Financial Matters

Is Your Bucket Leaking?

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Ever try to fill a bucket with a leaky bottom? No matter how much water you put in, the bucket never seems to get full. If you do not know the bucket has a gaping hole on the bottom then you might wonder why it is not filling the way you expect. It might be getting full, only slower than anticipated. Or, if the hole is large enough the water might not ever start to rise.

If you know the bottom of the bucket has holes then you would understand why the water level is slow to rise, if at all. You would have a different expectation than the person who thinks their bucket has a solid bottom. Filling a bucket with water or filling a bucket with money, either way it is important to check the bottom for leaks!

Leaks in your financial bucket can come from many sources but one of the most common and damaging is consumer debt. Common forms of consumer debt are credit cards which can drain your financial bucket as quickly as it is being filled.  According to the 2016 American Household Credit Card Debt Study credit card debt in this country totals over $784 billion with the average household credit card debt totaling $16,883. 


What does this mean for the average household? According to a rate survey by in 2017 the national average for credit card interest was 16.51%. If a household is not reducing the credit card balance then the interest paid each year on the $16,883 is $2787! That interest is money going to the credit card companies, in other words, leaking out of your financial bucket. Does the credit card company want you to pay down your debt? Of course not, because it would lose out on the $2787 revenue each year.

If a household were able to pay off the $16,883 balance by the end of the year there would be two immediate benefits. No longer would the monthly payment need to be made which increases the monthly household cash flow, but the household would no longer be “leaking” $2767 a year. If that savings were tracked it could accumulate and over 5 years would be approximately $14,000. What could be done with an additional $14,000 in your bucket? 


Of course, the reality for most families is paying off the credit card balance once it has grown is quite difficult especially if only minimum monthly payments are made. Credit card companies will state a minimum monthly payment required but that payment will do little over time to reduce the principle balance. According to a minimum payment is calculated as a percentage of the total current balance, or as all interest plus 1 percent of the principal. The calculation varies from credit card company to company. For a household making minimum monthly payments only a small percent of the principle will be reduced month to month.

For example a $1000 purchase is put on a credit card charging 16.5% annual interest. The first bill comes with a minimum payment of approximately $15.00. The monthly interest would be $13.75 and an additional 1% of the balance would be about 83 cents a month. To make the math easy let’s assume the minimum monthly payment is $15.

If a household pays only the minimum it will take about 15 years to pay off the $1000. At the end of 15 years not only will the $1000 be paid but an additional $1729 in interest. That means your $1000 purchase would have really cost $2729. Something to consider when making minimum payments only. 

What if in addition to the $15 minimum an additional $10 per month is paid? That would reduce the time to pay off the $1000 balance to 5 years and the total amount of interest paid would be reduced to $475. The leak is the interest paid over time; in this example $1254 would have leaked out of your bucket over the next 10 years. Reducing the leakage can be done by paying more than the minimum each month.


Another problem for households is a combination of making minimum payments only while adding to the balance with new charges month-to-month. This combination will cause the balance to creep upward despite monthly minimum payments. When households add new purchases and do not pay off that purchase the following month, the actual cost of the item is compounded by the months of additional interest causing households to get into an increasing credit debt cycle that is difficult to stop. 


How should a household manage credit card debt? Ideally purchases made each month should be paid off on the next bill. By doing so, minimum or no interest will be paid to the credit card company. Plugging a leak. If that is not possible, pay as much as possible against the purchase. Beware of minimum payments only. Remember minimum payments ONLY will maximize the amount of interest paid and elongate the period of time to pay off the debt.

As families try to accumulate and save, efforts can be thwarted as interest is being paid to the credit card company. Filling a savings account while money is leaking out the bottom via credit card payments is a phenomenon occurring in millions of households, yet few could identify the leak. The frustration of not seeing the savings balance increase can be due in part to the unseen leaks at the bottom of the bucket. As the credit card interest leak slows and possibly stop the level in your bucket can start to rise. 


  1. Total the amount of credit card debt you owe and note the associated interest rates.
  2. Pay more than the minimum due monthly, focusing on the higher interest rate cards first.
  3. Be careful not to add more credit card debt while paying the debt down.
  4. Consider balance transfers from higher rate cards to lower rate cards.
  5. If transferring balances, understand the balance transfer fees and terms for 0% transfer offers.

1. The minimum payment calculation varies from company to company. This payment is an example and not intended to represent the actual minimum payment due on an existing credit card with a $1000 balance. 

Asalyn Coachman is a Registered Representative of and offers Securities through The O.N. Equity Sales Company, Member FINRA/SIPC, 39395 W Twelve Mile Road, Ste. 102 Farmington Hills, MI 48331 (248) 482-3600. Investment Advisory Services offered through O.N. Investment Management Company. Financial Architects, Inc. is not affiliated with The O.N. Equity Sales Company or O.N. Investment Management Company.

Asalyn earned a degree in Economics from Harvard University and a law degree from the State University of New York at Buffalo. She lives in Lake Orion with her husband and two children where she is active in organizations such as the Harvard Club of Eastern Michigan, Lake Orion Schools, and the Baldwin Center of Pontiac, Michigan, where she serves as board president.

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