Cutiepies and your financial future

Posted by Jen’s friend Gretchen:

First off – aren’t Jenifer’s babies BEAUTIFUL!!! I am just taken by their cuteness!

A response to the radio show that has inspired the future financial plan. My take is this: the best way to pay off debt is not to pay the “smallest” debt first, but rather, to pay the “highest interest rates” first. In fact, this will make the time you need to pay off all debt shorter and less expensive (because those high interest rates are a bitch that will leave you in never-ending debt/interest payment). Here is a simplified example. Lets say you have three credit cards with the following balances and interest rates:

Card 1) $1000 14.9% interest
Card 2) $1500 23% interest
Card 3) $5000 3% interest

You would pay your minimums (plus 20%) on Cards 1 and 3 and then you would pay the most you could on Card 2. Let’s say that the most you can pay per month is $200. Well, as the months go on, your minimum payment will get smaller, thus paying off more of the principle debt. When that debt is gone, you now have an “extra” $200 per month to pay off Card 1. You would then pay $200 per month on that card PLUS the amount you were already paying on that card. When that card is paid off, you then pay that amount you were paying PLUS the amount you were paying on Card 3 to card 3. You total interest, and thus the total amount you expend, will be LESS if you pay it this way. As it is better to hold onto debt at 3% than at 23%.

A note on why you pay the minimum plus 20% on the “other” cards while you focus on one. Your credit score is dependent on your timely payments, plus the amount you pay. If you only pay your minimums, it will effect your credit score negatively. If you pay “over” your minimum, it will reflect your credit score positively (which will also effect the interest rates you pay on all your debt.) In order for the credit card companies to recognize that you pay over your minimum, you must pay at least 20% over your minimum. To get this number, take your minimum payment due and multiply it by 1.2. For example, if your minimum payment is $100, then your mimimum payment would be (100 x 1.2) = $120 per month. This is only applicable to credit and charge cards.

Also, if you have a mortgage, check with your mortgage company to see if there is a penalty if you split your mortgage payment up into two payments per month. If your mortgage is due on the first of the month, it would work like this: You would pay 1/2 your March mortgage payment on Feb 15th and then you would pay the remainder due on March 1st. Because the interest on your mortgage compounds not only on principle but also on the interest due, you will have eliminated two weeks of that interest due mid-month, thereby applying more of your second payment toward principle. On a 30 year loan, you could essentially pay off your house about 5 years early paying this way. Don’t take that number of years as exact, as it’s just an estimate, but ultimately, you get the idea.

I can not recommend more to read Suze Orman’s books, particularly her “Ask Suze Financial Library” which is not available in stores, but can be found on the secondary market on ebay. I got a set for a friend on ebay for only $9.oo. My original set was gotten on a special offer on PBS or something… but it is seriously invaluable regarding financial matters.

Best to all during these difficult times!!!

Love to the Roberts ( :

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