Save a Ton by Paying More

There are as many opinions on how to get out of debt as there are people selling ebooks, debt counseling services and get-out-of-debt coaching programs on late night TV. The fact is that if you have a little discipline and understand basic financial principles, you can get out of debt yourself, and quickly. Here’s something you may find interesting that will help you decide which debt to payoff first, and why.

For our example we’ll say we have a $5,000 debt, maybe it’s a car loan. Here are some interesting facts. (I’m going to round the numbers off to make the example a little easier to read.) If your debt is at 12% interest and you make sure to pay only 2.5% of the original amount each month, you’ll pay off the debt in about 52 months. If you increase the principal pay down to 3% per month, you cut your payoff by 11 months to 41 months total. If you pay 5% of the original principal each month you cut your pay off by 29 months to only 23 months. If you pay 10% extra each month, you cut your payoff by 41 months to only 11 months.

What if the debt is at an even higher interest rate, like a credit card? The savings get bigger fast. If your credit card is at 23% and you pay down the 2.5% of the original principal amount each month, your payoff will take 81 months. But if you pay 3% of the original principal each month, you pay off in 56 months. A 5% monthly principal repayment pays off the debt on only 26 months. And a 10% monthly principal payment pays off the debt in 12 months. Wow, what a difference!

If you are willing to exercise the discipline and make the sacrifice to pay off your debts quickly, you will reap huge benefits. Not only will you remove these obligations and their associated headaches, hassles and stress, but in the process you will learn to budget correctly, and then when the debt is paid off, you now have available funds for investment, and you have much more time to let it grow to meet your long-term goals. The bottom line is simple: the best investment most people will ever make is in paying off their debts! If you can’t earn an interest rate equal to the amount charged on the debt, plus the equivalent of your combined income tax bracket, then you are better off paying off the debt first, and investing later. It’s not brain surgery, but some people treat it that way. If you want financial security then do not encumber your life to creditors. Here’s wishing you quick and complete payoff of all of your debts. Good luck.