MORE MONEY

The "Good Life" and the "Prosperity for All" pages of this website delve into the subject of achieving financial security and prosperity in life. This page interactively examines the subject of debt management. Except perhaps members of the so-called 1% Club, money is one of those things in life in which only a few humans seem to have enough of it. Money is the key to material prosperity.

At the household level, most consumers cannot afford to purchase big-ticket material items outright with cash (such as homes, motor vehicles, furnishings for the home or apartment, a college education, etc.). Instead, consumers generally purchase these material things on credit. To be sure, credit has become so popular and prevalent in the Western world until many consumers purchase various small-ticket material items on credit, too.

Credit is not a bad thing per se. Credit provides many benefits to households, businesses, and governments. The above paragraph cites some of the benefits of credit at the household level, that is, the ability to consume goods and services that you otherwise could not afford to consume if you had to purchase them outright or upfront with cash. Credit only becomes a problem when it becomes unmanageable. Credit becomes a problem when you begin to accumulate more debt than your ability to repay your debt obligations. Consequently, you end up receiving a poor credit rating by your creditors or lenders.

Lenders require some type of recourse if you should renege or default on your debt obligations. Lenders lose money when borrowers renege on their debt obligations. The act of issuing poor credit ratings to those who are slow to pay their debts or those who refuse to pay their debts is one course of action utilized by lenders.

A poor credit rating is akin to having demerits or failing grades placed on your permanent financial record. Inasmuch as possible, throughout your adult life, you are going to want to try to maintain a spotless or unblemished personal financial record. It is considered a bad thing—and, indeed a scandalous and an immoral thing by some—to renege on your debt obligations. Yet, there do arise occasions in life whereby reneging on debt obligations simply cannot be avoided.

When you are young, say 21-years-old, separating from your parents, and venturing into the world to live on your own as an independent household unit, you generally begin your independent life with a somewhat spotless or blank financial record. All kinds of credit cards are fairly easy for you to obtain, that is, bank-issued credit cards, retail-store issued credit cards, gasoline store credit cards, and so forth. It also is very easy to make purchases on credit. Before long and often due to bad luck or an unfortunate turn of events such as the loss of a job, an unforeseen accident or illness to render you somewhat incapacitated to work and earn money, a broken home in which there once may have been two incomes but suddenly there is only one income to pay the bills, and so forth, the assorted debts that you have accumulated can snowball into an avalanche. The debt snowball could roll over and financially flatten you, so to speak. Excluding traditional debt for home and automobile purchases, perhaps some of the most prevalent debt obligations held by USA households as of 2014 are related to credit card debt and student loan debt.

Say, for instance, you obtained a 15-year or a 30-year home loan. Your debt obligations for the home loan would mean that you would need to experience 15 or 30 years of continuous and solid financial stability to see the home loan through to its scheduled payoff date. Yet, in the sometimes tumultuous, uncertain, and shifting employment marketplace, the prospect of 15 or 30 years of continuous, secure, or stable employment sometimes seems unattainable.

Some adverse impacts for having a poor credit rating include the following:

• Inability to make future purchases on credit due to denials of your credit requests by prospective lenders
• Some employers consider your credit rating as a factor when making hiring decisions
• Some landlords or property managers consider your credit rating as a factor when making apartment rental decisions
• Most mortgage or home loan lenders consider your credit rating as a factor when making home loan decisions
• A lower credit rating typically means the higher you are required to pay in interest when lenders do decide to approve your requests or applications for credit

In short, a poor credit rating—coupled with a past police arrest record for having committed one unlawful act or another—in young adulthood possibly can return to haunt you later in life when you decide to get married and seek to purchase a home. A poor credit rating has the dual adverse impacts of restricting or limiting your options in the broader economic marketplace while requiring you to pay higher interest rates when credit is made available to you. To prosper in life, you need all of the options, flexibility, and discounts that you can get in the economic marketplace. If you must make purchases on credit, then ideally you would want to pay the lowest possible interest rate. Conversely, when you are saving, you would want to receive the highest possible interest rate. Your overall financial objective is to accumulate more money or to accumulate wealth.

What is the point in accumulating wealth? What is the point in having more money at your disposal? As a household unit, the point is to have the financial resources, the financial flexibility, and the financial freedom not only to live a comfortable material existence but also to enjoy life, for instance, to have the financial option of purchasing a quality (college or career school) education, purchasing property and a home, taking nice family vacations, traveling to see the world and enjoying the finer things in life, and so forth. The point in accumulating wealth is to maximize your choices and options in the global economic marketplace.

