The Minimum Payment Trap

On the outside, minimum payments are made to look harmless and as though they exist for your advantage. However, this couldn’t be further from the truth. Minimum payments are designed to keep people in spiraling debt.

The lower the minimum payment (relative to the size of the loan), the more interest you will pay.

When you take out any sort of loan loan, there is often a structured loan repayment plant for the duration of the loan. Lower minimum payments are attractive to consumers because they see it as an opportunity to make big, expensive purchases without the need to save up for them. The problem with this model is that on top of paying for the items or commodities in question, you also pay interest on a loan. While this is widely known, what is not widely known is that Minimum payments maximize your out of pocket expenses significantly. 

My friend recently bought a home for a relatively affordable price in Bellevue, Washington. A year or so after buying the home, he found out the house had severe electrical and plumbing issues. He had to take out a second mortgage to gut, fix, and repair the whole house. At first, he was very happy because the minimum amount due per month on the 2nd mortgage was very affordable and would let him fix his abode.

Still, due to the cost of the repairs and materials, he did most of the work himself. I would come over to help him with heavy things or to hang drywall occasionally. One day I came over and he was noticeably upset. I ask him what was wrong, and he told me this:

(paraphrasing) ” I just found out that if I make the minimum payment on my second mortgage, I will pay twice as much across twenty years. I can’t afford to make much more than the minimum payment between other bills, my first mortgage, and student debt. I’m f**king screwed for twenty years. I looked into my other debts and it’s the same thing. I make $100,000 a year, but I can’t save anything because of all of my bills. How can I raise a family without sinking further into the hole?”

He had been lured into the minimum payment trap for the past decade of his adult life. He’s an opportunist. He saw every loan with a minimum payment as an opportunity to buy things he didn’t necessarily need… like the boat he purchased a few years ago. He doesn’t get to spend much time on it. It costs him a few hundred a month and it will continue to do so for years to come.

How do I beat Minimum payments?

The best way to get a head of minimum payments is to not take out loans in the first place. Save your money, then make a purchase. Not the other way around.

What if I already have Minimum payments to make?

Don’t make the minimum payment, even if you can only pay 5% more it will save you in the long run. If you can afford to pay more upfront on the loan, do so. If you can afford to make higher monthly payments, absolutely do so.

What if I have no other options, I need to take out a loan?

Same advice as above, try to put as much down up front as you can. Always pay more than the minimum payment due. Make sure to review the loan terms with scrutiny, some loans have terms that change after five years.

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Read my latest book!

Meditation: Benefits and Techniques for Beginners is available now!

I would like to thank Shangri La Press and their fantastic editorial team. My first book is officially out!

You can get it here for $4.99 on Amazon (or read it for free with Kindle Unlimited!) – Meditation: Benefits and Techniques for Beginners

This is a short book about different meditation techniques, with instructions on how to perform them. In it, you will learn about Mindfulness Meditation, Zen Meditation, Om Meditation, and a many more. It’s easy enough to read in a day or two. It’s straightforward and to the point.

One luckily follower of my blog will receive a free copy of the book, the drawing will be March 18th.

Here’s a brief excerpt from Chapter 1:

“The core objective of meditation is to discover you. Who are you? Why do you behave the way you do? Why do you feel happy and why do you feel sad? These are questions which we think about – sometimes consciously and sometimes unconsciously. However, we don’t easily find answers to these questions. In fact, we continue to remain in a state of utter confusion. Undoubtedly, you move from one life experience to another without understanding its meaning or impact. There is laughter and sadness, hope and despair, optimism and pessimism in your life, but there is no coherence.

Your life drifts along without your conscious knowledge or control. Sometimes situations become dangerous. Some will succumb to negative thoughts and allow them to dominate their life. It is here that meditation comes to your rescue. It helps to remove the negativity layer by layer and give you back the positivity that you once possessed. Instead of dwelling on your failures and losses simply live in the moment. How many of you enjoy looking at the beautiful blue sky and the shining stars? Do you even look at nature around you? The chirping birds and majestic mountains? Instead you’re constantly complaining and dwelling on negative aspects of life. It is here that you need to live for today; live for now.”

medditation

I am officially debt free today!!! (Save your money!)

With today’s paycheck, I am officially debt free!!!

… However, only in the cash positive sense. I still have debt, but the cash balance of my accounts is enough to pay off all of my debt right now (and then some). This is because I spent late 2015 and 2016 aggressively paying off my debt. I was unable to save much more than a few months rent until late last year. The advantage of this is that I was able to reduce the amount of interest will I pay and secure lower monthly payments very quickly into my career.

Had I been making the minimum payments, it may of only been $600 -$700 a month between my student loans, car payment, and credit cards. I now only need to pay $300 a month. In one year, by throwing all of my extra income at my debt, I dropped my payments in half.

I won’t count anything on credit cards as debt anymore. At this point I will only use credit for cash back benefits, and pay it off in entirety every month so I can save money. e.g. I won’t keep a balance on it and I wont pay interest.

