This free online Debt Payment Breakdown Calculator will calculate the principal portion and the interest portion of a payment you are making to a lender.
When you make a payment on one of your debts, a portion of your payment goes to your lender (interest portion), and the other portion is applied to your balance owed (principal portion).
Why is it important to know how much of your payment is going to one versus the other? Because one of the keys to getting out of debt and staying out of debt is to become painfully aware of how much your debt is costing you.
Of course the obvious answer is: Fees that banks charge to lend you money.
Or, one could also define interest charges as money rental fees.
If you are having trouble fighting the urge to buy on credit, here are 4 steps that might help.
1. Visit this calculator each time you make a payment on a debt.
2. When you make the payment, write two checks: one for the principal and one for the interest.
3. Visit the Future Value of Money Calculator and calculate the future value of the interest portion at your retirement age.
4. Using a red ink pen, write the forgone future value of the interest payment into the memo section of your checkbook register.
But here is how I like to define personal interest charges:
An interest charge is a fine for not being born into wealth, assessed by those who were.
Now don't get me wrong. I have nothing against the silver spoons of the world. Instead, my definition is simply one that keeps me from buying on credit (for a good visual watch the movie Matrix and view the machines as being corporate lenders).
I don't begrudge the silver spoons for their inherited mansions, private jets, and luxurious yachts, but I refuse to have their umbilical cords plugged into to my wallet.
I encourage you to take some time to develop an interest charge definition that will keep you from buying on credit. Who knows, if you find one that keeps from buying on credit, perhaps your descendents will be born into wealth.
In order to accurately track your income and expenses, you should be recording the interest portion of your debt payments to Interest Expense, not to the purchased item's expense category.
In the case of credit cards, you simply expense the interest charge that is displayed on your monthly statement and then record each charge to their respective expense categories.
For loans (mortgage, auto, personal, etc.) you can use the debt payment calculator to calculate the principal and interest portions of each payment. The principal portion would reduce the amount you owe, and the rest would be recorded to interest expense.
If you continually record interest to its own expense account, at the end of every month you will be able see how much of your hard earned money is being lost to interest. Most people would be shocked to learn how much of their hard earned income is going to pay the interest charges on their debts.
With that, let's use the debt payment calculator to see how much of your current payment is principal and how much is interest.
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Current balance owed: The amount you still owe on the debt. Due to compounding interest the balance you owe is changing on a daily basis (depending on the compounding interval). Therefore the amount you owe cannot be arrived at by simply multiplying your payment amount by the number of payments remaining. You may need to call your lender to find out the exact amount you owe.
Annual interest rate: The annual interest rate you are being charged by the lender. To calculate how much they get to charge you to rent their money, the lender divides the annual rate by the number of compounding periods per year, and then multiplies by the balance you owe. This amount is then subtracted from your payment amount. What's left is subtracted from what you owe.
Payment amount for current month: The dollar amount of the current month's payment.
Principal portion: The portion of your current payment that will be applied to the principal (reduction in how much you owe).
Interest portion: The portion of your current payment that will be kept by the lending institution.