GETTING DOWN TO THE REAL NITTY-GRITTY OF DEBT PAYOFF

Two often asked questions are these:

1. Given my current account balance for a given debt obligation, its interest rate, and the monthly amount paid, how long will it take for me to payoff the debt obligation?
2. How much must I pay each month to retire a given debt obligation much sooner than the scheduled payoff date?

Several techniques can be deployed to answer the above two questions. These techniques run the gamut from:

• high technology techniques. These include electronic spreadsheets, personal finance software applications, and online debt payoff calculators. Microsoft Excel is perhaps the most popular electronic spreadsheet applications on the market as of 2014. Intuit, the proprietor of personal finance applications such as Mint and Quicken, has long been an industry leader in the arena of personal finance software applications. Many online debt payoff calculators exist to answer these two questions. For instance, you can use Calculator.net's Payment Calculator, or you can use Still River Retirement Planning Software's Loan Amortization calculator to answer the above two questions.
• low technology techniques. These include the use of sophisticated, handheld financial calculators.
• old-fashioned, manual technique. This approach uses a pencil, paper, and a simple calculator (for performing addition, subtraction, multiplication, and division) coupled with relevant financial formulas to compute a debt payoff.

The old-fashioned formula for computing a debt payoff is called an ordinary annuity with payments due at the end of the period, and it is given as follows:

Where,

• PMT = Periodic loan payment (unknown)
• PV = Present value of the loan or the principal loan amount
  
• r = periodic interest rate or annual interest rate
  
• t = length of time (usually in years) to repay the loan
  
• n = number of compounding periods in the year.
  

The PMT formula shows how electronic spreadsheets, personal finance software applications, and online debt payoff calculators derive their solutions. It is somewhat ironic that the original idea behind the invention of the computer was to rapidly solve complex problems involving numbers. The "Information Superhighway" and the "World Wide Web" pages of this website illustrate that the capabilities of the computer have greatly expanded—and continue to be expanded—far, far beyond the computer's original numbers-crunching scope. The "Prosperity for All" page of this website introduced the PMT formula. The monthly payment for a $100,000, 15-year home loan (at a 4.5% interest rate compounded monthly) was computed as an example.

For purposes of this debt payoff discussion, assume that you purchased an automobile on credit. The price of the automobile was $23,020 USD. The terms of the loan were a payoff period of 4 years at 8% interest compounded monthly. How will this debt obligation be structured or amortized? As illustrated by the old-fashioned technique below, the PMT formula reveals that you would be required to pay $561.99 on the loan each month for the next four years to retire the debt on schedule (in 48 months/payments).

The next table shows how the automobile loan's payoff schedule would be structured or amortized.

Rather than a close-ended automobile loan, a more likely scenario of debt payoff would be open-ended debt such as credit card debt. In the case of the automobile loan, you are given an end date of 4 years to repay the debt. With open-ended debt, no end date exists. There is no deadline to retire the debt as long as you continue to make your required minimum monthly payments on the debt. The above two questions—(1) how long it would take to payoff a given balance or (2) how much to pay to expedite or shorten the payoff period—are more pertinent to open-ended types of debt.

You would have to read the fine print to determine the precise terms of the loan that you obtain and to determine whether or not your loan's amortization schedule conforms to the above computed compound interest method. For instance, another method of extending credit is referred to as the add-on interest method. The add-on interest method results in a higher total interest amount paid on the loan compared to the compound interest method.

The reader also should note that this automobile loan illustration assumes that all other things pertaining to the loan will remain equal such as a constant interest rate, no new purchases, no additional fees, no taxes, and so forth. In the real world, few things seldom remain equal. For instance, in the case of borrowing, generally, various fees and taxes also are included in the loan. These additional costs would need to be added to the computation to obtain a more realistic picture of the total repayment amount.

The following Debt Payoff Calculator I widget is brought to you by bankrate.com's Calculators. The Payoff Calculator I online calculator widget illustrates one method of answering the two above-posed questions. Input the automobile loan parameters into the widget to get the same results as presented above, that is, for a $23,020 loan at 8% interest compounded monthly for a duration of 4 years (or 48 months/payments).

