By Jason Price8 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 10, 2014.
As I pulled into the gas station over the weekend I was amazed at the price of gasoline. I know it’s been all over the news, but to see the price on the sign in excess of $3.30 is disheartening. While many people will experience a dent in their spending plan because of the rising prices, there are many who simply can’t afford to keep gasoline in their car. If you have a shortfall of cash everything month as it is, rising gasoline prices makes matters much worse.
How do you save money on gas when the prices are high and rising? There are a number of ways which I discuss below, but the one thing everyone should be doing is adjusting their spending plans. When you think about your spending for the month consider what the additional cost in gasoline is going to be. You’ve got to make a cut in your budget somewhere whether that be less entertainment, savings or some other area. Unfortunately, it’s a reality right now and we have to manage to it.
So, let’s look at some ways to minimize the cost of gas and the impacts on your budget.
Ride Share or Public Transportation
If you’re used to driving to work each day, consider other forms of transportation. This is a great time to look into taking the bus or ride sharing with others who live nearby. This tip is especially helpful if you have a long range commute.
Find The Cheapest Gas
This past week I downloaded the GasBuddy iPhone app. GasBuddy finds the cheapest gas near me. For example, I just looked on the app and it identified gas at $3.39 down the street versus the next highest price of $3.49 about a mile further. Go to GasBuddy.com to learn more.
Fill Up At Warehouse Clubs
Warehouse clubs such as a Sam’s and Costco almost always offer cheaper gasoline. There is less mark up on their gas prices since they are making money by people shopping for items in in the club.
Smart Driving Saves Gas
For those who drive fast and accelerate a lot, you’ll find you waste more gas. Rather, accelerate steady and don’t weave in and out of traffic. Follow the speed limit and you’ll also find you don’t have to stop at as many stoplights which requires you to accelerate more.
Take Advantage Of Coupons
According to CNNMoney.com there are a number of gas coupons you can find online and in newspapers. Make it a habit to start watching for them each week.
Some gas stations, for example, offer coupons for discounts on gas that can be found in newspapers, circulars and online. A quick web search will result in printable coupons for as much as 7 cents off per gallon, but they’re scattered across various stations around the country.
Take Advantage Of Cash Back Reward Cards
Finally, you might consider getting a gas credit card and take advantage of cash back rewards. A lot of gasoline companies offer credit cards which can also be an easy way to track your gasoline spending. Just remember to pay it off each month by budgeting your spending. A gasoline credit card isn’t a free ticket to spend without a plan!
How high are the gasoline prices in your area? Have you noticed an impact on your budget? If so, can you share some tips you’re using to minimize gas prices?
By Peter Anderson6 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited January 21, 2019.
One thing that always amazes me is how people waste so much money every year, just through lack of caring or wanting to make the slightest effort in order to save.
They leave the low hanging fruit, for no other reason than they just don’t care, or they just aren’t aware of how easy it is to save.
If you do some due diligence before you buy something, you can save a ton of money.
In today’s post I thought I’d take a look at some extremely easy ways to find the best deals, and then to find additional savings on the things you buy.
Search For The Lowest Price On Things You’re Buying
When buying products, tickets or other items it’s important to do some research to make sure you’re getting the best deal. Here are some easy ways to do just that.
Invisible Hand Browser Add-on: This tool has quickly become my go-to tool because it just saves me a ton of time, and almost always finds me the best possible price for an item. Basically the tool is a browser add-on (IE, Chrome, Safari, Firefox) that will show you the lowest prices on items when you’re on an e-commerce site. So if I’m on Amazon looking for a wi-fi router and find one I like, it will tell me if there is a lower price elsewhere on the same router. If it’s the lowest price, it will tell you that as well. If I could choose only one price compare tool, this would be it. This tool also allows you to find the best airfare deal as well, although I haven’t used that functionality yet.
Google Products Search: A quick place you can go and search for a product name, and then find listings of the price of that item at a variety of different stores.
Honey: Honey is an automated coupon plugin for your browser that will find the best coupon code for your purchase and apply it automatically for you. Find out more in our review.
Home Improvement Coupons: Looking for a coupon for a home improvement store like Home Depot or Lowe’s? Check out OneProjectCloser’s page.
PriceGrabber: Another price comparison site that will help you to track down the best deals on whatever item you’re looking for.
These are only a few of the useful sites you can use to find the best price on an item that you’re buying. At the very least I’d suggest installing the browser add-on tool because it really makes saving money a no-brainer.
Search Google For Discounts On The Things You’re Buying
Once you’ve found the best possible deal on something that you’re buying, the next step is to find additional discounts if you can. How do you do that? Simple, you search for them using Google.
As mentioned in the video, finding discounts online is as easy as this process:
Go to Google.com
Search for the store name or attraction plus the words “coupon code”, “discount”,”savings” or other words you can think of that denote additional savings.
Comb through the results to find the best possible discount or coupon. Best results aren’t always on the first page.
I’d say about half to 3/4 of the time you’ll find a coupon code you can use.
Savings In Action
The photo above shows an actual search that we used to find additional savings on our tickets to a local aquarium here in Minnesota, The Sea Life Aquarium at the Mall of America. The tickets were originally about $20 per adult, more than we wanted to pay.
A quick search on google for “sea life aquarium mn coupon code” brought up several sites with working coupon codes on the first page of the results. Those codes on the first page would have saved us about $5-6. Instead of stopping there we dug through a couple more pages of results and found a special discount code for a local trade group – that anyone could use – that ended up saving us $6 on each ticket – so $12 off. Just that extra 5 minutes saved us an additional $6.
Sites To Find Discount And Coupon Codes
If you’re not finding much in the Google search you tried above, often you can just find a coupon code or discount by checking out a coupon aggregator site, or coupon forum. Here are a couple of my favorite places to find coupons.
RetailMeNot.com: This site is by far my favorite because they always just seem to have a coupon code for just about everything. I was purchasing my hosting plan a while back, and ended up finding a coupon code here that saved my 20% on the life of my hosting plan! Just go to the site, and search for the online store or retailer you’re looking to purchase from, and a list of tickets will come up, in order of how effective they’ve been for other people.
Ebay.com: This one place you may not think of to find a coupon code, but often it’s a great place to find additional discounts. For example, when I was buying a laptop a while back I bought a coupon code for a dollar or two on Ebay that ended up saving me 15% off of the price of my laptop. While sometimes you can be a bit unsure if the code will work, the return for a dollar or two can be quite a bit.
