Personal Finance Advice

You may have noticed a line on your payment coupons for your mortgage or car loan that says, “Principal Payment.” You may have wondered what exactly a principal payment is, and how it differs from the regular payments you send in every month. Doesn’t all the money you send in for payments go to the same balance?

Yes, the money does go to the same balance, but principal payments actually designate where the payment goes. Here is how your usual payments work, unless you have an interest-only loan: Your payment is received and applied to your balance, but it is also applied to the interest your loan has accrued since the last payment was received. So if you have a remaining balance of $800, and send in a payment for $50, you might think that your remaining balance will become $750 after the $50 payment, but unless the payment is a principal payment, this won’t be the case.

Principal refers to the actual balance that you owe without any additional interest or fees attached. If you did not pay interest and fees in the last statement cycle, then these amounts become part of your principal balance too, resulting in you paying interest on previous interest. This is one of the ways creditors make their money. Paying interest on interest can result in a lot of money.

Your payment is comprised of two parts: principal and interest. If you have a mortgage loan, there may be additional parts to the payment including taxes and insurance. When you send in a payment, money is distributed to both principal and interest unless you specify otherwise. Your regular monthly payment should be this way because you can’t just choose to not pay interest, but a principal payment is the way to go if you are making extra payments. Why? The more you pay down on principal, the less overall interest you will wind up paying. This is because the amount of interest you pay is directly related to your principal balance. If your principal balance is $12,000, you pay interest on that full $12,000. Pay that principal balance down to $10,000, however, and you’re only paying interest charges on the $10,000. It’s a very basic concept.

Whenever you make a principal payment, you reduce the balance more substantially than you would if you allowed the payment to be applied to both principal and interest. If you send in an extra payment, specify that you want it applied to the principal balance otherwise your lender will probably apply it to both. If you send in an extra payment in the hopes of skipping the next month’s payment, however, a principal payment won’t work because it won’t replace your next payment. If you don’t realize this, you might wind up delinquent on your loan.

Try to make additional principal payments when you can. These specific payments will shorten the amount of time it takes you to pay off your loan and will reduce the overall cost of the loan. 

Insurance can protect you in the event of a potentially costly emergency. Car insurance will help you repair or replace your vehicle if you are in a collision, renters insurance will provide you with the money necessary to replace items damaged or stolen in a home or apartment that you rent, and health insurance helps pay for the costs associated with medical care. There are plenty of different insurance policies available for a variety of needs, and any review of your personal finances should include a thorough review to make sure your insurance needs are sufficiently met.

What happens when you can’t afford insurance? Some financial experts make the argument that people cannot afford to not have adequate insurance because of the financial problems that can result from getting into an accident without insurance or some other unexpected instance that should be covered by an insurance policy. On the other hand, if a family is already struggling to make ends meet, they have to pick and choose what expenses they can afford and what expenses are just too costly. If the choice is between paying the rent or paying health insurance premiums, most families are going to choose to keep a roof over their heads instead of paying an insurance premium, no matter how important it is to have insurance in place.

Make no mistake about it; insurance is an important expense and should be high on your list of financial priorities. If you are in a tight financial situation, it is usually a better idea to reduce your coverage instead of getting rid of it entirely. For some people, raising the deductible or lowering the coverage is sufficient to make the insurance affordable during a temporary financial setback, but coverage should be brought back up to adequate levels once the financial emergency subsides.

This isn’t an option for some people who simply cannot afford to purchase insurance at all. If it is simply impossible to squeeze your budget tightly enough to cover the cost of monthly insurance premiums for health or dental insurance, consider these alternatives:

Get help. There are assistance programs available for people who cannot afford health coverage. Some states offer impressive programs -mainly for children- that ensure people get preventative and routine care despite their inability to pay for the services. If you cannot afford health care, look into the federal, state, and local assistance programs that may be available to you and the rest of the people in your family.

Buy a discount plan. Dental and vision discount plans are popular as both replacements for costly insurance or as additional coverage for people who have coverage but with high deductibles. With these plans, you pay a small annual or monthly fee and then receive substantial discounts for care when you use an in-network provider. Some discount plans are better than others, so be sure to do some comparison shopping before settling on one company over another.

Ask for a payment plan. If you know that you will wind up paying for health care out of your own pocket, ask about paying in installments. Some medical providers are more than happy to discount the cost of services for patients paying cash, and some will further reduce the cost of services based on the patient’s income. There are many hospitals with staff designated to assist people who do not have insurance and who need help with figuring out a way to pay medical bills, so utilize these people if they are available.

Don’t skip needed health care just because you cannot afford to pay medical insurance premiums every month because this may wind up being an even costlier situation if your health deteriorates from lack of medical care.   

Some couples decide to keep their finances separate even though they are legally married. For some couples, it works. They keep their bank accounts separate, they have their own credit accounts, and they don’t share their money at all. They split the bills, either equally or in some other way that they both agree to. This can work well if both spouses have sufficient incomes, and can sometimes work if there is only one substantial income but the other spouse receives a set monetary amount from the earning spouse to cover bills and expenses.

Why do couples do this? Some couples just aren’t comfortable combining finances, especially if they are older and have already established their own financial standing. Another consideration is that some people simply do not want to lose the ability to have their own money and their own credit standing. This can be a viable concern because not having any credit in your own name can make it difficult to obtain credit down the road.

There are arguments against keeping marital finances individual to each person. Many people argue that when two people marry, they are supposed to combine every aspect of their lives and function as a whole unit as opposed to functioning as two parts within a unit. It may also be true that a couple can have much more success financially if they work together instead of separately with their money. There is also the consideration that one spouse may waste money with reckless abandon and the other spouse may not find out until that spouse is in serious financial trouble because of the financial secrecy the couple has.

Some couples have to keep their finances apart for viable reasons, such as when one person has flawless credit but the other person has a credit report riddled with delinquencies and other negative items. Applying for credit together in this instance would not make much sense because they would pay higher interest rates because of the one spouse’s horrible credit. In this instance, keeping finances separate -at least the credit portion of finances- works and makes sense.

Just because finances are separate, however, it does not mean that couples should be absolutely oblivious to where all the money is going. Each partner should know what the other person spends money on, what kind of bills the other person has, and how much money is sitting in the bank. The reason for this is obvious; even when finances are separate, the money situation of each individual affects the marriage as a whole.

This does not mean that a husband buying a shirt must report the purchase to his wife, nor does it mean that the wife should show an itemized list of spending to her husband after she returns from shopping. Instead, each person should be allowed a small review of what the other person’s money is doing. Does each person have enough money in the bank to cover bills? Are all the bills paid on time? How much debt does the other person have? These are all valid questions that should not be a mystery to either member of the marriage.

You don’t have to combine finances when you marry, although in many instances it can simplify things greatly. If you do decide to keep your finances separate, don’t allow this to turn into something where secrets abound within the marriage whenever the topic of finances comes up.