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Save Money by Paying Your Debt Faster

October 18, 2011 7 Comments

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Paying debt at the minimum rate is not only a waste of time, it’s also a waste of money. You can save thousands of dollars, by paying off your debt faster. It may seem counterintuitive – to pay off your debt faster, you have to spend more money.

That’s true, but you’re only spending the extra money in the short-term, a much shorter period of time compared to how long you’d be paying your debt if you stick with the minimum payments.

Not only can you save money by paying off your debt faster, you can maximize the benefit of paying your debt off faster by investing your payments once your debt is completely paid off.

How Much We Spend on Interest

No matter what kind of debt you have, part of your monthly payment goes toward interest. That portion of the payment does nothing to reduce your payment. So, for example, if you have a $1,000 credit card balance and a 12% interest rate, your monthly interest charge would be about $10. When you make a $50 payment, your balance only goes down by $40.

The other $10 goes toward interest. This happens month after month but on a larger scale if your debt balances are higher.

Let’s say you have $30,000 in debt at an average 14% interest rate and the minimum payment is 3% of the balance. You would pay more than $17,000 in interest by the time you pay off your balance in 20 years.

But, if you increase your payment to $1,000 per month, you would pay about $6,600 in interest and pay your balance off in just more than 3 years. That’s $11,100 on savings just by paying an extra $100 on your debt each month. Naturally, you’d save more money just by paying more toward your debt each month.

How Much Interest You Could Earn

Since you’re already accustomed to missing that $1,000 from your monthly budget, you could easily divert that money into an investment account. Investing $1,000 in an account earning 6% for 13 years, would let you earn about $117,000 in interest. The total value of your investment, including your contributions and the interest you earn, would be $321,860.01 in 13 years. (I picked 17 years because that’s the additional amount of time you would have been paying your debt if you’d been paying just the minimum.)

If you took a safer investment approach and put $1,000 in a savings account each month, you’d still earn more interest than you would have paid to the credit card companies. Over 17 years, $1,000 per month at 1% would earn $18,450.38 interest. Your total investment would amount to $222,450.38.

Do Your Own Calculation

It’s not hard to calculate these scenarios based on your own situation. You just need a debt payment calculator and an investment calculator. Both can be found online using a search engine. Enter your numbers into the calculator and see how much you can save and earn by paying off your debt faster.

This post was written by Eliza Collins, a guest writer specializing in personal finance topics like savings, debt relief as well as credit score improvement. You can read more of her articles at the debt settlement blog.

SB’s Thoughts: I always advice friends about four steps towards paying off debt faster

  • Payoff highest interest debt first
  • Pay more than minimum due
  • Consolidate debt in to a few
  • Create a budget and be within it every month.

What are your strategy to pay off debt faster readers?

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Comments

  1. Krantcents says

    October 18, 2011 at 2:50 PM

    In this economy, there are no investments that yield more than a few percentage points, so you should use your funds to pay down debt.

    Reply
    • SB says

      October 18, 2011 at 11:54 PM

      as much as possible

      Reply
  2. FPT Guy says

    October 19, 2011 at 4:10 PM

    Nice post here SB! I’m a HUGE fan of paying down debt as fast as possible, and never living off of credit cards, but using them to get rewards by paying them off every month.

    Reply
    • SB says

      October 20, 2011 at 7:13 AM

      This is precisely the way you should use your CC. Thanks FPT!

      Reply
  3. UltimateSmartMoney says

    October 22, 2011 at 11:31 PM

    Great point! We should all be focused on paying off our debt as soon as possible. I too have debt that I am currently trying to pay if off. My goal is to pay this loan within next 2 years.

    Reply
    • SB says

      October 23, 2011 at 10:18 PM

      best of luck on that. I believe you’re putting more than minimum due. I hope your blog income could enable to you pay down faster,

      Reply

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