Once the interest kicks in it can add a lot to your loan. When you break down the numbers and look at the percentage of your payment going to principal and percentage going to interest, it can be quite disturbing.

Here’s the breakdown of how much each payment goes to interest vs. principal in the first 6 months of a $10,000 loan at 7%:

About half of each payment is going straight to the lender in interest payments and barely making a dent on the loan’s balance.

Seeing these numbers may persuade you to increase your loan payments in order to pay less interest over time. But how do you figure out how much extra you should pay towards your loan every month?

Here’s a guide to help you decide how much extra you can afford to pay towards your student loan every month.

First, organize your loans by the size of the interest rates. Open a spreadsheet and list all of your loans, the principal, the minimum payment, and start with the highest interest rate on top. Anything over 5% is a priority for accelerating payments.

Find out how much each loan will cost you in interest. Use this student loan calculator and plug in the specifics of your loans. How much will each loan cost you in interest if you just pay the minimum? Write this number down in your spreadsheet.

The cost of a loan is misleading. A $5,000 loan at 6.8% with $50 monthly payments ends up costing $6,904 – with $1,904 in interest.

Mark your loans as high, medium, or low priority. High priority loans will be anything above 7% because at this point you’re better off throwing extra payments at your loans instead of investing. Paying off a loan gives you a guaranteed return on your money where as short-term investing is dangerous.

Medium loans are anywhere from 3-7%. Investing will trump paying extra on these loans because their rates aren’t devastating. Eventually when your high priority loans are paid off, you’ll start paying extra on your medium loans because you’ll end up paying thousands and thousands in interest if you just pay the minimum for the loan.

The low priority loans are below 3% and you’ll only pay the minimum on these unless you stumble into a large sum of money. These are your favorite loans because they’ll cost you very little in interest and you’ll be able to set up automatic payments and forget about them.

Before you pay extra on any high priority loans (>7%):

1. Have an emergency fund in place. If you live on your own, this should cover 3-6 months of living expenses. You can’t risk losing your job and having no savings so make sure you have a sizable rainy-day fund insuring your job. If you live at home, you can get away with having significantly less in your emergency fund and paying off your loans earlier will be easier.

2. Invest enough in your 401k to get the company match. If your employer offers a 401k with a company match, you need to take advantage of it. This is free money and shouldn’t be avoided, even if you are carrying high interest loans. You’re young so starting your 401k off now is beneficial for compound interest.

3. Look at your income and see how much you can afford to pay every month. Even an extra $50-100 a month will speed up the process and save you tons on interest in the end. If you hate loans, you may want to put as much as $250 extra towards your loan payments. If you’re content with your loans, then $50 extra is sufficient and will allow you to build up your savings else where.

Before you pay extra on your medium priority loans (3-7%):

1. Have an emergency fund

2. Max out matching 401k contributions at work (free money)

3. Max out your Roth IRA. The 2010 tax year allows you to invest up to $5,000 in a Roth IRA. This is money you won’t be taxed on when you withdraw in retirement, so max this out before you start paying off any medium priority loans because the market historically returns 7-8% (although this is never guaranteed). Starting your Roth now will allow it to grow exponentially faster when you’re older and you’ll be glad you started your Roth at 25 instead of paying an extra $75 towards your loans.

You can invest up to $5,000 but you can also invest any amount lower than that. You have until April 15th, 2011 to invest in a Roth for the 2010 tax year.

4. When the above 3 are complete, pay an extra $50-100 on your medium loans (3-7%). Start with the highest interest rate and work your way down.

Before you pay extra on your low priority loans (less than 3%):

1. Have an emergency fund

2. Max out 401k to get the company match

3. Max our your Roth IRA

4. Start building up specific savings goals (car, house, grad school, baby, etc.). The twenties are an expensive time in your life with a lot of huge purchases. Having extra cash around in your savings account will be beneficial. Open up a sub-savings account at your online bank to help save for specific goals.

