Personal Finance 101: Citibank Gets All My Money
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Personal Finance 101: Citibank Gets All My Money

In starting the journey to financial freedom, it is imperative that you are not burdened with "doodads", as Robert Kiyosaki called them. An example is credit card debts.
I was running errands the other day and since I don’t have a car, I usually ride the train or a cab. Some taxis here in my part of the world can be shared. So the other day, I was in a taxi I shared with three other girls. When we were passing by Citibank’s head office, one of the girls said “Citibank gets all my money!

When I heard what she said, I couldn’t help thinking this girl is on her way to becoming broke no matter how large her paycheck becomes unless her attitude drastically changes. Her attitude towards personal finance in general and money in particular dictates whether she will move on to financial freedom or be in the rat race the rest of her life.

As much as I can, I want to help people achieve financial freedom. Financial freedom means not worrying about where to get the money to pay bills because you’ve overspent your budget (e.g., you splurge on that new shoes though clearly you couldn’t afford it, rather you used your monthly rent money for it). Financial freedom doesn’t necessarily mean being filthy rich, but who wouldn’t like that?

Now, let’s go back to “Citibank gets all my money.” I bet that some of you can identify with that girl albeit it isn’t Citibank. It could be American Express? Just change Citibank with your credit card issuer and we’re all set.

The key to an auspicious start of your financial freedom journey is to pay your credit cards first. Unless you turn out to be a super star investor with consistent returns on investment above the effective interest rate charged to you for your credit card, you are better off paying your ‘bad’ debts first rather than investing the money. The following example will show why. Note that there are two examples presented: 1) US and 2) Philippines.

US Example

Let’s assume the following:

  1. $1,000 total credit card debt
  2. 15% annual percentage rate or APR
  3. The credit card company does not use the OCC formula in computing for the minimum payment, but rather uses 4%. This rate you have to confirm with your issuer.

Now, to get your minimum payment for a given month, you multiply you credit card balance by 4%. Thus for month 1, the total minimum payment is $40. $12.50 of this goes to the payment of interest, while only $27.50 is used to reduce your credit card balance. The table below shows the principal and interest components of the first 12 monthly payments given the above information.

If the minimum payment is strictly followed, it will take you about 437 months and a total payment of $1,455 to totally pay your balance. 437 months is 35 years and 5 months!

Philippine Example

Let’s assume the following:

  1. P50,000 credit card balance
  2. 3% interest per month on outstanding balance
  3. P500 minimum payment of 2% of total balance whichever is higher plus interest charges

This means that in Month 1, you need to pay P1,500 in interest for a total minimum monthly payment of P2,500 as shown in Table 2. Given these assumptions, it would take you about 7 years and 1 month to pay off your balance and you have paid a total of P106,625. That’s P56,625 more than what you originally owe!

The above two examples show that servicing credit card debts costs so much more.

Paying your credit card first before you invest is thus a prudent advice. I further suggest that you take the time build up on your knowledge and skills in investments until such time that you are no longer burdened with credit card debt payments. Then, you can begin building your nest egg.

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Comments (10)

very sage advice, clear off those debts first, and then don't make anymore

Thanks Carol. I agree, stop making new credit card debts is very prudent indeed

best bank

Citibank, as one of the largest banks in the world, can provide you with virtually all your banking and finance requirements

Personal Finance 101: Citibank gets all my money

Good info. I do think it is wise to build up an emergency fund however, so that if there is an emergency you won't have to build your credit card balance back up again.

Hi Rae, you're definitely right as to the importance of the emergency fund

Getting out of debt is freedom, thank you for this.

Thanks John. Good luck on your journey to financial freedom

This is a very good article. Something to think about!