- I tried to avoid it. I really did, but I’m still getting a much bigger refund than anticipated. #
- Did 100 pushups this morning–in 1 set. New goal: Perfect form by the end of the month. #
- RT @BudgetsAreSexy: Carnival of Personal Finance is live 🙂 DOLLAR DOODLE theme: http://tinyurl.com/ykldt7q (haha…) #
- Hosting my first carnival tomorrow. Up too late tonight. #
- Woot! My boy won his wreslting match! Proud daddy. #
- The Get Home Card is a prepaid emergency transportation card. http://su.pr/329U6L #
- Real hourly wage calculator. http://su.pr/1jV4W6 #
- Took my envelope budget out in cash, including a stack of $2s. That shouldn’t fluster the bank teller. #
Evil Interest
Everybody with a savings account or almost any form of debt has at least a passing familiarity with interest. How many of you actually know what it is, or even how much you are actually paying?
First, some definitions.
Principal is the term used for the amount of money you have borrowed.
Interest is the rent you pay to have that money. Interest is money-rent, expressed as a percentage of the principal. If you borrow $100 at 10%, you pay approximately $10 in interest. I say “approximately” because it’s just not that simple.
There are two kinds of interest: simple and compound.
Simple interest is called that because it is just that: simple. It’s easy to understand and it’s what most people mistakenly assume they are paying. With simple interest, the interest rate is only applied to the principal, never to the accumulated, or accrued, interest.
For example, if you have borrowed $100 at 10% annual interest, this is what your balance will look like:
- At the time of borrowing the money, you owe $100.
- After 1 year, you owe 10% of the $100, in addition to the original $100: $110.
- After 2 years, you owe 10% of the $100, in addition to the original $100 and year one’s interest: $120.
- After 10 years, you will owe a total of $200.
That’s simple.
On the other hand, in addition to five more fingers, you have compound interest. Compound interest complicates things considerably. With compound interest, interest is applied to the entire balance of what you owe; both the principal and the accrued interest are included in the calculation.
For example, with $100 at 10% compounded annually:
- Year 1: You will owe $100 + 10% of the original $100, or $110
- Year 2: You will owe $110 + 10% of the $110, or $121
- Year 3: You will owe $121 + 10% of the $110, or $133.10
- Year 4: You will owe $131.10 + 10% of the $110, or $144.41
- Year 5: You will owe $144.41 + 10% of the $110, or $158.85
- Year 6: You will owe $158.85+ 10% of the $110, or $174.74
- Year 7: You will owe $174.74 + 10% of the $110, or $192.21
- Year 8: You will owe $192.21 + 10% of the $110, or $211.43
- Year 9: You will owe $211.43 + 10% of the $110, or $232.57
- Year 10: You will owe $232.57 + 10% of the $110, or $255.83
That is a total of $155.83 in interest paid over 10 years, or $15.58 per year, for an effective interest rate of 15.583%.
To throw another twist into the mix, interest is rarely compounded annually. Monthly, or even daily, is much more common. With monthly compounded interest, the annual rate, or APR, is divided by 12 and recalculated every month.
For example, using the same $100 at 10% APR, compounded monthly:
Since the interest rate is compounded monthly, we will be using the monthly periodic rate, which is 10% / 12, or .83%
- Month 1: $100 + .83% of $100 = $100.83
- Month 2: $100.83 + .83% = $101.67
- Month 3: $101.67 + .83% = $102.51
- Month 4: $102.51 + .83% = $103.36
- Month 5: $103.36 + .83% = $104.22
- Month 6: $104.22 + .83% = $105.08
- Month 7: $105.08 + .83% = $105.95
- Month 8: $105.95 + .83% = $106.83
- Month 9: $106.83 + .83% = $107.72
- Month 10: $107.72 + .83% = $108.61
- Month 11: $108.61 + .83% = $109.51
- Month 12: $109.51 + .83% = $110.42
That’s $0.42 more interest paid the first year, and that number will continue to climb each year the interest is compounded.
It gets worse if interest is compounded daily, like most credit cards. If you see “Daily Periodic Rate” anywhere in your agreement, you are getting compounded daily. This same loan, compounded daily instead of monthly will yield $110.51 owed the first year. That $0.51 might not seem like much, but imagine it on a $10,000 credit card, or a $100,000 house! And that’s just the first year. Every year after, the disparity gets bigger.
