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!

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.

Living Life

I was thinking today about how many times we go through a whole day, just to reach the end and measure ourselves against what we have accomplished.  We make lists of things to get done, check them off, and go to bed, often unsatisfied with the outcome.  Usually this is because we have even more things to do tomorrow.

I admit I live in that world most of the time.  But, once in a great while, I manage to do something unexpected, something I personally enjoyed doing, that wasn’t called for, that wasn’t part of the plan, and I realize that much of my life is happening while I am hunched over, planning what I am going to do next.

There is something to be said for getting the essentials for life done, but just how much further should we go in pursuit of “getting it all done.”

If you are like most Americans, (and increasingly like most people in the world who are slavishly following in our footsteps) then you have more things to do in any given day than you can possibly accomplish.  The vast majority of self-help books basically consist of a set of guidelines for filtering out what are the most important things you want to do, arranging them in order of priority, determining how long each will take to do, and consoling yourself that you spent your entire day doing the most important things.  The result is supposed to be a happy productive life.  But for many I suspect it simply means that you have a really good idea that you are totally overwhelmed.

So, I’d like to offer a prescription for American Time Management.

Chill.

Take a deep breath.  Close your eyes.  Let it out.  Now, say this out loud to yourself.

“I owe myself a break.  I’ve worked hard, I deserve it.  I am taking five minutes, right now, that are just for me.  Not for friends, family, society, or habits.  I am not going to think of anything to do.  For five minutes I am going to relax and take in the whole world around me.  I am going to appreciate the simple fact that I am in control of my destiny.

“Maybe I’ll have a cup of tea.”

Deborah Nash 1950 – 2012

 

Deborah Nash, beloved wife

Nash, Deborah A., 62, of Exeter, passed away November 16th , 2012 at her home with her husband and members of her immediate family at her side.  She was the beloved wife of David Dougher.

Born in Crystal Lake, Ohio, her family moved to Columbus, Ohio and Orono, Maine before finally settling in Kingston, Rhode Island.  She was the eldest daughter of Charles and Frances (Agar) Nash.

She was a graduate of South Kingstown High School and the University of Rhode Island.  In her early career she championed women’s rights and was asked by the authors, G. Kass-Simon and Patricia Farnes  to be the Associate Editor of “Women of Science – Righting the Record.”  Considered a seminal work in the women’s movement, it has remained in print since its initial publication in 1990, and continues to be used as a textbook by colleges and universities.

An avid reader and writer, herself, she continued to assist others with their work.  Her final editing project was for the just released young adult novel, “The Marble Game”, by Sarah Sloane.  The book was dedicated to her by the author.  Her interest in writing led her to publish her own poetry and the hobby of creating miniature books.  She created several books, with each double sided page being smaller than a postage stamp.  Many included carefully reduced illustrations.

Deborah was an ardent believer in animal rights and a strict vegetarian.  She was an accomplished equestrian and engaged in many outdoor sports including ice skating, swimming, hiking, biking, and kayaking.

She worked for a period of time in the corporate travel industry, specializing in complicated travel itineraries for business professionals, and travelled widely herself.

In 1990 she left corporate work and turned her interest to dance.  It was a transformative experience. She trained as a ballroom dance instructor at Paris Academy in Massachusetts and went on to create riDance.com, one of the largest dance websites in the country.  She focused on older adult students, believing that too much attention was being directed to young and competitive dancers.  She worked constantly to improve her teaching technique and taught hundreds of couples and individuals in Rhode Island, Massachusetts, and Connecticut.  She never stopped her own education, and loved all kinds of dance.  She took dozens of classes from experts in jazz, tap, hip hop, ballet, lindy, and blues dance, as well as regular training to improve her understanding of ballroom technique.

Recognized by her peers for her work on riDance.com and the dance field in general, she was elected to be President of Dance Alliance, the Rhode Island organization representing the interests of the professional dance community from 2004 to 2009.  She was a frequent attendee of dance events:  high school recitals, college performances, ballroom events such as K&S and Dancing Feeling, modern performances by Fusionworks, and classical performances by the Providence Ballet.  She would promote these events and often personally review them on the website to give them additional exposure.

Besides her husband and parents, she leaves two brothers, Jonathan Nash and Eric Nash; and a sister, Susan Nash, and many, many friends from all walks of life.

A Graveside Service will be held Saturday, 11:00 am December 1st 2012 at New Fernwood Cemetery, Kingstown Road, Kingston. In lieu of flowers, memorial contributions to Dance Alliance Scholarship Fund,P.O. Box 372, East Greenwich, RI 02818 or Farm Sanctuary at http://www.farmsanctuary.org/ would be appreciated. For information and condolences visit: www.FaganQuinnFuneralHome.com.  Fagan-Quinn Funeral Home  401-295-5603

There will be a reception at the Busy Bodies Dance Studio, in Wakefield, RI after the graveside service for those who are interested.