5. When the above 4 are complete, pay an extra $50 a month for your low priority loans. At this point, you’ll be financially steady and you’ll end up savings yourself some extra cash by paying down these loans as well.

::::

Although student loans are an annoying burden that we all want to get rid of immediately, it’s important to take care of other areas of your financial life first.

Here’s a student loan calculator that allows you to see how much extra payments will help your debt situation. You can also figure out credit card debt within the same calculator.

Debt affects people differently so your priorities might be different from my suggestions above. But accelerated payments if you have the funds will save you tons on interest in the end. Run the numbers and get a system going for knocking out your student loans earlier so interest doesn’t dominate your life for the next fifteen years.

————————————————————-

Subscribe Follow us on Twitter Get email updates

One of my original goals for Foreigner’s Finances was to personally learn more about how different nations view money.

I’m fascinated by the topic of money in general. The fact that everyone uses money everyday, but relates to it differently, fascinates me. Throw in international differences and customs and there are some interesting facts and opinions to be found.

Today we’re going to narrow down the international money topic and take a look at how different Asian nations handle credit cards. I’ve managed to accumulate some interesting facts about six of the Asian countries to give you an idea about how they react to credit and plastic.

To give my American audience some perspective, I started off with American credit card facts so you can compare to the Asian countries.

Enjoy!

America

Population: 304 million

• There were 173 million credit cardholders in 2006, expected to rise to 181 million in 2010 (creditcards.com)
• There are a total of 1.5 billion credit cards in the U.S. (creditcards.com)
• At the end of 2008, Americans’ credit card debt reached $972.73 billion (Nilson Report, April 2009)
• The lowest credit card delinquency rate was 0.66% in North Dakota, while the highest was 1.98% in Nevada (Newton Daily News)
• The average American credit card debt was $5,612 in the third quarter of 2009 (Newton Daily News)

Verdict: Addicted to credit and debt. A dangerous combination.

Japan

Population: 127 million

In a  survery of 14,886 Japanese citizens:

(source: http://whatjapanthinks.com/2008/04/10/credit-card-usage-in-japan-2/)

• • 15% had zero credit cards
  • 48% had over three credit cards
  • 8% charged less than 3,000 yen/month ($34)
  • 15% charged 10,000 to 19,999 yen/month ($115-$230)
  • 11% charged 100,000 yen  ($1,152) or more
• In 2005, there were 10,765 ATM terminals for every million people (New York Times)

Verdict: Cash-based society, but warming up to the idea of plastic.

China

Population: 1.34 billion

• First credit card launched in 1985 by the Bank of China (researchandmarkets.com)
• Credit card debt is up more than 130% to $838 million (cnn.com)
• Credit card issuance is up 32% in the past year (cnn.com)
• The total number of bank cards, including debit cards, topped 1.58 billion by March 31, up 29.1% over the year (Asia Times)

Verdict: Will continue to blow away the rest of the world in credit card users. Needs to educate before debt becomes out of control.

South Korea

Population: 48.5 million

• The economically active Korean has on average 4 credit cards (World Socialist Web Site)
• “By the end of 2003, about 4 million South Koreans — nearly 10 percent of the entire population — had defaulted on credit card debt” (PBS.org)
• Ranked 34th in per capita income amongst countries, but 5th in per capita credit card spending (New York Times)
• “For every million people, there were 403,000 electronic cash registers that allowed them to pay with credit and debit card” (New York Times)

Verdict: Citizens have no idea how to handle credit and it has shown for the past decade.

India

Population: 1.17 billion

• Just 24.38 million credit cards (creditcards.com)
• “The credit card population fell by 8.62% to 25.87 million at the end of January 2009 (rediff.com)
• Credit cards account for just 1% of all purchases (creditcards.com)
• Average credit card debt is $540 (The Times of India)

Verdict: Not interested in credit cards, but this should change as they rise in power.

Russia

Population: 140 million

• Number of credit cards doubled in 2008 (creditcards.com)
• 24 million credit cards in a country of 140 million people (creditcards.com)
• Card fraud tripled in 2008 to $31 billion (mosnews.com)

Verdict: Another cash-based society that is slowly getting used to credit cards for purchases.

