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Yesterday we showed just how quickly (and sneakily!) interest can accrue on a debt. We talked about our friend Austin and his $30,000 of student loan debt that he will pay off over 10 years (or 120 months) at a 6% interest rate. His monthly payment would come out to $333.06 per month, and he would end up paying an extra $9,967.42 in interest over the life of his loans. Instead of just paying $30,000 to his lenders to pay back what he borrowed from them, he would eventually end up paying $39,967.42 in total. Yikes.
Now we’re going to look at exactly how hard your money can work for you when you pay down debt faster than your lender wants you to. We’re going to look at what would happen if Austin planned to pay off his student loans just 1 year early. One year is 12 months, so you would subtract 12 from 120 to get a loan term of 108 months. Go ahead and replace the “120” in the “Number of Months” field in the box below with “108” and see how much interest Austin will save over the life of his loans. Go ahead. I’ll wait.
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You see what happened? You just saved Austin over $1,000. Instead of $9,967.42 of interest, he will now only end up paying “only” $8,898.64 in interest. There’s another thing I want you to notice–by paying off his loans one year early, his monthly payment only increased by $27 from $333 to $360. Only $27! Think of what you spend $27 on over the course of a month. That’s like 5 Starbucks trips. If Austin could just put an extra $27 per month toward his student loans, he would have them paid off one year early (what a relief!) and would have saved himself over $1,000 in the process.
That, my friends, is what I call putting your money to work for you. Every time you receive money, whether it’s through a job, a side hustle, a gift, or even a tax refund, I want you to think, “How can I put this money to work for me?” While it may be sweet, spending $5 on a Starbucks latte every few days is definitely not a good example of putting your money to work for you, but setting aside an extra $5 a week to put toward your student loans certainly is. Remember that delayed gratification is key.
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What are your numbers? Do you know your numbers? Do you know how many loans you have and what their principal balances and interest rates are and for how long you’ll be paying them? If not, I encourage you to find your loan documents right away or to see exactly how much you will be paying in interest if you only make your minimum monthly payments. And then I encourage you to play around with the calculator above to see how much you would save if you paid your student loans off even a year early.
What could you cut out of your daily, weekly, or monthly routine so that you can put just an extra $5 a week toward your student loans? Remember, the more money you throw at your loans, the lower that “Total Interest” number is, meaning the total “extra money” that you’ll have to pay your lender.
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