You see before you… (well, you’re reading on your screen, at least..) a lady most informed on the calculations of interest. You’d think that this would be easy to find, but Google wanted to point me to lots of calculators that would do it for me (but only based on a year) but nothing that would tell me HOW to figure it out myself.. But I finally found this very easy to read and understand tutorial of sorts. I highly recommend it.
So using my newfound knowledge, I set to work. I decided to run numbers just based on the 16k balance that will be on our citi amex card, which the 0% rate expires in October. The goal is to get it paid off by October. However, the balance won’t be 16k in April, it will be $13,250k, due to a big payment courtesy of my husband’s bonus.
Behold, the “just pay it down already!” scenario A:
So you know where those bigger numbers are coming from, $1300 is going to come from the regular debt snowball.
We will be receiving $1k back from our state taxes, and my husband gets an extra paycheck in april, so April’s numbers are 1300 + 1000+ 1800 = $4100.
In May, we’re expecting the tax stimulus check: 1300 + 1600 = $2900.
The rest of the months are “normal”.
Next, scenario B, let’s call it the, “Stuff it into savings instead” scenario:
Obviously, we will need to pay the minimum on the card, which I am going to say is $250. Now that I think about it, that’s probably high, but oh well. You can see the running balance for the card on the right, in yellow.
On the left in green, you can see the savings account. Each month, the month that would have gone to debt (minus $250), is instead put into savings. The bright green column is the interest earned for that month, with a tally of all the interest earned at the very bottom of that column ($189). The middle column is the running balance, adding the deposit as well as the interest from the previous month.
So when October comes, instead of making a deposit into the savings account, there will instead be a withdrawal of $10,700, and then that money, paired with the same $1050 debt payment we see in scenario A, is enough to pay off the amex balance in it’s entirety.
And the result? Instead of the 2k we started out with, we have $2189 - $189 in interest. Which we could then use to pay off our other debt.
THE RESULTS:
I’m nervous about my numbers. I calculated the interest using this formula:
.035 (our interest rate) x balance x 31/365 (a month’s worth of a year’s interest)
So if you take the initial $2000, it works out like this:
.035 x 2000 x .0849 = 5.94, or as my google doc spreadsheet rounded it off, $6.
If anyone wants to check and/or correct me, feel free (all THREE of my readers, haha!)
If the numbers are somewhat accurate… I am a little surprised. A benefit of almost $200 bucks in only 7 months is nothing to sniff at, in my opinion. This is looking like a decent scenario! Which makes me think I must have screwed something up somewhere! If I am … in the ballpark of accurate, then perhaps we shouldn’t even put the $2.5K from the bonus towards the debt this month - I could stuff it back into savings and transfer over a 16k balance to the 0% card instead of 13ishk and reap even better interest benefits.
This is definitely something to mull over. I’d welcome any thoughts and comments.
Comments
The calculation looks right, although I would have used a monthly interest rate rather than annual to simplify the logic (0.035/12).
Be careful not to underestimate the psychological benefit of paying off the credit cards. My wife and I started saving in a separate account, but didn’t really get focused on paying debt until we started putting it straight on the card. Watching the balance drop is what kept us going. With a high savings balance, it gave us the false impression that we had more money that we really did.
You also need to be careful about potentially dipping into the balance for “emergencies”. Paying off the debt is final, but saving it leaves you open to the potential for spending it on other things.
Sounds like you are doing great, keep up the good work!
I have been using the spreadsheet you sent me back in February to calculate our debt paydown strategy (I love that thing by the way - thank you!!). Like Jonathan, I also use a formula of “(interest rate / 12) * principal” to calculate the interest we will be paying each month.
My first thought is - the 3.5% you are getting now may drop a bit (or alot) depending on the fed’s continued mood over the next year. I saw yesterday that my ING rate is now at 2.9% or something horrible like that. (But, on the flip side, the interest rate drops are a huge help in paying down the one variable rate student loan I have, so I can’t complain that much.)
I thought about pursuing a similar strategy as this post - we have all our credit card debt on 2 cards now. $13,000 fixed at 1.99% through Jan 09, and $8200 at 0% thr. March 09. Our plan is to pay the $13,000 off completely before the rate expires, and then if it makes sense, find another 0% card for the $8200 (which we should have paid off by mid 2009 regardless).
2 reasons I’m throwing $$ directly at the debt instead of letting it build up and accumulate ING interest instead (and lets pretend my 1.99% is 0% for the sake of this discussion, because obviously at 1.99% I’m still paying interest so the paydown makes sense): 1) I agree that the psycological effcts of seeing the balance shrink will be motiviating - esp. because I have a whole snowflake theory and I want to see how that pays off, and 2) we’re in the process of changing our credit card rewards strategy (based off things I’ve read at FMF) - we just received a Blue AmEx, and the next step is to get a Chase Freedom Visa. I’m not 100% sure our credit is strong enough for the chase card right now (we’re both around 680-700) but I know that paying down the credit card debt will help bring up that score. So that’s my rationale. (These 2 cards will be used exclusively for monthly expenses and paid off in full every month. We do the same now with a gold amex, but I can’t stand the annual fee)
But if I was in your shoes - I might do the “put it all in savings” approach. Hey, $189 is a pretty big snowflake. Even if saving rates go down, you’ll still end up with at least $150 or so, right? :)
when i was paying off my debt i chose to save the money in my savings account instead of paying it directly to the credit card. as long as you’re not paying any interest, there is no monetary benefit for you to pay it down. paying it down may help your credit score but most likely you’d rather have the extra interest money. just make sure you’re not tempted to spend it before you use it to pay the credit card!