One of my favorite financial advisors is Dave Ramsey, and he pushes the snowball method to reduce debt. The snowball method encourages reducing debt from smallest to largest, regardless of interest rate. Our instincts usually encourage us to pay off high interest debts first, but that doesn’t work if we have some small debts at lower interest rates.

I ran into a situation recently where I had three debts at different interest rates, and wanted to figure out how to pay them off so they would be done soonest. The answer surprised me, so I’m going to post the numbers here and let you take a look at this:

Debt 1:
$1800 at 5.49%. (Minimum payment is $179 per month)
Debt 2:
$8000 at 4.59% (Minimum payment is $276 per month)
Debt 3:
$22,000 at 10.25% (Variable interest rate, minimum payment is equal to finance charge)

I have $1000 per month to pay this off. How would you pay it off?

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I’ve been playing around with Ubuntu Linux lately because it is free!  This is a user friendly operating system which has an amazing assortment of free tools and applications available.  If you need an operating system (especially for an older computer), download this, burn it to a CD, and give it a try!  Unless you have some really quirky hardware, you’ll be online with it in no time.

How important is planning in your life?  Do you have a plan for an education or career path?  Do you have a plan for where you want to be in 10 years?

Even if you are the type of person who wants to be spontaneous and not tied down by an itinerary, it is important to set a plan, especially a financial plan.

Consider this:  Multiply your yearly salary by 10.  This represents the amount of money that you will have be able to control over the next 10 years.  (Ignore raises, promotions, etc.)  Obviously a big chunk of this goes to taxes, but whatever is left is what you can control.  If a business has that sum of money, do you think that they are just going to sit on it with no plan for doing something with it?

10 years is not just a convenient number; it also represents the time frame for which you can set some real goals and achieve them.  Maybe you want to buy yourself a car with cash.  10 years will give you enough time to save that money.  Maybe you’d like to retire some day.  If you contribute $300 per month for 10 years, and you have 20-25 years still to work before retiring, you’ll likely be able to retire off of that money.  If you own a house, you might consider paying that house off in 10 years.  The choice is up to you, but you need a plan.

Are you trying to justify that new car?  Maybe you are trying to rationalize it by better fuel economy, better reliability, or maybe you feel like you need a car that better represents who you are today…  Just remember this:  rationalize = rational lies.  If you “rationalize” that new car, you are telling yourself rational lies (lies that makes sense).

OK, so you decided that you want that new car.  Let’s say that you are buying a relatively modest car at $23,000.  You negotiate an average interest rate of 6%, and a loan term of 5 years.  By being the shrewd financial guru that you are, you decline the extended warranty, but opt for the gap protection.  (Gap protection is insurance that will cover the difference between the value of your totaled car and the remainder of your loan.  This could be several thousand dollars, so gap insurance for $300 sounds like a bargain.)

Summary:  $23,000 + $1610 (7% sales tax) + $50 (title) +$300 (gap insurance) = $24,960.   Plug the numbers into the loan calculator, and you come up with a payment of $482.55, and over the life of the loan, you will pay a total of $28,952.80.

Financial nuts will also look at depreciation of this car, so they will have an idea of the resale value in a few years.  Let’s say that you bought a car with good resale, so it only depreciates at 20% per year with average mileage.

 Now, instead of purchasing that car, let’s say you keep your already paid-for car, and invest your car payment into a mutual fund earning a modest 10% per year.  (To keep this simple, I will roll the car payment into a single yearly payment.)  We do this for five years, and then we don’t touch the money until retirement.