Honey: Honey is an automated coupon plugin for your browser that will find the best coupon code for your purchase and apply it automatically for you. Find out more in our review.
When No Discounts Are To Be Found? Just Wait.
Sometimes no matter how hard you try you might not be able to find a discount or a good price on an item that you want. In those cases quite often your best option is to just wait. If something isn’t on sale now, it will be in a month or two. If there isn’t a coupon code now, they may be running a promotion a week from now. Save up your money in an interest bearing account and eventually you’ll find the deal you’re looking for.
In cases where you absolutely have to buy something that day, you may be out of luck. For example, if we hadn’t found a discount on our aquarium trip, we most likely would have gone anyway. The key is to just give it a shot. It hurts nothing to do a little bit of research because in the end it could end up saving you quite a bit of money.
What smart shopping tips can you give us that can help us to save on the things we buy? Tell us in the comments!
By Peter Anderson3 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited April 3, 2014.
Up here in Minnesota summer usually doesn’t arrive until a little later in the year than many places, but when it gets here, it comes in with a vengeance. The last two days have been in the low to mid 90’s here in our area, and today there were tons of traffic problems all over town because the roads were buckling from the extreme heat. They expect more of the same today, and temps may top 100 today!
With the heat comes air conditioning season.
Our electric bills go through the roof as we enjoy having a nice cool home, and don’t mind paying for it. This year, however, we quickly realized over the last two days that our AC unit wasn’t functioning as it should.
Despite the fact that we were setting our thermostat to the low 70’s, the AC unit was struggling to keep it below 76 or 77 in the house. In the upstairs the temps were probably closer to 80 or so.
Calling In The AC Repairman
We decided on Sunday night that we would call the AC repairman on Monday morning to come out and fix our unit. The temps in the house were just a little too high.
We called the heating cooling folks and were promptly told that we’d be put on a list, and that someone would be out later in the afternoon. At 3:45 no one had shown, so we called them back. They said the person was still coming, but that since it was such a hot and busy day, they were going from call to call and coming as quickly as they could.
Finally at around 9pm the repair guy shows up at our house. He inspected our condenser outside, checked connections and then proceeded to inspect the inside of the unit. After looking at the coils on the unit he announced that he was reasonably sure that the coils on our unit was just really dirty, and that cleaning them off would fix our issue. He told us to come watch how he did it so that the next time we could save ourselves the house call, and the $172 that we paid to get our AC humming again.
First he unplugged the unit from the box next to the condenser on the wall. After removing power from the unit he hooked up the hose, and proceeded to gently spray the coils. Sure enough they were exceedingly dirty, and the dirty water started pouring down. After hosing the unit down thoroughly on all sides, he reconnected everything and plugged it back in. It fired right up and when we walked in the house the temps were already starting to feel more livable. Within the next half hour the temps had dropped 5 degrees, and were at the desired temp within an hour or so.
Try These Simple DIY Fixes For Your AC Unit Before Calling The Repairman
Sometimes we take the easy route out like we did at our house this week, and we neglect to try and find our own fixes to problems just because we think that the problem might not be very easy to diagnose, or that only a professional could handle it.
In many instances, however, even a non-handy homeowner like myself could easily fix their home maintenance and repair problems with just a simple Google search. For example, on our AC system “repair” last night, we ended up having to pay almost $175 for the guy to essentially hose down our AC unit.
If I had done a simple Google search before calling the professionals I would have found countless websites talking about how this is one of the most common reasons why an AC unit stops pumping out the cool air. There are even countless videos on how to do it if you’re so inclined. Here’s one in case you want to make sure your own AC unit is clean and maintained.
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Cleaning Your Own AC Unit
In case you want to clean your own AC unit and save yourself the hassles we went through and the money we spent, follow these simple steps shown in the video above.
Remove power source from AC unit: Usually there will be a box mounted next to the unit where you can open it and unplug the unit from power. Barring that you can turn it off at the breaker box.
Unscrew the grate/fan assembly on top: Take off the grate on top, usually by removing several screws around the perimeter. Remove the grate and the fan assembly carefully. Make sure not to bend the blades on the fan as this can cause problems later on.
Remove any debris from inside unit, and from around outside: You’ll usually find leaves, twigs and other plant debris inside the unit. Remove what you can see inside the unit, as well as removing any plants getting too close to the unit outside.
Hose off the coils around the unit, removing dirt and other debris: Once you’ve cleaned out other material, hook up the hose and hose off the coils around the exterior with a slow steady stream of water. Make sure you’re not blasting the unit with high pressure water, however.
Put it back together, plug it in and enjoy the cool air!: Once you’ve removed all the debris, and dirt from the coils, put everything back together, and plug the unit back in. It should resume normal operation, but now with increased efficiency and much more cool air!
Another thing the average homeowner can check on their AC unit before calling professionals is the filter on their unit, usually found by the furnace inside the house. If that filter gets too dirty it can impede the free flow of air and cause problems as well. Change the filter regularly.
Next time we know we can try a few simple fixes like this – before calling the repairman. He told us yesterday that probably 1/2 of his calls during that day had been simply dirty coils – an easy DIY fix.
Other Simple DIY Fixes We’ve Done
We’ve had at least one other easy DIY fix lately that saved us hundreds of dollars. Last month our washing machine started overflowing water in our laundry room. Luckily we didn’t have a flood as some others have, but it was perturbing nonetheless. Before we either called a repairman or bought a new washing machine, I decided to do a Google search for our make and model and see if there were any common and easy to fix issues that might cause overfilling like we had. Turns out that there was a piece on the unit that tells the machine when to stop filling with water called the “fill switch”. If it gets plugged (as sometimes can happen), the machine might not realize that it’s time to stop filling. The site we found had another helpful video, which we watched to see how to disassemble the unit and find the part. Sure enough, the piece was plugged with gunk. After removing the debris we had a fully functioning washer again. Easy fix, and we saved hundreds on either a service call or a new machine. Of course we’ll still be keeping a close eye on this machine for now as we don’t fully trust it… yet.
Lesson Learned: Simple DIY Fixes Can Save You Hundreds
The point I’m trying to get across here is that you don’t have to be handy in order to do your own home repair and maintenance tasks, at least the easy ones. In this day and age it’s pretty easy to find good instructions and tutorials online on how to diagnose and fix your problems without the help of an expert. Just make sure you take all the necessary safety precautions, and don’t stray from the instructions, and in many cases you’ll be able to save yourself a ton of money!
