Debt is something that can creep up on anyone. But have you thought about the interest you will pay for the life of that debt?
Something we should always do is look at the total cost of the debt (aka: loan). I will purchase the item for “X” but will really pay “X”. Now, this is not always the case or it’s very difficult to not take out a loan for the item (student loans and mortgages are examples of this).
But did you know that after you accrue some interest, you will pay interest on that interest. And this cycle keeps going until the debt is paid. This is how so many of us get stuck in debt…
HAVE YOU THOUGHT ABOUT THE INTEREST?
Many people suggest paying off the lowest balance of debt first but have you thought about the interest? Could you save hundreds or thousands by paying off the highest interest rate first?
Let’s use my debt as an example. If I paid the lowest balance first, we would pay $25K in interest and it would take 91 months to pay off all the debt. BUT if I paid the highest interest rate first, we would pay $22K and it would take 89 months to pay off all the debt.
THINGS TO NOTE: We have over $110K in debt (mostly student loans) and I am using the Debt Calculator to get my numbers (it is so easy to use!).
Note sure what the debt calculator is? See this post to help you pay off your debt using the calculator.
So by paying off our debts starting with the highest interest rate, we would save $3,000 and cutoff 2 months. How much would you save by paying the highest interest rate first?
SIDE NOTE: When you are trying to pay off debt the amount you pay always pays the interest first, not the principle of the loan.
