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Time to add up your debt

This is week three of the Bermuda 14-week plan to radically improve your finances.

STEP ONE

Review your credit card statements, a mortgage statement if you have bought a home, and don't forget personal debt payments to friends and family. How much do you owe in the short term, and the long term?

Hopefully, your answer is a good one: very little in short-term debt, but probably a pretty high balance in long-term debt. Why would that answer be just fine?

Consider what you have bought (you and the bank that is) by incurring that debt. Are we talking appreciating assets, depreciating assets, mindless consumption that have no lasting value whatsoever? Well, entertainment might have value since you may carry the memories of a wonderful time forever, along with the credit card balance.

Appreciating assets generally grow in value over the long-term, keep that “long” in mind given that Bermuda real estate (generally an appreciating assets) did lose value during the recession, but longer term, it has historically appreciated. Real estate also provides a permanent roof over your head. Your payments are building equity ownership into your purchase, an incredibly right financial reason to make that your goal.

This is your challenge! What are your appreciating and depreciating assets?

Examples: Designer bags, watches, antique chest-of-drawers, or taking friends out to lunch, groceries. When you sell these purchases (if you can sell them) — be honest now — will you get more than you paid for them? Can you name any other assets that you have or want to purchase that will increase in value — by incurring debt to buy it?

Readers, send me your answers. I'm not giving any hints.

STEP TWO

Now, look at your ratio of balances between depreciating spending and appreciating assets charged. How are the various debt repayments calculated?

Take a look at the prior credit card articles linked below. In part one of August 23, 2014 — we reviewed a $5,000 balance and the cost to carry that debt. It was 18 per cent a year. How? A simple calculation of 5,000 x 1.18 = $5,900 balance due in a year, or 20 per cent more than originally borrowed. Beware the minimum balance payment trap. Take a look at the chart. Of you only repay $100 a month it will take eight years and a huge amount of interest to clear the borrowing. Your total repayment will amount to more than $9,600.

You can try various amounts on the calculator at 360Financial Literacy, a free website sponsored by the American Institute of Certified Public Accountants. Here is the link: http://www.360financialliteracy.org/Topics/Credit-and-Debt/Credit-Cards/Credit-Card-Pay-off

The difference between debit and credit cards is huge. Debit cards deduct the charge immediately from your bank account using your money. Credit cards let you borrow other people's money (banks) and for that privilege these generous people (well, that is what we want to think) are going to charge for the use of their money. They are never in the business of lending for free.

Yes, debit and credit cards look the same and because of the similarity it becomes easy to use them both the same way, such as on all the little insignificant extras, the larger “cause-I-need-to” feel-good impulse purchases. People use cards for convenience. It is so easy, making it doubly hard to keep track of what expenses and what and how you paid for.

Credit card consumption is a huge moneymaker for finance companies. Did you know that in larger countries, such as the United States, finance companies bundle credit card accounts and sell them into secondary investment markets? Probably not happening in Bermuda, but do you really want to be in that group?

STEP THREE

Your goal is to decide how you are going to manage these debt payments better — by saving better and creating a realistic budget for you.

Stay tuned for week four — create a budget.

Our reader comment from Malcolm Raynor last week is so very true.

“The key to saving is to track your spending to the penny. Your regular and big expenses items are not the ones that break your budget, it is the small items that are not planned.”

Resource articles for Bermuda residents

In August 2014, I wrote two in-depth articles relative to credit card debt in Bermuda. They may be helpful to readers starting their 14-week financial review process.

On August 23, 2014 I looked at the potential permanent damage caused by using credit cards. This article is particularly relevant because it demonstrates how credit card balances increase when the family does not pay the entire balance due. These debts can last for years. Your impulse lunch or entertainment night — the final cost could be three to five times more. The two questions to always ask before you hand off that card are:

1. Is this purchase an appreciating asset — can I sell it and if so will I get my money back?

2. Can I pay the total balance due next month?

View the original article at: http://www.royalgazette.com/article/20140823/COLUMN07/140829883

On August 30, 2014, the article titled ‘The Bermuda credit card landscape' had a chart of descriptions, terms, interest rates, and various bank credit card offerings in Bermuda.

You can view that article by going to: http://www.royalgazette.com/article/20140830/COLUMN07/140839992

Those readers focused on appreciating assets can try the three-part series on mortgage tracking and payment calculator articles to consider building equity faster in your home.

Part one — Why would you want to accelerate the principal payments on your mortgage? This provides hints, calculations, and reasons why accelerating mortgage principal payments is a good way to stop frittering money away on depreciating purchases.

Here is the link: http://www.royalgazette.com/article/20140712/COLUMN07/140719909

Part two — Manage and track your mortgage. This guide shows how to review your mortgage statement and verify if your principal reduction schedule is correct — by doing the math yourself.

Here is the link: http://www.royalgazette.com/article/20140719/BUSINESS08/140719664

Part three — How to use a mortgage calculator. this article provides further help in tracking your mortgage payments and how applying extra to the mortgage principal reduces the number of years needed to pay it off. It links you to a bank rate mortgage page calculator and also discusses some ways to find the money for those extra principal payments.

Here is the link: http://www.royalgazette.com/article/20140726/COLUMN07/140729798

Write to me with any questions. I will answer them.

Martha Harris Myron CPA PFS CFP JSM, Masters of Law: International Tax and Financial Services. Appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. The Pondstraddler* Life™ Consultancy provides cross border financial planning for internationally mobile individuals and their businesses residing, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle. Specific focus on residents of Bermuda, the premier international finance centre. Contact: martha@pondstraddler.com

This graph shows how it would typically take 99 months to pay off a $5,000 credit card balance by making $100 monthly payments. However, it would only take 24 months if repayments of $252.34 are made each month

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Published August 22, 2015 at 9:00 am (Updated August 21, 2015 at 9:46 pm)

Time to add up your debt

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