For the record,  I haven’t paid any interest on my credit cards to date. But I’ll save that for another post. 

By front loading my expenses, and paying more upfront rather than the minimum payment, I saved a ton of money and lowered my monthly debt bill in half. Thus, I’ve made it easier to make a large investment early in my career. My goal is to become financially free and escape the 9 to 5 rat race. 

I can’t say this enough, making the minimum payments is a debt trap! Most people have no concept of saving anymore. As the result of decades of abuse of loan systems and market crashes, the debt system has exploded making it difficult for the majority of people to escape and get a head in life. Most people in America can’t afford to buy a starter home!

Saving is important, because the more capital you have, the more options you have. If you want to generate income – passive or not passive – you will need both money and time. For example It costs millions of dollars to buy a McDonald’s franchise. (There are also much cheaper franchises under $50,000 that I am seriously considering)

Most people won’t save a million in their life time! Hell, I am making just over $100,000 as a software engineer in Seattle. After taxes, housing expenses, holiday travel, and other bills I have about $33,000 left over pear year.  I’ve paid of about $24,000 in debt since I started working and have about $19,000 more to go. I am also very frugal with personal expenses. After ten years, assuming no raises, I would have $330,000 saved up. Assuming raises and bonuses, probably $450,000. In Seattle, family homes cost $1-3 million easy.

By paying significantly more than the minimum payments, I reduced my total debt quickly. This, in effect, allowed me to lower my payments. As a result, I can now save money faster. More importantly, I have minimized the amount of interest I will need to pay.

You may be wondering: “Well, since you can pay everything off now, why don’t you just do that?”

Because I have significantly minimized how much interest I will pay (and how fast it grows). The amount I pay per month will be much closer to the principal balance. The image below illustrates this concept well (sauce).

loan-amortization-emi

Most loans are structured like this, or similarly to this. They try to maximize interest profits. You pay mostly interest the first half of the loan with just minimum payments. Later in the duration of the loan, you begin to pay mostly the principal balance.

By aggressively paying off debt, I am now only paying much less interest with much lower minimum payments (Although I will definitely pay more than that). This is a technique that ANYONE with both debt and expendable income (no matter how little) needs to take advantage of. I will also be able to save more of my income to use as investment capital *hopefully* later this year or early next. This is the first step of my plan to become financially free in the next five years.

The ethics of Advertisements and Passive Income

Despite ads being such a large component of today’s society, the ethics of advertising are rarely discussed publicly. Personally, I use Adblock Plus to block advertisements on the web on my home computer. I do this because I think most advertisements clutter up web pages and detract from the user experience. At work, we can’t install plug ins like that. From experience, I can tell you that advertisements can make it hard to find useful information on a page.

Furthermore, I detest how some advertisements try to illicit some sort of emotional response by attacking things like body image or personal hygiene. Millions of other sites though contain ads all over their user interface. Some desktop applications even have adds! You’ve probably seen a site like this below- three ads on the page and you haven’t even scrolled down.

adds

In my search for passive income streams, one that’s come up a lot is using Google Adsense or a similar service (clicksense) to generate advertisement revenue. Adsense will pay you per link click, usually 1-25 cents. I used adsense once before in college. I made a resource website for a Screenwriting Club and decided to try out adsense to see where it would get me. It made over $100 dollars in two months time just from students in the club using the page (and a few hits from other countries).

I went to the resource site one day at a library computer and I saw ads for diet pills and teeth whitening. I didn’t want the users of my site to see this kinda garbage! I refreshed the page to see more junk. Again, and again, and again! I logged into my account right there in the library and pulled the ads from my site.

Despite making a profit, I decided to stop using adsense because I did not feel comfortable with it ethically. Sure, it made me money. But it was at a heavy cost. I lost all editorial control over what adds were featured on my site. This meant that products or ideas that I did not endorse could be ‘calculated’ to show up as an advertisement on my site.

I am not 100% against advertising or endorsements through affiliate programs, but I don’t want to loose editorial control over my sites content either. I think advertising is important and crucial to the success of many business and industries. I appreciate creative and clever advertisements that work off of whit or humor to get the message across. Ads like these are rare though. It seems they only show up during the superbowl anymore. 99% of ads are useless junk.

There will never be an advertisement on this site that I have not personally approved. I refuse to make banner ads, popup adds, or to put adds in between paragraphs of text. I don’t want my users to have a bad experience. I would never endorse a product or service as an affiliate that I personally didn’t already think was awesome. I can’t lead people on like that. My goal isn’t to become an internet salesman, my goal is to be free.

I may consider a single sidebar add to help cover domain name costs, but it will likely be curated by myself personally and not by a service. I would want the ads to be relevant to the site, and actually lead the user to useful and helpful information rather than try to make a few cents off of a click.

There can be no denying that advertising on a website can make you passive income, but I personally have reservations about making money off of advertisements. Because of this, you probably won’t see any ads on my blog ever.  I will likely not make any passive income from advertisements, and that’s definitely a personal choice. For those looking for passive income… you can do online ads and you will make money… but at the cost of user trust in your site or service if you go overboard with it.

