If you've read my post about compounding here, I hope it inspired you to start saving a portion of the money that pass your way starting TODAY, since time is probably the best friend of your money if you can find a place to park it with interest. However, it's expected that such a simple (yet powerful) concept is also not lost on other people. So, before you even start setting aside some cash to start compounding work for you, it's wise to check if you don't have any "leaks" in your finances. Let's check out the more common one: credit cards.
Are you one of those people that has savings in a bank or some investments, and yet you have a "revolving credit" in a credit card, meaning you have a credit card balance that incurs interest because you don't get to pay it in full at the end of the billing cycle? I won't venture into whatever reason you incurred that credit card debt. And it's also advisable to have some "liquidity" available to keep you ready for emergencies. But it remains that the credit card balance is a hole in your finances, draining some (or most, if you have a small savings) of the rewards of compounding on your savings. At the rate of around 3% interest per month, that roughly translates to a straight 36% income on the credit card company per year. They will get their money back in 3 years. And if you happen to pay only the minimum amount due, you will be giving them so much more money for so many more years to come. For a savings account or other relatively-free investments, I don't think you would get to earn more in interest than what the credit card companies are charging you.
So, to really maximize the benefits of compounding for you, those leaks should be patched as soon as possible. It could mean channeling some of the money you intend to save to become additional payments for the monthly dues. Maybe even taking out from your savings to pay off the balance even faster. It may mean curtailing purchases using credit cards, if it has become a sort of an impulsive habit (or worse, an addiction). so it won't be increased by current purchases even while you are trying to pay off the old ones. And of course, that means paying off current purchases for this billing cycle in FULL plus some more to pay off the rest. On a larger scale, it could mean sacrificing for a while some of the "usual" things in life that you have come to enjoy.
In closing, let me share my story. There was a time I incurred a credit card balance of three times my monthly gross salary. Luckily for me, I considered that a problem early on (I should have considered it a problem much, much earlier). I went through some drastic measures: I would leave all my cards at home. I think I gave the cards to my folks so they could check on me if I should decide to use them (accountability is truly powerful). I paid every expense I have in cash. It took me about two years to pay off everything, but something happened along the way. I got used to my new level of expenditures, which is definitely much lower than before. It got to a point I was able to start saving. After a while, I got back to using credit cards again more responsibly: I pay off balances every month, and since I do it at month's end, compounding works for my savings no matter how small it may be (it's the discipline that counts here). I try to avail of freebies they offer for using the cards, like discounts in gas pumps, free tickets and items etc. The credit card companies still earn from their business, I think (more on this idea in later posts). But by using this financial service more responsibly, it allowed me to maximize the benefits it provides minus the problems that its abuse could entail.
Are you one of those people that has savings in a bank or some investments, and yet you have a "revolving credit" in a credit card, meaning you have a credit card balance that incurs interest because you don't get to pay it in full at the end of the billing cycle? I won't venture into whatever reason you incurred that credit card debt. And it's also advisable to have some "liquidity" available to keep you ready for emergencies. But it remains that the credit card balance is a hole in your finances, draining some (or most, if you have a small savings) of the rewards of compounding on your savings. At the rate of around 3% interest per month, that roughly translates to a straight 36% income on the credit card company per year. They will get their money back in 3 years. And if you happen to pay only the minimum amount due, you will be giving them so much more money for so many more years to come. For a savings account or other relatively-free investments, I don't think you would get to earn more in interest than what the credit card companies are charging you.
So, to really maximize the benefits of compounding for you, those leaks should be patched as soon as possible. It could mean channeling some of the money you intend to save to become additional payments for the monthly dues. Maybe even taking out from your savings to pay off the balance even faster. It may mean curtailing purchases using credit cards, if it has become a sort of an impulsive habit (or worse, an addiction). so it won't be increased by current purchases even while you are trying to pay off the old ones. And of course, that means paying off current purchases for this billing cycle in FULL plus some more to pay off the rest. On a larger scale, it could mean sacrificing for a while some of the "usual" things in life that you have come to enjoy.
In closing, let me share my story. There was a time I incurred a credit card balance of three times my monthly gross salary. Luckily for me, I considered that a problem early on (I should have considered it a problem much, much earlier). I went through some drastic measures: I would leave all my cards at home. I think I gave the cards to my folks so they could check on me if I should decide to use them (accountability is truly powerful). I paid every expense I have in cash. It took me about two years to pay off everything, but something happened along the way. I got used to my new level of expenditures, which is definitely much lower than before. It got to a point I was able to start saving. After a while, I got back to using credit cards again more responsibly: I pay off balances every month, and since I do it at month's end, compounding works for my savings no matter how small it may be (it's the discipline that counts here). I try to avail of freebies they offer for using the cards, like discounts in gas pumps, free tickets and items etc. The credit card companies still earn from their business, I think (more on this idea in later posts). But by using this financial service more responsibly, it allowed me to maximize the benefits it provides minus the problems that its abuse could entail.
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