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countertopconfessionalz · 4 years ago

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Credit Cards & Debt

Now that basic budgeting was covered (click here for the Budgeting Basics post), I think it’s time to move onto another financial obstacle; credit and debt. We need to first define what both are. Credit is the total amount that CAN be borrowed while debt is the actual amount that is borrowed. Typically, credit and debt come with interest rates like APR (annual percentage rate). Interest rates are used to calculate fees for borrowing money, because borrowing money rarely comes free. This is important to understand because if a person doesn’t pay back the debt in full by a certain time period (typically end of the month), then the person is charged an additional amount on top of what they owe the following month (which is calculated by the amount owed and the APR).

Example: A person uses their credit card with 25% APR to buy groceries for $100. They pay back $25 out of the $100 and have $75 left to pay back (or the remaining balance). At the end of the month, the interest is added as $1.56 (the new total to be paid back is $76.56). Now that may not seem like much, but if the remaining balance was $4,000, the interest added would be $83.33. The kicker though, is that if only $25 was paid every month, the remaining balance would continually grow.

Here’s an example of how the debt can grow:

First month remaining balance: $4,000.00

APR (annual percentage rate): 25% or 0.25

Interest accumulated on first month balance: $4,000*(0.25/12) = $83.33

Total remaining balance: $4,000.00 + $83.33 = $4,083.33

Monthly payment to reduce balance: $50.00

Second month balance after payment: $4,083.33 - $50.00 = $4,033.33

Interest accumulated on second month: $4,033.33*(0.25/12) = $84.03

Total remaining balance for second month: $4,033.33 + $84.03 = $4,117.36

Notice how the second month has a higher interest payment than the first ($84.03 vs. $83.33). This is due to compounding growth. Basically, every day (it’s reflected on a monthly basis since it’s easier to read and understand) the credit card is being charged against what’s currently borrowed. It slowly adds the interest on a daily basis and at the end of the month the interest is added to the remaining balance for that month. In this particular instance, this person paid $50, but because that didn’t cover the interest that was built up, the second month had a higher interest and the overall balance increased to $4,117.36.

This person originally owed $4,000, but because they have a credit card with a 25% APR and their monthly payment is only $50.00, the interest will outpace their monthly payments. This means that this credit card will never be paid off and the person will end up “drowning in debt” as some would call it.

How can this be solved? The easiest way is to pay back in full the amount owed before any interest is built up or accrued. Realistically, the majority of Americans unfortunately do not have the luxury to do so. The next step would be to prioritize the credit cards and debt (assuming there are multiple) by balance and APR. Typically, it’s between large balances and high APRs that accrue the most interest.

To make things easier, I created what I call the Credit Card & Debt Payoff spreadsheet. It can have up to 7 credit card balances in there and help prioritize them to reduce the total amount interest paid. Granted, this isn’t perfect, but it provides guidance on which card to tackle and payoff first. Along with that payoff calculator, I provided the payoff schedule according to each credit card. This shows how the monthly payments and the interest paid. It also shows when the card will be paid off (estimated). The third tab is used to compare current credit card balances compared to balance transfers or credit card consolidation. I didn’t cover those strategies in this post, but I can later.

Please note that I live in the U.S and quite a bit of what I write will revolve around the laws and regulations within this country. Ways to reduce debt can be applied globally, but do know there will be times that these posts may not align with your country's (or even state) regulations.

Please feel free to leave any feedback on the file in the comments section. If you’re interested in how the spreadsheet was created (formulas, thought process, etc..), a tutorial or any other spreadsheet suggestions, please leave a comment.

Click here to access: Credit Card & Debt Payoff spreadsheet

How to use the Google Sheet file: Credit Card & Debt Payoff

Open the google sheet and go to the top left to File and either:

Make a Copy of the google sheet Or Download the file as an Excel spreadsheet

Note: If you download the file as an Excel spreadsheet, the macros won’t work (the buttons that reprioritizes by largest balance vs. highest APR won’t work).

The reason why the file is locked and only available for download/copy is to protect peoples’ information from being shared over the internet. Please make a copy into your personal drive.

Not everything has to be filled out. If you don’t have that many credit cards or debt, just zero them out and enter things that you actually have debt on.

*If you already know how to use spreadsheets, you can probably skip this section.