Credit Card payoff Calculator

What will it take to pay-off my credit card?

The following Debt Payoff Calculator II widget is brought to you by ilikecomputer.com's Cool Stuff. The Payoff Calculator II online calculator widget illustrates another method of answering the two above-posed questions. You'll notice that you can use this mortgage calculator to compute the automobile payoff amortization schedule, too. Input the automobile loan's parameters into the widget to get the same results as presented above, that is, for a $23,020 loan at 8% interest compounded monthly for a duration of 4 years (or 48 months/payments).

Finally, I developed the following Debt Payoff Calculator III widget using Microsoft Excel in conjunction with spreadsheetconverter.com's spreadsheet converter tool. The Payoff Calculator III online calculator widget represents a convergence of the high technology, low technology, and old-fashioned techniques. It uses the old-fashioned PMT formula to perform the payment computations. The PMT formula was applied to an electronic spreadsheet to generate the underlying table of payment results (shaded in blue). In turn, the completed spreadsheet was ported online. This particular online calculator widget mimics an electronic spreadsheet template. The Debt Payoff Calculator III widget illustrates how the two above-posed questions are answered but with a couple of twists. One twist is that it simultaneously computes the payment amount and the amount of time (years) it takes to payoff a loan. Another twist is that it allows you to interactively substitute multiple loan amounts, interest rates, payment frequencies, and loan durations to instantly re-calculate various payment amounts and payment frequencies.

The following legend applies to the above Payoff Calculator III widget:

• White shading = locked cells cannot be changed
  
• Gray shading = locked cells cannot be changed
  
• Green shading = locked descriptive cells
  
• Blue shading = locked formula-driven cells
  
• Yellow shading = Cells are not locked; you can change the values in the yellow cells, which will recalculate the applicable formula-based monetary results shaded in blue from Row 5 through Row 18
  

Column D/Row8 or cell D8 of Payoff calculator III indicates that a 4-year loan for $23,020 at 8% interest compounded monthly would equate to a $561.99 payment per month. Conversely, Column D/Row 6 or cell D6 of the table shows that, if you wish to payoff the loan in 2 years instead of 4 years, then you would need to pay $1,041.13 per month. Column D/Row 11 or cell D11 of Payoff calculator III indicates that if you paid $358.79 per month, then it would take you 7 years to payoff the loan instead of 4 years.

Assume that you possess a $50,000 line of credit. Assume that you used the entire credit line to complete a home improvement project. Assume that your credit line is structured as a regular compound interest type of debt. Assume that the minimum payment required by the issuer of the credit line was $1,991.81 per quarter. Column C/Row 14 or cell C14 indicates that at $1,991.81 paid per quarter, it would take you 10 years to payoff the $50,000 debt. Finally, assume that you decide to payoff the debt in 5 years instead of 10 years. Column C/Row 9 or cell C9 of Payoff calculator III indicates that you would need to pay $3,207.36 per quarter to payoff the debt in 5 years. This particular example assumes that you would be paying a 10% interest rate compounded quarterly.

Notice how I left cells C3 (Column C/Row 3) and B18 (Column B/Row 18) unlocked (and shaded yellow). Cells C3 and B18 were left unlocked to serve as freeform cells. You can input your own loan amount, interest rate, payment/compounding frequency, and loan duration at cells C1, C2, C3 and B18 to compute the applicable payment amount at cell C19.

With the advent of the microcomputer and electronic spreadsheet applications, the procedure for performing debt payoff computations has been automated, streamlined, and greatly simplified. Instead of having to resort to the old-fashioned, longhand formula-based method to solve, say, household-finance problems, you only need to complete several functions in Microsoft Excel. The 4-year (or 48-month) automobile loan amortization table or schedule of payments above was created in Microsoft Excel.

Take Microsoft Excel and the automobile loan, for instance. In conjunction with the loan's parameters, if the payment amount is unknown, you only need to use Microsoft Excel's PMT function to compute the monthly payment amount of $561.99. You only need to use Microsoft Excel IPMT function to compute the interest portion of the payment. Given the automobile's beginning loan amount of $23,020, Microsoft Excel's IPMT financial function reveals that the interest portion of the first payment would be $153.47. Microsoft Excel's PPMT financial function reveals that the principal portion of the first payment would be $408.52. Microsoft Excel's NPER function reveals that, given a $23,020 loan at 8% annual interest and payments of $561.99 per month, then it would take 48 months to retire this automobile loan. Microsoft Excel's RATE function reveals that, given a $23,020 loan with a 48-month duration and payments of $561.99 per month, then the monthly interest rate computes to 0.666666667% (which, when multiplied times 12 months becomes an annual interest rate of 8%). You can use Microsoft Excel's function wizard to assist you with inputting the required values for each function.

