Repay your Loans – Multiplying your Efforts
Channel: The Financial Literacy Course
Date: 2021-01-14

Are you ready to start paying off those financial commitments?  In this lesson, we will learn three ways to multiply our efforts to pay off our debt faster than you may have thought possible.

Take out as little debt as possible – The smaller the loan the faster you can pay it off.
Pay off debt as quickly as possible – The faster you pay, the less the loan costs you.
Reduce your expenses to afford larger repayments. 

It's a fact, the less you owe, the less you have to pay back. It's also true that the faster you pay back what you owe, the more money you keep for yourself.
Using these two facts, we can optimize how we repay our loans.
First, by taking out as little as possible, and second, find as many ways as you can to pay more than your minimum payment.

When we borrow less, our monthly payments will be lower. This means we will have more money available to put on our student loans, and thus pay them off faster, all while keeping more money in our pocket.

We can multiply this effect by reducing our expenses and using that extra money to pay off our debts sooner. When we work, we pay taxes on our income, but when we save, all that money is ours to keep. In other words, a penny saved is a lot more than a penny earned. By saving, we've just multiplied our money.

Let's compare two great savers, both with the same student loans.
Penurious Pete and Frugal Frank both save $1000 and regularly make payments on their student loans. Pete puts the extra thousand into a savings account, earning him 2% interest, while Frank uses the money to pay off some of his student loans that are charging him 5% interest.

Who ends up better off?

Pete, he earned interest! Frank, he pays less in interest
Both are the same.

Since Pete's student loans are charging him a lot more than he is earning at his bank, Frank ends up being better off.

Using that $1000 to earn interest in a bank earned Pete $20, and yes, he will have to pay taxes on income. Frank, on the other hand, saved himself from paying $50 in interest. By using our saved money to pay off debt, we've multiplied our money again, and if we are paying off high-interest debt like credit cards, that difference can add up fast.

What can you do to pay off your debt faster?