Cinderella stomped her foot. Where was her fairy godmother when she needed her? Marrying the prince had not turned out happily ever after and she had become quite short tempered. The monotony of palace life was bound to get on anyone’s nerves. She knew her shopping habit was out of control. Since it was her job to be the belle of the ball, and Manolo’s are so pretty, she had always been able to rationalize her purchases. Lately though she had begun to feel embarrassed. She had taken to putting her purchases into plain brown bags so the prince – and town people – couldn’t monitor her spending.
She knew she was overspending and if she didn’t start cutting back on expenses she would have to go back to work. Unfortunately, due to her limited skill set and education, that meant a return to the scullery.
She needed her fairy godmother to wave her magic wand and fix it all. After all, that woman could do anything. Then reality hit. Her fairy godmother had been cut in the last round of palace lay-offs. She was going to have to go it alone.
Rather than panic, she decided to do some homework and some financial planning. To begin she re-read some of the post from So Many Shoes – especially the ones on credit cards, interest rates and debt. She also turned to No Regrets for savings ideas. She vowed to get her financial life under control and to check back more often.
January 28th, 2009
There are two kinds of interest: Simple and compound.
Simple interest means that when you borrow money, you pay back the amount you borrowed, which is called the principal, plus the interest. The interest is only calculated on the amount of the principal. The amount of interest you pay back depends on the interest rate, which is usually expressed as a percent due for a full year, and the length of time over which you borrow the money.
There is a formula for calculating simple interest: Simple interest equals: Principal multiplied by the interest rate multiplied by the length of time. While you don’t need to remember the formula, please note two things: (1) The formula only uses multiplication and, (2) You know what each of the things you need to multiply are.
Here is an example of how to calculate simple interest. If you borrowed 1,000 dollars (your principal) at a 10 percent interest rate per year (the bank’s fee), for three years (the time period), the simple interest rate is: 300 dollars (1,000 dollars multiplied by 10 percent interest, multiplied by three years, equals 300 dollars). The total amount you would owe the bank at the end of the three years would be 1,300 dollars (1,000 dollars, the original amount you borrowed, plus the 300 dollars interest).
Compound interest is like simple interest in that when you borrow money, you pay back the amount you borrowed plus the interest. However, unlike with simple interest, where the interest is calculated only once, for compound interest the interest is calculated at the end of each compounding period. A compounding period is how often interest is charged – which can be yearly, monthly, weekly and even daily. This means you are charged interest on the prior period’s interest as well as interest on the principal.
Here is an example of how compound interest is calculated. In the simple interest example above, we borrowed 1,000 dollars at a 10 percent interest rate per year for three years. If the bank charged compound interest instead of simple interest, and they were compounding the interest annually (once a year), we would use the same formula: Interest equals the Principal multiplied by the Interest Rate multiplied by Length of Time, but we would use it three times.
In year one: 1,000 dollars, multiplied by 10 percent, multiplied by one year, equals 100 dollars. The total amount owed at the end of year one would be 1,100 dollars (1,000 dollars, the original amount you borrowed, plus the interest, 100 dollars).
In year two: Perform the calculation again, but this time use as the starting point 1,100 dollars – the balance at the end of year one. To calculate year two, multiply one 1,100 dollars, by 10 percent, by one year. This equals 110 dollars. The total amount owed at the end of year two is 1,210 dollars (1,000 dollars, the original amount you borrowed, plus 100 dollars, the interest from year one, plus 110 dollars, the interest from year two).
In year three, start with the 1,210 dollars from year two and perform the calculation again: 1,210 dollars multiplied by 10 percent, multiplied by one year. The total amount you would owe at the end of year three is 1,331 dollars (1,000 dollars, the original amount you borrowed, plus 100 dollars, the interest from year one, plus 110 dollars, the interest from year two, plus 121 dollars, the interest from year three).
The higher the interest rate, and the more you borrow, the bigger the difference between simple and compound interest becomes. Unfortunately for borrowers and credit card users, the interest on most long-term debts and all credit cards is calculated using compound interest. Banks know how much the difference adds up.
January 15th, 2009
The best gift you could give yourself this holiday season is to get though December without incurring additional debt. Believe it or not, your friends love you for you – not for the gifts you give them. If they don’t, get new friends.
Not paying your credit card bill in full every month is one of the worst things you can do for your finances, except in emergencies. Unless you can pay your bill in full every month, use a debit card instead of a credit card. If you are unable to pay your bill in full when you receive it, pay off as much of it as you possibly can. Do not use the card again until you have completely paid your bill and have a zero balance. The reason you want to pay as much as you can possibly can is the more you pay now, the lower your outstanding balance (what you owe the credit card company) and the less interest you will owe on the balance. Remember, interest is calculated on the amount outstanding. If you pay only the minimum required, you will pay the credit card company a lot of interest.
There are lots of ways to give without spending a fortune: Many websites and magazines have gift lists in various price ranges – use the range that you can comfortably afford. Diets aside, don’t over look home baking. Fattening deserts are always a crowd pleaser. Parties are good too. Arrange a pot-luck so everyone shares the cost and each others company. A heartfelt phone call wishing them a happy holiday and letting them know you are thinking about them is often better than any gift. Last but not least, since today is global AIDS awareness day, don’t forget charities. Making a donation in a friends name is a great way to honor them – and to help others in need at the same time.
December 1st, 2008
Even The Fashion Police can’t arrest this economy. The pain, suffering and torment of “Fashion Don’ts” have been surpassed by recession hell. How did this happen?
Basically, banks and mortgage companies lent a lot of people money they probably shouldn’t have. In turn, people invested in properties which cost more than they could afford. The idea, was that property values would continue to increase (and, why not, they had been for years) and everyone would make money. Everyone forgot that what goes up also comes down.
Fashionista’s already knew this – hemlines fluctuate between micro-mini and trains depending on designer’s collective will. The economy, like skirt lengths, has proved subject to the same kind of whims. In fact, in the 1920s, the economist George Taylor conceived the hemline index, finding that skirts got longer as the economy slowed. Lately, there’s been talk of a haircut index, with short locks signaling a declining economy. Bob’s have been all the rage – perhaps Katie, Posh and Gwyneth are onto something?
The next part of the crunch will be credit cards. A credit card is a small, but powerful, piece of plastic. It allows you to buy something now, today, this minute, when you want it, on credit; meaning you don’t have to pay until the bill comes. Unless you pay the bill in full each month, in return for letting you borrow money credit card companies charge you a fee. These charges are interest and the amount of interest is called the Annual Percentage Rate (or APR). Since there really is no such thing as a free lunch (or dinner…often someone wants SOMETHING for it), credit card companies charge a big fee for letting you borrow money from them.
In the coming weeks and months credit card companies may raise these rates – which means, if you do not pay your bill in full, it will cost you more to use your credit cards. They will also certainly make it harder to get a credit card, transfer balances from one card to another and, if you have a line of credit (an amount of money you are pre-approved to borrow at any time) they may reduce the amount of the line and thus how much you can borrow.
The very best thing you can do for yourself? Pay off any outstanding credit card debt you have as quickly as you can. If that means putting your cards away (out of sight is, after all, out of mind) then do so. The reason for this is so that you have as clean a slate as possible – that way when you need your credit card you will be able to use it.
October 31st, 2008