The Debt Game

This week I’m going to give you a free class in how to get out of debt as fast as possible. To do it, I’m going to show you a simple game. Then I’m going to make it more and more realistic while showing you how to win every time.

So let’s play… The Debt Game

You have two debts. Both debts are for $100.00. It’s the beginning of the month. You are receiving one hundred dollars per month to eliminate your debts. Assume there is no additional penalty for not paying a bill. One debt has a 10% interest rate per month. The other debt has a 25% interest rate per month.

How much should you pay towards each bill to get out of debt and spend the least amount of money? The answer may seem obvious (and it is) but let’s play it out and see what happens…

If you make no payments at all, you would still owe the original $200.00.  In addition, you would incur a $10.00 penalty from the loan with 10% interest and a $25.00 penalty from the loan with 25% interest.  So at the start of the next month you would have a debt of $235.00.  Oops! Wrong way to go!

Next, let’s make payments on each bill.  At the end of the month, you will have interest in both bills. Let’s say you put $50.00 towards each bill. So, at the end of the month, you still owe $50.00 on each one. The 25% debt adds another $12.50 to what you owe. The 10% debt adds another $5.00. With this choice at the start of the next month, your original $200.00 debt will drop to $117.50.  Better, but not optimal.

You could also pay off one of the debts completely. Let’s pay off the debt with the smaller interest rate. In this case, you would eliminate the 10% penalty completely.

However, you would still owe 25% on the remaining bill. So that’s $25.00. At the end of this scenario, you end up owing $125.00 at the start of the next month. Ouch!

In the last case, you pay off the debt with the highest interest rate. So, the 25% debt is removed. You still owe 10% on the remaining debt or $10.00. So, in the second month with this payment plan, you would owe $110.00.

So, which debt should you pay off first?

In this simple example game, you would pay off the loan with 25% interest first. By doing so you eliminate a $25.00 penalty and keep the $10.00 penalty. Any other combination results in your owing more money.

The important thing to notice is that we owed $200.00 total. In each case (except the first one), we paid $100.00 towards the actual debt owed. The difference in the amount we ended up with was strictly a function of what the interest rate was on each debt. The more you pay towards the higher interest rate item, the less money you will owe going forward.

Now, let’s make our game a bit more complex…

In a real debt, however, the situation seems more complicated. The lender will almost always require that you – the borrower – must pay some interest on the loan for that month plus a percentage of the actual amount you owe. If you understand this then you can see how loans actually work and the fastest way to pay off any loan.

Let’s say that the person making the loan wants it paid off in ten months. If you borrow $100.00 he will want $10.00 of the loan paid to him each month PLUS the interest on the amount you still owe. So, in the example above. The lender who issued a loan for $100.00 at 10% interest would want $10.00 paid off on the loan, plus 10% interest on the $100.00 for another $10.00. That means he wants $20.00 for the first month. The second loan at 25% interest would want $10.00 paid off on the loan plus 25% interest on his $100.00 or $35.00.

The actual amount of the money you borrowed that you still owe and pay interest on is called the principal. So, both lenders want you to pay off $10.00 of principal plus the interest. ($10.00 from one lender and $25.00 from the second.)

So, the rule for getting out of debt is actually very simple. You ALWAYS pay any extra money towards the principal with the highest interest.

This is IMPORTANT. It is easy to see that this is true when the amounts are the same.

However, our reasoning can easily get clouded when the amounts differ.

If we significantly increase the debt amounts to say $5000.00 for both debts you can see that by focusing on the debt with the largest interest rate you would get out of debt much faster. The 25% interest loan is adding an additional $250.00 to your debt while the 10% load is only adding $50.00. Paying off the 25% loan would clearly be the priority.

However, when you shift the debts to an uneven amount we can be easily misled. If we change the number we owe to $5000.00 for the 25% debt and $1000.00 for the 10% debt a strange thing begins to happen. Paying off the smaller debt suddenly seems to be the better choice. Our reasoning shifts. “I can pay off the smaller debt and then use the money from the second debt to pay off on the first debt. I’ll be getting out faster!

This doesn’t work! Why? Because you are paying down the principal on the smaller debt while paying the interest on the larger debt and keeping the principal on the higher debt. Interest rates will increase your debt based on the principal you owe. Even though you eliminate one debt, the amount of interest you will accumulate on the other will ALWAYS exceed what you would have saved if you had paid down the principal on the debt with the greater interest.

