Invest In Yourself
Garcia has a little over 16 years left until he's eligible to retire. He is married with two kids. He has the following debt:
- $175,000 house with a 30–year mortgage at 7%
- $15,000 car financed at 9% for 5 years
- VISA credit card with a $3,000 balance at 14.99%
- SEARS/Discover Card has $1,500 balance at 19.8%
AND, he wants to buy some land to retire on for $30,000 for 15 years at 8% interest.
Can He Do It? Should He Do It?
If Garcia pays his minimum monthly payments until everything is paid off, Garcia is going to throw away TWO HUNDRED SEVENTY FIVE THOUSAND, SEVEN HUNDRED TWENTY SEVEN DOLLARS! He's going to pay more in interest than the original cost of his purchases.
I know you're saying that Garcia is no brain surgeon. Well, neither are most of us, but if we allow ourselves to focus only on paying the monthly minimums, that is EXACTLY what will happen to us.
Wake Up Now
To retire in 16 years, Garcia needs to realize the 3 basic principles to POWER PAY his bills. They are:
1. Don't earn less than you're paying in interest. In other words, as stated above, if he's only earning 4 –8 percent on his money, which is in his savings account or locked away in another investment, and he's paying 8 to 19.8 percent on his debts, he's actually LOSING 4 to 11.8 percent of his money.
2. Consolidate all your debts at the lowest interest rate available. If Garcia had enough available credit on his VISA, it would pay for him to payoff his SEARS/DISCOVER with his VISA and cut up the SEARS card (19.8% is a TERRIBLE RATE).
3. POWER PAY YOUR BILLS
Start with one bill at a time, starting with the highest interest rate, then short–term debts, and then working towards the lower interest, long–term debts. As one bill gets paid off, roll all the monthly payment money that was going to that bill into the next bill until it's paid off and then roll all that money (payments from bills 1 and 2) into bill number 3, and so on and so on. Guess what you're building? Your AMERICAN DREAM! FINANCIAL FREEDOM!!!
Here's how Garcia can pay everything off in the sixteen years he has remaining to work, thereby freeing up his retirement for the day–to–day expenses he'll have.
Remember, this is a hypothetical situation, but these numbers and figures are NOT HYPOTHETICAL. They do not lie and anyone who handles their finances this way can achieve remarkable things. There is literally no limit – early retirement, yachts, planes, vacations, travel – you name it. Once you've done this, your credit will be PLATINUM and will stay this way if you keep these good habits.
Financial Success – Before this is all laid out, it should be pointed out that our man Garcia is going to do this without:
- Trusting his money to someone else
- Getting a second or third job or
- Putting his kids to work in the coalmines. It should also be noted that his standard of living WILL increase as bills get paid off and he'll be in better financial shape than ever before to handle the little (yea right) things that life will tend to throw in our faces year to year.
Garcia focuses his efforts into bill #1, the SEARS/DISCOVER credit card (remember basic principle #3?).
He feels he can safely increase his monthly payment from $25.00 to $100.00 ($75.00 pinch which no longer goes into savings account) starting on January 2001. This changes his pay off date from the year 2024 (no kidding, if he sticks to the minimum $25.00 payments, that's when it would be paid off) to June 2002 – a difference of 22 years, 6 months! TOTAL SAVINGS FROM STEP #1: $5,533.51
June 2002: He then takes $90.00 of the $100.00 he no–longer owes to SEARS ($10.00 goes in his pocket for beer, golf balls, etc.) and rolls that into the $60.00 payment he makes on his $3,000.00 VISA which is, at this point, down to $2,232.80, making his total POWER PAYMENT $150.00. Now is where it starts to get fun! This changes his pay off time from the year 2011, to October 2003 (a difference of almost 8 years!) TOTAL SAVINGS FROM STEP #2: $168.09 (saving on interest from 4 years of payments scheduled less interest paid during POWER PAYMENT period) DISCIPLINE IS REMEMBERING WHAT YOU WANT!!
October 2003: Garcia takes the $150.00 from that bill, rolls it into his $311.45 car payment, and adds an additional $38.55, making it an even $500.00 a month on his $15,000 car, which by this time is down to $7,586.25. This changes his payoff time from December 2005, to February 2005 (10 months earlier). TOTAL SAVINGS FROM STEP #3: $329.30 (saving on interest from last 2 years of loan less interest paid during POWER PAYMENT period)
February 2005: He takes the $500.00 from Step 3 and adds it to his $286.76 land payment, then subtracts $36.76 for a little fun money (all work and no play makes Garcia a dull boy), for a total POWER payment of $750.00 on the land loan, which by now is down to $24,998.30. The bigger payment changes his pay–off time from December 2016 to April 2008. TOTAL SAVINGS FROM STEP #4: $9,217.95 (saving on interest from last 8 years of land payments paid during POWER PAYMENT period).
April 2008: Take the $750.00 from step 4, add it to the $1,164.50 mortgage payment, kick in an extra $85.50, 'cause now you're driven to get rid of debt, for a total monthly POWER PAYMENT of $2,000 on your $175,000 mortgage, which, by this time, is down to $158,793.25. Your pay–off time just got reduced by 13 YEARS, 9 MONTHS!! TOTAL SAVINGS FROM STEP #5: $104,019.02 (savings on 13+ years of interest paid during POWER PAYMENT period)
BINGO! HE DID IT! AND, AT A SAVINGS OF OVER $119,000.00
He now owns, outright, his vehicle, his home, and his vacation property. Bottom line. Now you know and I know that life is not that perfect. You will probably have other bills come up during the 16 years, like college for your kids, a new car, medical bills, etc... BUT – I hope you can see what this exercise did show you – that buy POWER PAYING your bills, you CAN make them disappear!!
If It Is to Be, It Is Up to Me!
This financial planning tip is credited to BMC Don Rogers of the United States Coast Guard. BMC Rogers ends by saying, "Don't blow this opportunity to take control of your finances and always, always, remember what you're throwing down the toilet by the way of interest. It's exactly like burning perfectly good hard earned money!" We couldn't say it better, Don!