Do You Know How Much Interest You Are Paying Each Month?

by Patrick on October 30, 2009

Are you ready to be shocked? Then gather your most recent statement for each loan you have and walk through a short exercise with me. Somewhere on the loan will be a breakdown of how much you borrowed, the amount of your monthly payment, how much of your monthly payment goes toward the principle, and how much interest you are paying on your loan. With this information in hand I want you to make a 4-column chart to record your data (you can use a spreadsheet or paper and pencil; both work great for this exercise).

How much interest are you paying?

It’s one thing to know the interest rate you are paying on your loan, but it takes on an entirely different meaning when you see how much money you are actually paying toward interest each month. In many cases, the final number is shocking! I created an example debt chart to represent loans that a young couple may face shortly after starting their life together. Details about the hypothetical loans follow the chart.

Example debt chart:

Loan Total Payment Principle Interest
Mortgage $900 $200 $700
HELOC $375 $325 $50
Student Loans $184 $166 $18
Auto Loan 1 $368 $312 $56
Auto Loan 2 $250 $215 $35
Credit Card 1 $150 $25 $125
Credit Card 2 $150 $42 $108
Total $2377 $1285 $1092

Almost HALF the loan payments are for interest!

When you look at the numbers it almost doesn’t seem real, but it is – 46% of these payments go straight to the lender in the form of interest. It is amazing to see how much interest is charged on loans, and many people don’t realize how much interest they are paying until they write it down. These numbers are even more difficult to swallow when you realize they are monthly numbers and the annual interest would run over $13,000, which is a substantial percentage of many people’s take home pay.

Of course, each situation is different. For example, the mortgage interest makes up the vast majority of the interest in this chart, but even if you remove it, you would be paying $392 interest on $1477, or roughly 27%.

Hypothetical, but realistic numbers. The loans in this example represent common loans that many young couples face shortly after graduating college, getting married, and starting a family. The numbers used in this example were arrived at by using an amortization schedule calculator for reasonable loans at various stages of repayment to simulate a real world situation.

Loans and interest rates used in this example:

  • Mortgage – 30 years, $150,000 loan @ 6.0% interest after 5 years. Mortgage payment does not include property taxes, insurance or PMI.
  • HELOC – $20,000 @ 5.0% for 5 years after 3 years.
  • Student Loans – $20,000 @ 2.0% for 10 years, after 5 years.
  • Auto Loan 1 - $20,000 @ 4.0% for 60 months; after 1 year.
  • Auto loan  2 – $15,000 loan @ 6.0% interest for 48 months; after 2 years.
  • Credit card 1 – $7,500 @ 20% interest, paying $150 each month with no new charges.
  • Credit Card 2 – $5,000 @ 10% interest, paying $150 each month with no new charges.

How long will it take to pay off your credit card? The example in this article uses a credit card with a $7,500 balance at 20% interest. If you pay $150 per month and don’t make any new charges, it will take you 108 months to pay off your card. That is 9 years! The second credit card bill will take 40 months to repay.

How to reduce the amount of interest you pay

As you can see, paying interest will get you nowhere fast. There are several ways you can reduce the amount of interest you pay each month – and you have already done the first step, which is recognizing how much you are paying. The next step is to stop adding new debt, which means no more credit cards or additional loans.

Following that, you will want to try and negotiate  lower interest rates. You may not be able to do that for fixed rate loans without refinancing the loan (which may cost money or be subjected to other conditions). But you may be able to negotiate lower interest rates on your credit cards or other non-fixed rate loans.

Other options include creating your own do it yourself debt consolidation plan, which may include using a 0% balance transfer credit card to consolidate you credit card debt at 0%, using your HELOC to consolidate your higher interest loans, or consolidating your loans through a peer to peer lending company such as Lending Club or Prosper. These loans allow borrowers to take an unsecured loan to use as they wish. In this case, consolidating debt may be a good way to pay less interest and simplify the repayment process by making fewer payments.

The importance of paying more than the minimum payment

As you can see by this example, paying the minimum on your loans means you are sending a lot of money to the lender each month instead of reducing the principle you are paying. When you make extra payments that money goes straight to the principle, which reduces the amount of money you owe, the interest you owe, and the time it will take to pay off your loan. It’s a win-win situation for you.