Have you done your own repairs or maintenance in order to save money? Tell us about the last time you saved by doing your own DIY projects, and how much you think you saved in the comments.
Saving money is a crucial aspect of personal finance. Understanding the different types of savings accounts and selecting the right one for your needs can help you grow your money and achieve your financial goals.
In this article, we’ll explore various types of savings accounts, including traditional savings accounts, money market accounts, certificates of deposit (CDs), high-yield savings accounts, cash-management accounts, and specialty savings accounts.
6 Types of Savings Accounts
Here are the six primary types of savings accounts, each designed to meet varying financial needs and goals.
1. Traditional Savings Accounts
Traditional savings accounts are a popular choice for those looking to start saving money. They are typically offered by traditional banks and credit unions and are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
Key Features
Low minimum deposit requirements
Limited transactions per month
Modest interest rates
Pros and Cons
Traditional savings accounts are easy to open and maintain, making them an ideal choice for beginners. They offer a secure place to store your money, with the backing of federal deposit insurance. However, the interest rates on these accounts are typically lower than other types of savings accounts.
Ideal for: Emergency Funds and Short-Term Savings Goals
A traditional savings account is a great place to start building your emergency fund or saving for short-term goals, such as a down payment on a car or a vacation. They provide a safe place to store your money while earning modest interest.
See also: Best savings accounts for 2023
2. High-Yield Savings Accounts
High-yield savings accounts offer higher interest rates than traditional savings accounts, making them an attractive option for savers looking to maximize their interest earnings.
Key Features
Higher interest rates than traditional savings accounts
Online and mobile access
Minimal fees
Pros and Cons
High-yield savings accounts offer competitive interest rates, often higher than those found at traditional banks. They typically come with low or no monthly fees and provide easy online and mobile access. However, these accounts may have limited branch locations, making it difficult for some users to visit a physical location.
Ideal for: Maximizing Interest Earnings While Maintaining Liquidity
A high-yield savings account is an excellent choice for those looking to earn a higher return on their savings while still maintaining easy access to their funds.
See also: Best high-yield savings accounts for 2023
3. Money Market Accounts
Money market accounts are a type of savings account that typically offer higher interest rates than traditional savings accounts. They are offered by banks, credit unions, and non-bank financial institutions.
Key Features
Higher interest rates compared to traditional savings accounts
Limited check-writing and debit card privileges
Minimum balance requirements
Pros and Cons
Money market accounts offer higher interest rates than traditional savings accounts, making them an attractive option for those looking to earn more on their savings. They also provide some liquidity with limited check-writing and debit card access. However, these accounts typically require a higher minimum balance to maintain, and there may be monthly fees if the balance falls below a certain threshold.
Ideal for: Those Seeking Higher Returns with Some Liquidity
If you’re looking for a savings account that offers higher interest rates than a traditional savings account, but still provides some access to your money, a money market account may be the right choice for you.
See also: Best money market accounts for 2023
4. Certificates of Deposit (CDs)
Certificates of deposit (CDs) are time-based deposit accounts that offer fixed interest rates for a specified term. They are offered by banks, credit unions, and other financial institutions.
Key Features
Fixed interest rates for a specified term
Early withdrawal penalties
Various term lengths
Pros and Cons
CDs offer higher interest rates than traditional savings accounts and money market accounts. They are a low-risk investment option, making them ideal for long-term savings goals. However, CDs require you to lock your money away for a set period, and early withdrawal penalties may apply if you need to access your funds before the term ends.
Ideal for: Low-Risk Investments and Long-Term Savings Goals
If you have a long-term savings goal or are looking for a low-risk investment, a CD may be the right choice for you.
5. Cash-Management Accounts
Cash-management accounts are a hybrid of checking and savings accounts, offering the benefits of both types of accounts in one convenient package.
Key Features
High-interest rates
No minimum balance requirements
Flexible access to funds, including check-writing and debit card privileges
Pros and Cons
Cash-management accounts offer high-interest rates and the flexibility of a checking account, making them an appealing option for those who want the best of both worlds. However, these accounts are typically offered by online banks and non-bank financial institutions, so access to brick-and-mortar branches may be limited.
Ideal for: Those Seeking Flexibility, Convenience, and High Returns
A cash-management account is perfect for individuals who want a high-interest savings account combined with the convenience of a checking account.
6. Specialty Savings Accounts
Specialty savings accounts are tailored to help individuals save for specific financial goals. These accounts often come with unique features, benefits, and tax advantages. Let’s take a closer look at three common types of specialty savings accounts.
Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) are designed to help individuals save for qualified medical expenses on a tax-advantaged basis. They are available to those who are enrolled in a high deductible health plan (HDHP).
Key Features
Tax-deductible contributions
Tax-free withdrawals for qualified medical expenses
Funds can be invested, and investment earnings are tax-free
Unused funds roll over from year to year
Pros and Cons
HSAs offer significant tax advantages, allowing you to save and invest money for healthcare expenses without paying taxes on contributions, earnings, or withdrawals for qualified expenses. However, HSAs are only available to those enrolled in an HDHP, and there are annual contribution limits. Additionally, using HSA funds for non-qualified expenses can result in taxes and penalties.
Ideal for: Saving for Healthcare Expenses with Tax Advantages
If you have a high deductible health plan and want to save for future medical expenses while enjoying tax benefits, an HSA may be the right choice for you.
Education Savings Accounts (ESAs)
Education Savings Accounts (ESAs) are designed to help families save for education expenses, such as tuition, books, and other related costs. The two main types of ESAs are the Coverdell Education Savings Account and the 529 Savings Plan.
Key Features
Tax-free withdrawals for qualified education expenses
Wide range of investment options
Contribution limits and eligibility requirements may apply
Pros and Cons
ESAs offer tax advantages, allowing you to grow your savings tax-free and make withdrawals for qualified education expenses without paying taxes. However, there are contribution limits, and eligibility requirements may apply. Additionally, using ESA funds for non-qualified expenses can result in taxes and penalties.
Ideal for: Saving for Education Expenses with Tax Advantages
If you’re planning to save for future education costs, such as college tuition or private K-12 schooling, an ESA may be the right choice for you.
Individual Development Accounts (IDAs)
Individual Development Accounts (IDAs) are designed to help low-income individuals save for specific financial goals, such as purchasing a home, starting a business, or paying for higher education.
