Friday, January 14, 2011

Money Help

Welcome to 2011! It's a brave new world, renewed again in the midst of another cold winter. Hope you all had a wonderful holiday season. I've been out of commission for a bit, getting changed over to a new computer and a secure location on the server. But I'm back now and ready to talk again about personal finance.

I'm prompted to get back on the stick again today because I received some good news in my P.O. box. Remember, a few posts back, I was telling you about creating some room on a credit card in order to get a special interest offer. Well, that's what came in the mail today. And the offers keep getting better and better as I continue to make timely payments and improve my financial standing. Today's offer: 0% for 6 months, or 3.99% for 12 months. Zero percent! Wow! This is exactly what I was talking about when I asked you to pay off a credit card you were in good standing with. Then you get a great interest offer like this, and then transfer your high interest rate card balances over.

Of course, 0% sounds great, but in reality, (and I fully expected this) after doing a little math, the 4% offer is actually a better bargain. So, since I have to choose one or the other, the 4% offer will be the one I go for.
The particulars of this particular situation are as follows:

This is for a Capital One account with a $3,000 credit limit and normally a 20% interest rate. I have about $500 on the card already at a 4% promotional rate, so I will only be able to transfer about $2,500 from a higher rate card. My higher rate account is currently at 20%, so that will be what we use to calculate our savings. As with virtually all these types of offers, there is a 3% transfer fee charged for the transaction. So here's the math:

6 Months 12 Months

0% 3.99%

Loan Amount: $2,500 $2,500
3% Fee: ($75) ($75)
Interest: 0 ($100)
20% saved: $250 $500

Savings: $175 $325

As you can see, the loan amounts and the fee for the transactions are the same. There is a cost to carrying the $2,500 for a year at 4% of $100 (actually for comparison purposes this could be halved to $50, which would cover the 6 month period of the 0% offer). Savings is calculated at 10% for the 6 month loan (20%/year x .5) and the full 20% for the 12 month loan.

So I would have paid $500 interest, over the 12 months, but instead, I am paying $100 in interest over the 12 months and a $75 one time fee. That makes a savings of $325. That's pretty good when you consider we are talking about such a small principle amount ($2,500). Of course, were I to be able to do this on a larger scale (and I do already have $4,000 at a permanent 4%, and $1,500 at 8% for 6 months) the savings would really be significant.

These figures are well above what one could reasonably expect as a return from even the most lucrative stock or bond market investments. So take a few simple steps and start toward financial freedom (and take that "snowball" and throw it at the next personal finance guru you see).

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