Pay it off!

Debt. This stuff will crush you...if you let it. We get so caught up on buying random things on credit or taking out unnecessary loans, because 1) "saving takes too long" and 2)the monthly payments tricks you into thinking you're getting a good deal. In reality, both of these are untrue because of Interest. Saving $1,000 at $100 increments is a lot quicker than paying off $1,000 in debt at $100 increments, because the $100 debt payments include a charge for interest expense and the $100 incremental savings do not.

 The idea of monthly payments being a good deal is also untrue for the exact same reason. Okay cool, you don't have to pay for it all up front, but now you'll end up paying more for it in the long run due to the interest expense. Don't think your 3% interest rate is a big deal? Those of you with loans, take your monthly payment and multiply it by the number of months in your loan term. Then subtract out your original loan amount. This is the amount of interest you will pay over the life of the loan. You should be hearing Craig and Smokey saying "Daaaaammmnnnn" in your head. Now if you really want to feel the pain, take your original loan amount and divide that by your monthly loan payments. This is how long it would have taken to save that amount while putting up the same amount you are currently paying on your loan. This is why it's so important to avoid debt or get out of it as quickly as possible. 

The debt pay off method I'm going to be using on my journey to financial freedom is the snowball or runaway method. Let's use Sam as an example. Sam used my "Interest Sucks" test above and now she literally can't even. She wants to pay off her debt as quickly as possible to avoid future interest expense. Sam has a $100,000 mortgage balance, a $20,000 auto loan balance, a $10,000 student loan balance, and $5,000 in credit card debt. Her mortgage payment is $800, her car payment is $300, her student loan payments are $150, and her credit card payments are about $60 monthly. After savings, bills, and minimum loan payments; Sam has about $300 of monthly disposable income. To pay off debt using the snowball method, Sam should apply her $300 in monthly disposable income to her credit card balance since it is the smallest balance. Assuming she spends no more on her credit card, she should have it paid off in a little over a year. Now she has one victory under her belt to keep her motivated (you wouldn't believe how psychological this stuff really is). Credit card is paid off and now Sam has $360 in disposable income. What should she do now? If you said finance a new BMW, please return the top of the post and reread very carefully. Sam can now add this extra $360 to her $150 student loan payments. About two years pass and Sam's student loans are now paid off and she has another win on her record - along with $510 in disposable income! Now Sam can add an extra $510 in principal payments to her auto loan balance. After a while, her car is paid off and she can now add an extra $810 to the principal on her mortgage. More time passes (it waits for no one) her house is paid off and she is now debt free with $1,610 in monthly disposable income to do with whatever the hell she wants. Be like Sam. Now some of you may be wondering why didn't Sam just start with paying off her house first. If she had done that with the $300 initial disposable income, it would have taken her a lot longer to pay off the mortgage - mostly likely longer than the life of her other loans. Meaning she would have paid every penny of the interest on those debts. Get on it y'all.

Have you tried the snowball method? How did it work for you? What kept you going? Why did you quit?