Debt looks a lot of different ways for different people: credit cards, mortgages, student loans, car payments, you name it.
And whether you’ve done the math and have seen the numbers or you know in your gut that you don’t want to pay on your debt forever (or what feels like forever), there’s a chance you’ve thought about paying down your debt quicker than normal.
I decided to pay down my debt early. I did the math, made a plan and plugged along to make a huge dent in my debt (without sacrificing my social life, mind you).
For me, the benefits of paying off my debt early outweigh the alternative — you know, like, paying the minimum on everything for years, carrying a mental burden of owing other people money.
Related: Choose Your Own Adulthood
Why I Decided to Pay Off My Debt Early
- I’m saving myself years of being in debt
- I’m saving thousands of dollars in interest
- I’m gaining flexibility in my monthly budget (aka, my cash flow) for Future Allea to spend money how she wants
Paying off my debt early will help me reach my big, financial goals faster, while saving myself thousands of dollars in interest, as well as years of having debt.
But remember, I’m all about striking a balance between debt repayment and having a life. That’s very important for your mental health — and friendships.
I’ll explain my reasoning, eh?
Early Debt Payoff Means Saving [Literally] Years of Being in Debt
I’ve been paying down my student loans since February 2012 — some federal, one private. According to the typical standard repayment plan, I’m scheduled to pay off my federal student loans by 2022 — aka, forever away.
People will be living in space by then. Zenon too.
(Surrrre, maybe I’m exaggerating, but commmme on, I can’t even image what 2022 will be like.)
In addition to my student loans, I took out a 5-year car loan in June 2015. I signed up for that car loan myself, and within 7 months, I really wished it was gone. According to the standard repayment plan when I took it the loan, it’d be paid off by 2020.
If I keep going with the standard repayment plan for my car and student loans, I’ll owe other people a minimum of $400 for five more years, until my car is paid off — and then I’ll still have $200 monthly student loan payments for another 2.5 years.
I’d still be in debt when I’m 33.
Thinking of it that way, I realized that there are a lot of other things I’d rather spend my money on when I’m in my 30’s than student loans and car payments (uh, hello travel).
When I did the math (using this calculator), it wasn’t just to see how much interest I’d save or which loans to pay off first — I wanted to see how much of my time I could “get back” from my debt.
I did this by adjusting the minimum payment in the calculator. Like, “hmmm, how much faster could I be debt free if I put...an extra $20/month toward my debt…”
Instead of mindlessly paying the minimum payments until I’m 33, I’ve made a different plan. With my current repayment goals, I will be debt-free by 29. That’s four years sooner than the original plan — four years of not owing payments for a car or student loan like originally planned.
It’s practically time travel. Or magic.
Paying Off Debt Faster Saves on Interest
What I love about repayment calculators is how easy it is to see the total amount of interest you’ll owe over the years, depending on your debt repayment schedule. By tweaking the minimum payment amount, you’ll see the “total interest paid” number change — either it’ll increase or decrease — which can be really motivating!
I like saving money.
According to my original repayment plan for my student loans, I would have paid over $6000 in interest alone. Add that to my principal balance of $22,087, and I’d actually end up paying around $28,250 total.
By paying an extra $50 a month toward my loans, I’d pay closer to $4310 in total interest over the life of the loan — that’s a savings of $1,863 than if I paid just the minimum loan payment!
Extra payments are super helpful because that means you’re putting more dollars toward the principal balance — and it’s the loan principal that determines how much interest will be added to your loan balance each month.
The more interest that adds up, the longer it’ll take to pay off the loan, because you’ll need money down to pay off the principal and interest completely.
See if this makes more sense:
paying down the principal = paying less in interest = paying less money in the long run = paying off the whole loan faster
Of course, I got the debt-repayment bug and am paying more than that each month, so I’m saving even more on interest! You can read all about my big repayment goals from 2016 here.
Also, back to time travel, by paying an extra $50 to my loans each month, I’d pay off my debt TWO years sooner!
Finding $50 per month in your budget is easier than you think. A little change in your spending, plus being proactive in paying down your principal early, can save you loads of money on interest.
If you’re right out of college, I’d recommend making your monthly student loan payments a little more than what’s required — even if it’s only $20 to $50 extra — and you’ll see a big payoff over time!
As much as I’d like to pay off my debt tomorrow, I would much rather make reasonable minimum payments based on what I can handle in my budget, versus breaking my neck trying to save on interest. I’d rather take 24 months to pay off a loan and still have a life, than try and knock it out in 18 months.
It’s completely up to you. For me, striking a balance is what I recommend in my coaching sessions. It’s how I choose to go about it with my own debt too. It might take a little longer, but you have to weigh your priorities and go from there.
If you’re aware of your financial situation, proactive with paying down your debt and making responsible and intentional choices with your money, you’re going in the right direction.
Gaining Flexibility in My Monthly Budget
I base my budget on my monthly income. What comes in from my paychecks each month funds my entertainment, lifestyle and living expenses.
My budget includes responsible things like being able to pay my utility bills, car maintenance and vehicle registration, while also saving up for things like travel, a new dress or buying gifts for friends.
I have a limited amount of income, just like everyone else. (Even Taylor Swift has a finite number of dollars, you guys. We’re just like Taylor.)
What comes in and goes out of your budget each month is called your “cash flow.” And when $400 of that cash flow is wrapped up in paying student loans or car loans (like it was for me), it makes it harder to save up for future things.
For instance, some day I’d like to buy a house. I’d also like a dog. Both of those things cost money — and they both continue to cost money, because house things break and dogs need food. I’m going to need money in my monthly budget to take care of these expenses.
I look forward to the day I don’t owe my regular monthly loan payments. Someday, I’ll get to spend that $400 each month how I’d like to spend it. Perhaps I’ll buy a dog and part of that $400 will go toward dog food, vet expenses, short-term boarding, toys or extra treats.
Or, rather, if I’m not paying $400 toward loans each month, I could lump that money in with what I’m currently paying in rent, so I could afford a mortgage.
When my loan payments are a thing of the past, I’ll probably sock that $400 a month away for a while, building up my emergency fund. Then save up for a house down payment. And then maybe I’ll get a dog.
Since my money won’t be tied up in owing other people required payments each month, I can spend that money how I want.
If at that point I want to buy a house, I’ll be in a much better position to do so. My monthly cash flow would be freed up to purchase a house with confidence, knowing I could afford a mortgage, since my monthly funds won’t be tied up in car and student loan payments.
I want to pursue home ownership with freedom, not unnecessary stress. And who knows, maybe I won’t buy a house, but it’s the idea that I could which motivates me to pay off my debt early.
Related: Choose Your Own Adulthood
What’s your “Why”?
For you, it might not be a house. Maybe you want to travel uninhibited or start a business or have the flexibility to move or freedom to switch jobs (even if that means lower pay).
Sure, you can pay toward your student loans, take out a car loan, bear the costs of starting a business and carry a mortgage all at the same time — but that’s just too much for me. I draw the line for myself, and you can too.
Have you thought about paying off your debt early? Share with us in the comments: “What’s your ‘why’?”