Paying bills, debts, taxes and other obligations on time is a good first step to seeing how exercising financial responsibility can make room for saving and investing. Pay attention to the late fees, penalties and interest paid during the year because the amounts add up and can be significant. The following are examples of ways money can be better utilized to start investing in stocks, bonds, ETFs, retirement accounts, REITs, and other investments.
Interest Savings
Interest savings is the amount you save by making a larger payment on debt than the amount required by the terms of your loan agreement. For example, on a five year car note with a principal balance of $10,000 and interest rate of 4%, you can expect to pay total interest of $2,000 (or $400 each year). The monthly payment will be $200 with $167 applied to principal and $33 applied to interest. The total interest to be paid over the five year term can be reduced by paying an additional $50 (or other amount) and having it applied to principal; this will reduce the total interest since the principal balance will be reduced sooner than five years – $2,000 in principal is expected to be paid each year but by paying an additional $50 principal paid each year will be
No interest savings
Principal Interest Total Principal
Year Payment Payment Payment Balance
- Year 1 $2,000 $400 $2,400 $8,000
- Year 2 $2,000 $400 $2,400 $6,000
- Year 3 $2,000 $400 $2,400 $4,000
- Year 4 $2,000 $400 $2,400 $2,000
- Year 5 $2,000 $400 $2,400 $ -0-
With interest savings
- Year 1 $2,600 $391 $2,991 $7,400
- Year 2 $2,600 $296 $2,896 $4,800
- Year 3 $2,600 $192 $2792 $2,200
- Year 4 $2,600 $88 $2,288 $ -0-
- Year 5 $ -0- $ -0- $ -0- $ -0-
Mortgage Loan
Paying extra on a mortgage works similar to the car loan example above. Paying extra on a long term loan can result in an overall lower interest rate and early payoff of the loan. Paying off a long-term note early will free up money to make a new investment, contribute more to a retirement account, or use for any purpose you decide. For example, a thirty-year mortgage on a $100,000 loan with an interest rate of 4% would result in annual interest of $4,000 (or $333 a month) in addition to the annual principal payment of $3,333 (or $278 a month). By paying an additional $75 a month and having it applied to principal would result less interest being paid and the mortgage being paid off in less than 30-years.
No interest savings
Principal Interest Total Principal
Year Payment Payment Payment Balance
- 5 $16,665 $20,000 $36,675 $83,335
- 10 $16,665 $16,667 $33,332 $66,670
- 15 $16,665 $13,334 $29,999 $50,005
- 20 $16,665 $10,001 $26,666 $33,340
- 25 $16,665 $ 6,668 $23,333 $16,675
- 26 $ 3,335 $ 667 $ 4,002 $13,340
- 27 $ 3,335 $ 534 $ 3,869 $10,005
- 28 $ 3,335 $ 400 $ 3,735 $ 6,670
- 29 $ 3,335 $ 267 $ 3,602 $ 3,335
- 30 $ 3,335 $ 133 $ 3,468 $ – 0 –
With interest savings
Principal Interest Total Principal
Year Payment Payment Payment Balance
- 5
- 10
- 15
- 20
- 25
- 30
Unpaid Taxes
If you owe taxes at the end of the year, every effort should be made to pay the taxes by the due date of the return to avoid penalties and interest. If the taxes are not paid on time, penalties are assessed to the unpaid tax then interest is applied to the unpaid tax plus the penalty, and usually there is a fee to set up an installment agreement. Depending on how much you agree to pay monthly per the installment agreement, you will see the monthly payment will primarily be used to pay the penalty and interest with very little applied to the tax. This means that a $1,000, $2,000 or other amount of unpaid taxes will be paid over about 10 years.