One smart financial move generates huge returns, but don’t stop there.
When Mark and Bethany read statistics about the financial status of American families, they felt some comfort that they were better off than most of their peers. Yet, they instinctively realized that they had accumulated assets that were far short of where they needed to be at age 58.
A careful review of their finances confirmed their instincts. They needed to aggressively step up their 401(k) contributions to accumulate as much money as possible over the next nine years. However, they were surprised to learn that paying an additional $30 a month to American Express could generate additional cash for their retirement.
Mark and Bethany were never interested in budgeting, but they did make an effort to “pay themselves first” through 401(k) contributions and using automatic bank transfers to mutual funds. They also made additional payments on their mortgage. It is now scheduled to be paid off in 18 months. The good news is that their two cars are paid for, and the only other debt they have is a $14,290 balance on their American Express.
Even though they did invest money every month, their lack of a budget put them in a position of paying property taxes, vacation expenses, and some home improvement costs using their credit card. Their lack of diligence allowed the balance to grow, resulting in a current minimum monthly payment of $473.99.
The problem with minimum payments
It was only when they took the time to do some planning that Mark and Bethany discovered the bad news. If they continued making the minimum payment, it would take 26 years to pay off the balance. They would be 84 years old!
By making only the minimum payments, they would pay $46,569 to American Express over the next 26 years to satisfy a $14,290 debt.
The $30 solution
Mark and Bethany were stunned by the numbers they saw. They did not want to draw down their emergency fund to near zero to pay off the credit card, so they were mildly surprised to find an alternative. The credit card statement indicated that they could pay off the entire balance in only three years by increasing their monthly payment from the minimum to $504.
By sending in an additional $30.01 a month, they could eliminate 23 years of payments, saving a total of $28,421. Paying an extra $1,080.36 over three years to save $28,421 was a no-brainer for Mark and Bethany. At the end of 36 months, they could then redirect the $504 a month to their investment accounts.
An even better solution
Although increasing their monthly credit card payment by $30 would have a very positive impact on their overall financial situation, Mark and Bethany had an even better option available. They had a good credit rating, so they could apply for a new credit card that offered zero interest on balance transfers.
With no interest being charged on their credit card balance, they could pay off their debt in less than 36 months…28.35 months, to be exact. If we round up to 29, that is seven fewer months or an additional savings of $3,528 ($504 x 7).
Moral of story: Don’t be lazy
Many households carry credit card balances. Credit card companies count on them to look at the minimum payment amount and send it in. That’s what Mark and Bethany were doing. By making the effort to pay $30 more than the minimum, they save $28,421 and 23 years of payments. By taking the additional step of making a balance transfer to a new card with a zero-interest offer, they save an additional $3,528 and seven months of payments.
If you have credit card balances and good credit, the only thing preventing you from saving thousands of dollars is procrastination.
Action to take
If you have one or more credit cards on which you make minimum payments, do this immediately:
Managing and paying off credit card debt generates significant reductions in interest expenses and more quickly frees up cash flow for savings and investments. The increased peace of mind that you’ll enjoy is a bonus.