Time Is Money
Time is money. I've heard that phrase so many times growing up. During my childhood, I didn't know what it meant. When I went to college, I got my first credit card with the help of a lovely lady who worked with the credit card company. She told me how to complete my application even though I did not have a job at the time. I could purchase clothes, meals, whatever I wanted (well, at least up to my credit limit)! Then I received my first bill. I didn't have the money to pay the entire balance. No problem, I could pay a little at a time. Then I received my second bill. Wait, what?! Someone in billing made a mistake. Why wasn't the balance reduced by the amount I paid last month? What are those percentages? What's APR? What's compound interest?
That was my introduction to debt. As I learned how interest rates were calculated, "time is money" took on a new meaning. If I didn't pay the balance in full within 30 days, I paid interest. If I didn't pay on time, I paid a late fee and interest. The bible states in Psalms 22:7, " The rich ruleth over the poor, and the borrower is servant to the lender." What I didn't know then was that I allowed those credit cards to rule over me. I became a servant to the lender. I didn't understand how credit worked before getting credit.
How Time Is Money
Major lenders know that most people desire a small monthly payment. However, they do not tell that those small payment amounts keep you hostage as a servant for more extended periods of time. Here's what I mean. Let's say you have a credit card with a $3,000 balance, an Annual Percentage Rate (APR) of 25%, and a low monthly payment of $88. The time required to pay off the $3,000 is five years at the cost of $2,300 in interest payments.
The $88 monthly payment includes both interest and principal payments. To calculate the interest portion, first, multiply the loan balance of $3,000 times 0.25 (the decimal representation of 25%). The result is $750 per year. Then divide the $750 annual cost by 365 days to determine the interest cost per day, which equals $2.05. Lastly, multiply the $2.05 daily cost by 30 days; the result is $61.50 per month.
Now remember, out of each monthly payment, interest cost is paid first. So that means that out of the $88 bill payment, only $26.50 applies as principal, and the $3,000 balance reduces to $2,973.50. The small payment causes the loan balance to remain higher longer, so lenders will earn more interest and keep you in debt longer.
A key debt reduction strategy is to change your spending habits to generate extra cash to pay towards the debt. For example, let's assume you can find $20 to pay toward the credit card debt every month as an extra principal payment. By doing so, the debt will be paid-in-full in three years and six months at the cost of $1,500 in interest payments. Conversely, by not implementing this strategy, time lost equals 1.5 years, and money lost totals $800 more in interest payments.
Changing Spending Habits Saves Time/Money
Changing spending habits can start the journey to reducing the amount of time required to pay off debts and becoming more responsible with money. So let's explore some options.
Shopping
Entertainment
There are so many more options to make time and money work for you. We will explore those in the coming weeks.