I would love to hear the communities thoughts of advertising and the ethics of it. How do you feel about advertisements on the internet?

On call this week……

I haven’t had to much spare time this week because I’ve been on call. Until this point in my career, I did not need to be on call. My team replaced an old team in my division a few months ago. On the new team I am on call 2 months out of the year. Each employee has to take shifts in rotations of one week about eight times a year. On top of handling all the issues that come in every day, the engineer on call is also responsible for a variety of other tasks as well as deploying the latest version of the software DAILY.

The service my team runs has tens of millions of users, and any outages that happen need to be rectified asap to avoid loss of profits, unintentional leaks, and to maintain security of our systems. The previous team that our team replaced did a terrible job building the existing software. As a result, it has many fault points where it breaks. We have to support the old team’s software while we try to rebuild it’s entire infrastructure, so it’s difficult to make progress.

Occasionally, we create bugs in the code because the original team did not comment or document ANYTHING. The code is convoluted, and every day we find new problems left by the old team that can sometimes require weeks or even months to fix properly.

The past week’s experience has been a great motivator for wanting to escape the 9-5. I thought the hours I had to work (usually around 50) were toxic enough. I’ve been putting in 12 hour days every day, and at the end of the week I will of worked nearly 80 hours!!!! My salary is only for 40 hours!!!! I should at least be getting paid to match the excessive hours needed of me this week. And the same for all the other engineers I work with.

What’s I think is most unfair… is that I’ve barley had time to think to myself. 

As a basic right of being a human being, you should be entitled to free thought. But when working for someone else, you have to spend all of your time and stress worrying about other peoples problems and making sure other people are making money. In a high stress software production environment, the job follows you home and it will keep you up at night.

When your on call, it’s like that on steroids. You become personally responsible for every issue in the software.

I don’t want to be chained to my desk on sunny days anymore. I don’t want to spend all this time working my ass off to find that my life has passed me by and I am on my death bed, never experiencing my dreams.

If I wasn’t motivated to escape the rat race before, I sure as hell am now. I probably wont have time to post anything more this weekend. I’ve been lucky enough to have the half hour to write this post. I think I am going to take some time tonight to try and meditate and relax. Hopefully I won’t have anymore calls today.

…Until Monday!

How to make $30-150 dollars a day making small investments

I’ve been doing so much research on passive income streams that I’m glad it’s a long weekend.  There are literally hundreds of different things you can do that will generate passive income!

A major franchise business or restaurant is a great example of a single source of income, but most need somewhere between $1-2 million in order to qualify. The advantage is your buying into a guaranteed (usually 6 -7 figure) income and business model. Another one is land lording. Buying a house  and renting it for passive income won’t be enough to retire, but a small apartment building might bring in enough to live comfortably.

The average american income is around $50k. After bills and expenses there is not much left to save, even in the best case of saving $25k a year on average. There’s tens of millions who are below the average income in America. Many people are living month to month, unable to save much or at all.

The truth is there are very few single things that you can buy into or invest in that that will give you a guaranteed steady income without first having millions of dollars in the bank. The good news is, it still may be possible to break free within a few years by purchasing lower value investments with lower returns, and amassing 3-4 of these over a period of five years.

There are a franchises that are much cheaper, like Vangaurd Cleaning, ReMax Reality, and Liberty Tax Service. The drawback is the return is not high enough to retire immediately- but it will boost your annual income. They start at $3K, so they could be a good in for some people that don’t have much spare cash. You can also sell them to other investors if invest and don’t think it’s right for you after a while, so that lowers risk.

It seems that the best thing to do is to set up multiple sources of passive income across time. You can’t afford much now. So, you have two options which you must execute in tandem. You must save your money for a long time, and invest in something big. Or, you can save your money for a while and make a series of smaller investments.

By doing this, you can more quickly expand your portfolio of investments. Let’s say your an average American who’s been saving your money for three years. After unforeseen financial impacts, the $75k you should have is in fact $52K. There’s still at least 50 investments you can make today on this list.

If you make an extra $3600 a year from one of those investments, you’ve added 14% to your annual base income. You’d now make $28.5k. Was your last raise that much of an increase?

Now, where did I get $3600 from? If you look each franchise on the list, you see that the net gains are often higher than that

I say $3600 because that is the first milestone you should set- try to make $10 a day via passive income. It’s very likely in the first year you will exceed this. The next goal is $20 a day, then $30, and so on. If you can make $100 dollars a day, you will bring in a considerable amount of passive income.

dollday

Assuming you have $50,000 now- or will soon. These two table show business plans based on making small investments. On the left, we assume $10 dollars a day for each investment. On the right, one $20 and three $30. You can make your own and mix and match daily net gains. Please note that investment income should be separate from savings. I deducted 20% for unforeseen expenses. On the right, if you notice, you will bring in $37,000 of passive income annually. That’s more than you make in savings. Two more years of this and you could quit your day job.

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