How paying off debt the right way can SAVE A TON of MONEY!!!

If you are in debt you need to think strategically about how you pay your debt down or you could be leaving a large amount of money on the table!

The key idea is to always focus on paying down the debt with the highest interest rates first! Doing this will minimize the interest that you pay over the long run and put more cash in your pocket!

For example let’s say Bob has two loans each for $100,000. Bobs total debt is $200,000 and the rate on the first $100,000 loan is 5% while the rate on the second $100,000 loan is 15%.

Looking at the facts above if Bob has an additional $10,000 each year he wants to pay in addition to the minimum payments he should always allocate the additional money to the loan with the highest rate.

Let’s look at a few examples for the first year:

Example 1:

In this example Bob splits the additional $10,000 equally between the two loans to pay down the principal. Assuming the payment is made the first day of the year Bob will pay around $4,750 on the 5% loan and $14,250 on the 15% loan.

Total interest paid in year 1 is $19,000 in ex. 1.

Example 2:

In this example instead of splitting the $10,000 he applies it all to the 15% loan. Now the interest on the 5% loan would be $5,000 and interest on the 15% loan would be $13,500.

Total interest paid in year 1 is $18,500 in ex. 2.

In the first year just by focusing on paying the higher 15% loan with all excess cash instead of splitting it equally Bob saves $500! This type of savings will continue each year so the potential savings over the total loan term is much more!

The numbers above may not be exact as they are simplified for this article but the savings per year is close.

If you do not strategically pay debt with high rates first you are basically throwing money away and depending on loan sizes the amount of money lost could be huge!

If you are not sure the best debt payment strategy consult an advisor to help as it could be well worth it!

Disclaimer:

This article is for informational purposes only and should not be considered legal, accounting, financial or tax advice. Please consult your own advisor.