Simple Ways to Painlessly Reduce Debt and Increase Savings
Don't Overlook the Small Stuff
Many people today find themselves living from paycheck to paycheck while struggling under a heavy load of high interest debt.
Since they have no money left after paying bills, they find it impossible to save. And, without savings to fall back upon, every little emergency not only threatens to push them over the edge financially but also forces them to use what little available credit they have to pull through the emergency.
Much like the mythical Sisyphus who displeased the gods and found himself condemned to spend eternity pushing a rock up a hill only to have it roll back down again, these people often feel like they are on a treadmill of unending debt.
Whether one is living on the edge financially or simply can never come up with money to save, it is possible to save money and/or get out of debt without an increase in income or major cuts in spending.
Of course, if one can increase income with a raise, an extra job such as writing for HubPages or having a spouse go to work, that would be great but this would not necessarily result in a reduction of the household's debt or increase in its savings. The same is is usually true if expenses are cut.
The problem here is the fact that, on a monthly basis, the extra income from a raise or an additional paycheck or a reduction in monthly expenses, will probably not amount to much more than a hundred dollars or less.
The uncomfortable truth is that increases in disposable income, whether from increased income or decreased expenses, inevitably result in increased spending. And this increase in spending is usually on small things here and there leaving us with no idea where the extra money from a raise, extra job or elimination of a monthly bill went.
Pennies a Day Can Quickly Become Many Dollars a Year
What is needed is more aggressive management of the money that flows through the household each month. This does not mean watching and recording every cent that is spent.
What it does involve is to first, make a simple budget where you list your monthly income and required expenses. Subtracting required expenses from income will show what, if anything, you will have left for savings and extras.
Next, you have to be on guard against creeping increases in monthly obligations.You also have to begin managing your bills and extra cash in a way that allows you to accelerate the paying down of debt and funneling at least a little bit of the resulting extra cash to savings each month.
A recent article in the personal finance section of the Wall Street Journal, entitled Bill Creep, described the process by which the periodic addition of additional, small obligations builds up over time to become a noticeable drain on a household's finances.
The problem is usually not the big purchases, which most of us consider carefully before deciding to buy, but rather the little extras which only add pennies a day to a purchase we are financing.
This includes things like increasing the monthly cable or cell phone bill to add an additional or enhanced service. It can also be a new service or subscription that will be billed monthly and really only cost pennies a day.
If the additional service or new subscription is something you want and will use then go for it!
Pennies Can Add up Quickly
In reality, these add-ons and extras are designed and marketed as impulse purchases. They usually have some attraction which causes us to purchase them. However, the big attraction is the low monthly price.
For instance, your cable TV company might offer you some additional premium channels for a mere 33.3¢ (thirty-three and one-third cents) per day. That cost is not much and if these are channels you and your family will watch frequently it probably IS a good deal.
If you are a busy person and don't have time to watch a lot of television you probably wont' watch these channels regularly. Still, it is cheap at 33.3¢ a day and you will probably take the offer.
However, if instead of quoting you the cents per day price and offering to add it to your bill, the sales rep had asked you to pay up front for the year you might think twice about the offer as this changes the purchase from a little one to a big one as33.3¢ a day comes to $10 per month which works out to $120 per year.
Again, if the extra channels are something you want and will use, the $120 could be a very good deal. But if you know you won't view the channels that often, $120 is way too much to pay.
Then there is the three to six month free trial offer after which your monthly bill or credit card will have the cost of the service automatically charged to it unless you take time to cancel it within the trial period.
Of course we frequently forget to cancel and then quickly get anesthetized to the additional charge just as we have become accustomed to and don't feel the pain of the loss of money that the government siphons out of our paychecks every payday.
If we really want and enjoy any of these services there is no problem, but the fact is that they frequently provide little or no satisfaction and often lay forgotten and unused just as their monthly drain on our finances is also largely overlooked and forgotten.
Banking and Paying Bills Online Makes Managing Money Easier
The easiest way I have found to capture and put these funds to work is to do my banking and bill paying on line.
This way with a few key strokes I can easily move money around and quickly direct these funds to where they will do the most good.
Some goes into a savings account we maintain for emergencies.
Some goes into my wife's or my retirement accounts where it not only grows tax free but also generates a tax deduction when I put it into one of our traditional IRAs.
