Home > Managing Debt > Math for Grownups: A Simple Approach to Your Debt and Finances

Comments 1 Comment

By Laura Laing

Let me see a show of hands—who has debt?

More than likely, you do. Fact is, the cornerstone of many people’s personal finances involves some form of credit. But if you find it overwhelming to manage your debt, there are a few things that you learned in middle and high school that can help.

Yep, the math you may have despised and feared can play a starring role in your personal finances. This may make your palms sweat and heart race, but I promise: it’s not as challenging as you think. Take a look at these common examples.

Getting Down

If you’re buying a home or a car, you will probably take out some sort of loan. And there’s one sure-fire way to reduce your monthly payments up front: a large down payment. That’s because down payments reduce the amount you’ll be borrowing and, in turn, the amount of interest you’ll pay over the life of the loan.

In other words, the larger the down payment, the more money will ultimately stay in your wallet, bank account or investments. The size of that down payment is completely up to you, but a little bit of really simple math can help you plan.

There are two ways of going about this. You can either set a deadline for having that cash on hand, or you can set a monthly amount of savings. And for simplicity’s sake, we’re going to assume here that you’re just putting your money in your mattress. In other words, we’re not considering any interest or profit you could earn if you socked away your savings at a bank or invested in the stock market.

Let’s say you want to have $25,000 on hand by the end of five years. The amount you’ll need to put away each month is $25,000 ÷ 60 or $416.67.

(Where did the 60 come from? 12 x 5, or the number of months in a year multiplied by the number of years.)

Or what if you know you can put away $350 each month? How long would it take you to save $25,000? Easy-peasy: $25,000 ÷ $350 = 71.43 months. In other words, you can reach your goal in just about six years.

[Featured tool: Get your free Credit Report Card from Credit.com]

What’s the APR?

The interest rate itself is another way to save money on credit. And trust me, it can be quite a shock to calculate how much you’ll pay in interest over the life of a loan. But lenders don’t necessarily make this easy for us regular folks to understand.

First, a definition: APR is the annual percentage rate of a loan, not the rate you are paying each month. So if your mortgage has an APR of 3.5%, and your loan is compounded monthly, you are actually paying 3.5% ÷ 12 or 0.29% each month.

And that means you can’t just multiply the APR by the amount owed to find the total interest you’ll pay.

Instead, you’ll need a formula—except that you don’t, really. Online calculators can compute this answer for you, lickety split.  Just be sure that you input the values—like time period, APR and principal—carefully.

Paying More than the Minimum

Here’s a little secret: creditors make their money by setting minimum payments. But you can reduce your loan much more quickly by paying more than the minimum each month.

Let’s say you owe an even $6,000 on a credit card with 16% APR and your monthly minimum payment is 2.5% of the balance.  That translates to a $150 payment in the first month. (Trust me.) If you make a monthly minimum payment each month, you’ll be in the clear in 40 months (or just over three years), right?

Not so fast. Simply dividing the debt by the first minimum monthly payment ($6,000 ÷ $150 = 40 months) won’t cut it. That’s because you’ve ignored the interest and the fact that your minimum payment will go down each month.

Again, an online calculator will help here. If you merely paid the minimum monthly payment on this loan, it would take you a full 254 months to pay it down! But let’s say you can pay $150 each and every month. In that case, you’re looking at 58 months (or almost five years) of payments. Much better.

[Related: To Save or Pay Down Debt? Budget for Both]

Laura Laing is the author of Math for Grownups, a funny and accessible look at how we use math in everyday life.  She blogs at www.mathforgrownups.com.

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team