Edit: The formula for calculating compounding interest is Principal x (1 + rate as a decimal / compounding term)compounding term. So, for $100 at 10% compounded monthly, the formula is 100 x (1 + 0.1 / 12)12
That’s the downside to compounding interest. There is an upside, if you have investments or interest-bearing accounts. If that’s the case, compounding interest is working in your favor.
If you save $100 per week, and manage to get a 10% return on your investment, you will have $331,911 after 20 years(with $104,000 contributed) and $2,784,424 after 40(with $208,000 contributed). That mean you will have tripled your money in 20 years, or vingtupled* it in 40 years.
That’s how you get rich. $100 per week for the rest of your life will leave you with a comfortable retirement, without missing out on life now.
—
* Yes, it’s a real word**. It means a twenty-fold increase.
** No, I did not know that yesterday.
Twitter Weekly Updates for 2010-04-17
- RT @kristinbrianne: Get Talk and Txt Unlimited Cell Svc w/ Free Phone for $10 per month by joining DNA for Free. http://tinyurl.com/yyg5ohn #
- RT: @ChristianPF is giving away an iPod Touch! – RT to enter to win… http://su.pr/2LS3p5 #
- 74 inch armspan and forearms bigger than my biceps. No, I don't button my shirt cuffs. #
- RT @deliverawaydebt Money Hackers Network Carnival #111 – Don't Hassel the Hoff Edition http://bit.ly/9BIAvE #
- @bargainr What would it take to get you to include me in the personal-finance-bloggers list? #
- Working on a Penfed application to transform my worst interest rate into my best. #
- Gave the 1 year old pop rocks for the first time. Big smiles. #
- @Netflix @Wii disc works well and loads fast. Go, go gadget movie! #
Twitter Weekly Updates for 2010-05-17
- @Elle_CM Natalie's raid looked like it was filmed with a strobe light. Lame CGI in reply to Elle_CM #
- I want to get a toto portable bidet and a roomba. Combine them and I'll have outsourced some of the least tasteful parts of my day. #
- RT @freefrombroke: RT @moneybeagle: New Blog Post: Money Hacks Carnival #115 http://goo.gl/fb/AqhWf #
- TED.com: The neurons that shaped civilization. http://su.pr/2Qv4Ay #
- Last night, fell in the driveway: twisted ankle and skinned knee. Today, fell down the stairs: bruise makes sitting hurt. Bad morning. #
- RT @FrugalDad: And to moms, please be more selective about the creeps you let around your child. Takes a special guy to be a dad to another' #
- First Rule of Blogging: Don't let real life get in the way. Epic fail 2 Fridays in a row. But the garage sale is going well. #
10 Tips to Help Parents Stay Out of Debt
People say that when you have a baby, your world gets flipped upside down. That’s not true. Your world gets dropped in a martini shaker and left to the whims of a sadistic bartender with a shaking fetish. Everything changes. That sounds like an exaggeration and nobody believes it until it happens, but it’s true.
When you find out you are about to reproduce, you will experience a phenomenon called “nesting”. Nesting is the idea that, if you take your credit cards and beat them against the curb until they bleed and VISA calls you asking for mercy, you will be transformed into the best parent ever, regardless of what you may actually screw up. It’s the way parents calm their fears by spending money, often on things that aren’t needed.
Q. How do you avoid becoming a debt-ridden, worried mess of an over-protective, over-extended new parent?
A. What do you get when you cross an elephant and a rhinoceros?
I can’t help with the rest, but here’s 10 ways you can avoid the debt problems.
- Have a budget. I may have said this before. It’s possible this counts as a recurring theme here. If you don’t have a budget, you aren’t in control of your money. If you aren’t in control, then how do you know where it has gone or where it is supposed to go?
- Budget for baby crap. This will be a recurring expense for years, so get used to it. A friend of mine is on the cusp of having everyone out of diapers for the first time since 1993. Do you think they plan that expense? Diapers.com has $10 off and free shipping on orders over $49. Use code “ LiveReal” during checkout.