Key Features
Matching funds provided by non-profit organizations or government agencies
Financial education and counseling services
Eligibility requirements based on income and other factors
Pros and Cons
IDAs offer the unique benefit of matching funds, which can significantly boost your savings. They also provide financial education and counseling services to help you achieve your financial goals. However, IDAs have strict eligibility requirements based on income, and there may be restrictions on how the funds can be used.
Ideal for: Low-Income Individuals Saving for Specific Financial Goals with Matching Funds
If you meet the eligibility requirements and have a specific financial goal in mind, an IDA can be a valuable tool to help you save and achieve your objectives with the support of matching funds and financial education services.
How to Choose the Right Savings Account for You
Selecting the right savings account is an important step in achieving your financial goals. To make the best decision, consider the following factors and follow these steps to guide you through the process:
Step 1: Assess Your Financial Goals and Priorities
Before choosing a savings account, it’s crucial to understand your financial objectives. Consider your short-term and long-term goals, such as:
Building an emergency fund
Saving for a down payment on a house or car
Planning for retirement
Funding a child’s education
Saving for a vacation or other significant purchase
Understanding your goals will help you determine the type of savings account that best aligns with your priorities and financial timeline.
Step 2: Compare Interest Rates, Fees, and Account Features
Once you’ve identified your financial goals, start comparing interest rates, fees, and account features across different savings account options. Factors to consider include:
Annual percentage yield (APY): The APY represents the interest rate you’ll earn on your savings over a year, taking into account compounding. A higher APY will result in greater interest earnings.
Fees: Be aware of any monthly maintenance fees, ATM withdrawal fees, excess transaction fees, or other charges that may apply to the account. Look for accounts with low or no fees to maximize your savings.
Account features: Evaluate the account’s accessibility, such as online and mobile banking capabilities, branch locations, and customer service. Consider any unique features or benefits, such as rewards programs or cash-back offers.
See also: Best 5% Interest Savings Accounts of 2023
Step 3: Consider the Accessibility and Customer Service of the Financial Institution
When choosing a savings account, it’s essential to evaluate the financial institution’s accessibility and customer service. Factors to consider include:
Branch locations and hours: If you prefer in-person banking, opt for a financial institution with convenient branch locations and hours.
Online and mobile banking: Ensure the financial institution offers robust online and mobile banking services, allowing you to manage your account, transfer funds, and check your balance with ease.
Customer service: Assess the quality of customer service, including responsiveness, availability, and knowledge of the institution’s representatives.
Step 4: Diversify Your Savings Strategy to Take Advantage of Different Account Types
Diversifying your savings strategy by utilizing different types of savings accounts can help you maximize your interest earnings, meet various financial goals, and manage risks. Consider opening multiple accounts, such as:
A high-yield savings account for your emergency fund or long-term savings goals
A money market account for short-term goals or to maintain liquidity
A certificate of deposit (CD) for low-risk, long-term investments
Specialty savings accounts, such as a Health Savings Account (HSA) or an Education Savings Account (ESA), to save for specific financial goals with tax advantages
Bottom Line
Understanding the various types of savings accounts can help you make an informed decision about where to store your money and how to grow your savings. By choosing the right account for your needs, you can maximize your interest earnings, maintain liquidity, and achieve your financial goals. Start saving and growing your money today!
Last Updated on February 25, 2022 by Mark Ferguson
When considering either a 15 or 30 year loan for investing, most people choose the 15 year loan. 15-year loans may appear to save money over 30-year loans because they have a lower interest rate, but I would much rather have the flexibility of a 30-year loan. Buying rental properties is a great investment, especially when you are able to use a mortgage to buy the properties and still get great cash flow. Many investors will get a 15-year mortgage because the rates are a little lower and they can pay off the properties quicker. I use a 30-year loan when I buy my rental properties because I get more cash flow and I can make much more money buying more properties than I can be paying off loans.
Why is a short term loan better?
The biggest advantage of a 15-year mortgage is the interest rate is less than a 30-year loan. The difference in rates changes daily and varies with different banks, but a 15-year loan is usually about .5 percent less than a 30 year fixed mortgage. With a lower interest rate, you are paying more towards the principal and less towards interest.
Some people think the biggest advantage of 15-year loans is the shorter length of the loan. I don’t agree because you can pay a 30-year loan off early if you want too. You will have a higher interest rate, but .5 a percent is not a huge rate difference, especially when you consider how much you can make buying more properties.
Are mortgages front-loaded with interest?
A lot of people want to pay off their loans faster because they think the interest is front-loaded on a mortgage. That means you pay more interest at the start of the loan compared to the loan amount than you do at the end of the loan. The truth is you do pay more interest at the beginning of the loan, but not because the interest is front-loaded, but because the loan amount is higher. If you have a 5% interest rate on your mortgage, 5% of your payment is paid to interest. You pay less money to interest as time goes on because the loan amount decreases.
How much do you save with a lower interest rate?
If you get a 15 year, $100,000 loan on a rental property at a 4 percent interest rate, the payments will be $740 a month (check out bank rate mortgage calculator for calculating mortgage payments). Over the 15 years of that loan, you will pay $33,143 in interest. With a 30 year loan at 4.5 percent interest, the total amount paid in interest over the life of the loan will be $82,406.
On the surface, it looks like you are saving almost $50,000 by getting a 15-year loan. However, you are paying interest over 30 years on one loan and over 15 years on the other, which is deceiving. The payment on a 30-year loan is only $507 a month, which is $233 less a month than the 15-year loan. If you were to take that $233 a month and put it back into the 30-year loan each month, the 30-year loan would cost $39,754 in interest and be paid off in less than 17 years. It definitely costs a little more to have a higher interest rate, but over 15 years that is only $550 more each year. As time goes by that money is worth less and less due to inflation.
I go over specific numbers on 15 versus 30-year loans in the video below:
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Why do banks push 15-year mortgages?
You may hear banks and lenders push 15-year loans on the radio and social media all the time! I always wonder if the 15-year loan is so much better for consumers and worse for banks, why are the banks trying to convince people to get 15-year loans? There are a couple of reasons.
The banks want people to refinance their loans because they make more money every time someone gets a new loan. You pay 2 to 5% in closing costs on a new loan and the bank or lender gets most of that money.
Most banks do not want their money locked up for 30 years. There is a reason they offer a lower interest rate on 15-year loans because they want more people to get 15-year loans. 30 years ago interest rates were more than 10%! Now they are less than 5%. The banks know that the lower the rate is, the shorter-term loan they want. They don’t want their money tied up in long-term loans.
