What do you think of when you hear “holiday season”? Presents? Friends and family? Food – and lots of it?
Personally, I think of all of those things plus college football bowl games. My DVR was working overtime recording all of the games.
But are the holidays really over? Well, the decorations may be down and the presents unwrapped, but for many people the answer is no.
Why? Now all of the bills come due.
For many, now is the time to deal with the spending on the credit cards, special financing deals, and the like. And you’re now you start thinking of how to pay off those credit cards and loans.
But how? Highest interest rate first? Smallest balance first? Pay off the credit cards first or the home equity loan? Pay the minimum? Pay more, but how much more? Or just pay everything equally?
There’s lots of factors, including one that many people don’t think about – taxes.
I’ll cover what order to pay first in the coming weeks, but let me suggest an overall strategy called debt stacking.
Regardless of the order you choose, as each loan is paid off, take that payment and apply it to the next loan.
For example, if you have 3 loans…
Loan A – Monthly payment of $100
Loan B – Monthly payment of $200
Loan C – Monthly payment of $50
Your total loan payment in this example is $350 (the sum of the 3 loan payments).
As loan A is paid off, apply that payment to loan B. That means that when loan A is paid off, you’ll be making a total payment of $300 on loan B ($100 from Loan A plus $200 payment for loan B).
Once loan B is paid off, then take that money and apply it loan C – the total payment would be $350.
As each loan is paid off, the amount of money you pay for loan payments stays the same ($350 in this example), but how much you pay on each loan changes.
How does this help you? Well, look at this real life example. A young couple I worked with recently had the following:
Auto loan Balance - $7,615, Mo payment - $296.66, Rate - 3%, Years left on loan - 3 yrs
Auto loan Bal - 15,000, Mo pmt - 267.78, Rate - 2.9%, Yrs left - 5 yrs
1st mortgage Bal - 216,528, Mo pmt - 1,413, Rate - 6.5%, Yrs left - 28 yrs
2nd mortgage Bal - 43,206, Mo pmt - 326, Rate - 7.5%, Yrs left - 28 yrs
Student loan Bal - 43,351, Mo pmt - 248, Rate - 1.875%, Yrs left - 17 yrs
Student loan Bal - 12,807, Mo pmt - 102, Rate - 2.7%, Yrs left - 12 yrs
This couple also uses credit cards, but pay off the balance each month.
Let’s compare the results:
Paying loans as scheduled:
Total interest paid - $307,879
Time to payoff - 27 yrs, 6 mo
Debt stacking method:
Total interest paid - $250,622
Time to payoff - 20 yrs, 7 mo
That’s a difference of over $57,000 in interest expense saved! And they pay off their debt almost 7 years earlier!
How much “extra’ does this couple have to pay on their overall loan payments? None. That’s right… ZERO…. ZIP…. NADA
What do you think of this? How much money could you save and how much faster can you be out of debt?
Trivia: What President declared that within 5 years of making the speech the country would reduce the annual budget deficit to zero? Was it?
A – Richard Nixon
B – Ronald Reagan
C – Bill Clinton
D – George W. Bush
Answer in next week’s blog.
