Paying off debt can feel overwhelming, but it will significantly impact your financial well-being (and perhaps enable you to order what you actually want). And honestly, it means you can have more fun in life if you do it right! While it may seem daunting at first, the benefits of paying off your debt early are numerous. Here are some of the top advantages of getting out of debt sooner rather than later.
In This Guide:
- Benefit 1: Save Money on Interest
- Benefit 2: Improve Your Credit Score
- Benefit 3: Reduce Stress
- Benefit 4: Free Up Money for Other Things
- Benefit 5: Build Wealth
Benefit 1: Save Money on Interest
One of the most significant benefits of paying off your debt early is the amount of money you’ll save on interest payments. Whether you have credit card debt, student loans, or a mortgage, the interest you’re paying can add up quickly. By paying off your debt sooner, you’ll reduce the total amount of interest you’ll pay over the life of the loan, which can save you thousands of dollars in the long run.
Benefit 2: Improve Your Credit Score
Another advantage of paying off your debt early is the positive impact it can have on your credit score. A higher credit score can open doors to better interest rates, loan terms, and credit card offers. By paying off your debt, you’ll reduce your debt-to-income ratio and show lenders that you’re a responsible borrower.
Benefit 3: Reduce Stress
Debt can be a significant source of stress for many people. The constant worry of how you’re going to pay your bills and make ends meet can be overwhelming. By paying off your debt early, you’ll reduce your financial stress and feel more in control of your finances.
Benefit 4: Free Up Money for Other Things
When you’re no longer making monthly debt payments, you’ll have more money to put towards other things, like saving for retirement, taking a vacation, or investing in your future. Paying off your debt early can give you the financial freedom to pursue your dreams and enjoy life without the burden of debt.
Benefit 5: Build Wealth
Finally, paying off your debt early can help you build wealth over time. By reducing your debt, you’ll free up money to put towards savings and investments. The earlier you start building wealth, the more time you’ll have for your money to grow and compound, which can lead to significant financial gains in the future.
This benefit deserves a little more exploration. Below is a chart of various types of debt and how much they end up costing you over the life of the debt (or the length of the loan, however you want to think about it.
Table 1: True Cost of Debt
|Loan Type||Total Amount Owed||Interest Rate||Monthly Payment||Time to Pay Off||Total Interest Paid|
|Credit Card||$5,000||18%||$250||24 months||$1,813|
|Student Loan||$20,000||6%||$225||120 months||$8,990|
|Car Loan||$10,000||4%||$175||60 months||$1,500|
Now I want to show you another table. This table shows what could happen if you didn’t have those debt payments and could invest that money instead. The point here is to show that when you pay off your debt, don’t take more on! Take the money you were putting toward your debt and invest it in income-producing assets that build wealth for you over time. There is not guaranteed rate of return, but the S&P500 has returned an average of 10% so we will use that as a rough estimate.
Table 2: Investing Instead of Debt Payments
|Loan Type||Total Amount Owed||Interest Rate||Monthly Payment||Time to Pay Off||Total Interest Paid||Invested Monthly||S&P 500 Average Annual Return*||Potential Return|
|Credit Card||$5,000||18%||$250||24 months||$1,813||$250||10%||$6,400|
|Student Loan||$20,000||6%||$225||120 months||$8,990||$225||10%||$63,962|
|Car Loan||$10,000||4%||$175||60 months||$1,500||$175||10%||$10,827|
The bottom line is pretty simple. You will pay a total of $115,904 in interest on these debt payments. If those debt payments could be put into investments returning an average of 10% return over the same time periods, you would end up with a total of $1,554,565 that you own fair and square.
I know this isn’t a realistic example for most people. The vast majority of us cannot go buy a house for cash. You will most likely have to take on some debt in life. I give this hypothetical example as a way of trying to show why you should take out as little debt as possible and why income-producing assets are so much better to buy than debt-financed liabilities that don’t produce any income.
While paying off your debt early may seem like a daunting task, the benefits are well worth the effort. From saving money on interest to improving your credit score and reducing stress, paying off your debt can significantly impact your financial well-being. It’s even better if you then take those savings and invest them. So, take the first step towards financial freedom today and start paying off your debt early.