Saving, Investing, and Personal Finance – Transitioning From Credit and Interest Expense Payments Into Found Money
How much are you paying in credit and interest expense? Did you realize the money you pay for those expenses can be transitioned into a kind of found money for you? Gaining that knowledge can help you put your life under your control, but it will take time and patience. It all starts with understanding your fate is up to you. This is the one of a series of articles for those new to saving, investing, and personal finance.
People usually notice the credit expense, but interest payments are one of those things that can be overlooked because they tend to become part of the financial landscape.
Have you recently totaled the outgoing interest expense you pay each month?
Interest and credit expense payments are a brake which slows your savings and investing rate.
There is no way to magically convert an interest payment expense into income. But, without increasing income, there are two ways that reducing and eliminating that ongoing additive debt will help improve your financial situation without increasing your income. In practical terms, that can be considered transitioning from debt payments into found money.
Everyone knows as you pay down debt, both the minimum payment and interest payments are reduced. If you pay too little, the interest payments add up, and you can owe increasingly more than when you started.
Some will pay the minimum. Some will pay as much as possible. Others will pay the same as they had been paying. Let's assume we can only pay what we've been paying because it's all we have available to pay towards this debt, and let's assume the amount is enough to lower the debt.
Keeping the numbers simple, let's assume the month 1 payment is $100, with $50 principal, $50 interest. Once that is paid, there is less principal outstanding. The minimum payment usually decreases.
Let's assume the month 2 payment becomes $98, with $49 principal, $49 interest.
We're assuming you pay the same $100 as last month. By paying $100, then it's $49 interest and $51 principal, instead of $49 on the principal and $49 on the interest.
That $2 difference is not earth shattering but even though the principal amount was minimal, a mere $2, there is a second benefit. Since there is less principal outstanding, the interest will be lower for all future months.
So, in effect, you are gaining found money with each payment because your payments go farther. The same monthly payment pays off more and more principal with less and less interest. Best of all, for each payment the savings extend into the future. Your total cost is less. You will pay off the debt more quickly without increasing your income. That is found money number one.
The interest payments were extra payments that were going from you to the creditor. You borrowed the principal, and paid the interest. The extra interest payment dollars over and above the principal dollars you borrowed are now going to you. You could think of those interest payments as found money two.
I don't know if an accountant or CPA would deem this found money or not. Technically, it was your money all along. You paid one thing, now you transitioned payments from debt to savings. But, I'd argue that technicalities don't matter. The fact is you were paying the $100 to someone else. Part of that payment was interest to have use of the principal. Without increasing income, and without changing outgoing payments, it's your money now. In this example, that is saving the $100 that you were not able to save before. Or, perhaps the $100 is used to accelerate the payoff of another debt. No matter what it is called, that helps you.
Paying off interest bearing debt and transitioning from payments to pocketing the difference is one of many steps in getting to a better point in financial life. It all starts with understanding your fate is up to you.
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