Have I Piqued Your Interest?
That’s a money pun right there! Money is pretty important whether we want to admit it or not. It determines what we can and can’t do for the most part. I mean there’s people out there recycling toilet paper and living in a van down by the river who are perfectly happy. Not judging them, but that’s not exactly my idea of comfortable. The problem I’ve faced with money is that after graduating from college I literally had no idea about personal finance. I don’t think I’m alone. Throughout college I only had to take one economics class which I passed... with a D. I’m still pissed at my freshman advisor for scheduling the single hardest class of my college career in my first semester freshman year. My point is, I had very little to go on and was thrust into the real world. I want to help other people out if I can and document my realizations about the economic world or just show everybody what an idiot I was and you can get a good laugh.
For the past, what’s it been like, oh man... ten months...it’s been ten months since I graduated..damn... well anyway...I’ve been doing more active research than I did my entire senior year into the world of finance. So like any millennial trying to write a blog I’m going to talk out of my ass for a while and hopefully I’m close to right about some of this stuff. Again, this site’s called Barely Researched so I feel like I have a built in excuse. Ok so here is my first financial lesson:
Interest is like gas station food, seems harmless at first but a few months of it and it’s gonna be hard to comeback from that.
Like many college students I’ve been saddled with an exceptional amount of debt that I am solely responsible for paying off. I may have more than some or less than others but for the majority of us with these loans we are currently working with a negative net worth. Which is bad. You can’t get away from the student loan debt. You can’t pull a Trump and bankrupt your way out of it. Which on one hand is good because it can’t force you into bankruptcy which will make it impossible to get a loan for the next five years but on the other hand there’s no running from it either. You’re expected to pay it off sometime between now and death and possibly your kids will have to pay it back after you die. So getting this paid back should be on top of everybody’s list.
What they don’t tell you (or nobody who already knew told me) is while you get that 6 month grace period before your first payment is due you accrue a hefty chunk of interest on top of what you thought you owed, (interest basically being the cost the people with money charge the people without money to borrow...their money). Yes, a 20 year payback plan is great with that low monthly payment but you’ll be paying an astounding amount in interest because it just keeps piling up every month. When I looked at the amount of interest I had accrued on my student loans I almost shit my pants. When I looked at my paycheck and monthly payment I’d need to make I double shit my pants. It’s so important to look into how much of your payment is going to the interest on the loan and how much is going to the principle (the amount you actually borrowed, I don’t think you’re dumb you probably already knew that but if one person needed that it was worth it). If that minimum payment is making life easier right now it may be because none of it is actually going to the loan and you’ll be 80 wondering why you still have $20,000 in student loans.
What they also don’t really tell you is that you student loan is made up of a bundle of different loans that all have different interest rates. So paying the ones with higher interest rates is a more effective strategy if you’re trying to pay them back as quick as possible. Eventually, once you pay enough of your loans back, refinancing them into a more manageable loan is the way to go, at least I think. I mean, that’s what I’m going to do. With interest rates for other loans at some of the lowest points they’ve ever been (this was a band-aid over the bullet hole that was the 2008 financial crisis) it would be smart to do this before they begin to rise in the very near future. In simple terms refinancing means you take out a loan equal to the amount you still owe on the first loans but at a lower interest rate so you pay less in the long term. Boom! A gem of advice right there from a totally under-qualified source, but still. I may be wrong but I’m not lying.
Besides student loans another place millennials find interest is credit cards. Interest on credit cards can really screw you over if you’re not careful. You could end up paying WAY more than you think if you carry a heavy balance on your credit card. Right now the interest on my credit card is around 20% that would mean if I paid $100 for something and carried it over until next month it’s actually cost me $120. I basically paid an extra $20 for no reason. This is why most financial advisors tell you to get out of credit card debit. The interest is so high that it can be almost impossible to dig your way out of that hole. I realize that for some people this is almost impossible but realizing what a detriment it is to your finances is step one I guess.
The final part about interest (that I’m going to talk about) that sucks is the interest that’s tied to your savings account or a similar account. *Spoiler Alert: It’s basically a scam. Interest for the most part, is the cost of borrowing money, that means that the cost the bank has to pay to borrow your money is the interest and money you accrue on your account. For most banks this is around 0.5% or if you sock it away for five years in a CD you might be able to get 2%. This sounds great, right?! Free money, they pay you to just house your money and you get to sleep better at night. Just so you know banks aren’t doing you any favors, even here.
You may be asking what’s the catch? The catch is a sneaky little bastard called inflation. With cost of living and economic developments the dollar decreases in its buying power. I.e. you can’t buy what you used to for a dollar. This is where your mind/trust in banks should be completely blown; inflation is currently around 2%. You’re consistently losing money year by year in a savings account or checking account unless that account is beating the rate of inflation. So that awesome interest rate you have on your savings account doesn’t mean jack if you don’t get more than a 2% return.
So in summary, if you’re still reading and haven’t died of boredom, interest sucks for the most part. Unless you’re taking out a huge loan like right now or in the very near future, interest rates generally work against you. But understanding interest rates is the first step in beating the game.
There it is the first lesson I learned about money in my adult life. I hope this is helpful or you could otherwise laugh at my complete lack of financial knowledge. I’m still researching my tail off so I may be writing more of these so please let me know if this is helpful. Not that it’ll change what I write but at least it’ll help to inflate my ego.