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.

Featured Image Source

Read my latest book!

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!