Saudi Arabia

Population: 28.7 million

• Number of cards rose 104% to 12.3 million from 2003-2008 (creditcards.com)
• “Cards are controversial as some Muslims believe credit cards of any kind violate Shariah’s prohibition against businesses that charge interest” (creditcards.com)

Verdict: Struggling to fit credit cards into their culturally rich society.

There you have it. Some credit card facts for some of Asia’s more notorious countries. I know I’ve gained a great amount of insight into the world of credit cards in Asia, and hope you found this beneficial as well.

Next week, I will take a look at credit card facts in Europe and see how their continent’s citizens are handling credit in their day to day lives.

————————————————————————————-

Photo by: centralasian

Subscribe Follow us on Twitter Get email updates

Bad money situations do not appear out of mid air. Poor education, bad luck, or lazy habits are just a few of the many problems that can lead to a difficult money situation. But one thing is for certain: complicated and dire money situations are tough to navigate.

Massive debt can be incredibly constricting and cause a lot of stress in one’s life. It’s difficult to escape a poor money situation and, unfortunately, too often the bad habits continue because the individual avoids taking action due to the size of the problem.

What an individual who is suffering from debt needs is clarity.

With bills piling up and not enough money coming in, the situation can seem complex. It may seem like there is always someone who is demanding more money, yet, there is no money available. The credit cards help for a while, but even they have their limits. Deep down inside, the person may want to fix the problem, but they just can’t seem to get themselves in a place where they are able to tackle the situation.

This is where meditation comes in. Yes, Foreigner’s Finances is going to get new-agey for a minute.

This week all the Assistant Language Teachers in the prefecture joined together for a Mid-Year Conference. One of the workshops I attended was titled: “Stress Management through Meditation or How to Deal with Your Coworkers and Boss without Freaking Out“. I didn’t have many expectations for the workshop, but it changed the way I viewed meditation forever.

After trying our own meditation for ten minutes, the group joined together to discuss the effects of meditation on an individual. The idea of meditation as clarity was brought up.

One person asked, “how do I avoid not sleeping?” The answer was, “perhaps, meditation is telling you that you need more sleep in your life.”

Another person asked, “how do I stay focused when so many thoughts run through my mind?” The answer was, “perhaps, meditation is the only time you’re letting your mind rest and it’s telling you that you need to rest it more often.”

I thought the last sentence was brilliant. Meditation opens up the mind and allows you to see yourself and your needs more clearly.

When you use meditation to tackle a debt situation, it can bring about the same results.

Perhaps, your debt situation is incredibly complex and instead of analyzing it and taking steps to defeat it, you avoid it. You excessively browse Facebook, go shopping, go out for drinks, watch movies; anything to avoid thinking about the debt situation. These actions are counterproductive and will only create more anxiety about the problem. You will always need to do something in order to avoid the one looming problem in your life: your debt.

Meditation can calm your mind and give you uninterrupted time to think clearly. It can lead to moments of clarity, and can be the first step in fixing a debt situation.

Here’s how to do a simple meditation session:

Meditation Steps

• * When you’re awake and energized, take ten minutes and sit upright on a chair.
• *Close your eyes or let your eyes settle on the ground. Place your hands on your knees.
• *Listen to your mind. Try to calm it down, but let your thoughts wander. Give your mind time to breathe and work.
• *After ten minutes, analyze how you feel. Could you sit still for the entire time? Where did your mind wander? What thought repeatedly occurred? How do you feel?

If you’re like me, you probably felt calm for the first time in a while. I often feel anxious and have trouble sitting still.

The ten minute meditation session showed me I need to slow down and give my mind time to relax.

Meditation can bring you some clarity, and maybe you will discover a positive thought that leads you to tackling your debt situation. Don’t fear your thoughts because you will need them to defeat your debt. Instead, embrace, listen, and learn from them.

