Saturday, December 21, 2013

Eliminate Debt - By Chris Wallace

Primerica believes the ultimate key to financial success is knowledge– about how money works, how to make responsible, well-informed decisions and how to get the best value for the dollars you spend. As part of Primerica’s continuing commitment to consumer education, over the next several months we will discuss common sense financial concepts that can help people overcome the obstacles they face and achieve their goals. 
This month we will focus on the forth principle: Eliminate debt.

Of all the threats to your financial security, none is more dangerous than debt. In every family’s quest to feel good financially, debt is the most common enemy. The very fact that it is so common – who doesn’t have debt? - makes it one of the biggest challenges to your financial well-being.

The bad news about compound interest is that it always works. When you are building a saving program it works in your favor. With debt it works against you. When you pay just the minimum balance on your credit cards, interest charges are added each month to the remaining principal. Your new balance is principal plus the interest… and that amount gets compounded again and again. It is easy to see how small debts grow large with compound interest.

Did you know if you made a one-time $3,000 purchase with no new purchases and make the minimum payments, it would take 10 years to pay off and you would end up paying $2,002 in interest charges? Based on APR of 18 percent.

There are two kinds of debt, revolving and fixed. Credit card debt is what is known as “revolving” debt. The interest compounds daily instead of monthly which means you can pay much more in interest. Because there is not a fixed amount that you pay each month, your debt can go on forever. Additionally, your interest rate could change at almost any time and there is little a consumer can do beyond paying off the entire balance at once. Revolving debt can erode your financial security quickly.

The surest way to protect your self is to not get into debt in the first place. If you do get into debt then you want to focus on paying it off as soon as possible. Debt stacking is the quickest way to do this. By taking into account the interest rate and amount of debt, debt stacking identifies an ideal order for you to pay off your debts. You begin by making consistent payments on all of your debts. As you pay off the first account you apply this payment the next account and continue until you payoff that account. This gets the principal of compound interest working for you.

So let us say you have $2,720 in monthly debt payments. You continue to make this payment on all of your debts until they are paid off. Most people when they pay something off create another expense. This plan can eliminate 10 or more years on your debt freedom date and save hundreds of thousands in interest.
There are a variety of programs that can help you do this. As always we recommend you consult with a professional to accelerate your debt freedom date!

In the time you took to read this article at least one resident of Windham will have had something stolen. We will talk about that next month when we explore the five most common credit mistakes.

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