To take matters a step further, Microsoft Excel includes more sophisticated techniques to compute various debt-reduction strategies. One such technique is the what-if analysis. The following link to one of Microsoft's loan amortization templates illustrates how quickly and easily Microsoft Excel is capable of performing various mathematical computations:

To take matters yet another step further, Microsoft Excel includes several other sophisticated techniques to compute assorted financial strategies. These more sophisticated techniques include Microsoft Excel's Goal Seek and Solver tools.

ENVISIONING THE FUTURE

It is completely up to humans what kind of Earth to build and what type of future to live. Deserts can be made to bloom if humans make it their duty.

When natural disasters strike on Earth, Mother Nature does not care anything at all about the targets of her wrath. Similarly, the Universe, in general, does not care anything at all about humans killing one another or about humans going extinct. If humans were to go extinct one day, about the only thing that the Universe would likely say is, "Too bad, so sad for humans...but moving right along." If humans should go extinct one day, then the Earth will continue spinning and other life forms will emerge to replace humans.

I envision a future of Heaven on Earth—and beyond Earth—for human beings of the here and now to enjoy each day. It remains for humans to choose their future wisely. Humans cannot be complacent, cross their fingers, bury their heads in the sand, and wish for the best to happen on Earth. Humans, for instance, must take proactive steps to avoid extinction such as fostering worldwide nuclear disarmament. For, as the saying goes, action speaks louder than words. You instantly can tell by their actions how serious the world's nuclear powers are about their desire for world peace or about their desire to not destroy the whole of human life by way of a nuclear holocaust. You can tell simply by noting the actions that they take to reduce and eliminate their stockpiles of nuclear, chemical, biological, and radiological weapons. You instantly can tell by the safeguards that they enact to help ensure that no nation cheats. For, it is conceivable that, in their war-planning activities, some nations might harbor secret programs to rapidly reconstitute these extinction-inducing weapons should an outbreak of a major war occur in the future. It has to be admitted that destroying these extinction-inducing weapons does not destroy the knowledge of how to rapidly reconstitute them. So long as nuclear weapons and extinction-inducing weaponry programs remain in tact on Earth, then all of the talk by world leaders about cherishing world peace and not wanting to destroy the world is just that—meaningless, empty, idle words.

Humans must take proactive steps to ensure their future prosperity such as slowing their population growth rate, for instance. Humans must take proactive steps to ensure that international and domestic harmony prevails over international and domestic discord on Earth such as treating one another with courtesy and respect, for instance. In my lifetime, there is one thing that I have learned about human behavior and it is this: The quest for power, money, stature, and sex—and, perhaps to a lesser degree, an unhealthy preoccupation with politics, religion, race, and even nationalism—can cause some humans to do some really atrocious, disreputable, deplorable, and despicable things as can the quest for survival in crisis situations can cause some humans to commit some rather horrific, barbaric, and savage acts. With the increasing global popularity of substance use, a more recent development in human history is this: All kinds of drugs, both from the perspective of drug dealers (who are motivated to make more money) and drug addicts (who are motivated to obtain the next high), also are causing some humans to engage in all kinds of egregious, nefarious, and unspeakable behavior.

THE HUMAN SPIRIT ENDURES

As has become customary of this website, I wish to close this page by sending some good (musical) vibrations your way. After all, who wants to be sad in life? Nobody does. Despite the trials and tribulations of life on Earth, the human spirit always manages to endure.

Jeanne Calment of France (born on 21 February 1875 and died on 4 August 1997) is the oldest "officially verified" human to have ever lived (according to Wikipedia.com and excluding notable religious figures such as Methuselah). She lived for a total of 44,723 days. When 44,723 days are divided by a typical 365-day year, it yields an age of 122 years old. Using the above Days Difference calculator, how many days have you been alive? How does your current longevity compare to Jeanne's?

NOTE: Please view your browser's page source for a list of resources used to create this page (generally, by right clicking the mouse).