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!

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!

5 Simple Ways to Save Money

Be sure to share this with your friends!

 

1. Eliminate your debt
If you are trying to save money but still have debt, pay off the debt first. Not convinced? Add up how much you spend per month on debt, that money can be easily saved instead. Don’t make the minimum payment! 😛 .

2. Establish savings targets
One of the best ways to save money is to visualize what you are saving for. Do you want to buy a house in five years with a down payment of 20 percent? Do you want to open your own business?  Do you just want $1000 or to just be debt free? It’s important to have a vision.

3. Pay yourself 
Set up an automatic debit from your checking account to your savings account each payday. Whether it’s $50 or $500. Put this money away into a savings account until you invest it – or until you retire.

4. Save on the electricity bill
By lowering the thermostat on your water heater by 10 ° F, you can save 3 to 5 percent on energy costs. And installing a water heater on request or without tank can save up to 30 percent compared to a standard water heater with storage tank. You can save hundreds a year just by doing this!

5. Skip the frequent treats
How frequently do you *treat* yourself? By this, I mean buying a coffee or other little pick me ups throughout the day. Even buying a Kit Kat bar in the checkout aisle. All of these little expenditures add up as each day goes by. By the end of the year, if you drink a $4 mocha frappe coffee everyday, you will of spent nearly $1,500! It’s important to treat yourself, but don’t spoil yourself either.

7 Reasons most people can’t Save Money

A few months ago I decided to dedicate my life to building personal wealth to attain financial freedom. I started this blog as away to share my experience and opinions as I go through the process. Right now, I am focusing on building wealth and in perhaps a year or so I hope to invest that money. For the time right now, I am experimenting with stocks with a small portfolio(<2k) as well as Writing books on the side in addition to my full time Software Job. The little time I have leftover I spend on this blog, researching, or with my lovely fiance.

While it’s important to look for things to invest in; it’s fundamentally more important to get out of the Rat Race Mindset. In doing this, you’ve already taken the first step.

Financial freedom is truly a journey, not a destination. Good Luck! -WW 

  1. You’re stuck in a cycle of debt
    • When you’re broke, you’re desperate. When you’re desperate and can’t find work, you will do anything for money. Payday loans and credit cards are your worst enemies if you are already in debt, as they just add to it.
    • You need to break the cycle of debt and get a head of your finances. This is not an easy task, but it can be done. This is not an optional task either. It may take you months or years, but you WILL BE BETTER OFF. How I paid off my student loan debt quickly!
  2. You feel like you don’t even have a chance
    • This is often the root cause to why most people don’t try to escape the rat race. They feel overwhelmed. They’ve gotten up and fallen over so many times that they don’t think it is worth it. This point is more or less a shout out to everyone I knew in High School. You always have a chance, but you need to take the first steps yourself to see it go anywhere.
    • I should know that you have a chance. Two years ago my income was less than $8,000 a year, now it’s much higher ($110,000). Albeit, the high income is subsidized by high taxes and high costs of living. Either way, I’ve moved up in the world in the past few years. I intend to keep moving up, too.
  3. You don’t know about personal finance
    • Did reading personal finance stress you out a little? That’s ok. Two years ago I knew NOTHING but basic budgeting skills. Now, I know far more. Knowledge is power because knowledge gives you options. When I was young and broke, I thought stocks were just.. well… stocks. Now, I know that there is a multitude of different types of stocks, ways to invest in them, and strategies at that.
  4. You put short term happiness before long term happiness
    • Stop eating out everyday. Stop buying Coffee at Starbucks. Stop buying energy drinks. Stop shelling out $500 to stand in line at Disneyland.
    • In general, don’t waste money on things that provide short term happiness. It’s ok to do this occasionally, but the average american does this EVERY DAY OF THEIR LIFE. All the money you don’t spend can be invested or saved for later when you just want to drink some tea and watch the sunset on a lazy afternoon.
  5. You don’t have an emergency fund
    • In general, it’s a good idea to save up 4-6 months living expenses. It’s an even better idea to keep this money liquid. Save up for emergencies before you invest. This money will act as a safety net if you loose your job or if there is an actual emergency. If you need this money, you will thank yourself later.
  6. You’re not making savings a priority
    • You think… “I can buy this shiny new thing now, and just save next months paycheck.”
    • What you should think is… “If I save up for 3 months I can buy the shiny thing and put money away. Holy shit I’m awesome.”
    • A great tactic is to decided before you get your  paycheck how much you can afford to put away and just do it. Once it’s no longer readily available, it’s far less tempting.
    • It’s also good to learn will power and avoid impulse buying. When you want something online, put it in your cart and wait a few days. If after a few days, you still really want it: buy it. You may find that you don’t need it that badly.
  7. You don’t budget
    • This kills me that people don’t know how to budget or even that it’s a concept. Even some of my younger friends at the Company I work for don’t budget. When you don’t budget, you can’t anticipate savings. You also have no idea how much your spending. Once you know how much your spending, you can learn how to save money more efficiently.

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.