A Financial Reality Check: Calculate Your Interest This Month
George Boelcke FCI
August 15, 2007
Do you know what you’re paying out in interest this month? If you’re like most people, you don’t have a clue – and it’s often too depressing to think about in the first place. But you cannot change what you do not know or acknowledge. And knowledge really is power when it comes to your finances.
Since all the interest you pay each month is for something you purchased yesterday, or years ago, it’s costing you a lot of money today. But what does it all add up to? It’s something you should know, because it’ll really motivate you – but only if you have a number in front of you.
Sometime today, take a piece of paper and draw six lines down the page. The six columns across are: Who you owe, the total amount, interest rate, monthly payment, interest this month and principal this month.
The first four columns are no-brainers. Just fill in who you owe the money to, your balance, the rate and the monthly payments. OK, maybe not that simple because more than 40 percent of people don’t even know the rate on their credit cards! In the case of credit cards or HELOC, the payment is either the minimum due or the amount you’ve actually been paying each month.
Now do a few seconds of simple math to calculate the rough amount of interest each month. Take each balance times the interest rate and divide it by 12 to get this months’ interest. After all, the interest portion of what you’re paying is going out the door each month and you’re getting nothing more for it. It’s only the left-over principal payments with which you’re gaining any ground on paying back your debts.
The last step is just to subtract the interest from the monthly payment – that’ll get you the amount going to pay down your balance this month.
Here’s an example:
Who Total owing Rate Payment Interest Principal
HELOC $ 30,000 8% 265 200 65
(30,000 x 0.08 divided by 12 = 200 interest. The 265 payment less 200 interest = 65 principal
Mortgage $210,000 6% 1340 1050 290
Credit card 1 $ 3,000 16% 120 40 80
Credit card 2 $ 7,000 19% 245 111 134
Totals: $250,000 1970 1401 569
In this example, almost $2,000 in payments is going out the door each month. Money that has to be paid and income you have to earn just to pay other people! Now just think for a minute of what you could do with this $2,000 each month and how this has you in a total financial straight-jacket to get seriously motivated and focused on changing this around.
1401 of that total is in interest payments just to tread water and to buy the right to owe it another month. But only $569 of the two grand is actually making a dent in the total debt!
Of course, the more money going to principal, the faster the debt is paid off, the faster you’ll get to keep that payment for yourself and the less interest you’ll pay in total. That’s the reason every $20 or $50 extra that you can pay comes right off the balance, because the interest is already taken off the top.
So don’t dismiss a few extra dollars – it makes a big difference, goes entirely off the balance and brings the end into sight that much quicker. Yes, we all pay interest when we borrow. But how much interest you pay is totally up to you, because the magic of paying it faster is that interest will always be charged on a lower and lower balance each month, and that’s always within your control.
You can pay it now – or pay it later – but later will always cost you a lot more.
Since all the interest you pay each month is for something you purchased yesterday, or years ago, it’s costing you a lot of money today. But what does it all add up to? It’s something you should know, because it’ll really motivate you – but only if you have a number in front of you.
Sometime today, take a piece of paper and draw six lines down the page. The six columns across are: Who you owe, the total amount, interest rate, monthly payment, interest this month and principal this month.
The first four columns are no-brainers. Just fill in who you owe the money to, your balance, the rate and the monthly payments. OK, maybe not that simple because more than 40 percent of people don’t even know the rate on their credit cards! In the case of credit cards or HELOC, the payment is either the minimum due or the amount you’ve actually been paying each month.
Now do a few seconds of simple math to calculate the rough amount of interest each month. Take each balance times the interest rate and divide it by 12 to get this months’ interest. After all, the interest portion of what you’re paying is going out the door each month and you’re getting nothing more for it. It’s only the left-over principal payments with which you’re gaining any ground on paying back your debts.
The last step is just to subtract the interest from the monthly payment – that’ll get you the amount going to pay down your balance this month.
Here’s an example:
Who Total owing Rate Payment Interest Principal
HELOC $ 30,000 8% 265 200 65
(30,000 x 0.08 divided by 12 = 200 interest. The 265 payment less 200 interest = 65 principal
Mortgage $210,000 6% 1340 1050 290
Credit card 1 $ 3,000 16% 120 40 80
Credit card 2 $ 7,000 19% 245 111 134
Totals: $250,000 1970 1401 569
In this example, almost $2,000 in payments is going out the door each month. Money that has to be paid and income you have to earn just to pay other people! Now just think for a minute of what you could do with this $2,000 each month and how this has you in a total financial straight-jacket to get seriously motivated and focused on changing this around.
1401 of that total is in interest payments just to tread water and to buy the right to owe it another month. But only $569 of the two grand is actually making a dent in the total debt!
Of course, the more money going to principal, the faster the debt is paid off, the faster you’ll get to keep that payment for yourself and the less interest you’ll pay in total. That’s the reason every $20 or $50 extra that you can pay comes right off the balance, because the interest is already taken off the top.
So don’t dismiss a few extra dollars – it makes a big difference, goes entirely off the balance and brings the end into sight that much quicker. Yes, we all pay interest when we borrow. But how much interest you pay is totally up to you, because the magic of paying it faster is that interest will always be charged on a lower and lower balance each month, and that’s always within your control.
You can pay it now – or pay it later – but later will always cost you a lot more.
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