Using the Credit Card & Debt Payoff file Instructions:

Once you download and/or make a copy of the spreadsheet and open the copied file, you will notice the following:

The cells in BLUE font can and should be changed to fit your needs. For future reference, in all my spreadsheets, anything in BLUE font should be replaced with the information you want to analyze.

Column and Input Descriptions (Starting from left to right):

In the “Credit Card Payoff” tab, the first 10 rows are the inputs for your basic credit card and/or debt information.

Column B is the where you input the name of the credit card or loan name

Column C is the total line of credit for each credit card (this won’t be applied to loans). The reason this is important is because this is used to determine credit utilization (which I will cover in a later post along with balance transfers and credit scores).

Column D is the Outstanding Balance or the amount you owe for each card and/or loan.

Column E is the interest rate/APR (annual percentage rate). For transparency and simplicity, I am calculating this on a monthly basis. Most credit cards show an APR, but in reality is calculated on a DPR (Daily Percentage Rate) basis.

Column F is the minimum payment that’s required for each credit card. I put it as 2.25% of the outstanding balance, but you can put the minimum payment if it’s shown on your statement.

Column G is the Monthly Payment or the amount you decide to pay each credit card/loan. I currently have it as the minimum payment except for the first one (cell G4). This will be the difference you plan to spend in total in cell C14 and the rest of the payments. You can of course replace it with whatever amount you want.

Column H is credit utilization. This is helpful if you are trying to understand your credit score and how to raise it. I will talk about credit scores and credit utilization in a later post.

Column I is the total interest accrued during the time you pay off the debt. This column is important because we want to minimize all of these numbers.

Column J is a rough time frame of when the debt will be paid off based on the currently monthly payments.

As we move down to rows 12-16, these are the additional inputs along with the macro buttons to auto sort for Largest Balance or Highest APR.

In row 13, cell C13, this is where you would put when you plan to start paying off the debt. This date applies to all credit cards and loans in the above cells.

In row 14, cell C14, this is the total amount you plan to spend each month across your debts shown above. This cell doesn’t matter if you manually input column G(Monthly Payments)

In row 15, cell C15, gives you the option to choose snowballing/rolling over payments. Snowballing or rolling over a payment is when you finish paying off one credit card or loan, you take the amount that was being paid for that and apply it to another loan you have to pay it off faster. I suggest doing this if possible because it drastically decreases the amount of interest you would pay.

In row 16, cell B16, you have two choices between prioritizing Largest Balance or Highest APR. By left-clicking on the orange button, a macros will run and auto sort by largest to smallest balance. Left-clicking the blue button will sort highest to lowest APR. When you first click on either button, it will ask permission to run these macros. You don’t need to accept, but you will just have to enter things manually instead. It’s more of a convenience feature.

Finally, rows 18-19 in orange and white are just totals and averages from rows 4-10. As you turn snowball payments off and on, you can see the difference in interest in cell I19.

As you move to the second tab called “Payoff Schedule” you will notice a long string of numbers. These numbers represent the monthly beginning balance, interest accrued, the amount paid, and then the ending balance for each credit card/loan. It breaks out in detail what’s shown in “Credit Card Payoff” the Interest Accrued and paid and the length of payoff (time it takes to payoff the debt).

The last tab called “Balance Transfer Comparison” will be covered in another post as this one is long enough.

Hopefully this will help you prioritize which cards to payoff first to reduce the amount of interest you pay by showing how interest can increasingly grow on both large balances and high APRs.

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countertopconfessionalz · 4 years ago

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Budgeting Basics

The unfortunate reality is that many people don’t know how to budget. They end up maxing out their credit cards and accruing a large amount of debt. They wouldn’t even know how to start because the debt balloons faster than they can pay off. Others state that they can’t save enough, but have a $60/month gym membership and 3 streaming accounts that are $12.99/month each.

If someone is paying $12.99/month for 3 accounts, that’s about $467/year. Even if they can’t move that to investments, at the very least those payments can be used to pay down debt. Are the gym memberships and streaming accounts really that important? Some may initially think so, but when the month ends and their balance in the bank is under $10, it may be time to re-think those priorities. By creating a tool for people to understand where their money is going, that can be the first step for financial stability.