The banks and lenders push 15-year loans because they make more money with short-term loans.
Is a 15 or 30 year loan better?
You will pay less interest on a 15-year loan than a 30-year loan. However, you are paying a higher payment every month on the 15-year loan. If you add up the payment savings with the 30-year loan, you save $2,796 each year and $41,940 over 15 years by getting the 30-year loan.
That extra money can be used for many things that will make you much more money than that $6,000 in interest you save. You can save up the cash flow to buy more rental properties. You can use the money to build an emergency fund. You could also pay extra to the mortgage and if you ever need the extra money later, you can stop putting extra money into the mortgage.
If you have nothing to invest that money into, it might make sense to get the 15-year loan. If you want to keep buying rentals and build your empire, the best bet is to get a longer-term loan and buy as many rentals as you can now.
Something else to consider is that inflation makes money worth less in the future. The graph below shows how much more money a 15-year loan costs you at the beginning of the loan when inflation is considered. It takes until year 24 or longer to start saving money with the 30-year loan.
Why does a 15-year loan make it harder to buy more rentals?
Another huge factor when considering whether to use a 15 or 30-year loan, is qualifying for more properties. When banks qualify an investor, they will look at debt to income ratios. A 15-year loan will have a higher payment and increase your monthly debt payments. The higher your loan payments are, the less cash flow you will have, and it will be harder to qualify for new loans. Many banks will only count 75 percent of your rental income when qualifying an investor for a loan. Even if you are cash flowing with a 15-year loan, if you can only count 75 percent of the rental income, you may show a loss each month. If you have many rental properties showing a loss, it will be very hard to qualify for new loans.
A 30-year loan with its lower payments will make it easier to qualify for more properties.
What if you cannot get a 30-year fixed-rate mortgage?
I own 180k sqft rental properties and it is really hard for me to find fixed-rate mortgages. I use a local lender and they do not offer 30-year fixed-rate loans, only ARMs.
When I finance my rental properties, I use 30-year ARMs. An ARM is an adjustable-rate mortgage that has a fixed interest rate for a certain amount of time. The interest rate on an ARM can adjust up or down after the fixed time period is up. My portfolio lender offers 5 and 7-year ARMs with a 30-year amortization. The rate will stay the same for the 5 or 7-year term but can adjust after that term is up. There are limits on how much the rate can adjust each year and a ceiling that it can never go over. The great part about ARMs is they have a lower rate than a 30 year fixed rate loan and even the 15-year fixed-rate loan.
If you get an ARM for your rental properties you will have an even lower payment than a 30 year fixed rate loan and save money in interest costs over a 15-year fixed-rate loan. To me, it is the best of both worlds.
Why is an ARM less risky than you may think?
There are obviously some risks involved with an ARM because the rate can go up after 5 or 7 years. I always have plenty of reserves and cash flow to make sure I can afford the higher payment if the rates adjust. Even if I hold the loan well past the initial fixed-rate term, it takes a few years for the ARM to become more expensive than a fixed-rate mortgage. Chances are rents will increase in the time period as well. If you have enough cash flow and a plan for when rates could increase, you should have no problem with an ARM.
If you don’t have enough cash flow and your payments go up, you could get into trouble with an ARM. Negative cash flow is hard to sustain and it will make it harder to qualify for loans as well.
Many lenders will also only offer ARM loans after you have a certain number of mortgages in your name. I would suggest getting the fixed-rate mortgages when first starting out, and as you advance in your investing career look at the ARM option.
Why is a lower payment more important than a lower interest rate?
ARMs allow a small payment at the beginning of a loan and possibly a higher payment in the future. The nice thing about the lower payment is you have more cash flow and inflation comes into play when you are investing money. If you can pay less money now and more in the future it is a good thing, because inflation will make money worth less in the future. Even though your payment might go up on an ARM; 5 or 7 years later that money will be worth less and your rents could have gone up. If you use the money you save on an ARM to invest in more rental properties or something else with a decent return, you will be way ahead than if you had paid a higher payment with the 15 or 30-year fixed loan.
Why is a 30-year loan safer than a 15-year loan?
Many people have a tough time saving money and the higher your mortgage payment is, the harder it will be to save. Having an emergency fund is very important for financial stability. If you do not have an emergency fund, do not get a 15-year mortgage. Get the 3o-year mortgage, and save up for the emergency fund. Once the emergency fund has enough money (6 months of living expenses) you can pay off your mortgage early if you would like to.
Remember that you see no real benefit to paying off your mortgage early unless you pay off the entire loan, refinance, or sell. Your house payment will stay the same until the loan is paid off in full. If you need to access the equity you have in your house, you cannot ask the lender to give you back what you have paid early. You will have to sell the house or get a brand new loan (refinance or home equity line of credit).
If you get a 15-year loan and have a medical emergency, lose your job, or cannot work, the bank will not lower the payment for you. You have to keep paying that high mortgage payment every month. If you had a 30-year mortgage and were paying more to it every month, an emergency would not be nearly as devastating, because you could stop paying extra.
Does a 15-year or 30-year loan allow you to buy more rentals?
My goal is to buy as many rentals as I can. Not only do I want each rental to make as much money as possible, I want to buy a lot of them! The 30-year loan allows you to buy more rentals because you are making more money each month. If you take that money and reinvest it into more properties, the results are phenomenal.
My nephew, who is a math whiz, made this amazing graph. Here is how it was created:
Each rental has a $120k value and $1,200 a month rent. The house was bought 30 percent below market value. but we spent $10k on repairs and 20% on down payments. We also spent 4% on closing costs to buy.
Monthly costs are 1.5% for taxes and insurance, 8% for property management, 5% for vacancies, and 10% for maintenance.
The chart shows what happens when you buy 1 property with a 30-year loan and reinvest all the cash flow into buying more properties vs 1 property bought with a 15-year loan and reinvesting all cash flow into more properties. You buy 119 houses over 30 years with 30-year loans and 32 houses with 15-year loans. You are making $53k a month with 30-year loans vs $11k a month with 15-year loans.
This does not account for inflation! With inflation, the 30 year is even better because rents increase on more properties. You buy 147 houses vs 38. It may be tricky getting a 30-year loan on that many properties, but it shows the value of investing your money early on instead of paying off debt early.