Some is added to loan payments where it helps to pay off the loan faster and reduce the interest we have to pay.
In fact the biggest and safest investment returns for many people today can be obtained by adding a few extra dollars to their home, car or other loan payment. Adding a few extra dollars to the minimum payment on a credit card balance really pays off in the long run.
Extra payments in any amount on loans serve to reduce the principal balance which is good but the real kicker is that it also reduces the interest due on all future payments.
Little Bits of Cash Just Slip Through Our Fingers
Then there are the little bits of cash and small cost savings that flow our way each month but, like the pennies a day additions to our bills, these pennies a day type of inflows are also overlooked and quickly become commingled with the rest of our funds and are spent without a second thought.
Here I am talking about things like product and credit card rebates, pocket change thrown on a dresser, the periodic ten or fifteen dollar deposits to Hubbers checking accounts from Amazon or eBay for their ads on our HubPages.
Another source of additional cash is picking up change on the ground and tossing it into a cup and letting it accumulate. Many, like my wife and children, don't think it is worth the time and effort to do this and simply step over it and continue on their way.
I, however, am one of those who do pick up change from the ground and add it to the pocket change that I toss into a cup on my dresser each night and then periodically take it to the credit union where I deposit it to our savings account for emergencies.
I don't keep track of how much I accumulate this way but my Hub colleague, Jimmy the Jock wrote in one of his early Hubs that over the course of eight months he managed to accumulate $139 from coins he and his family had found laying on the sidewalk.
Like bill creep, the amount of cash received or savings realized from these sources individually each month is small and easily passes by unnoticed, but taken together over the course of a year they can add up to hundreds of dollars.
The beauty of looking closely at our finances and capturing these small savings is that since the things these are spent on add little to our lives, there is no sacrifice involved in redirecting them to debt reduction and/or savings.
Reducing Your Mortgage Balance by $620 With $200 Worth of HubPage Earnings
In the case of home, auto and other installment loans with a fixed monthly payment, adding a few dollars extra to each month's payment will result in a larger portion of every future payment going to principal thereby accelerating the payoff date and total interest paid.
To get a rough idea of how this works, assume that you receive a $200 payment from Google for ads on your HubPages and decide to add it to the first payment you are making on a new 30 year home loan with a 7% interest rate. You will immediately reduce the balance by the additional $200.
Your monthly payment was calculated on the assumption that you would be paying 7% interest on that $200 for the next 30 years. Seven percent interest on $200 works out to $14 per year or about $1.17 per month and this $14 per year will now be going to principal instead.
Ignoring the compounding effect, as a result of your extra $200 payment to principal on your first payment, an additional $1.17 per month or $14 per year of your regular payments will now go to principal. Multiplying this by 30 years (14 x 30 = 420) you find that your single $200 payment from HubPages resulted in a reduction in your mortgage of $620 (actually the amount is even greater when you do the math to apply the full compounding effect).
Not a bad return on a $200 investment.
High Interest Credit Cards With a Balance Offer the Biggest Return for Your Money
If you happen to have a high interest (such as 10%, 15%, 20% or higher rate) credit card with a balance on which you are making the minimum payment each month you can get an absolutely phenomenal return by adding your $200 payment from HubPages to the minimum payment you are making on your credit card.
If you have a 20% interest rate on your credit card the extra $200 reduction in the balance will result in a rough savings (again, ignoring compounding) in interest of $40 per year (20% times $200) or about $3.33 per month ($40/12) which is probably close to the amount that gets applied to reducing your balance when make the minimum monthly payment.
By continuing to pay the same minimum payment as you were before making the $200 extra payment to the principal (the credit card company will reduce your minimum payment as your balance declines but you can elect to keep paying the same amount you started with) you will automatically get the benefit of an extra $3.33 to principal each month without having to pay anything extra out of pocket (this, of course, assumes that you don't charge anything more with the card until the entire balance is paid off).
No Sacrifice is Necessary
By identifying and putting to use, either as savings, investing or debt reduction, money which we save on monthly expenses by following some of the suggestions above or from extra money earned from HubPages or other activities you will find that you can payoff debts faster and/or accelerate your savings without any belt tightening or giving up anything that you enjoy.
© 2009 Chuck Nugent
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