The Big Three: What I Would Have Liked to Have Known Before I was 18…Part 3

Debt Repayment Graph - Very helpful tool!

Over the past two weeks, I’ve been writing about what I would have liked to have known about personal finance before I turned 18. These three personal finance topics sure would have been useful when I was just starting out as a young adult! My goal for this series was to enlighten one or two people on what you need to know about savings and debt.  Today’s final post is focusing on topic number 3, How finance charges work. Here is a recap on my Big Three: (click one or two to read the full post for each)

1. It’s never too early to start investing – making compound interest work for you,
2. Don’t be a slave to debt – using credit wisely, and…
3. How finance charges work – using amortization tables for clarity.

How finance charges work: Using amortization tables and calculators for clarity

When I signed up for my first credit card years ago, there weren’t any online calculators I could use to see how my minimum credit card payment was being applied toward my balance. (The internet was in its infancy! I’m dating myself ) I didn’ t know that the majority of my calculated minimum payment was only paying off the interest, not the principal. If someone had shown me the length of time it would take to pay off a measly $1,500 by only paying the minimum payment, it would have been an eye-opener! Let’s take a look at two pay off scenarios, shall we? We’ll assume that the total balance due on a credit card is $1,500 at 19% interest rate. Here are two very different scenarios:

• Paying only the minimum of $32 a month: 86 months until paid off – that’s over 7 years! The interest paid is almost the same amount as the principal.  (I’m calculating the minimum monthly based on the 19% APR divided by 12 months plus a couple of bucks towards principal.)
• Paying an additional $100 a month for a total of $132 per month: 13 months until paid off . Wow! What a difference, and the interest paid is only $167.

Today, there are lots of great websites that offer calculators and charts (creditkarma.com, bankrate.com, etc.) that do this for you. For my examples above, I used a debt repayment calculator from CreditKarma.com. It allows you to see how long it will take to pay off debts at varying interest rates and monthly payments. These calculators may also inspire you to shop around for the best rates. Lower rates equal less cash out of your pocket in the long run. Learn how to use these calculators!

Another item I also use is an amortization chart which shows how much of your payment is applied to the finance charges and how much is applied to the actual principal, or amount you borrowed. You can watch your principal to interest ratio move from paying more toward interest to paying more toward principal as the years go by. What a handy tool! It will also show you the total amount of interest you will pay on your debt. It’s a great motivator to help you pay off that debt quickly!

Finally, using budgeting software to set up a budget and see where most of your money is going is a  must-have tool for organizing your finances. I personally use Quickbooks, similar to Quicken, but there are some great personal finance software programs online as well, like Mint.com.

Summary

The saying that hind sight is 20/20 couldn’t be more accurate. In my early 20’s, I didn’t know what questions to ask and I was ill-prepared for personal finance. Now that I’m in my late 30’s, I realize that what I’ve learned can be helpful to young adults just starting out. Hopefully this can be used as a starting point for those who are fumbling through the murky waters of personal finance.

How do you think the internet has helped you with your own personal finance? For those of you in your 30′s, like me, do you think this knowledge would have been beneficial in your late teens and early 20′s?