Conclusion
On the surface, a 15-year fixed-rate mortgage may seem like the best way to go. It saves money on interest over the life of the loan and has a shorter term. I believe the 15-year loan is the worst choice because you are tying up your money, making it harder to qualify for loans, and you could be investing that money in something that gives a higher return. If you get a 30-year ARM, the interest rate will actually be lower than the 15-year loan, and you might be able to pay that loan off faster than the 15-year loan.
Without a doubt, the outdoors is coming alive. Now to bring all that freshness inside.
Here are a few ideas for easy, budget-friendly touches around your home that will make it feel like spring has truly sprung.
A pretty spring wreath. Now’s the time to put up a welcoming and flower-festooned wreath to let guests and neighbors know that, yes, you do indeed know what time of year it is. In the interest of reducing waste and saving money every spring, I recommend buying a high-quality faux (but realistic-looking) fabric version that you should plan on using again and again for the next five years or so. For that functionality, I like designs such as Monique Lhuillier’s Faux Lemon Wreath & Garland ($126 on potterybarn.com), which looks completely real and brightens up any entryway.
Bring the outside in. While I absolutely love having fresh blooms around my house, it can get expensive and a little annoying to have to constantly replace flowers after they die. Here’s something that lasts a lot longer but has the same net effect: spring branches. Buy some or get them from your yard — a bundle of branches from trees like forsythia and quince just need a few days in water indoors to start blooming. And they last up to a month if you change the water every week.
Swap out the placemats. You don’t need to go buy a while new set of serveware; just change the background for a brand new look. I prefer placemats to tablecloths because they’re modular and if you spill on one, there’s far less to wash or clean up. Also, since they cover less space, you can take a few more risks with wild patterns that make a statement. Consider something like the Citrus Garden Placemats by Matouk ($108 on bloomingdales.com), which makes a big, bright impression through the meal. Or get a little mod at the kitchen table with the Mirimo Florapop Spring Placemats by Deny Designs ($50-$75 on target.com). I love their fun, casual whimsy.
Brighten up the bed. Lighten up your nights with a new, thinner, lightweight duvet, and then cover it with something that freshens up your entire bedroom. Go for something sweet and lovely like the Spring Party Duvet Cover ($211 on annieselke.com) — with a bevy of little blooms dancing across it. Or go a little bolder with the hot pink-and cherry red Unikko Duvet Cover & Sham Set by Marimekko ($129.99-$179.99 on nordstrom.com).
Add more natural light. One of the smartest and simplest ways to add more natural light is to capture light near a window and reflect it. By adding a medium- or large-sized mirror to an entryway, for example, you’re creating different points of light and all kinds of new dimensions. And I love choosing mirrors that are themselves a work of art — like vintage-y, 1920s-inspired Daughtrey Modern & Contemporary Accent Mirror ($133 on wayfair.com), or big-drama shapes like the Elinor Rattan Wall Mirror ($229 on westelm.com).
Bring on the bright sofa pillows. There’s no need to buy the whole shebang, in many cases you can just purchase the pillowcase to refresh the look. That’s the case with the Palm Pillow Cover (on sale for $39.99 on serenaandlily.com) in a warm sunflower hue. Or double down on the natural vibe with a softly colored design like the Ivory Coral Whimsy Embroidered Pillow Cover ($89 on garnethill.com). Added to your sofa or favorite chair. It’s as good as instant sunshine.
By Jason Price4 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited January 21, 2019.
Have you ever stockpiled items to save money?
A lot of people stockpile when prices are low. A good example of stockpiling is buying 10 boxes of cereal when you can get the cereal for $1 a box versus $2.50. A lot of people plan all of their grocery shopping around this strategy. It can provide a lot of benefits, but it isn’t exactly easy to implement, in my opinion.
How Does Stockpiling Work?
I first learned about stockpiling by playing The Grocery Game. The Grocery Game was created based on this method. In short, you buy items when they’re on sale at their cheapest prices (the game tells you this by monitoring the trends) and further reduce the price by clipping and using coupons. My wife and I had a closet packed with more food than we could imagine when we played the game. I think we must of had a least 20 boxes of cereal after one shopping trip!
When you get a chance, check out these sites which all provide stockpiling related services.
Benefits Of Stockpiling
There are two primary benefits of stockpiling:
Saving Money
Well, as mentioned the main benefit to stockpiling is saving money on groceries. You actually buy items when they are at their cheapest prices. Most items go on sale every 2 -3 months and services like the Grocery Game tell you when to buy items by generating a shopping list for stories in your local area.
Convenience
Eventually, you create your own grocery store at home with all the items you use. You have plenty of the items in supply and simply pull from your stockpile when the need arises for an item versus going to the store.
When you have a need for paper towels, for example, you might typically go to the grocery store at that time (or during your weekly trip) to purchase the paper towels. The problem with this approach is you might be buying the item at the most expensive price. Perhaps it’s not on sale, or even worse, you haven’t planned ahead and don’t have a coupon to further reduce the price.
Drawbacks Of Stockpiling
Based on my experience, there are a few drawbacks of stockpiling you must watch out for.
You Might Use More Than Usual
Having your own grocery store at home certainly makes it easy to use items. For example, you might be more likely to make a trip to the stockpile for snacks. If not careful, you might even be more wasteful knowing you have plenty of supply on – hand.
You Need To Find Room For All Your Items
We were really amazed at how many items we had in our stockpile. It required us to put in some shelves in a storage closet because we no longer had room in the pantry. Some people take stockpiling so far as having items stacked in common areas of the house. Yikes!
You Might Need To Invest To Get Started
Finally, you might be buying items at rock bottom prices, but it may take some investing. We learned this the hard way. I mentioned we maybe had 20 boxes of cereal and many other items in our stockpile. But, we used our budgeted grocery spending money to stockpile and didn’t have any money left over for other items we needed during the month. We learned this the hard way a few times and dipped into savings. I think the best way to get started is to use a little extra to invest in your stockpile, or just stockpile a few items at a time. Don’t go overboard at the grocery store or wholesale club when stocking up. Also, don’t forget to Costco membership discount if you sign up to get deals there.
Have you ever stockpiled to save money? If so, tell us about your experience?
With the recent rise in gas prices, many people have been looking for ways to save money on gas. These efforts usually fall into two categories; reducing your fuel consumption, or finding a way to pay less. Realizing that because of the various uses for crude oil, gas prices are somewhat out of our control (especially if our only weapon is a gas boycott), we are limited in how we can reduce the price that we pay. Paying less for gas is really just a matter of either finding the lowest priced gas stations in your area, or using various credit card benefits to get cash back.
