Personal Strategies for Financial Management

This guest post by Rick and entry in our non-fiction writing contest.

Have you ever wanted a simple strategy you could use to get yourself out of debt and begin building that magical, almost mythical thing called a “nest egg”? Throughout the following article, I’ll share some strategies with you that have worked for me throughout the years, and then use the strategies in scenarios to show how they work. I’ll try to lay out simple rules and then show you how you can put them together to create something that’s greater than the individual parts. I’ll use math to explain a lot of these strategies for those of you who enjoy calculations, and if published, I will try to respond to questions about the strategies laid out.

Let’s start with a couple of simple things everyone can do to prioritize where any extra money would be best spent with regards to savings and revitalizing one’s finances.

Rule 1. Pay off the highest interest rates first.

This should seem simple, but many people overlook this simple concept. It is not the amount owed that’s important here, it’s the interest rate applied to the money owed. So, while it’s attractive to put a little extra on each car payment, due to the size of the loan involved, it may actually be far more profitable to pay that little bit extra on your credit card.

Let’s use an example to illustrate this idea:

If you have a car loan of, say, $20,000 at 4% APR on a 5 year loan, and you have a credit card debt of say $2,000 at 18% APR, you’re probably looking at minimum credit card payments of around $40, and car payments close to $400 a month. On the surface, this seems simple, as $20,000 is 10 times more than $2,000 so the payment should be ten times as much right?

On the surface the math seems simple enough, but what many overlook is that the car will be paid off in 60 months making the “minimum” payment, whereas the credit card will take 19 YEARS to pay off making the minimum payment and charging NOTHING ELSE at all over 19 years.

Total interest paid for the life of these loans? $2126 on the car, and $3863 on the credit card. So, we’re paying nearly twice as much interest on $2,000 as we will on $20,000.

If even an additional $10 a month could be found to apply to these bills, paying the additional money toward the credit card would have the credit card paid off a mere 3 months after the car is paid off. This means we’ve paid the credit card off 13 YEARS ahead of schedule, and have only paid ~$1077 in interest on the credit card. This means that by simply paying an additional $10 a month on the credit card, we’ve saved ourselves $3863 – $1077 = $2786. So, we saved nearly Three thousand dollars by simply adding an additional $10 a month to that credit card. What could you do with an additional $3k? I’d love to have that kind of money floating around, and that’s exactly what you’ll have if you apply this simple concept.

How much could we save if we paid that additional money on the car? Without doing an amortization schedule here, suffice it to say that the money saved on the credit card was more than the total interest paid on the car.

Now that we’ve paid off that credit card, let’s look at Rule 2.

Rule 2: Keep making payments, even after things are paid off.

So, in the 5 years we’ve been paying an additional $10 on our credit card, we’ve paid off a car and a credit card. Let’s hope that car is still running well, because rule 2 will start to pay major dividends at this point. We’re already gotten used to making those payments of $450 a month ($400 for the car, $40 for the credit card, and $10 extra on the credit card), so why change our budgets just because we’ve paid these things off? We’ve obviously survived until now, and continuing to make these “payments” into savings we will begin building that elusive “nest egg” so many have spoken of. If we can keep that car for another 5 years, we’ll save a total of $27,000 by simply putting our “payments” into savings. This means when your car has problems, you can either afford to fix them, or in 5 years you could potentially purchase a new car outright, in cash.

To break it down a little simpler, without interest eating into our “payments” it adds up very quickly. $450 * 12 = $5400 a year, just by NOT changing our budget. By changing nothing for 6 years, we’ve not only saved $2786 in interest on the credit card, but we’ve added $5400 in savings. All by simply adding $10 a month to a credit card bill, and sticking to our budget even after things are paid off.

The longer you can keep your budget the same, the more that nest egg grows, and once you’re comfortable with the size of your savings account, we move onto a suggestion: Drive that paid off car until it can’t be resurrected with a voodoo witch doctor and a skilled mechanic. Every single year that car lasts nets you an additional $5400 in savings, or $5400 in reduction of other bills owed. Imagine that.

Look forward to future articles detailing coping strategies for financial hardships, and ways to accelerate savings, in addition to improving one’s credit score in simple easy steps.

This contest will end on April 22 2013  – prizes include:

• First Place winner will receive - A $500 dollar gift certificate courtesy of LPC Survival that is good for $500 off anything on their site. And  a Wonder Junior Deluxe hand-mill courtesy of Kitchen Kneads,
• Second Place winner will receive – Two cases of MRE’s courtesy of Camping Survival and a $150 gift certificate off of Hornady Ammo from LuckyGunner.
• Third Place winner will receive -  a one year subscription to Personal VPN service courtesy of unspyable.

Well what are you waiting for – email your entries today. But please read the rules that are listed below first… 

Originally at : The Survivalist Blog.net · Copyright © 2013 · All Rights Reserved.

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