Meditation doesn’t have to occur every day, but it can be something done once a week that allows you to calm down. It can lead to thoughts of success and maybe it’ll help you find the solution to your looming money problem.

Give it a try and see what you find.

———————————————————–

Photo by alicepopkorn

Subscribe Follow us on Twitter Get email updates

My financial turnaround began a little over a year ago. After reading some articles online about personal finance, I was persuaded to head to the local library to pick up some personal finance books.

It was the summer before my senior year and I was having one of those, “oh my god, I’m graduating in a year moments”. Life transitioning moments like a graduation, marriage, birth of a child, or purchase of a house are usually the sparks that lite the change in many people’s personal finance lives.

In hindsight, it was one of the best decisions I’ve ever made. As soon as I was finished with the first book – it was The Automatic Millionaire by David Bach – I was hooked. I wanted to tell everyone what I had learned and have them be as interested in personal finance as I was.

The trend I began to notice in the personal finance books I was reading was that every now and then certain facts, graphs, or insight would show up that would stop me in my tracks and overhaul the way I viewed money forever.

These moments are much more much life-changing than a friend or family memeber just saying, “hey, you should pay off your credit card debt.” They are moments of clarity, of education.

Today, we’ll dive into some of these facts of clarity when looking at information on credit card debt and how much paying the minimum is really costing you every month.

The True Cost of Paying the Minimum on a Credit Card

Many people assume paying the minimum on their credit card statement isn’t hurting them too much. Most people think of a credit card balance as a temporary problem that will eventually be handled. Everyone believes they’ll pay it off someday.

Even if you do pay off your credit card balance, the cost of keeping any balance on your credit card is astronomical. Credit cards offer interest rates around 15-19% which doesn’t seem terrible upon first glance.

This graph with hypothetical data paints a different picture and shows how much paying the minimum on your credit card really costs.

Paying the minimum is easy. It seems like progress is being made, but the truth is that only the credit card company is pocketing the money. When one is carrying a balance, a huge percentage of the payment goes towards paying the interest. The principal – the money you borrowed and needs to be paid off – is take care of after the credit card company gets there loan back. In the case above, this takes decades.

For example, the first month’s payment for the $3,000 worth of debt would look like this:

Month: 1

Min. Payment: $60

Principal: $12

Interest: $48

Remaining Balance: $2,988

Total Interest Paid: $48

Only 20% of the payment is going towards the principal while a whopping 80% is going to the credit card company because they let you borrow their money.

To compare, this is what the last payment would look like:

Month: 310

Min. Payment: $13

Principal: $13

Interest: $0

Remaining Balance: $0

Total Interest Paid: $7,986

Check out creditcards.com for a more detailed graph of these numbers.

These numbers are frightening and too many people never spend the time to figure out how much it really costs to finance an item on their credit card.

Paying the minimum can eventually lead to someone paying off their entire credit card balance, but it rarely does. The reason is that credit card debt continues to grow. The above graph is only true if the person with $3,000 worth of debt stops using the card altogether. However, if the card is active, it is often being used and the balance is increasing as the payments are made.

Unless the card is frozen or cut up, paying the minimum on the card will only have the credit card company getting richer with interest payments every month for a long time.

What hurts even more is the opportunity lost while this money was being paid to the credit card company in interest. That money could have been incurring interest in a savings account or in the stock market. Here is what that $10,896 could have possibly done invested – assuming an 8% historical market average return – instead of being locked up in credit card debt.

$10,896

Invested as $419 per year for 26 years

8% Return

Returns $36,550!

These numbers help explain why so many people struggle with their credit card debt.

The numbers are almost possible to figure out in your head, and too many people assume the credit card company is looking out for them.

If you are buried under debt, check out some a budget calculator or credit card debt calculator at creditcards.com or bankrate.com. These allow you to plug in your own numbers and figure out how long it will take to pay off your debt, and what you can do to accelerate your debt repayment.

———————————————————————————–

Photo by JasonRogersFooDogGiraffeB ee

Subscribe Follow us on Twitter Get email updates