The Monthly Budget spreadsheet (which is free) is the first step for people to help them identify how much they earn and save versus how much they spend, (broken down by Needs, Wants and Debt). Using this spreadsheet will show where the income is going and how it’s broken down in the 50/30/20 rule, (which I will explain later in the instructions as well). Once the spreadsheet is filled out, people will be able to clearly see their expenses and ways to reduce the Wants and Needs while putting more into savings and investments. I understand that everyone’s financial situation is different, but I would assume that everyone would like to retire with no debt and have a comfortable savings/retirement account.

After using this spreadsheet, my hope is for people to better understand where their money is and how much debt they actually have. People don’t realize using debt to pay off more debt only creates more trouble until they see it broken down. Paying off debt should be a priority as interest accrued (amount owed on top of what is being borrowed) will be minimized. I will provide a Credit card and Debt calculator for people to use in another post. This will help them understand how much interest will be accrued and ways to minimize that impact.

Please note that I live in the U.S and quite a bit of what I write will revolve around the laws and regulations within this country. Budgeting can be applied globally, but do know there will be times that these posts may not align with your country's (or even state) regulations.

Click here to access the: Monthly Budget Spreadsheet

How to use the Google Sheet file: Monthly Budget

Open the google sheet and go to the top left to File and either:

Make a copy of the google sheet or download the file as an Excel spreadsheet.

Note: If you download the file as an Excel spreadsheet, the formula and drop downs will still work, but the formatting and coloring may be off. The 50/30/20 chart may not work either for some reason…

The reason why the file is locked and only available for download/copy is to protect peoples’ information from being shared over the internet. Please make a copy into your personal drive.

Not everything has to be filled out. If you don’t have that many expenses, just leave them blank and enter things that you earn, save, spend. It’s your budget and everyone’s is different.

*If you already know how to use spreadsheets, you can probably skip this section.

Using the Monthly Budget file Instructions:

Once you download and/or make a copy of the spreadsheet and open the copied file, you will notice the following:

The cells in BLUE font can and should be changed to reflect your own finances. This is your budget, and this should help you categorize what you’re making, saving and spending on.

In Columns A and C there are downward pointing triangles (in excel it won’t show until you scroll over the cells). These are dropdown selections where you have a list to choose from.

Column and Input Descriptions (Going from left to right):

Column A is a description of what the payment is (you can fill in whatever you want here as everyone’s income/savings/expenses will all be different) to help track how much you’re paying/spending for each item.

Column B is a dropdown selection/list for how often a payment/amount happens. Example: If you get paid bi-weekly, you should left-click on the triangle and change the cell to “Every Two Weeks” instead of the “Twice a Month” in row 3. There’s also Monthly and Weekly as well if you get paid like that.

Column C is another dropdown for the types of Categories these payments are for. This helps identify whether the expenses are necessities or not and will reflect in the graphs to the right.

Currently there are 6 choices:

Income – The after-tax amount you make to spend and/or save

Savings – The amount you move to the side for emergency and extra savings

Investments – The amount you move to investment accounts expecting long-term growth

Debt – The amount you must pay back to Banks, Loans and other things that are being borrowed against (this is a type of expense).

Needs – The amount you need to spend for essential items for basic living and survival (this is a type of expense).

Wants – The amount you need to spend for non-essential items (this is a type of expense).

Column D is where you enter the amount you earned, saved, invested, or spent for the items shown in Column B.

Column E and F transform the amounts to a monthly and annual/yearly basis since it’s easier to read in those amounts.

You’ll notice that Rows 9, 23 and 47 are highlighted in orange with white font. Those are the total amounts for Income, Savings & Investments and Expenses. It’s easier to compare your income vs. expenses when it’s converted either monthly or annually.

As we go to the right from Columns H-L, these are the monthly totals categorized by Column C and added together. It has the overall monthly amount in row 3, the percentage of income in row 4 and then a visual breakout shown as a donut chart.

From Columns N-R, it’s further broken out using the 50/30/20 Budget rule

The general guideline for the 50/30/20 rule is:

50% of your expenses should be in “Needs” (things that are essential and necessary to survive)

30% of your expenses CAN be in “Wants”

The last 20% will be for savings, investments and paying off debt.

Realistically, I think people can manage up to 50% in “Needs”, 30% in savings, investments and paying off debt (the sooner you pay off debt the more flexibility you will have with cash flow) and the rest in “Wants”.

#Deep In The Sheetz

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