However, it is in the area of reducing fuel consumption, where people can get very creative. Unfortunately, some of these techniques can actually cost you money or make your drive more dangerous. Recently, Investopedia published an article outlining some of these methods. I thought it would be interesting to see which fuel saving techniques they highlighted and what they had to say about each one.
They are listed below, with my feedback beneath each one. Be sure to leave your comments below.
Save Money On Gas? Not With These Techniques!
Devices To Increase Airflow
The Theory: High-tech devices designed to increase your engine’s airflow will improve fuel efficiency.
The Facts: It sounds plausible, but the results don’t back up the impressive claims. Consumer Reports tested several of the devices, such as Fuel Genie ($89.95, plus shipping), that purport to increase fuel economy by accelerating airflow to the engine. The tests found no noticeable gains in MPGs, despite claims of 50% fuel savings. While it’s true that drastically increasing the airflow to an engine is a common way to increase horsepower (i.e. forced induction through turbo and superchargers), doing so will actually increase fuel consumption and increase wear on the engine, not to mention that this proven technology costs significantly more than its gimmicky competition.
I have to admit that I have never gotten so much into fuel efficiency that I’ve researched or purchased an airflow gadget. However, I know that some people have been willing to make significant investments in these types of gadgets in order to increase their miles per gallon.
If the problem of increasing the wear on your engine is true, then these gadgets will end up costing a lot more than what you pay for gas!
Fuel Additives
The Theory: The gas we buy can be improved by adding scientifically formulated chemicals that will increase fuel efficiency and, sometimes, horsepower.
The Facts: Clearly, some drivers believe the answer to their fuel woes lies in a magic elixir, because there are numerous fuel treatments that claim to increase MPGs, despite no scientific proof or explanation of how less fuel is burned. According to CNN.com, one common tactic used by shady fuel-additive makers is to tout the product’s approval by the Environmental Protection Agency (EPA). This suggests that a trusted consumer watchdog has approved the product’s claims, but in fact, the EPA had only deemed that the product does not increase a vehicle’s harmful emissions. The truth is, if there were an additive that made fuel burn more efficiently, oil companies would be racing to market their new gas at the pumps and gain a bigger market share.
I used to add a fuel treatment to my car every 3,000 miles. I never noticed a difference in how the car ran, or in the fuel efficiency, but I just figured it was because I wasn’t paying close enough attention.
I think that the worthless EPA approval is pretty deceptive. The average person would think that the claims to improve fuel efficiency have been tested and proven to be true; however, it just means that it won’t increase your emissions!
I don’t think I’ve purchased this stuff since we got our new car over 3 years ago, but I always had a supply in my trunk before that!
Premium Gas
The Theory: Premium gas provides increased performance and better gas mileage.
The Facts: This is true … if you own a premium automobile that requires high-octane gas, but these cars make up the minority of daily drivers. So if you’re in the majority – drooling over Ferraris from the seat of your Corolla – your car’s engine control unit (ECU) is programmed to run on the octane levels present in regular gas. Increasing the octane – either through buying premium gas or adding bottles of octane-boost – can actually cause the engine to be less efficient, as the car’s combustion timing becomes altered and efficiency is lost. But the most noticeable loss will be the extra 20 cents per gallon you’ll be wasting to buy high-octane gas. A safe bet is that if you can afford a vehicle that requires only premium fuel, you likely aren’t concerned with gas prices or tracking mileage.
This is one I’ve always known about. I think the only time I ever purchased anything higher than regular was when the gas station ran out, and they charged the same price as regular.
Once in a while I would come across people who swore by a higher octane, but they could never tell me why. It was just another case of, “it costs more, so it must be better”!
I love what the article said at the end of this…it’s very true. If you can honestly afford a car that needs a higher octane, you probably aren’t worried about your MPG as much as most.
Over Inflating Your Tires
The Theory: Rounder tires roll easier, creating less work for the engine and therefore, better MPG.
The Facts: Again, this tip is true … to a point. Over inflated tires will have less friction with the road, which lessens the effort the engine exerts to keep the car rolling, providing slight gas savings. However, overinflated tires will wear out quickly and irregularly, causing you to need early replacements at a cost of about $50 to $100 per tire. What’s worse is that the decreased contact with the road increases stopping distances and limits handling capabilities. This all adds up to a large risk in costly accidents and injuries. Even if you are lucky and avoid a collision, it would take a lifetime (which could very well be short if you’re riding on bald and bulbous tires) for your fuel savings to negate the cost of four new tires. According to Edmunds.com’s testing, the fuel consumption difference between driving with over-inflated tires and tires at the recommended pressure is negligible. Sometimes, despite what GM’s recent track record suggests, carmakers do know what they’re doing and the recommended settings and levels do provide the best results.
I’ve actually never heard of this trick. It just seems so dangerous, because you have less of your tire making contact with the road – meaning it is more difficult to brake! Even if the increase in MPG were substantial, I would not feel comfortable doing something this dangerous!
I think that the cost of your new tires and the increased risk of being in an accident, would easily negate any gains you have from buying fuel less often.
Roll Down The Windows Rather Than Using Air Conditioning
The Theory: Operating the AC to cool the vehicle uses fuel, so it’s more efficient to cool off by driving with the windows down.
The Facts: While it’s true that some fuel is used to operate the AC compressor, as much or more fuel is lost when the windows are down. Rolling down the windows increases the drag on the car, which causes the car to work harder to maintain its speed. For even better mileage, you can improve your AC’s efficiency by using the re-circulation setting on the car’s HVAC system instead of forcing the AC to cool the hot air from outside. Heeding this tip will increase your mileage, as well as your comfort.
This has been a subject of great debate for a while now. Many people – including me for a while – will drive on the highway with the windows down in the summer, in order to save money by not turning on the AC. Actually, I do it because I love fresh air and I didn’t want the AC to burn up gas. However, once you get over about 40 MPH, the drag on the car (from the air resistance) causes the fuel efficiency on your car to drop dramatically. Therefore, if you are driving on the highway, you will burn less gas by using the AC and keeping the windows up.
Now, I just have to weigh this fact against my need to feel comfortable. I am one of the few people who I know are more comfortable with air blowing on my face in the summer, than having the “conditioned” air blowing on me. If gas prices continue to increase, I may have to get used to running the AC (on the lowest setting, or course).
Reader Questions
What methods have you implemented in order to save money on gas?
How often do you think about rising gas prices?
What are some common myths that you’ve heard about saving money on gas?
