This past week I was chatting with one of FinancialFluency’s followers and asked him for suggestions about a future topic he’d like for me to cover. He shared that he has credit card debt he’d like to payoff as fast as possible and he’d like to learn more about the impact it will have if he dedicated $50 more a month towards the debt. First off, kudos to you for wanting to make an extra effort to bring down your credit card debt!
Having debt is extremely costly and your interest rates will vary depending on whether they are secured or unsecured loans. It’s crucial to set a game plan to bring down your debt as fast as possible. As you may have read from my other posts, you can either make more money OR live below your means and find ways to cut expenses. Just recently I found 3 ways to cut my expenses (Uber Eats, Cable TV, cutting coffee) and I’m projecting to save $2,300 a year!
So, I’m going to play out 2 scenarios…one is if you have a $250,000 mortgage and the other is if you have $5,000 in credit card debt. In these scenarios, I’m going to calculate for you the approximate savings you will have if you dedicated $50+ more monthly to pay off your debts.
You have a $250,000 mortgage. The terms are 30 years at 4.25% interest rate. Based on an amortization calculator I used, your estimated monthly principal and taxes will be $1,230. By the time you payoff your mortgage you would have paid $442,746…that’s nearly double the size of the house you just purchased.
So how far can an extra $50/monthly save you? Well, an extra $50 bucks would shave approximately 2 years off of the mortgage and save you $15,438 of interest! So what if we took this a step further?
FYI – if the graph is a bit hard to read, the green line is the balance over time and the yellow line is the cumulative interest.
An extra $100/monthly would shave approximately 4 years off of the mortgage and save you $28,332 of interest. NICE!
So, now I’m really curious if we doubled that to $200 in extra payments. An extra $200/monthly would shave almost 7 years and save you $48,722 of interest!!
According to Nerdwallet, the average American household has about $16,000 in credit card debt. But for this scenario, lets just say you have $5,000 in credit card debt and an interest rate 24% APR (which is ridiculously high, but not unheard of).
If you set yourself a goal to pay this debt in 3 years, or 36 months, you will pay about $200/monthly. At this rate, you will be paying close to $2,000 in interest. Ouch!
By paying $50 bucks extra monthly, you will reduce pay off time to 26 months and cut your interest to $1,449. That’s a savings of $551!
Now, if you pay $100 extra a month, you will reduce your pay off time to 21 months and cut your interest to $1,143. At this rate you’d save 15 months and $857!
As you can see with both scenarios, it’s a winning strategy for you to commit extra payments to your debts. Debt management is about creating a strategy to get yourself out of the quicksand you’re in and to ultimately become debt free. To make this work, it all comes down to the financial principles I’ve talked about before: Live below your means, Prepare for the hurdles, and Invest in your future. Ah, and don’t forget your written game plan…the budget!