Debt Repayment Strategy

For those who are having trouble managing multiple debts, a debt repayment strategy can save money and also be psychologically rewarding. The first step in any debt repayment strategy is to list all of your debts with the balance outstanding, interest rate, and minimum monthly payment for each. For example:

Description	Balance	Interest Rate	Minimum Payment
Car Loan	$11,000.00	3.5%	$200.00
Visa Credit Card	$1,900.00	12.99%	$43.00
Discover Card	$3,500.00	14.99%	$83.00
Student Loan	$9,500.00	8.99%	$153.00

The next step is to establish a budget and commit to make the minimum required payment on all of your debts every month; the free budgeting tool at Mint.com that I've been discussing in recent posts could help. In addition to committing to pay the minimum monthly payment on all of your debts, you also must commit to pay a little bit extra towards one of the loans. The extra amount will all be applied to the principal balance, as opposed to interest, and a lower principal balance results in less interest being charged over the life of the loan. While Mint can be used for tracking your debts and payments, other free online tools dedicated to debt reduction such as ReadyforZero.com are available.

Which creditor should be paid the extra amount? All else being equal, this would obviously be the one that is charging the highest interest rate. However, many financial planners recommend making the additional payment towards the loan with the lowest balance. The reason for this is that you will see results sooner as the small balance goes down to zero. By seeing results faster, you will be more likely to stick to the debt repayment plan, which is better than starting with the higher rate/higher balance loan but ultimately abandoning the plan.

Perhaps a good compromise would be to sort all of your debts from highest interest rate to lowest, then move the loan with the lowest outstanding balance to the top of the list and pay off your debts in that order. The order of debts in the example above under this method would be the Visa Credit Card, Discover Card, Student Loan, and Car Loan.

Whatever method you choose, the next phase of the debt repayment plan after the first debt is paid off is important. The entire amount that was going toward the payment of the paid-off debt becomes an extra payment towards principal in addition to the minimum payment on the next debt on your list. For instance, in the example above if you were paying the minimum Visa Credit Card payment of $43 plus an additional $10 each month, after that debt is paid off, the $53 that has been freed up becomes an extra payment to Discover Card in addition to the minimum you are already paying.

This cycle is repeated until all your debts are paid off. As the number of outstanding loans diminishes, the extra amount being paid has grown substantially, similar to a snowball rolling downhill. This "Snowball Method" of debt-payment can help you achieve your goal of debt freedom.

Read More

Budgets and Goals on Mint.com Part II

In my previous post, I discussed using Mint.com to track outgoing and incoming cash, categorizing line items on the Transactions menu, and integrating these items with Budgets. The topic of this post is Mint's Goals.

To set up a goal, click the Goals tab, select one of the predefined goals or a custom goal, and answer the questions as prompted, such as source of funding, target date for reaching that goal, desired monthly contribution, etc. Each goal should be linked to an account so that Mint can track the balance and report on your progress. The Goals function is a particularly good fit for the situation I addressed in my previous post, paying off a credit card balance you are carrying.

The difficulty some have experienced with Goals on a Budget is that while Mint can reduce your projected monthly net income by the goal contribution amount, the goal amount is not linked to any Budget payment. This means that there is no indication on the Budgets tab whether a payment was actually made towards a goal in a month and no goal contributions appear on any report of expenses, net income, etc. If you create a budget item for the goal amount, the contribution toward the goal will essentially be double counted on the Budget.

The workaround for this is to add the goal amount as a budget item and exclude the goal amount from the Budget calculation. This is done by clicking on the Budgets tab, scrolling down to the goal, clicking Edit Details, and opting to exclude part or all of the goal amount from the budget calculation. This is also the appropriate way to treat a goal where the funding for that Goal comes from an account that is not linked to Mint. For example, if you set a retirement goal, employer contributions to a retirement plan would never appear as income, so that monthly goal contribution should be excluded from your budget calculation.

In summary, in order to set Goals, categorize transactions, and establish Budgets in Mint and have your reports provide accurate information, the key is to focus on each account type and the unique interaction each account has, if any, with other accounts being tracked by Mint.

Read More

Budgets and Goals on Mint.com

My wife and I have used Mint.com for personal finance management for over three years now. While it is not perfect, it is low-maintenance, fairly intuitive, and completely free. After signing up, Mint accesses the transactions from your financial accounts and helps you categorize income and expenses, establish budgets, set goals, and generally stay on top of your personal finances.

Many Mint users have expressed frustration at understanding the relationship between Mint's Budgets, fund transfers reporting, and Goals; this is one of the areas of Mint that is not always intuitive. Hopefully, the following explanation helps.

The first thing to understand is how income, expense, and transfers are handled in Mint. When you deposit your paycheck or pay for movie tickets with a debit card, you have income and expense respectively; Mint's treatment of cash coming in from or going out to an outside source is straightforward.

If you pay for a movie with a credit card, and pay off the credit card at the end of the month, Mint records three transactions: the charge to the credit card, the debit to the checking account when the payment is made, and the credit to the credit card account when the payment is received. The net result is the movie expense; the two payment transactions, if properly classified as a Transfer, net to zero. Everyday income, expense, and credit card transactions are grouped in the Cash and Credit section of the Transactions menu and appear on Mint's Budgets.

All payments or transfers from one account to another, where both accounts are Cash and Credit accounts, should be categorized as a Transfer and net to zero. If you have a loan such as a mortgage, activity on the mortgage account will appear on the Loans section of the Transactions menu, as opposed to Cash and Credit. Payments from your checking account to your mortgage account should be categorized as an expense, as opposed to a Transfer, and will appear as a cash outlay in Budgets.

In contrast to Mint's treatment of a traditional loan, suppose a large emergency expense occurs in one month, such as a medical bill, and you charge it to a credit card and plan on carrying a balance. In this situation, the "loan" will appear as a large expense in one month and the payments will be categorized as a Transfer in subsequent months. In other words, there will be no budgeted cash outlay in Budgets in subsequent months; each time a payment is made on the credit card, there will still be a debit to the checking account when the payment is made and a credit to the credit card account when the payment is received.

If you classify the debit to the checking account as an expense so that it shows up on Budgets as a cash outlay, the credit to the credit card account will still be listed as a Transfer and ignored on the Budgets, and your budget over time will ultimately count the large expense twice. The initial credit card charge will be an expense in month one, and each subsequent credit card payment will also be an expense. You are faced with either double counting your expense over time or not being able to effectively budget for the cash outlay each month a payment is made. The solution to this problem may be Goals, which I will discuss in my next post.

Read More