It seems there is an assumption out there that everyone in the universe should understand what interest is and how it works.  After counseling hundreds of folks in a mess of debt with no clue how they got there, I promise these concepts are not as widely known as every bank assumes.  Today I’m going to spend some time breaking down (in simplest terms possible) the concept of interest (simple and compounding) and how/why it can work for or against you.  Before you pass out from boredom, what if I told you I could make the next ten minutes worth $55,000?  Read on and I’ll teach you what you need to know to make that true.

What is Interest?

For someone borrowing, interest is the cost of borrowing money.  Usually expressed as a percentage (often measured in an Annual Percentage Rate or A.P.R.), interest is the amount of money you pay over and above the amount you borrowed to have the privilege to get that money and use it for a while.

Last week I shared some ways to becoming a millionaire and I’ll hit that topic from a few different angles in the coming weeks.  This week, I want to give you some simple ways to make the most of the income you already bring in, because if you can cut your expenses, it is pretty much the same thing as getting a pay raise.  Here are five ways to cut those expenses and resources that will help you maximize your income.

Look at Your Paycheck

I am privileged to see pay statements for lots of those folks I counsel.  As we’re reviewing the pay information, I always check to see what things are being taken out before the net (take-home) pay.  There are the usual suspects: federal and state taxes, health insurance, 401k, etc. But every now and then there’s something crazy in there.  I’ve seen everything from allowing the IRS to withhold an extra $500 per payday so you’ll get a big tax refund (which is a bad plan, by the way) to withholdings for some random, unclaimed benefit that the employee didn’t even know he/she had and didn’t want.  That’s money down the drain.  As obvious as it may sound, look over your most recent paycheck stub and make sure you’re not giving away any money you shouldn’t.  If you can’t understand everything on there, visit HR and ask them to explain it.

I preach the value of doing a new budget every single month and how important it is to get in the habit of planning every dollar that will come in. In doing so, I get a lot of feedback dominated by eye rolls and smirks. Apparently a lot of you don’t like to make a plan for your money on paper every month.  And I can’t necessarily blame you.

It is hard, and it takes discipline. It also is IMPORTANT. So when you have to choose between the latest episode of your favorite TV show or doing your monthly budget after a long day of work, the budget is apt to lose every now and then.

That being said, I bet you’d appreciate it if I could give you an easier method to do your budget than pencil and paper. That’s what today’s post is all about, thanks to a question by a reader. Let’s learn to simplify the dreaded budget!