going to have find an extra $500 a month at a simple 5% interest rate. But, if you have a 20% interest rate, you now have to find an extra $2000 a month. Ouch! At that rate you will have paid $10,000 in interest after only 5 months. That’s what the car costs!
Hopefully by this point it has become a little more clear how interest rates can affect you. Watch tomorrow’s post for suggestions on how to determine which loans to pay off first when you have different rates and different loan amounts.
Change Your Mind, Change Your Life
If you are serious about getting yourself out of debt, you need to take a serious look at your mindset. How you think will determine what you do. If you believe that your family has always been in debt and will always be in debt . . . well . . . you have pretty much sealed your own fate. Your actions will follow what you think.
For example, let’s say you are an earth lover and think that SUV’s are evil. They guzzle gas and polute the atmosphere. Well, if that’s what you believe (i.e. think) then I highly doubt you are going to go buy an SUV tomorrow. That action would go against what you think.
It’s the same with debt. If you think that you can’t get out of debt, then your actions won’t do things to get you out of debt. It’s really that simple.
To change your mindset, I suggest that you start by spend time picturing life without debt. Allow yourself to feel the relief of knowing you can pay your bills each month with plenty left over. Once you can get a picture of what life would look like without debt, you can now see where you are going. You want to head towards that picture. Now, you need to start making decisions that will bring that picture to life! (We’ll cover that in another post.)
One more thing . . . You know that feeling of relief, freedom, and satisfaction that you felt when picturing life outside of debt? Those are also good motivators to help you fight the battle of overcoming financial difficulties. You get to choose whether you want to stay under the burden and pressure of debt and financial obligations or if you want to live in freedom. The control is in your hands and only you can make it happen.
Thanks for letting me share my thoughts. Let me know what you think! 
http://www.keepinglifesimple.net/Freedom_From_Debt.html “Possible solutions to escape the burdens of debt.”
www.OverflowLiving.com “Learning to live the good life that God planned!”
Credit Cards Are Not Bad
After my last post you probably think I believe credit cards are evil. I really don’t. Credit cards are actually a good thing if you pay them off completely every month. They help you build credit and you can get perks such as airline miles. They are also more convenient than having to run to the bank every few days to get more cash.
I believe the way to stay out of credit card debt is to live by one simple rule. If you don’t have the cash in the bank to pay off the credit card at the end of the month, don’t make the purchase.
Credit card companies are more than happy to loan you money so that you can buy something you don’t have the cash for. However, they want something in return. That’s called interest. Interest on credit card balances can be over 20% which is crazy.
Right now you loan your money to a bank (in the way of a savings account) and they pay you at best 4-5% interest. That’s at best. If you get lucky in the stock market you may get 10-15% return but from what I hear that takes a lot of skill and patience. But, the credit card companies are loaning you money and you are paying them 20% to borrow that money.
Everyone sees those outrageous interest rates on credit cards and think those companies are horrible. But, the fact is that you don’t have to take their money. You are making the decision that buying a particular item is important enough to warrant paying 20% of the item’s price to the credit card company. Please realize that racking up credit card debt for non essential items such as a new TV, fancy cell phones, and recreational toys is really adding more strain on yourself. Because now you not only have to come up with the money for that luxury item, you also have to find money to pay the credit card company for borrowing their money. Yikes!
Thanks for letting me share my thoughts. Let me know what you think!
http://www.keepinglifesimple.net/Freedom_From_Debt.html “Possible solutions to escape the burdens of debt.”
www.OverflowLiving.com “Learning to live the good life that God planned!”
It’s Really Not a Deal If . . .
You don’t pay your credit card off each month in full.
Let’s say there was a great outfit that cost $100. It was on sale for 10% off so you snatched it and put it on your credit card. At the end of the month you decided to only pay the minimum balance required on your credit card. Here’s the kicker. Credit card interest rates are astronomical. Some are over 20%. So, you just paid $90 for that outfit. However, your credit card is going to charge you $18 a month in interest. In 5 months, you will have paid more in interest than you paid for the outfit originally. Still not making sense? Try this.
$100 (original outfit cost) x 10% (store discount) = $90 (what you paid for the outfit) and a savings of $10.
$90 (charge on the credit card) x 20% interest (which is what you pay for the credit card company to loan you money) = $18
Notice that you saved $10 but you are paying the credit card company $18 to borrow the money. After the first month, you just paid $108 for the outfit. After the second month of not paying the credit card off, you now paid $126 for that outfit.
Credit cards are only good if you can pay them off at the end of the month. Otherwise, you end up paying more to borrow the money than you are getting the product on discount.
Feel free to drop me your questions or comments.
Intro to Debt Free Living
Hi Everyone!
Have you ever said any of the following?
“I wish I could go further into debt.”
“I love the pressure of knowing I can’t pay my bills this month.”
“I enjoy having collection agencies call my house.”
“I love living paycheck to paycheck with never enough to get ahead.”
I’m going to go out on a limb and assume you said no. So why do so many people fall further into debt?
I’m not a financial analyst nor do I have a degree in finance, but I believe a big reason is lack of knowledge and poor decisions. Of course there are other things that also factor in such as illness, job loss, etc., but even then you shouldn’t have to live in poverty.
I look forward to sharing with you practical tips and solutions to not only get out of debt but also get ahead. Money cannot buy happiness but it can give you opportunities to be a blessing to someone else. My goal is to give you some suggestions that will allow you to rise above your situation and be a blessing to others!
Talk with ya soon!
Christy
