Tag Archives: debt

The Minimum Monthly Payment Trap 2!

In my last post, I told you two ways your loan balance can continue to increase.

Even when you are making your minimum monthly payments, 

  • if you miss your minimum monthly payment, and/or
  • whenever you are allowed to pay less than your minimum monthly payment
    • your loan balance may continue to increase.
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Other scenarios in which your loan balance will continue to rise:

A ‘debt relief’ program promises you can make ‘smaller payments’

  • than the standard/reasonable minimum monthly payments, and
  • used by some unscrupulous lenders to trap you
    • into perpetual debt.
  • Some government and/or education loans repayment plan are also
    • income driven, i.e. based on
      • how much you earn not
      • how much is required to pay off the loan
        • in a reasonable period of time.
  • Example 1: you owe $25,000, at 15% annual interest rate computed on the balance each month
    • The minimum payment is 2% or $500.
      • “That’s too high”,  you say,  “can you help me?”
      • “Can I pay $200 per month please?”
      • Sure”, the lender says, “just for you!”
      • What you may not realize is that
        • $200 does not cover your monthly interest ($314).s
        • The difference ($314 – $200)
          • is added to your loan balance
          • (the interest has been ‘capitalized’)
            • which continues to earn interest.
  • Example 2: The Education Department Income Driven Repayment Plan (IDRP)
    • provides relief to people allowing them to make payments
      • based on how much they earn
      • on loan balances that earn interest each day
        • until the to total balance is paid off.
    • As above, you may be making all regular required payments
      • but your actual loan balance could be increasing!!

You make regular minimum payments but

  • if the interest rate is high and if
  • the loan balance is continually earning interest,
    • your loan balance will continue to increase; in fact
    • the loan balance will double approximately
      • every 70/(interest rate) years
        • according to the ‘Rule of 70’:
          • an amount that grows at the rate of ‘x’ per period
            • will double approximately every 70/x periods.
      • Example, a credit card balance of $25,000 at 15% annual interest rate
        • will double every 70/15 = 4.7 years (4 years and 8 months)
        • If you make every minimum required payment of 2%,
          • The balance will double every 70/13 = 5 years and 5 months.

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Note: 

  • Some credit card loans will have lower/higher interest rates.
  • Some loans (some mortgages, car notes)
    • have interest calculated over the life of the loan.

Final Take Away

  • If possible, avoid loans
    • for which the interest rate is calculated frequently
      • on the outstanding balance.
  • Make sure your minimum payments at least cover your interest
    • in each period.
  • Make sure your minimum payments covers some of your principal each time
    • If not the make additional payment to cover
      • paying down your principal.

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Email me at reach4himwdray@gmail.com

You Can Do It!  Let’s Do This!!

[Very] Basic Steps for Managing Your Money!

TOO MANY ‘days left at the end of your money’;  the next pay check?  Here are simple steps to help you manage your money!

  1. Know Your Spending Pattern!
    1. Track your every penny for 2-3 months.
    2. Write it down, use Excel.
      1. Make a list.
      2. Write down the Date, Place, Description, Amount,
        1. for every penny you spend!!!
        2. Who says good things come cheap?
  2. Plan Your Spending
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    1. Draw from ‘1’ above.
    2. Make a budget.
      1. This is a ‘plan for spending’ based on your income.
      2. Use approximate numbers (averages).
      3. Estimate regular expenses at the higher end (Be realistic!).
  3. Monitor Your Spending Pattern
    1. There are many apps that do this.
    2. Most likely your Bank can also do it for you,
      1. if you do not mind someone else tracking your finances, and
      2. if you do not mind signing up ‘for free’
        1. (nothing is truly free) or,
      3. you can make your own Excel budget.
      4. Excel has many templates for household and other types of budgets.
        1. Here is one that I use:
          1. By George Hayward – Household Budget Template
  4. Keep to Your Plan (Your Budget!)
    1. Automate Regular Expenses:
      1. tithe (10%),
      2. bills, and

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      3. savings and investments (10%).
      4. It will help your credit score.
    2. Keep Spontaneous Purchases to a minimum.
      1. They are the main source of going over budget.
      2. This includes ‘eating out’ on the spur of the moment.
  5. Make a Priority List for Spending, Mine: 
    1. tithe,
    2. bills and obligations,
    3. necessities (health, food, etc.),
    4. emergency Funds saving,
      1. (six months worth of regular monthly expenses)
    5. savings and investments, and
    6. leisure, and other discretionary spending.
  6. Don’t hold Credit Card Balances
    1. The interest rate is too high (often 10 – 25%) on balances.
    2. Even when you make minimum payments,
      1. your balance is still increasing and
      2. your outstanding it will double in almost every 4-7 years!
  7. Learn How to Invest and Grow Your Wealth – More on that later!

AND YOU ARE ON YOUR WAY!

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YOU CAN DO THIS!

LET’S DO THIS!