Personal Finance
Card interest, savings goals, emergency funds, employer matches, and which debt to pay first.
Pen and paper is fine · no calculator needed why?
Opens at level 24. You're level 1. You can read and practice here now.
the idea
A card's annual rate is charged monthly as one-twelfth of it, so an 18% card charges 1.5% a month on the balance.
Saving toward a goal, count only the gap still to fill, and round the months up: part of a month still leaves you short. Asking how long savings last, round down: a month you can't fully pay doesn't count.
An employer match covers your contributions only up to its cap. And extra money for debt saves the most interest on the highest rate, whatever the balances.
techniques
Gap, divide, round the right way
- For a goal, find the gap: the goal minus what you have.
- Divide the gap by the monthly saving, and round up.
- For savings that must last, divide savings by monthly spending, and round down.
worked example
You have $2,000 saved and want $5,000. You add $400 at the end of each month (ignore interest). After how many months do you first have at least $5,000?
- Gap: $5,000 − $2,000 = $3,000.
- $3,000 ÷ $400 = 7.5.
- Round up: 8 months.
Answer: 8
Match only up to the cap
- Take the smaller of your contribution and the cap.
- Multiply that percent by your salary: the matched part.
- Apply the match: 50 cents per dollar is × 0.5, dollar for dollar is × 1.
worked example
Your salary is $50,000. Assume your employer adds 50 cents per dollar you contribute, on contributions up to 4% of salary. You contribute 6%. How much does the employer add per year?
- Only 4% is matched: $50,000 × 0.04 = $2,000.
- 50 cents per dollar: $2,000 × 0.5 = $1,000.
Answer: $1,000
One-twelfth of the annual rate
- Divide the annual rate by 12 for the monthly rate.
- Multiply this month's balance by that monthly rate, as a decimal.
worked example
Assume a credit card charges a 24% annual rate, applied each month as one-twelfth of that rate on the balance. This month's balance is $1,500. What is this month's interest?
- 24% ÷ 12 = 2% a month.
- $1,500 × 0.02 = $30.
Answer: $30
watch out for
- Charging the full annual rate for one month. At 18%, a $1,000 balance costs $15 this month, not $180.
- Forgetting the money already saved, or rounding the months to a goal down.
- Matching your whole contribution when it is above the cap.
- Paying off the smallest balance first instead of the highest rate.
practice
Credit card interest this month
worked example
Assume a credit card charges an 18% annual rate, applied each month as one-twelfth of that rate on the balance. This month's balance is $3,800. What is this month's interest?
Answer: $57.00
- Monthly rate = 18% ÷ 12 = 1.5%.
- $3,800 × 0.015 = $57.
Months to a savings goal
worked example
You have $4,800 saved and want $6,000. You add $300 at the end of each month (ignore interest). After how many months do you first have at least $6,000?
Answer: 4
- Gap = $6,000 − $4,800 = $1,200.
- $1,200 ÷ $300 = 4, so it takes 4 whole months.
Emergency fund months
worked example
You have $19,700 saved and spend $9,200 a month. How many full months of expenses does it cover?
Answer: 2
- $19,700 ÷ $9,200 ≈ 2.14, which covers 2 full months.
Employer match
worked example
Your salary is $59,000. Assume your employer adds $1 for every dollar you contribute, on contributions up to 3% of salary. You contribute 1% of your salary. How much does the employer add per year?
Answer: $590.00
- Your 1% is within the 3% cap, so all of it is matched: $59,000 × 0.01 = $590.
- Dollar for dollar, the employer adds $590 a year.
Which debt first?
worked example
You pay the minimum on every debt and have $750 extra each month. The rates are fixed annual rates. To pay the least total interest, which debt should get the extra payment first?
- Student loan at 8% ($29,000)
- Credit card at 27% ($4,000)
- Car loan at 6% ($24,000)
- Store card at 20% ($3,000)
Answer: Credit card at 27% ($4,000)
- An extra dollar saves the most interest where the rate is highest: the credit card at 27%.
- Paying off the smallest balance first can feel good, but it costs more.