Debt is simply the money you owe – it is an amount of money or other property that is owed by one person, organization or company. It is not the credit you owe as credit turn into debts. Getting into debt is very easy and maybe it is fun for some people as it might impress them. As a first look, people are happy, they can buy without having cash, and they can afford to get a car even without having the budget etc. but they missed the best part, they will live and drive this car for 12 years to make payments and pay huge interests for what already impressed them!
Who never heard of cholesterol? Much like cholesterol, where there is a good and bad cholesterol, debts comes in two versions. Good and bad debts. Debts can make your life easier or ruin your life but however bad your debt problems, there is a solution. People and businesses who know how to handle debts and how to manage their credits can take advantage of debts while people especially young who does not have a big knowledge in debt management and creating debt reduction plans are always in troubles.
Debts can also be classified as temporary or chronic debts.
In most cases, there are very good reasons to take on debt. For example, students take loans which are a good thing but we insist that you must know how to handle and pay off your debts after graduation.
Also taking debts for setting up a business is good but it depends how the structure is going to be setup. You must have a clear plan, and know how much money you would need and the most important, how to pay it back. In such cases, debt is a part of the business success.
If you can afford to pay cash and limit the risk of taking debts, do it! Do not hesitate to pay by cash when you have the money.
The problem is when you borrow money but do not use it productively. More clearly, debts are good when you invest it and NOT simply spend it. Taking debts simply to spend it is the bad thing ever. Debts must be under control. You must know very well how to pay back your debts. Create plans, especially rapid reduction plan. This e-book will show you how to proceed with managing your debts and become debt free in half the time.
The secret to repaying debts quickly and saving on interest charges is to continue to pay the same amount each month until all debts are repaid. As one debt is paid off, apply that payment amount to another debt.
To move forward with the same example, the current monthly payment is $850. If you pay an additional $180 each month thats mean $1030 of total monthly payment, your debts will be repaid in 7 years and 10 months and you will avoid $23.617 in interest charges.
As you noticed, by simply allocating $180 you save $23.617 meaning if you allocate more monthly payment you will save more and more!
If you follow your Debt Free/Reduction Plan, you will save $23,617.86 in interest which is equivalent to 39.5% and have your debts paid off in 7 years and 10 months and not 13 years and 2 months.
There is a very important note to take in consideration. If for example you have a debt of $5600 with 3% of interest, you will not pay 3% each month, this amount decrease accordantly. The following table will explain step by step how to calculate the monthly interest rate.
Debts to pay:
Monthly Payment: $680
Interest rate: 3%
|Month||Balance||Monthly Payment||Interest*||How to calculate new balance|
|January||$5600||$680||$14||($5600-$680) + $14= $4934|
|The new balance for the next month is $4934|
|February||$4934||$680||$12.34||($4934-$680) + $12.34 = $4266.34|
|The new balance for the next month is $4266.34|
|March||$4266.34||$680||$10.67||($4266.34-$680) + $10.67= $3597.01|
|The new balance for the next month is $3597.01|
|April||$3597.01||$680||$8.99||($3597.01 $680) + $8.99= $2926|
|The new balance for the next month is $2926|
|May||$2926||$680||$7.32||($2926 $680) + $7.32 = $2253.32|
|The new balance for the next month is $2253.32|
|June||$2253.32||$680||$5.63||($2253.32 $680) + $5.63 = $1578.95|
|The new balance for the next month is $1578.95|
|July||$1578.95||$680||$3.95||($1578.95 $680) +$3.95 = $902.90|
|The new balance for the next month is $902.90|
|August||$902.90||$680||$2.26||($902.90 $680) + $2.26 = $225.16|
|The new balance for the next month is $225.16|
* Interest calculation
$5600 x 3% = $168/12 months = $14 as interest for the 1st month
$4934 (new balance) x 3% = $148.08/12 months = $12.34 as interest for the 2nd month
$4266.34 x 3% = $127.99/12 months = $10.67 as interest for the 3rd month
$3597.01 x 3% = $107.91/12 months = $8.99 as interest for the 4th month
$2926 x 3% = $87.78/12 months = $7.32 as interest for the 5th month
$2253.32 x 3% = $67.60/12 months = $5.63 as interest for the 6th month
$1578.95 x 3% = $47.37/12 months = $3.95 as interest for the 7th month
$902.90 x 3% = $27.09/12 months = $2.26 as interest for the 8th month
$225.16 x 3% = $6.76/12 months = $0.56 as interest for the last month
So each month the interest decreases depending on the new balance.
Now that you have completed these examples, you will be able to easily calculate and manage your debts and know exactly how much you will pay and the time to payoff all your debts and the most important how to re-create a debt reduction plan and save money and time!