In today’s fiscal climate, it is easy to get confused with the shuffle of interest rates, amortization schedules, and offerings of cheap credit. Without education into the fine details of managing your money, your savings and credit score can be damaged and will add a considerable burden to your fiscal health. However, a little knowledge goes a long way, and being armed with basic knowledge of how such things work will be an advantage in your back pocket.
Sweeping Away Ignorance
There are more than a few fiscal gurus out there who can help you put your financials on solid footing, but none can help if you don’t understand the basics. Professionals such as Robert Kiyosaki, author of Rich Dad Poor Dad, are a great resource in that they start from the beginning, teaching you the terminology and practical aspects of sound fiscal management. From humble beginnings great oaks grow, and starting with lessons in how money is generated in relation to debt and credit will assist you in making wise decisions along the way to strong money management.
Amortization Schedules
For many people, a home loan is their most significant element of debt. The process to get into a mortgage has been made simple by brokers and bankers, but many homeowners know little about their mortgage terms beyond what their principal is and their interest rate. Yet combining the details of these two elements and the term of the loan can be the difference of a manageable loan and one that can suck you dry without knowing it.
One key piece of advice Kiyosaki and others suggest is getting in the habit of making pre-payments as often as possible. Many mortgage lenders allow for automatic payments, and scheduling them every two weeks rather than twice a month will put another whole payment against you loan, knocking off up to 7 years in a thirty year loan.
As for loan term lengths, interest rates are often a little higher on fifteen year loans as the banks want to earn their dime no matter what, but if a home owner can swing a little higher monthly payment on the same principal amount, they can be saving up to forty percent in interest payments when compared to a thirty year loan with a few points less.
Pre-Payments for Financial Health
Pre-payments are not something many financial institutions care to educate consumers about, as they apply directly to the principal and not the interest owed. Once a monthly payment is made, home owners can pay and additional amount toward the loan that goes to directly pay down the principal amount borrowed. This simple act, even if it is fifty or a hundred dollars extra, reduces the principal faster, and with less principal, less interest applies in the proceeding months. The lower the principal becomes, the quicker the loan is paid off. As mentioned above, a thirty year loan can be shaved considerably by applying just a little more each month.
Moderation to Beat the System
Nearly every financial advisor will tell you that the key to success in getting your finances in order is a system of responsible spending. This means keeping close tabs on your monthly expenditures as well as any impulse purchases you might make over the course of time. For predictable expenses, such as credit card bills and recurring debits such as insurance premiums and utilities, it makes sense to get in the habit of checking and comparing rates every once in a while. Insurance companies will vie for your business, and if you are receiving the same coverage with lower rates, it makes sense to switch whenever possible.
As for utilities, thanks to the US anti-trust laws, you have options in your service providers. Take a look every few months at competing rates and make the switch when you can. The process is simple, and if rates swing the other way, you can always return to your original providers. This method of active shopping can net you up to twenty percent of your monthly expense back each month if done on a regular schedule.
Cheap Credit Isn’t Cheap
When looking at credit, going with the lowest rate may not always be the best way to travel. Fine print in lending documents may indicate that a low interest rate is simply an introductory rate, and promises to climb unchecked in the following moths once a set amount of time has expired. Knowing how easy it is to switch out of loan programs, lenders often write in penalties for those who decide to reduce their debt early or condense their loan payments under a lower fixed rate.
On the same note, be aware of variable rates, these are often tied to a stable prime rate, but will increase during the life of the loan. A lower rate on the head in can give you time to pre-pay down your debt, but if that isn’t possible, sky rocketing rates will put serious damage on your future budgeting needs. Introductory rates in the single digits such as prime plus two might shoot upwards to amounts as high as prime plus twenty three. When signing any loan agreement, be sure to confirm the rate you are agreeing upon is a fixed rate, and won’t change no matter what the financial environment might look like down the road.
Savings to the Rescue
As a last note, maintaining a healthy savings account can mean the difference between a happy home and losing it to foreclosure due to an inability to pay. Mortgage companies might often offer to assist during times of fiscal stress, but this is always in their best interest with burgeoning rates set as a penalty for failure to pay.
To guard against this, always have at least four months of budgeted savings available in a rainy day fund that you can access should times become lean. It is as simple as setting up a savings account with your commercial bank, where you can move funds immediately and without penalty to cover any unforeseen expenses.
Take your time when entering into any new fiscal agreements, and review your current contracts every once in a while to compare against better rates. A little education goes a long way, and will end up saving you considerable amounts of your hard earned dollars in the long run.