Debt management is an important part of personal financial planning, as it can be a useful way to increase your purchasing power and build a credit history, which will help you obtain financing in the future. However, too much debt can create a significant financial burden that can be difficult to overcome.
Instructions
1. Review the master promissory note you signed with your lender when you initially took out your loan. If you have credit-card debt, the master promissory note is the same as the terms of agreement for the credit card, telling you how much principal you owe, what the interest rate on your debt is, and how long you have to repay the loan.
2. Use Microsoft Excel to determine the monthly payment you need to make on the debt. Enter the following formula into a cell in Excel: =PMT(rate,nper,pv). "Rate " is the interest rate you owe on the debt, "nper" is the number of payments, and "pv" is the amount of principal you owe.
For example, suppose you have a $50,000 loan with a 6 percent interest rate that requires you to make monthly payments, and the length of the loan is 10 years. In this case, your monthly payment equals =PMT(6%/12,120,50000), or $555. Note that you must enter "6%/12" for "rate" in the formula because 6 percent is the annual interest rate, and you are required to make monthly payments.
3. Copy your calculated monthly payment down 120 rows (one for each monthly payment you are required to make) in the same column in Excel. Multiply the monthly interest rate (in this case 6%/12 equals .5 percent) by the beginning balance to determine how much of your first payment goes to paying off interest. In this case, the amount of interest you are paying in the first payment is $50,000 multiplied by .5 percent, or $250, while the amount of principal you are paying off in your first payment is $555 minus $250, or $305. Subtract this amount of principal from the beginning balance to determine the ending balance of principal after you have made the first payment. In this example, the ending balance is equal to $50,000 minus $305, or $49,695.
4. Copy these calculations down the 120 rows in Excel. The last row should reflect an ending balance of zero, since you will pay off the entire amount of debt in 10 years, or 120 monthly payments.
As you pay off principal each month, the amount of your payment that goes towards interest declines. This spreadsheet allows you to determine how much interest you still owe on the loan, which illustrates how much money you would save by paying off the loan early.
Tags: interest rate, first payment, monthly payment, amount principal, ending balance, monthly payments