So, paying off the smaller debt with the lower interest rate might make you feel good, but it will actually make you spend MORE money. Remember that. Sometimes we really need the win to keep going. In that case, you can choose to pay off the smaller debt to keep going. But recognize it is going to cost you more and can actually take longer. It’s sort of like running a race where you have a backpack with some rocks in it. You are getting tired. You can take a big rock out of your pack and keep going – but the race will get a quarter mile longer… Or you can take smaller rocks out every quarter mile and finish sooner… and end up carrying less weight overall.

Now, there are two things to watch out for in paying off debts.

The first is tax deductibility. Many people keep around things like mortgage loans because they are tax deductible. However, the deduction for a mortgage loan is only a percentage of the interest you paid on the loan. At best, you should think of it as reducing the interest rate on the loan by about 20%. So, if you had a mortgage with a 10% interest rate then you could deduct 20% of that and say that your mortgage rate is actually closer to 8%. When you look at it this way, you can see that while a mortgage is generally one of the last things you want to pay down when trying to get out of debt (because of the generally low-interest rate to start) you shouldn’t avoid paying it down just to save the tax deduction.

The second thing to avoid at all costs in seeking a loan is one in which you cannot pay in advance against the principal to reduce your debt. Here’s why. Some lenders will specify that you cannot make extra payments against the principal. They will take a payment and treat it as reducing the last payment on the debt. So, you are paying off the debt faster, but you are not saving on any interest until the end of the debt.
Let’s see how this is different.

You owe a lender $100.00. He is charging you 10% interest per month and he wants you to pay off the debt in ten months. You will be paying $10.00 towards the principal each month. So, the first month you pay interest on $100.00. The second month you pay interest on $90.00. And so on…

Now, Let’s say in the third month you receive an extra $10.00 bonus and include it in the payment to reduce the debt. Here’s the difference. If the loan were paid off normally you would see payments that look like this.

100 90 80 70 60 50 40 30 20 10
+10 10 10 10 10 10 10 10 10 10
+10   9   8   7   6   5   4   3   2   1
+20 19 18 17 16 15 14 13 12 11

Those would be your payments and the interest

The top row is the principle.
The second row is your $10.00 payment against the principle the lender wants.
The third row is the interest payment on the principle for that month
The fourth row is what your payment would be every month until the debt is gone.
It’s pretty straightforward.

Now let’s take a look at what happens when we add that extra $10.00 payment in the third month.

If the lender pushes the payment to the end of the month your payments would look like this.
100 90 80 70 60 50 40 30 20 10
+10 10 10 10 10 10 10 10 10 10
+10   9   8   7   6   5   4   3   2   0
+20 19 18 17 16 15 14 13 12 10

You have eliminated the final payment but you continue to pay on the principal until the debt is discharged. You paid $10.00 extra and shortened the loan time but you saved very little ($1) in interest.

Now look at what happens when you apply that to the principle.
100 90 80 60 50 40 30 20 10 0
+10 10 10 10 10 10 10 10 10 0
+10   9   8   6   5   4   3   2   1 0
+20 19 18 16 15 14 13 12 11 0
——+10

Not only do you pay off the debt one month faster, you actually pay substantially less money! You actually saved $1.00 for each month from that payment point.  So you end your debt one month early and you saved $7.00 in interest.  See the difference?

Now, in the real world what would happen is that the amount you pay differs based on the kind of loan you have.

If you have a mortgage, the amount you pay is fixed and you initially begin paying off only a small piece of the interest at first. The lender applies a certain amount of the interest and a certain amount towards the principal in a complicated formula designed to reduce your debt over a fixed amount of time. As your payments progress, you pay less and less interest and more and more in principal until near the end almost the entire payment is going to principal. If that is the case, making extra payments on the debt is most beneficial the earlier you do it. Near the end of the debt, you are paying primarily towards principal anyway so you are only shortening the time until the debt is paid off. If you pay extra at the beginning of the debt you reduce the principal and not only pay off the debt faster but reduce the interest payments creating a snowball effect of paying more and more towards the principal reducing the debt even further. For large loans, paying early on principal can snowball into tens of thousands of dollars of savings overall. In our example above you saved about $7.00 as well as ending a month early. With a standard fixed payment, the picture would be more complicated but the early payment would have a huge effect in reducing the time and payment.

