Debt is the American way. Six months ago, you whipped out your credit card again to buy that

state-of-the art computer for little Johnny so he could

get his homework done. It only cost $1500. Or did it?

If it feels like you are sinking into a quagmire of

debt, here’s something else you can do with that new

computer: use it to figure out what things

*really* cost you.

Even if you aren’t a spreadsheet whiz, figuring

out what is really going on with your credit isn’t

difficult. The simple spreadsheet in the figure below can

be the first step in an eye-opening financial exercise.

Our spreadsheet shows two separate situations. The first one shows the dangers of making

minimum payments and what would happen if you

increased your credit card payment. Under Scenario 1, you

input the price of Johnny’s new computer, i.e., $1,500.00 (in parentheses because money you owe

is a negative), the interest rate on your credit

card, 17%, and the minimum payment of $30.00. In

Excel, you format numbers to tell Excel the type

of number. So, you format the dollars by

highlighting the text in the cell and clicking the dollar sign ($)

on the toolbar. Similarly, you format the percentage

rate by highlighting it and clicking the percent sign (%).

Now you get to the fun stuff. You want to find

out how many payments it would take to pay off that

new computer if you made the minimum payment. So you put this formula in C9 to calculate it:

=ROUND(NPER((C6/12), C7, C5),2)

The ROUND function rounds the payments to two decimal places, and the NPER function

calculates the number of periods it would take to pay

off the debt. You divide the interest rate (in cell C6)

by 12 to get a monthly rate. Then you use the NPER function and pass it the monthly interest rate,

the payment (C7), and principal amount (C5) to get

the number of periods it would take to pay off. With

our sample data, that result is 87.59, which is more

interesting if you find out how many years that is. So

in cell C9, you divide that number (C8) by 12 and round it to two decimal places. You learn it

would take more than 7 years to pay off Johnny’s

computer! If you multiply the number of payments (C8)

times the payment amount (C7) you find Johnny’s

computer actually cost $2,627.70—$1,100 more than

you *thought *you paid for it! The second column

shows what happens if you were to double the payment.

Okay, so you decide that seven years is too long

to pay off the computer and even 2.59 years is

depressing. So the next section calculates how much

you have to spend to pay off the debt in two years

and one year. To do this, you use this formula in C16:

=PMT((C14/12), C15, C13)

You use the PMT function and pass it the

interest rate (the APR in C14 divided by 12), the total

number of payments (C15), and the principal (C13).

You discover that to be free of this debt in two

years, you’d have to pay $74.16 and only about $200 in

interest. Paying in one year looks even better.

The moral of the story is paying minimum payments won’t get you out of debt. If you get

depressed, remember the reason you got in debt was that you spent more money than you had. And

the only way to get out of debt is to do the reverse.