It's tax time again! You know what that means. Time to get back all that money you spent being old Saint Nick a month ago. If you're like most Americans, you already have new gadget or big boy toy that you want to go purchase with the money, right?
Oh but not this year, this year you will have a plan to make your money go much further than spending it on something that will loose its value the second you swipe your card. This year is the year to save, pay off debt and invest. Whenever I get a large sum of money the first thing I do is sit down and look at where I am financially. Then I start asking my self things like, how can I make this money work hard for me? What can I use this money for that will get me that much closer to financial freedom?
I gather a list of all my bills along with their interest rate, I also gather a list of all my accounts along with their interest rates. Now get online and find a loan calculator and amortization. You can google it and find one easily. If we were to you have a credit card debt of $1200 with a 10% interest rate as an example. We will say that the minimum monthly payments are $25.50 which would pay the debt off in 5 years. If you were to pay just the minimum, the interest on the loan would cost you $329.79 over five years or about $66 per year.
So instead of buying some nonsense object lets say you were to pay the off the debt right now. Paying off the debt right now would be like adding $66 per year to your pocket. Now if you started taking that $25.50 per month (that would have gone to the bank) and put it into a high yield savings account each month, at 5% it would grow to $321 the first year. By the end of the 5 years that $25.50 per month would grow to $1,776.
So this shows you how investing in paying off your debt to the bank and sticking to a set out plan can put some money in your pocket. This does not work if you don't show discipline and commit to paying yourself. You committed to paying your bank each month, why not commit to paying yourself. You deserve it, right? From the second you pay off that debt with the bank you are now in debt to yourself.
If you were to continue paying the monthly payments to the bank by the end of the 5 years you may be clear of the debt and the bank will thank you for doing business as he waves goodbye with a wad of $1200 plus an additional $329 in his hand. Or you can invest $1200 in your future right now and pay yourself the $25.50 minimum. Then at the end of the five years take out that hard earned $576 and buy something nice, keep it, invest it in something, whatever. The key is to think about the big picture. When you look at your bills don't think about just the monthly payments, think about how it is going to affect you five or ten years down the road. Think about who is really getting the better deal, you or the bank? Now develop your plan and stick to it.
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