Another way to reduce debt is to split payments in half and pay half early. So, if you have a mortgage payment of $1000.00 and you make two payments of $500.00 in the middle and end of the month you will save thousands over the course of the loan rather than paying the full $1000.00 at the end of the month. This is because you have reduced half of your normal principle payment 15 days early each month. Again, switching to bi-weekly payments at the end of a mortgage does little to reduce your debt since you are paying primarily on principle at that point anyway, but doing it from the beginning of a new mortgage can result in substantial savings.

The second kind of loan you can receive is one where the payment is not fixed but adjusts with your indebtedness. Credit cards are the typical example. Each month the amount you are asked to pay shifts based on how much you owe. The debt includes all the interest on the debt plus some portion of the principle. The credit card will generally offer a date as to when the card would be completely paid off and how much it would cost you if you stopped using the card and focused on paying off the debt. It can be pretty disheartening to see just how much your credit card debt is eating up your cash. And if you have more than one card it can be scary trying to figure out how to pay them off.

At the bottom line though when trying to pay off debt one rule applies. Interest rate pushes everything. To get out of debt pay off the biggest interest rate debt first.  If you do you’ll be a winner!

David Dougher – author, ballroom dance instructor, computer consultant, game designer, and odd fellow.
My Personal Website
My Author Website
My Author Facebook Page
The Amazon Author Page to My Novels
Subscribe to My Email List!

Advertisements

Happy Birthday Kea! And bye-bye TV & (anti-)social media.

Today is Kea’s birthday!  I’ve decided to celebrate with her by getting out of this stupid, pointless social media rat race I’ve mired myself in for the past few years.

I am done.  Done with tons of email that is occasionally useful.  Done with the barrage of self-help courses that don’t help but only tell you that other people are more successful than you because you don’t work hard enough on the “right” things. I’m done with social media that isn’t social at all, just a volcano of petty resentments that periodically flares up to smite the innocent and the guilty alike.  I don’t need it.  I don’t want it.  Feel free to spam my inbox until it explodes – I’m not reading it.  It now auto-forwards to trash.

I’m pulling my head out of this social media nightmare where everything you think and say has to be profanely criticized by some sophomoric teen with delusions of importance.

I’m done with 25 minute television commercial marathons.  I’ve turned it off.  Your one hour shows that really last only 35 minutes and actually only have 22 minutes of content – gone.

However, I am not pulling out of my responsibilities as a citizen of this country.  I’m just not listening, watching, or falling for the sleight of hand political maneuvering that is going on now.  You know, where the press is led off into week-long apoplexy over some outrageous statement, while no one is reporting the fallout from the repeal or rewrite of legislation designed to protect us from mistakes we made in the past.  I’m not buying into having knee jerk reactions from reporters who aren’t smart enough to realize they are being jerked around.

I’m going back to long walks on the beach, working out at the gym, and talking to real people.  I’m up for quiet dining in nice restaurants with people I like.  I’m listening to good music on my stereo instead of twenty minutes rants by half educated DJ’s – who only know their half of any story, and haven’t seen the other side of anyone’s point of view since 2004 – if ever.

I’m going back to basic housework.  I’m doing some fun yardwork.  I’m saying hello to my neighbors.  I’m picking up the trash that’s littered my lawn and my street.

I’m cleaning up my life.

And, with all this new spare time I’ve gained from rejecting the hype, I’m going to try new things, be happier, and accomplish more of the things that matter.

Yup, going to be a great day.  Think I’ll start by playing with the dog.  She hasn’t gotten enough attention in a long time.  And she deserves the attention more than the media crap going on around me lately.

ps. To all the “news reporters” who seem to have forgotten their Journalism 101 classes. A quick reminder.  Who, What, Where, When, and Why.  These questions are the essence of journalistic reporting.  State the facts, skip the opinions, and never speculate.  If you aren’t reporting the facts, (and just the facts,) you are practicing propaganda – not journalism.   Duh.

 

David Dougher – author, ballroom dance instructor, computer consultant, game designer, and odd fellow.
My Patreon Site
The Amazon Author Page to My Novels
Subscribe to My Email List!

