August 1, 2012

Budgettabouddit! Part 3: Snowballs in August

So I’ve already talked about budgets and the importance of tracking actual expenses in one central location so we can see how much they are, how they’re changing, and how they relate to our budget. But there is one “expense” which deserves its own post entirely.

Debt.

Debt deserves not only its own post, but also a little set of horns.  It makes overspending way, way too easy.  And then it tacks on outrageous interest charges, with a teensy little minimum payment.  You know why that payment is so low?  So you’ll never pay off your debt and so the credit card company can continue to charge you out your ears.

Here are some actual numbers for you.

<hopping on my soapbox>

You buy a TV for $1,500 and charge it.  Your interest rate on the card is 10% (this is probably low).   You make a $33 payment toward your credit card every month.  In five years, that TV will be paid off, at a total cost of $1,893. 

Congratulations!  You now have an obsolete TV which was overpriced by $393.  What else could you do with $393?

<hopping off my soapbox>

Okay, so let’s say you have debt.  Credit card debt, car payments, student loans, whatever. 

What now?  Assuming you’ve set up your budget (by the way, your budget should include all the minimum payments for your debts – those are bills, after all), and you’ve tracked your actual expenses for a couple months and established a consistently positive “left over” balance at the end of each month….. Here’s what you do:

   1.  Gather your statements and list out each debt by name, current balance, interest rate, and minimum payment.

   2.  Identify the highest interest rate debt. 

   3.  Next month, make your minimum payment on this debt PLUS all of your spare cash from last month.  You had $200 leftover at the end of last month?  Send it with your minimum payment.  Make only the minimum payment on all other debts.

   4.  Once that first debt is paid off, move to the next highest interest rate debt.  Make that minimum payment PLUS your savings from last month PLUS the minimum payment you used to make on Debt #1 (which is now paid off!!).

See how the “snowball” forms?  And keeps on rolling!

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Here’s an illustration that assumes a family has $500 extra each month:

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This is very hypothetical, and most likely you wouldn’t have a $400 minimum payment on your credit card, but this scenario totals out at $20,500 of debt.  …Which is completely paid off in 2.1 years.  (I didn’t show that part.) 

If this family had less than $500 (say $200?) available each month, the payoff time changes to 3.7 years.  And then…it’s gone.  And they have $736 a month free from all those minimum payments they don’t have to make anymore. 

That’s almost enough to buy a TV! Open-mouthed smile

This is another template I can give to anyone who wants it.  Since I’m having trouble figuring out how to put these templates in a post, shoot me an email at Katie@burbtales.com, and I’ll email it to you. 

And now I’m done yakking on and on about financial stuff.  I think budgets are the bomb, I’m a fanatic about tracking our expenses and I think you should be too, and debt is my worst enemy. 

I like looking into other people’s financial windows and hearing how they do stuff, and I really hope you guys got a couple good ideas here or there.

More interesting things coming up!  Like my trip to the store today to make my very first attempt at doing *all* our grocery shopping for the whole month.  It was …enlightening.   I’ll be back later with the details Smile

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