Does it make sense to pay off debt early? It actually depends on your specific financial situation and your plans for the future. There are times when it is a good idea to pay it all off as soon as you can. However, there are also times when it is a bad idea to do so.
For instance, some people think you should leave your debt payments alone if they mostly have low-interest rates. Instead of paying off the debt, you might want to set your money aside for investing purposes. After all, the amount you will earn through investing might be bigger than what you will save when you pay off the debt immediately.
But if you mostly have high-interest debts – then that is a different situation. It might be more beneficial to focus on paying your debts as soon as possible. The high interest will cost you a huge amount of money if you decide to go slow in paying it off. According to reports, the average credit card debt is now at $6,506. Let us assume that the interest rate is 18% and the minimum payment is calculated at 4%. If you stick to the minimum payment it will take you 144 months to completely pay off the debt. Not only that, the total payment will amount to $10,283.06. You will be paying almost double what you really owe. In this case, it makes more sense to pay off debt early.
3 important reasons to pay off debt early
There are many reasons why you need to make an effort to pay your debts faster so you can get rid of it earlier. The reasons will actually depend on what you prioritize the most – based on where you want to end up in the future.
Among all the reasons, there are 3 major ones that almost everyone can relate to.
The first reason to pay off debt early is that it will help you save money easier. It is evident in the example provided in the first part of the article. If you only pay the minimum of the debt, you will end up paying 58% more on the whole debt. That percentage represents the interest rate of the whole debt. But if you pay more than the minimum amount, you can save money easier. For instance, in the example provided, the minimum payment is around $260. If you increase your payments to $500, you will only pay 12% more than what you really owe. It will also shorten your debt payment period. From more than 140 months, you will be debt-free in 15 months. At least, as long as you do not add to the balance that you already owe.
Another reason to pay off debt early is to help strengthen your finances. If you want to build a stronger financial foundation, you need to get rid of your existing debts. Having limited funds is difficult enough. If you have to share it with your debt payments, it will make your life even more challenging. So if you really want to build a stronger financial position, you need to make sure that you will get rid of your debts.
Your credit score is also another factor that can strengthen your finances. If you pay off debt early, you can have a positive effect on your credit history.
Your credit obligations will not just restrict your finances. It will also keep you from working on your financial future. If your extra money is used to pay for debts, it will keep you from saving a lot of money that will lead you to reach your goals. It will force you to delay milestones like buying your own house, getting married or even having kids. You need a stronger financial future if you really want to achieve all of these.
The final reason for you to prioritize paying off your debts if to live a stress-free life. According to a survey, almost 6 out of 10 respondents admitted that the top cause of stress in their life is related to money matters or challenges. If you want to get rid of the stress in your life, you need to do something about your debts. Most of the time, people worry about debt. After all, it is difficult to stretch their income to pay off their credit obligations while paying for basic necessities.
In case something compromises your source of income, you will most likely feel more stressed because of your debt obligations. If you did not have debts, you just have to worry about your daily expenses – something that you can easily be frugal with. But with your debts, it is not that easy. You need to talk to your creditors and lenders because if you fail to pay what is expected of you, that can result in consequences that will make your life even more difficult.
The lower level of stress will also help you make smarter choices about your finances. You will not feel distracted by the feeling of desperation that is usually associated with stress. It is less likely that you will make mistakes.
Tips to help you pay off debt early
If your specific financial situation means it makes sense to pay off debt early, the next thing you have to do is to come up with a plan to do it. Fortunately for you, there are a lot of debt relief programs that will help you accomplish this. But apart from finding the right debt solution, you should also implement certain tips that will make things easier.
Increase your income
Obviously, you need to earn more if you want to be able to pay off debt early. The extra money that you will earn can be used to increase your monthly debt payments. Of course, increasing your income is not as easy as you think. But it is not impossible. You can do this by asking for a raise. Or you can work longer hours. Some people use side gigs to help increase their monthly income.
Lower your spending
Another tip that will help you pay off debt early is to lower your spending. This usually involves your discretionary expenses. These are the expenses that are not fixed. It involves your food budget, clothing, and entertainment expenses – among other things. According to a report, 3 out of 10 consumers have admitted that their discretionary spending is the main cause of their credit card debt. If you really want to increase your monthly debt payments, you need to find ways to lower your discretionary spending. Take food for example. It is a basic necessity but that does not mean you cannot save more in this category. You can cook your food from scratch instead of ordering take-out. You also have the option to brown-bag your lunch instead of eating out. These may only give you small savings but it will add up to be a significant amount.
Make payments every two weeks
A trick to help you pay off debt early is to pay your dues every two weeks instead of once a month. If you count the number of weeks in a year, you will realize that you will make one extra month’s worth of payments compared to just paying once a month. Not only that, you can save money on the interest if you send payments every two weeks.
Use windfall as payments
Finally, you should also know how to use any financial windfall that you will get. These are unexpected income that was not included in your budget. You should discipline yourself enough to use this money to pay more of your debts. As long as there is no prepayment penalty on the debt, you should be able to save a lot of money by making a lump sum payment.