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!

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!

How to save money with Credit Cards

I got my first credit card after I received my first big job offer because I needed to move across the country. I never had a credit card before because I wasn’t very educated on how they worked. I thought credit was a bad thing, and to a degree I was right to think so.

However, after I did some research, I began to look at credit as a tool to save money, rather than a tool to spend money. This only works if you use your cards wisely.

Most cards offer a form of cashback rewards. However, if you look and read the fine print you will often discover all sorts of limitations. Often, there is cap on how much you can earn back ($100 per year on some cards). Or you will only earn cashback on certain purchases (groceries, gas, eating out, etc). Sometimes these purchase categories will rotate! This makes it difficult to keep track of and most people will give up trying to ‘game’ their card to maximize their benefits.

Just to be clear, I am NOT an affiliate for any credit card company or bank. The cards I suggest are in my wallet, and I use them carefully and always pay them off. I essentially use the cards to save money. I have a citibank card that has 2% unlimited cashback. I have a chase amazon prime card that gets unlimited 5% back on Amazon purchases. Although 2% does’t sound like much, It’s good to save every cent you can. Everyone has expenditures, so why not save a little bit on every purchase or bill?

For example, say I buy lunch everyday at the office. If I am using my card with unlimited  2% cashback to buy lunch everyday at work ($35 a week average). Across 50 weeks, this is about $1,750 a year. That translates to $35 dollars cash back.

Effectively, I eat lunch 5 times a year for free. This is just a small example.

How I use credit as a tool:

  1. Ignore the interest rate for the card
    • This sounds crazy, I know! But if you follow these rules you will never pay interest!
  2. READ READ READ the terms! If you don’t understand them, find someone who can explain it too you!
    • This is critical to ensuring you won’t get screwed later.
  3. Find a card with 12-15 months no interest (optional)
    • This is handy if your in a tight spot and you might need to keep a balance on the card for a few months while you get back on your feet. Pay the balance off before the end of the term however!!!
    • If your not in a tight situation, this wont matter.
  4. Find cards with very open cashback terms, or cashback terms that may work in your benefit
    • You don’t want to waste time trying to keep up with lenders changing rules. Try to find a card that doesn’t rotate your cashback options.
    • eg. you travel a lot, and the card gives 3% back on gas year round
    • eg. you buy stuff on amazon, and their card gives you 3% cashback (5% for prime), but only to spend at Amazon.
    • eg. you get a 1-2% cashback card and use it everywhere (open terms)
      • make sure there is no limit! Very few cards like this exist, but I assure you they do!
  5. Always pay off the balance before it is due
    • This is the only way to not pay interest
  6. Don’t make purchases that will prevent you from paying the full balance each month
    • unless you are working on step 2, of course.
  7. Always pay off the balance before it is due
    • Saying this twice so it will sink in… Good luck!

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.

Featured Image Source

Read my latest book!

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.