Our yearly payment is: 12 * $482.55= $5790.60 

  • year 1:  Contribution = $5790.60 | earns 10% | total value = $6369.66
  • year 2:  Contribution = $5790.60 | earns 10% | total value = $13376.29
  • year 3:  Contribution = $5790.60 | earns 10% | total value = $21083.57
  • year 4:  Contribution = $5790.60 | earns 10% | total value = $29561.59
  • year 5:  Contribution = $5790.60 | earns 10% | total value = $38887.41
  • year 6:  Contribution = $0 | earns 10% | total value = $42776.15
  • year 7:  Contribution = $0 | earns 10% | total value = $47053.77
  • year 8:  Contribution = $0 | earns 10% | total value = $51759.14
  • year 9:  Contribution = $0 | earns 10% | total value = $56935.06
  • year 10:  Contribution = $0 | earns 10% | total value = $62628.56
  • year 11:  Contribution = $0 | earns 10% | total value = $68891.42
  • year 12:  Contribution = $0 | earns 10% | total value = $75780.56
  • year 13:  Contribution = $0 | earns 10% | total value = $83358.62
  • year 14:  Contribution = $0 | earns 10% | total value = $91694.48
  • year 15:  Contribution = $0 | earns 10% | total value = $100863.93
  • year 16:  Contribution = $0 | earns 10% | total value = $110950.32
  • year 17:  Contribution = $0 | earns 10% | total value = $122045.36
  • year 18:  Contribution = $0 | earns 10% | total value = $134249.89
  • year 19:  Contribution = $0 | earns 10% | total value = $147674.88
  • year 20:  Contribution = $0 | earns 10% | total value = $162442.37
  • year 21:  Contribution = $0 | earns 10% | total value = $178686.60
  • year 22:  Contribution = $0 | earns 10% | total value = $196555.26
  • year 23:  Contribution = $0 | earns 10% | total value = $216210.79
  • year 24:  Contribution = $0 | earns 10% | total value = $237831.87
  • year 25:  Contribution = $0 | earns 10% | total value = $261615.06
  • year 26:  Contribution = $0 | earns 10% | total value = $287776.56
  • year 27:  Contribution = $0 | earns 10% | total value = $316554.22
  • year 28:  Contribution = $0 | earns 10% | total value = $348209.64
  • year 29:  Contribution = $0 | earns 10% | total value = $383030.61
  • year 30:  Contribution = $0 | earns 10% | total value = $421333.67
  • year 31:  Contribution = $0 | earns 10% | total value = $463467.03
  • year 32:  Contribution = $0 | earns 10% | total value = $509813.74
  • year 33:  Contribution = $0 | earns 10% | total value = $560795.11
  • year 34:  Contribution = $0 | earns 10% | total value = $616874.62
  • year 35:  Contribution = $0 | earns 10% | total value = $678562.08

By year 35 (remember, you can’t withdraw from your IRA/401k/Social security until you are 62.5) your “new car” payments will be worth $678562.08, or in other words, they will be earning $67,856.21 per year for you.  Pretty nice yearly income for simply sacrificing that new car purchase.

Since I was tagged by Dreamy I’m now going to post 8 random facts about myself.

  1. I am bored with my job. I completed a bachelors degree and a masters degree in mechanical engineering, but I’m only pretending to be an engineer. I’m not one, and I don’t think like one. I don’t get any enjoyment out of my current employment, and my previous was just as bad. I love the jobs that I held in college, despite them being much more stressful. (Responsible for maintaining computer systems for a government contractor, had my own business repairing computers as a consultant.)
  2. Deadliest Catch is one of my favorite shows.
  3. I enjoy driving around in an ugly old Dodge Dakota (1994). I made the mistake of buying a “new” car one time, and now I try to be as anti-“new car” as I can be.
  4. I nearly failed out of college my first year. I was on acedemic probation until I became a sophmore in college. After two years at that school, I transferred to another school so that I could get those credits transferred (anything higher than a C) but my GPA wouldn’t follow. I was on the dean’s list twice during the next year.
  5. I built a radio station during my freshman year in college. I ran it from my dorm room until the police threatened to bring the FCC in to shut me down.
  6. I owned a 1975 Plymouth Duster with a slant six engine, and I sold it to pay for the last part of school. I regret selling that car, and I had tears in my eyes when the guy drove it away.
  7. I love anything to do with water… the beach, cruising in my boat, tubing…. water.
  8. I like watching Mythbusters.

Yep, June 22 is tomorrow, and in the northern hemisphere it is the longest day of the year.  That reminds me, can anyone answer where June has gone so quickly?

Yes, seriously!  Ice cream should be a compliment to a cake or pie.  If you have a tasty chocolate cake, the ice cream should be vanilla or mint, or possibly chocolate chip.  There’s no reason to go with such an extreme ice cream, such as moosetracks which covers up the flavor of the cake.