- Double the number you have in #2. Seriously. It will cost you more than you think, but it doesn’t have to cost you as much as you fear. It’s far better to have too much budgeted and find yourself with extra money than it is to budget too little and be forced to make up the difference at the feet of Master Card.
- Only take the advice of people you know and trust. Every random jerkface on the street has (usually) well-intentioned advice for new and expecting parents. Ignore them all. If they aren’t your doctor, your mother(assuming she did her job right), or friends with children, they are clueless and their advice should be immediately round-filed. Ditto for parenting magazines. The writers don’t know better than you do. Read the magazines for six months and watch for conflicting advice, not only in the same magazine, but often from the same writer! Don’t add the stress of bad advice from strangers to what is already a stressful time.
- Don’t get every gadget designed to cushion the baby. A wipe warmer is a waste of money. Do you want your baby to be scared of a little chill forever? Cold wipes build character. If that isn’t good enough, hold the wipe in your hand for a few seconds before using it. There are a million other gadgets to keep your little one from ever feeling a moment of discomfort. Don’t waste your cash. It may only be 10 pounds, but it’s tougher than you think.
- Don’t get every gadget designed to cushion the parent. They make ergonomic bottles, braces to hold your arms in the right position to feed, fancy cloths to catch baby vomit. Tough it up. Support your baby yourself. Build some muscle and some character. Use cloth diapers to catch various treasures your little brat will spit up on you. Spending more doesn’t always make it better. The ergonomic bottles that make it easier to feed a baby, make it harder for the baby to hold the bottle. This is actually making your life more difficult.
- Focus on the necessities. Yes, the fancy formula with the pre-digested proteins has a nicer label. It doesn’t make a difference. The generic brand at the warehouse store usually has the exact same ingredients in the exact same ratios as the brand name at the baby store–for half the price. There is nothing special about the blankets in the baby section–except the price. The fancy bottle warmer doesn’t do anything that a cup of warm water on the counter won’t handle. You need: A crib, unless you are doing a family bed; a easy-to-clean mat to change diapers(on the floor works!); and a diaper bag(back-to-school backpacks are more ergonomic and easy to organize than anything in the baby store!). Everything else is a luxury.
- Time counts more than stuff. No matter what else you hear, no matter how old your child gets, time with you counts more than anything else you could do or buy. Be there for your kids and the rest is gravy.
- Brand-name and designer labels are not status symbols. The opinions of the other soccer mommies do not matter. The opinions of the random jerkfaces on the street do not matter. Designer labels do not make you a better parent and are not an indicator of a happy baby.
- Always remember: Babies bounce and have short memories. While I don’t recommend bouncing your baby on the floor, they are surprisingly resilient. They don’t hold grudges, either. There is room to make mistakes without screwing up your kid.
For a hundred thousand years, people raised babies with nothing more than a scrap of hide to alternately chew on or wipe with. You can probably get buy with just a bit more. Relax and enjoy the process of raising your kids. Money doesn’t matter nearly as much as your presence.
Twitter Weekly Updates for 2010-05-29
- RT @ramseyshow: RT @E_C_S_T_E_R_I_: "Stupid has a gravitational pull." -D Ramsey as heard n NPR. I know many who have not escaped its orbit. #
- @BudgetsAreSexy KISS is playing the MINUTE state fair in August. in reply to BudgetsAreSexy #
- 3 year old is "reading" to her sister: Goldilocks, complete with the voices I use. #
- RT @marcandangel: 40 Useful Sites To Learn New Skills http://bit.ly/b1tseW #
- Babies bounce! https://liverealnow.net/hKmc #
- While trying to pay for dinner recently, I was asked if other businesses accepted my $2 bills. #
- Lol RT @zappos: Art. on front page of USA Today is titled "Twitter Power". I diligently read the first 140 characters. http://bit.ly/9csCIG #
- Sweet! I am the number 1 hit on Ask.com for "I hate birthday parties" #
- RT @FinEngr: Money Hackers Carnival #117 Wedding & Marriage Edition http://bit.ly/cTO4FU #
- Nobody, but nobody walks sexy wearing flipflops. #
- @MonroeOnABudget Sandals are ok. Flipflops ruin a good sway. 🙂 in reply to MonroeOnABudget #
- RT @untemplater: RT @zappos: "Do one thing every day that scares you." -Eleanor Roosevelt #