Read more on this topic:

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What to Look For When Opening a Roth IRA

by Patrick on October 28, 2009

Individual Retirement Accounts (IRAs) are a great way to invest for retirement because they give you the opportunity to invest your money with tax advantages that are more beneficial than investing in a non-retirement account. You can open a Roth IRA at many financial institutions, which is convenient for investors. But each financial institution is not created equally and every investor has different needs, so it pays to do your research before jumping in with both feet. You should assess your investment style and needs before opening a Roth IRA or making any other investment.

What to look for when opening an IRA

Where you can open an IRA

Many financial institutions and brokerages offer IRAs, including banks, brokerage firms (Merrill Lynch, Edward Jones, etc.), online discount brokerages (Scottrade, E*Trade, TradeKing), mutual fund companies (Vanguard, Fidelity, T. Rowe Price), and independent certified financial planners. You will want to find the financial institution that best meets your investment needs.

If you prefer speaking with someone face to face, then you may wish to go with a full service broker that has an office where you can discuss your investment needs. If you prefer a more hands on approach you may wish to go with a mutual fund company where you can invest in a variety of mutual funds and other investments, or an online brokerage where you can make inexpensive individual stock trades. If you like a combination of these features, then consider a company like Scottrade, which offers a discount online brokerage, and also has individual branches where you can meet with a broker to discuss your investment needs.

Best places to open a Roth IRA. Here are some of the more popular places to open a Roth IRA.

Questions to ask before opening your IRA

  • Is there a minimum initial investment to open an IRA?
  • Are there minimum contributions?
  • What types of fees are charged and how much are they?
  • Can fees be avoided with minimum account balances or by receiving electronic statements?
  • Does the company offer option to make automatic contributions?
  • Which investment options are available? Stocks, Bonds, Mutual funds, ETFs, CDs, other?.

You should be able to get the answers to most of these questions online, unless you are opening an account with an independent financial planner, who may or may not have this information online. If the information is not readily available online, give the financial institution a call and ask for an information packet before opening an IRA. It’s a good idea to review the fees and other details prior to opening your IRA; that way you have a good idea of what kind of fees and other expenses you can expect to pay.

All things being equal, go with the company or broker you feel most comfortable with. And if you later decide that you don’t prefer the financial institution where you opened your IRA, you can always transfer it to another financial institution. The brokers there will be happy to help you fill out the paperwork.

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Best Discount Brokerage Firms

by Patrick on October 27, 2009

The online brokerage community has grown by leaps and bounds in the last few years, which is great for investors who like to participate in online stock trading. The competition has forced innovation, cheap online stock trades, and additional features such as educational and training centers, free webinars, chat rooms and forums, social networking, free tax software to track gains and losses, and more. Not all of these features are available at each online brokerage, and some stock brokers offer better value than others. This online discount brokerage comparison chart will give you some basic information on pricing structures, and below the comparison chart are some unique features about each of these online brokerage firms. Hopefully you can use this information to find the discount online brokerage that is best for your needs.

Best online discount brokerages

Discount Brokerage Cost Per
Stock Trade		 Cost Per
Options Trade		 Reviews
Scottrade $7 $7 + $1.25 Scottrade Review
TradeKing $4.95 $4.95 + $0.65 TradeKing Review
E*Trade $7.99-$12.99 $7.99-$12.99 + $0.75 E*Trade Review
Zecco Trading $4.50
*(up to 10 free)		 $4.50 + $0.50 Zecco Trading Review
tradeMONSTER $7.50 $7.50 + $0.50 tradeMONSTER Review
OptionsHouse $2.95 $9.95 OptionsHouse Review
ShareBuilder $1-$9.95 $9.95 + $1.50 ShareBuilder Review
OptionsXpress $9.95-$14.95 $12.95-$14.95 OptionsXpress Review

Discount Brokerage Features

Each of these brokers has some features that set it apart from the others.

Scottrade: Scottrade has 25 years of experience and one of the best reputations in the brokerage industry. The $7 trades are right in the middle of the price range out of these online brokers, but Scottrade is the only discount brokerage on this list featuring brick and mortar offices where you can visit a broker for face to face meetings. No maintenance or inactivity fees, low stock trades, free online workshops, the Scottrade community, research and educational tools and tax tracking software make Scottrade a great fit for day traders and the casual investor alike. Scottrade will reimburse new customers up to $100 to transfer their holdings to Scottrade. For more information, or to open a Scottrade account, visit http://www.scottrade.com/.