Food Review – Mae’s Place

8230 Post Road
North Kingstown, Rhode Island

Mae’s Place is small cafe located on the junction of Route 1 and 1A (or Post Road and West Main Street curve for those of you who are local.) Mae’s serves breakfast and lunch in a clean, cozy atmosphere.  They open promptly at 6:30 and close at 2:30.  There is ample parking but getting into and out of the lot can require a tiny bit patience when the Post Road traffic is heavy.

The restaurant is small, but well laid out.  There is a glass counter to the right for quick take out. It also does a brisk business.

Already, even though it is the off-season, Mae’s is already building a loyal clientele.  The place is immaculate and brightly lit.  The service is open and friendly.

The waitstaff is happy, friendly, and knowledgeable.  The portions are generous and are freshly made.  Food here is solid and even the weekly specials are intended to leave you happy and full rather than simply being “catchy”.  Food delivery is very fast considering the kitchen is small. Food arrives cooked to your requirements and hot.  Kudos to the cooks in the back.

This is a family place, not a “tie and tails” place.  Casual is the norm.

The restaurant is handicap accessible.  There is a concrete ramp leading to the main door.

The prices are reasonable and the weekly menu has a number of interesting choices if you want to try something a little bit off the beaten path.

For example, I found the Caramel Apple Belgian Waffle quite tasty.  A combination of flavors excellently blended without any one becoming overpowering (which the caramel has a tendency to do.) The apples were not bitter and not overcooked to mush.

A couple of other things to keep in mind.

For those who are Rhode Islanders, Mae’s has johnnycakes.  I took along a couple of locals who were both pleased with the offering.  Next, Mae’s has hash browns as an option instead of home fries.  I tend to avoid the extra carbs from home fries, but I rationalize like crazy to justify good hash browns.  Mae’s are very good.

Finally, buy a muffin – or six.  At the risk of losing my supply, they have a wonderful raspberry and white chocolate muffin which could easily substitute as a dessert on its own. Mae’s does not skimp on the size or the taste.

So for a good solid breakfast or lunch in a clean atmosphere visit Mae’s.
They’ll be happy to see you, and you’ll be happy you went.

Keeping The Promise That Mattered

It was over five and a half years ago.  Deb and I had just been given the news that she had four, perhaps five years to live.  (We actually had much less, but did not know it.) We were riding home in the car trying to digest the news when she said, “I wonder if anyone will even remember me in four years?”  (She always went with the low number, being a realist.  I, being the optimist, insisted on five.)

“I will,” I said.

She squeezed my hand and said nothing.  I knew she felt that much of her life was wasted, that she had made little lasting impact in the world.

Well today marks the fourth anniversary since she was taken from us.

This year, her mother and I went to the awards ceremony where the scholarship in her name was given to a lovely girl who wants more than anything to dance.

The historical photography project she worked so hard to complete went up on display at a prominent Rhode Island College.  Parts of it will become the posters for future Dance Alliance advertising to promote dance and the arts.

This year I was given a DVD by two of her students showing their winning routine in a Dancing with the Stars contest. The dance was dedicated to her.

The list of her former students who still tell me of lessons they learned from her goes on year after year.

I still get calls on a weekly basis from people who use her riDance website, despite its age.

I meet weekly with many of her favorite students in the classes I now teach, and at local watering holes and, of course, at dances.

So, Deb, I finally won an argument with you.

In time we will all be forgotten, the great, the not-so-great, the famous, and the infamous.  But, not today.  Today, four years later, I still remember.  And so do many, many others.

My life, and theirs, goes on.  We grow and we change. I’ve become the writer we always discussed, and I’ve added new friends and new students. I’m moving forward.

But, we are all better for having spent part of our lives with you.

So, I’m off to a dance now.  It’s what I do.

Breakfast Reviews

For the past several months I have been doing reviews of the places I like to go for breakfast.  Like all good things I was bound to run out.  It’s not that there aren’t other excellent places for breakfast in the South County area.  It’s simply that these are all the ones I normally go to.

So, I have to make a choice.  I can move on to doing other kinds of food reviews – lunch, brunch, dinner. I could expand to a wider area – which would involve a lot of extra driving.  I could ask you for places that I haven’t tried and then go there.  Or I could simply stop here.

It has been fun, but I wouldn’t want to continue by recommending places I don’t think people would like.  And I don’t think you or I would get much out of dissing a restaurant in a review.  That’s not what I am about.

So, for this week, no recommendations.

