In 2001, I took a break from sports writing to start a sales position in Washington, DC. And while I quickly realized I would never enjoy the work, the pay was the best I’d earned to that point. It was then that I asked a financial planner how best to make my money grow for long-term financial freedom.
His answer holds just as true today as it did then…
Eliminate all interest-bearing debt as quickly as possible
There may be no other area of your life to save money and improve your future financial viability than right here, because you’re basically using the money to pay yourself.
Whether it’s credit cards, car payments, house payments, student loans, etc., interest-bearing debts are designed for the lender to make money through the interest you pay each month. The longer it takes you to eliminate the debt, the more interest you pay.
Some will say this isn’t an option as their income barely covers their monthly bills. But by implementing Part 1 of the 5-step plan to financial success, you’ll find there is almost always a way to increase your discretionary income.
*** By using this extra money to make direct “loan principle” payments in addition to your on-time monthly payments, you’ll significantly reduce the final cost/time needed to eliminate the loan. ***
For example, interest.com describes how making the equivalent of one extra payment per year just to the principle adds to huge savings.
“A $200,000 30-year home loan with an interest rate of 5% would cost $186,512 in interest with the traditional 12 monthly payments per year. Make the equivalent of 13 monthly payments every year, and the loan will be retired in 26 years and you pay only $153,813 in interest — a savings of $32,699.”
While the math works in every case, one mistake to avoid is spreading your principle payments over numerous interest-bearing debts. Instead, rank you debts in terms of lowest to most expensive balance, then concentrate as much of your discretionary income as you can afford toward paying extra principle on the loan with the quickest payoff. When that loan is done, combine the money you’d been paying toward the extra principle with what had been your monthly payment and pay that total toward the principle on the next lowest loan.
(Example: Student loan monthly payment = $180. Extra monthly principle payment = $50. Combined monthly principle payment for next loan = $230.)
Remember, it’s still vitally important to make your monthly payments on time and for the full amount. The closer you make your additional principle payment to your monthly payment the better, as interest accrues each day.
Keep doing that until all of your loans are eliminated. It’s really that simple. You’ll be amazed how much quicker you’ll be debt free and how much you’ll save in interest.
Make today better than yesterday, but not as great as tomorrow!
Chris Errington is a husband, dad, writer, seeker of truth and fervent believer in the power of utilizing best practices to live a more balanced and enjoyable life. When I’m not coaching Little League baseball, rooting for the Steelers and West Virginia University or desperately attempting to grow grass in the front/back yards, I’m working my plan to live my ultimate goal – Writing remotely from the deck of a 32-foot sloop while sailing throughout the Caribbean. Getting my wife to agree is another matter entirely.
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