When you think about saving money, what’s the first thing that comes to mind? If you’re like most people, it’s going to be one of three things. Either, you’re thinking about coupons, eating out less, or cutting back on electricity bills by working to become a more energy efficient consumer.
While it’s great to save $3 on a bottle of laundry detergent, $10 on eating in rather than eating out, and up to $30 on energy efficiency, the truth is that for many, the biggest way to save money has nothing to do with any of these ideas. No, the biggest way to save money is to get strategic about paying off debts. In fact, according to Debt Consolidation, American household debt sits at $12.73 trillion! With debt carrying interest and other fees, this debt is a massive expense to many families, and by getting strategic about it, you may be able to break free from the statistic!
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Why Paying Off Debt Faster Will Save You Money
We all know that with debt comes interest and fees. And while annual and other fees are pretty transparent, there are plenty of people out there that haven’t sat down and done the math to see just what interest costs them. At the end of the day, interest is the single largest expense associated with debt. Charged as an annual percentage, interest is based on the balance owed, and if you make minimum payments on credit cards or any other unsecured debt, chances are that the vast majority of your payment is used to cover interest costs, with very little actually going to your balance.
This is also seen secured loans like auto loans and mortgages. If you’ve ever purchased a house or a car on a loan, and took a look at the amortization schedule, you know exactly how it works. At the beginning of many secured loans, very little money from your payment will actually go to pay the principal amount owed on the debt. In fact, in most cases, it’s not until years into paying on a note that you will actually see even half of your payment going to principal. This is because interest is based on the amount owed. So, as you slowly pay debts off, more of your minimum payment goes to the principal balance on the loan. This means that when you have debt that carries an interest rate, you’re letting money essentially fly out of the window!
Save Money By Paying Debts Faster
Now that you know just how expensive holding a debt can be, it’s time to work to get rid of your debts and save money. This is often easier said than done, but with the right plan, chances are that you can speed up the process.
For most people, a strategy known as the debt snowball strategy is a great way to pay your debts off quickly. The debt snowball strategy is based on the concept that you have at least a little bit of extra money to pay towards your debts. So, instead of sending minimum payments, it’s best to set an overall payment amount and strategically pay high interest debts off faster.
Let’s say that you owe $5,000 on a credit card with a 19.99% interest rate, $6,000 on a car with a 5.25% interest rate, and $47,000 on a home with a 4.75% interest rate. Now, let’s say that combined, the minimum payments on all of these loans come to about $1,000, but you have $1,100 you can afford to pay every month. As a result, the extra $100 should go toward paying your highest interest rate debt, the credit card. Once the credit card is paid off, use all of the excess funds that have become free to pay off the car with the next highest interest rate. Finally, once the car is paid off, you’ll have quite a bit of extra funds to pay your mortgage of faster. Not only will following this method help to save money through interest, but it will help you to become debt free. To learn more about the debt snowball strategy, click here.
If this is a method that won’t work for you for one reason or another, consider searching online for debt help programs. Debt consolidation and debt settlement are the two most common types of these programs, and have provided relief to a countless amount of borrowers.
While few may notice, the reality is that with such high amounts of debt in the United States, interest is one of the largest expenses that Americans have. So, if you’re looking to save money, look no further than your debts. By paying them off faster, not only will you become debt free, chances are that you’ll save a ton of money!