I’m open to suggestions.  Got a place you would like me to try?  Think I should shift to lunch or dinner reviews?  Time to retire?  Speak up.  I’ll announce the decision next week.

 

Food Review – Aunt Carries

Aunt Carrie’s Seafood Restaurant

1240 Ocean Rd,
Narragansett, RI 02882

Not exactly breakfast, they typically don’t start serving until 11, but you have to mention them…

Aunt Carrie’s is a seasonal dining hotspot located near Point Judith very close to the ocean. Locals and vacationers have long crowded in during the summer for it’s excellent seafood  brunch, lunch and  dinners.  Not to mention the huge variety of pies they offer.

The building is a low single story affair with little parking. Locals will often park behind the ice cream store across the street (which is owned by the same people who run the restaurant.)

The entryway is wide enough for a wheelchair and, except for a small bump at the front door access is pretty easy.

Aunt Carries does not claim to be animal friendly, but people often buy from the open front booth area and then eat outside at the picnic tables in the back or across the street.
The food is very good, especially the seafood. The atmosphere is family friendly, not fine dining. You won’t find many suits at Aunt Carries, and you may find more than a few bathing suits outside.

I actually spent a good part of last summer trying each of the pies they offer and I found them all to be very good. The crust tends to be a bit doughier, mainly due to the fillings, so if you are expecting a light and flaky crust you might be a bit disappointed. You shouldn’t be disappointed by the taste, the size, or the quality of the ingredients in any of their meals.

Fish and seafood is fresh, and the batters are crispy. Meals are served quickly and the waitstaff is friendly and chatty.

Mark this one as another fun summer find and remember to save room for dessert.

Food Review – Tree House Tavern and Bistro

The Tree House Tavern and Bistro

1094 Centerville Rd..
Warwick, RI 02886
Please note address correction above.

The Tree House Tavern in Warwick does a booming business in the evening.  Which is why it is such a delight to visit early in the day for breakfast.  You can generally get in and seated right up to lunch with little waiting.

The Tree House has a fun atmosphere and as the weather warms up so do the options you can enjoy.  In winter you are typically limited to the main building – a collection of rooms of various sizes that you can dine in.  If you call ahead you can arrange to have your favorite.

But with the warmer weather the gardens begin to bloom (the bistro was a garden shop in a former life) and you can eat outdoors.

Outdoors, there’s a bit of bustle from the street, but it is easily ignored.  The parking area is adequate and very easy to navigate in the early morning.  There is even a traffic light to let you exit back onto the busy street.  The entryway is flat and handicapped access is easily possible.  There is a bathroom on the floor with a wide door as well.  Outdoor dining means that your pooch could come along, but check with the management about their policies.

Indoors you realize that things here are a bit… different.

I first visitied around St. Patrick’s Day and I entered to find an eight foot tall yellow stuffed camel with a green fedora on his head and a pair of bongos lodged between his humps.  There was Celtic music playing in the background. Later, outside the window by the small table where I was dining I could see a grey squirrel giving my meal the eye.  He’d climbed up a nearby tree to watch.

Feel free to “go walkabout” in the restaurant.  There are a several cozy rooms to visit and when you think you have seen them all a new one pops up.  No going upstairs or out into the kitchen, of course. The different sizes allow you to have groups of diners gathered for meetings or just a quiet meal.

Looking around the main dining area is a treat, with an odd collection of items hanging on the walls.  I personally loved the collection of old saws artfully arranged in an arc on the second floor wall.

Dining is confined to the first floor and the outside areas.  The covered open tool storage area with its giant picnic table makes it an interesting choice.  The actual treehouse (yes they have one) is off limits to diners but it’s low enough to the ground that a tall person could let a small person take a peek inside.

The food here is very good.  I went with traditional fare, but I’ve come back a couple times to begin working my way through several of the apple dishes that fill out the menu.  If you want an early morning mimosa or hangover cure they also have a fully stocked bar.

This is Rhode Island and seafood is a must try – even for breakfast.  I’ve had both the new England Benny with lobster, asparagus and hollendaise, and the smoked salmon Benedict.  Both were very good.  I’m also up for the Apple Pie French Toast, especially in October when apple season is in full swing.

I must also add that I had a very pleasant time chatting with the owner, a freindly sort with a wry sense of humor and a great attitude about his business and his life.

So for a fun time year round, and excellent food and service try the Tree House Tavern and Bistro in Warwick.