Last time we talked about your cash flow (How Is It Flowing?) and you took a look at where your money was actually flowing versus where you would ideally have it flow. This is an on-going process so you probably still have a lot of exploration to do in that area. Keep at it; the more information that you have, the more you can determine what is working well and what needs to be changed.
For this week, let’s look at an easy way to evaluate your debt situation. I know I have more debt than I want and am always considering how to get those debts down. Fill in the following to get the snapshot – you should have some of this information from the “Changes and Rearrangements” post a couple of weeks ago but if not, here is a good place to capture it.
|Debt Issuer||Amount Owed||Credit Limit||% Utilized (owed/limit)||Interest Rate||Annual Interest (owed x balance)||Minimum Payment|
|Installment Loans (cars, student, etc)|
Drop in who issued the credit card or loan, the amount owed, credit limit (for credit cards), interest rate and minimum payment. Calculate the “% utilization” to see how much of your credit limit you are using. Using over 25% of the total limit, regardless of whether you pay it off in full or not, can hurt your credit score. Consider reducing the utilization, if possible. Also calculate the “annual interest” which is the amount owed multiplied by the rate. If you don’t pay off the balance in full each month, this is the potential interest cost to you annually. Sometimes seeing that big number can motivate changes. Of course, if you pay credit cards in full each month, you don’t incur that cost. Take a look at your installment loans, though, and really think about how much that loan is actually costing you each year. This calculation is a “high side” estimate because the balance is decreasing monthly but it does give you an idea of the cost of your credit.
Now think of one or two small sacrifices that you could make each week to cut back the spending and add a bit more to the highest interest debt payment (or the lowest balance debt if you are looking to knock out a balance entirely.) Would reducing your debt be worth eating at home one extra time per week, taking your lunch to work rather than buying, or cutting back on the cash that you spend weekly? Every time you say no to a purchase, write down the amount. At the end of the week, pay that much on your debt. Small amounts do add up more quickly than we think so it really does make a difference.
To your financial success!