A new analysis from Zillow revealed that nearly half of mortgage applicants opted to pay points when taking out a home loan last year.
These optional costs allow homeowners to buy down their interest rate at closing.
Doing so lowers their monthly mortgage payment for the duration of the loan term.
And it saves them money on interest via a lower mortgage rate, meaning more of each payment goes toward principal.
But are points actually a good deal for homeowners? And do they make sense when interest rates are high?
A Lot More Homeowners Are Paying Mortgage Points These Days
Zillow Home Loan’s analysis, which used data from the Home Mortgage Disclosure Act (HMDA), found that roughly 45% of conventional primary home borrowers paid mortgage discount points in 2022.
As noted, these points allow borrowers to obtain a lower mortgage rate. They are a form of prepaid interest.
The result in a reduced monthly mortgage payment and a lower interest expense during the loan term.
What’s interesting is a lot more homeowners are paying these points than in prior years.
For example, when mortgage rates were at or near record lows, far fewer applicants paid points.
To put it in perspective, just 29.6% of borrowers paid points in 2021, 28.4% in 2020, and 27.3% in 2019.
As for why, it’s probably because the mortgage rate offered was so low that there was little need to pay points. And probably little desire.
Zillow notes that buying points is most often used by low-income borrowers (those who make between 30% and 50% of their area’s median income).
These tend to be the folks who are most fixated on keeping monthly payments down.
At the same time, borrowers were more likely to pay points in top and middle price tiers than for homes in the bottom price tier.
Simply put, a lower mortgage rate makes a bigger impact on a larger loan amount.
However, those who made less than 30% of their area’s median income purchased the most points overall for homes in that bottom price tier.
Another issue lately is because the mortgage market has been so volatile, many lenders made mortgage points compulsory.
[Why Mortgage Lenders Are Requiring Upfront Points]
Paying One Point Might Reduce Your Mortgage Rate by 0.25%
While this can certainly vary, Zillow found that mortgage applicants might need to pay 1% of the loan amount to reduce the interest rate by 0.25%.
For example, on a $300,000 loan amount with a rate of 6.75%, it could cost $3,000 to lower that rate to say 6.5%.
The difference in monthly payment would be about $50 and the interest saved about $18,000 over the full 30-year loan term.
Knowing this, you would need to determine if it’s worth that upfront cost. To do so, you figure out the break-even period, which is how long it takes to recoup those costs and begin saving money.
In our example, it might take around four years of reduced payments and interest to make that upfront point worth it.
And that’s the rub. You have to stay in the home AND keep the mortgage for at least that long to actually benefit.
Note that at the moment, mortgage discount points might be going a little further in terms of rate reduction.
Be sure to shop around with multiple lenders to see how far a point can go, as this can vary by company.
Is a Temporary Buydown a Better Option Than Paying Points?
While paying points wasn’t as popular when mortgage rates were rock-bottom, it may have been underutilized.
After all, someone with a 30-year fixed set at 2-3% will arguably keep that home loan for as long as possible. So paying upfront for even more savings could be a winning move.
Conversely, someone who takes out a mortgage set at 6.5% today may not want to keep it very long. Or pounce at the first opportunity to refinance.
There’s also an expectation that mortgage rates could ease later in the year and in 2024. As such, paying points at closing could be a money-loser.
Remember, if you don’t keep the loan past the break-even period, you won’t actually save money on the upfront costs.
This makes the argument for a temporary buydown, such as 2-1 buydown, perhaps more compelling.
You can save money for the first two years and get the lender, builder, or seller to pay for it.
And once a refinance opportunity comes along, you can swap your mortgage in for a new one at a lower rate.
Instead of banking on keeping the mortgage for a long-haul, you can take advantage of lower payments for the first couple years.
It’s less commitment, and possibly more cost-effective. You’re only using the payment reduction for the year or so until mortgage rates ideally come back down.
The homeowner who pays discount points might feel stuck in their loan knowing they’d “lose money” if they refinanced prior to breaking even.
However, the borrower who opts for the temporary buydown must ensure they can afford the actual mortgage payment if a refinance opportunity doesn’t come along.
Save more, spend smarter, and make your money go further
It’s claimed Albert Einstein once said “the power of compound interest is the most powerful force in the universe.” While it’s still unknown if he actually said this or not, the message remains powerful and widely adopted and here’s why: Compound interest is basically interest on the principal amount + interest that has already accrued.
In other words, interest on interest. Here are the key factors to keep in mind:
Principal = amount borrowed or invested
Interest rates =
Interest paid on principal
Interest paid on accrued interest
Compounding schedule = interest can accrue daily, monthly, yearly or any other schedule laid out in the agreement.
Depending on whether you’re earning compound interest by saving money, investing, or paying it off on credit cards, loans, etc., compound interest can either help you out or hold you back.
Working in Your Favor
Let’s say you deposit $1,000 into a savings account that pays 1% interest compounding annually. At the end of the first year, you would get $10 in interest, bringing the account balance to $1,010. Assuming you don’t make any deposits, at the end of the next year, you would earn 1% on the $1,010 in your account, earning $10.10 in interest at the 1% rate. At the end of the second year, your balance would be $1,020.10.
Though in this example the increase seems small, over time (and depending on the interest rate) you can see how the dollars can add up without much effort on your side. So take a look at the interest rate on the accounts you have now, and keep this in mind if you ever consider signing up with a new bank.
Considering the Downside
Now, say you have a $5,000 credit card balance on a card that has an annual percentage rate (APR) of 15%, which compounds daily with a 30-day billing cycle. First you should calculate your daily interest rate from your purchase APR by dividing the 15% purchase APR by the number of days in a year. Then you multiply the daily rate by your average daily balance. Next: multiply that number by the number of days in your billing cycle to get your monthly interest charge.
In this case, your monthly interest amount is $63.70. Meaning, if you were to make payments of $63.70 every month to pay off the compound interest (and without spending any more on that card) your balance would never go up or down. However, by only paying the interest rate, you’re not making progress towards reducing the overall amount you owe on the card balance.
In the end, you have to factor in the amount you need to pay for interest as well as an additional amount you want to pay to decrease your debt in order to work toward clearing the balance.
Now What?
Are you earning or paying compound interest? If you’re earning it, congrats – keep it up! If you’re paying it on credit cards, student loans, mortgages, etc. you can use an online calculator, like the Securities and Exchange Commission’s, to see how much you’ll end up paying – and can adjust your budget accordingly.
Save more, spend smarter, and make your money go further
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