Monday, April 23, 2018

Money Friendship Month - Chapter 4

As we are building better relationships with our money and we are becoming friends, we want more of it to hang out in our own bank account instead of the credit card company. Most people know that interest can work in your favor or against you. That may be a cliche but it is also a truth. Every dollar bill you have wants to hang out with its friends - other dollar bills - so either it brings you more of said friends and they hand out in big groups in your wallet or your bank account, or it goes to a bigger company - credit card company, store - to find friends to hang out with.

If you want to build a friendship with your money, you need to make sure you give as little as possible to the creditors. Now, I'm not suggesting to lower your payments, just to shorten the time you pay - this in turn will reduce your paid interest. This same method applies to credit cards, as well as car payments or even mortgage. The faster you eliminate a debt, the less interest you are paying on that debt.

There are 2 ways to tackle debt, each with its pros and cons. One is based on paying the highest interest first, and the other one is based on paying the lowest balance first (known as the snowball effect).

They are both efficient and can be followed by anyone. The challenge is that we are humans, and we naturally procrastinate, and we also naturally get side-tracked even when we are working on the project. Therefore, when making the decision on which way works best for you, the most important to keep in mind is your personality and your motivation.

If you know you can stay focused, and if you want to pay as little as possible in interest, the “highest interest first” method may be your best choice. For the rest of us however, the most likely way to succeed may be the “lowest balance first” method. The reason is the increased motivation once a debt is paid off.

Either way you decide to tackle your debt, it is important to keep working on it and never give up. The best approach is to pay the minimum required on all credit cards and other loans, except for the one you are working on at the time – whether that is the lowest balance or the highest interest. On that one, you want to put as much money as you can, in order to pay it off as soon as possible.

The total monthly payments should stay fixed (or increase if possible – if you want to pay everything off faster). Once a card is paid off all the money that was going on it should be redirected to the next debt, thus keeping the monthly at the same amount but increasing always the payment on one debt until it is paid off. 

Remember we talked last week about building an emergency fund that would take care of unexpected bills. When you have that in place, you don't have to worry about higher credit card balances due to things you could not budget for. And after you obliterate credit card debt, make sure to tackle all your other debts, such as car loan, mortgage and student loans. None of them are your friends, even though your tax preparer may suggest you keep a mortgage in order to deduct the interest on your taxes. Chances are slim to none that you would be able to use that, especially if you have been paying for 5 years or more. Not worth making your mortgage company rich.

If you want your money to be your friend, don't pass it on to creditors! Encourage it to hang out with you more.

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