The Eradication Of Debt

The Eradication of Debt

Hi There,

Before we start - let us remember the rules

Let us say that you have a credit card. Incidentally, the chances are that you do and In America alone there are 1.5bn scattered around. If all these cards were added on top of each other you would have 70 miles of plastic. That is roughly the same height at 12 Mount Everest’s’!


But we digress already.


Let us also say that the balance on your card is £1000 in debit, which basically means that you owe the lender this amount of money. Let us then assume that the interest rate is 15%Apr (in reality it will be more like 12-16%). If you did not pay a penny off the amount in that year, you would owe £1150.


Are you with me so far? Very good.


So, you haven’t paid off your card; but you have decided to start saving some cash. You are concerned that retirement may not be as far away as you think and so you leg it to your local building society to see what is on offer. Against all odds you find a super, super saver rate with an outstanding interest rate of 10%! Well done.


You put the £1000 in and sit back.


12 months later you review your building society account. Your savings have accumulated an extra £100 – for free! An extra £8.33 per month has been saved on top of your original £1000. You decide to leave it there for 10 years and vow never to touch a penny.


Ten years pass and you return to the building society. You now have £2,593 in your bank account. While you are there you decide to add £10 a month to the account and leave for another 10 years.
Those 10 years have passed, and you return. Sitting in your account is £8,829.31p. Not bad for doing nothing. After all, you will be 20 years older, regardless of whether you put that money away or not. You could have bought a car for £1000. Would it be worth eight grand? Probably not comrade.


Oh dear.
You forgot something.


You moved house and whoops a daisy kind of accidentally on purpose forgot all about your credit card! At a rate of 15% per year you now owe them £16,366.54p.

This is also known as compound interest, or the rule of 72. The rule of 72 allows you a good estimate of how many years it will take a lump sum to double at a rate of interest. Simply:

Divide 72 by the rate of interest and you have approximately the number of years of doubling the investment.

72 / X% = years to double. If you (like me) are not mathematically competent in any shape or form then there is a handy calculator here.

Saving and investing is a must. But you must pay off any debt that has interest on it. Instead of putting anything into a savings account, it should be put to your debts first.

All extra money should go to paying off:
1. Car payments
2. Mortgages
3. Credit cards
4. Store Finance
5. Anything else that accumulates interest.

It is a simple case of using maths. You know that on one account you can gain interest, much like on your savings account. And on the other you know that the things you want, but not necessarily need are financed, costing you interest.

There is a reason why savings accounts are typically less interest accumulators than credit finance. So the lenders can make a profit!

So in summary:

1.Pay off debts. Debts that do not accumulate interest are not as important.

2. Start to invest.

3. Add regular contributions to your investment. Notice how the 20 year account illustrated above accumulated £8,829.31p after 10 years of £10 per month added? If that £10 had been added monthly from day one there would be a whopping £14, 287 in that account.

4. The better the interest amount, the more cash at the end.

£1000 initial investment, with £100 going into the savings a month, with an interest rate of 12% will give you £106,484.78p That is 5 numbers and the bonus ball guaranteed for you in 20 years.
Next time we will be looking at how to get those returns.


Speak soon,

Oliver Jones
Making Finance Work