Is Financial Freedom Worth The Hype?
One of the conveniences of capitalism is the easy availability of credit. You can buy almost anything on credit and applying for a credit card is easy! Some credit card companies give out free Pizzas just for signing up!
Average credit card debt is over $15,000 today whereas the average median household income in the United States is about $50,000. That’s a whopping 30% debt! But if you believe the financial burden is worth it as long as you have ‘one low monthly payment‘ to make, I don’t think you should even be reading MoneyCone! You are better off writing a fan mail to Chase or Citi!
The High Cost Of Low Monthly Payments
How would you like to purchase a TV that’s on sale – $900 off list price! The list price on a 65″ HDTV is about $4500, but if it went on sale for $3600, I think it is a good deal. Don’t you think? Maybe you waited almost a year for this TV to go on sale before snagging it for $3600. If you intend to pay it off with your credit card minimums, here’s what you are actually paying – $11,725.59. That’s $8125.59 in interest alone! That $900 savings doesn’t seem much now does it? In fact, you should probably pay the full amount and stimulate the economy!
Making Money Work For You Is Hard, Real Hard
To put this into perspective, let’s say you gave Chase Bank the credit card issuer, $3600 as a savings deposit. According to Chase website, Chase offers a whopping interest of 0.10% for your $3600 deposit. That’s right! When Chase lends you the money it is 14% interest, whey you lend Chase the money it is 0.10%. Even the stock market averages cannot beat the 14% rate! And miss a payment and your rate jumps to 29%! Now you see why credit cards are a real sweet deal for the credit card companies?
In Pursuit Of Financial Freedom
So how does one become free financially? What is the magic technique? The technique is pretty simple actually and it works provided you meet the prerequisites.
- You must be able to make your monthly payments
- You must be motivated to become debt-free
- You should not take on additional debt (exception home, auto)
The Magic Technique
- STEP 1: List all your debts in ascending order and indicate your monthly minimum next to each
- STEP 2: Add up the minimums (which you should be able to pay) and determine how much more you can afford each month as extra payment towards your debt.
- STEP 3: Make this payment toward the first debt in your list. That is, the one that can be paid off the soonest
- STEP 4: Once that is paid off, add the minimum you were paying for this debt along with any extra payment you can make to the minimum of the next debt in your list till that is paid off
- STEP 5: Repeat the same for the next by adding up the minimums of both the first and the second towards the third thus having a snowball effect towards tackling your debt
Not surprisingly, this technique is called the Debt-Snowball method first proposed by Dave Ramsey. It works because it is easy, and keeps you motivated since you tackle the smallest debt first. There is no rule to how much extra you can put in. Set aside whatever you are comfortable with and this can vary month to month.
Next time when something goes on sale and you make a purchase intending to pay it off in full, you beat the credit card companies by benefitting from the 1% or 2% rewards they offer and having free credit!
You are now what credit card companies call a deadbeat! Congratulations!