Open a TradeKing account todayTradeKing: TradeKing is a personal favorite of mine. They have a slick and easy to use interface, cheap stock trades, an exceptional learning center, free webinars, free access to Maxit Tax Manager to track your gains and losses, and more. TradeKing’s pricing structure is among the best in the business for discount stock trades, including for investors who prefer to trade options. TradeKing also offers to reimburse new customers up to $150 to transfer their assets to TradeKing. For more information, or to open a TradeKing account, visit http://www.tradeking.com/.

E*Trade: E*Trade is offers a full-service brokerage firm and an online bank which makes it easy to link accounts and transfer funds to and from. E*Trade has won numerous awards for both their brokerage services and their online savings accounts. While their trades are not the cheapest of the listed brokerages, they offer a wide array of services and features not found with many other online discount brokerages. New customers can get 100 free trades when they open a new Power E*TRADE accounts and fund it with a $1,000 minimum deposit within 60 days. For more information, or to open an E*Trade account, visit https://us.etrade.com/e/t/home.

Zecco Trading: Zecco burst onto the scene a couple years ago with unlimited free stock trades. Though that business model didn’t last, you can still get up to 10 free trades per month at Zecco if you make a minimum of 25 trades per month, or maintain a minimum account balance of $25,000. Zecco also features an online community, educational services, and premium services. For more information, or to open a Zecco Trading account, visit http://www.zecco.com/.

trade-monstertradeMONSTER. tradeMONSTER is one of the newer online brokerages, but they have won several awards since their launch in 2008. One of tradeMONSTER’s more prominent features is their award winning user interface which allows the user to customize it to his specific tastes. tradeMONSTER features streaming stock prices with no additional charges or trading minimums, which is a rare feature among discount brokerage firms. The streaming information is a nice touch that removes the need to continually refresh the page for current prices, news and trends. For more information, or to open a tradeMONSTER account, visit https://www.trademonster.com/.

100 Free Trades. Visit OptionsHouse.com TodayOptionsHouse. Options House offers the lowest prices for a standard online stock trade out of the brokerages listed in this review. A standard stock trade only costs $2.95 and options trades are a flat rate of $9.95. OptionsHouse was rated #1 by Barron’s in user experience. This is a great brokerage for investors who are concerned with cost per trade.  While options traders may be able to find a lower average cost based on their trading habits, OptionsHouse scores points for their user interface, software, and other features, making them a solid option for investors of all types. OptionsHouse boasts no maintenance fees, volume requirements, monthly minimums, or additional charges for broker assisted trades. For more information or to open an account, visit: http://www.optionshouse.com/

ShareBuilder- Welcome pageShareBuilder. Buy and hold is the mantra of many investors, and that is the business model employed by ShareBuilder. Trade prices range from as low as $1 if made with an automatic purchase plan, up to $14.95 for real time trades. Most investors will fall in the middle of this price range, with all customers being eligible for automatic trades as low as $4 each without any additional fees, minimum trade requirements, or account minimums, making ShareBuilder an ideal brokerage for methodical discount trading. ShareBuilder offers an educational and training center and a variety of premium features. ShareBuilder is owned by the same company that owns ING Direct, which makes it easy to link accounts. For more information, or to open a ShareBuilder account, visit http://www.sharebuilder.com/.

optionsXpressOptionsXpress. OptionsXpress has a variable pricing schedule which drops when you makes 10 trades in a quarter. OptionsXpress has no inactivity or maintenance fees regardless of how much you have in your account, and does not charge for streaming quotes or standard withdrawals. OptiosnXpress offers free webinars, free trading tools, free advanced research and the option of a personal coaching program. You can also get up to $100 when you transfer your stock broker account to OptionsXpress. For more information, or to open an OptionsXpress account, visit http://www.optionsxpress.com/.

Which discount brokerage is the best?

As you can see by this comparison chart, there is a wide range of prices and features with these brokerages, which should cover just about anyone. I recommend reading about how to evaluate online brokers and visiting these sites to determine which online discount brokerage is the best for your needs.

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