Make More & Pay Less
So, now that you know what interest is- why do you care?? The answer: the higher the interest rate and the longer it takes for you to pay off your debt, the MORE expensive your debt becomes and the harder it is to get out of the cycle! On the flip side, the sooner you start saving, the more money you’ll make in the long haul!
Here’s an example of both:
What to Pay Off First
Lisa has four different student loans totally $12,000. She only makes the minimum payments for each loan every month, but she can afford to spend $20 more a month if it would actually get her out of debt faster. All her loans are of different amounts and have different interest rates, so we started to see what it would actually save her if she paid even just a little bit more.
With the help of an online student loan calculator, we first figured out how much she will be paying in interest over the course of each loan and how long it will take her to pay off her debts if she continues to pay only the minimum amount. Then we distributed some of that $20 to each loan payment, but it didn’t make a significant difference at the end of the day.
But then… we applied the full $20 to the largest loan with the highest interest rate out of the four. This loan, for $5,ooo at 6.8% interest, will take Lisa 8 years & four months to pay off and cost her $1,622 in interest. However, by paying $20 more a month, Lisa will pay off this loan off in just 6 years & one month- paying $1,116 in interest. That’s shaving 2 years & 7 months off her loan payments and saving $506!
Why Starting to Save Now is the Key to Long Term Wealth
The same principal works when saving money…
If Lisa has $2,000 in a savings account that earns her 5% APY (annual compounded interest), and she NEVER adds another dollar into the account, in five years, she will have a balance of $2,566.72 (having earned $566.72 in compounded interest). However, if she saves just additional $25 per month, she’ll have $4,226.87! That’s an additional $1,700 in the bank at the end of the five years (and $200 extra in interest earned)!
Interest can cut both ways – either making your financial life out of control and miserable or – if you learn to save and invest, it can be the gift that keeps on giving. Despite what you may currently believe – it is NOT (or should not) be normal to have loads of credit cards with mounting balances leading to heaps of interest. Yet sadly, many of us have become so accustomed to this interest bearing lifestyle we think it’s fine. This all adds up to why we ALL should really be more interested in interest!
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Always informative and helpful!!! It is so frightening when you stop to think how much the interest on these credit cards is really costing us. My advise is to pay them off as quickly as possible. You most likely won’t miss $20 bucks a month, but it sure is amazing how much it can save you when you apply it to your credit card or loan payment.