The average American has tens of thousands of dollars of debt. For some people, this creates substantial hardship, now or in the future. While carrying some debt is advantageous, there are times and situations that indicate paying off debt and reducing your overall debt load is a wise move. For example, if you are setting your sites on an early retirement, it can be advantageous to pay off as much debt as possible. However, if you are growing a small business or saving for college, it may be more advantageous to carry low-interest rate debt and use it correctly. Below, are some examples of how you can benefit in the long term by paying down or paying off debt now.
Primary Residence Mortgage. Many people believe that the tax benefit on a primary residence that allows you to deduct mortgage interest and property taxes paid is an excellent reason to keep a mortgage on your home. Moreover, this can be the case depending on your personal financial situation, and long-term financial goals; however, the actual tax benefit depends on the value of your home, and your income tax bracket. Now, there are some things that you can do to pay off your mortgage early. You might consider this if you want to retire early, or if you just want to save tens of thousands of dollars of interest over the term of your loan.
If you are carrying a 30-year fixed mortgage at 4.5% interest and the balance is $325,000, you can save over $81,000 in interest, and pay off your mortgage in 22 years, instead of 30 years. All it takes is paying an extra $300 per month. It is wise, in most cases, to secure a mortgage that you can comfortably afford with an additional $200 to $300 per month extra to reap the benefits. In the example above, in addition to saving over $81,000, you can save an additional $192,000 if once your mortgage is paid off — you put the same amount into a savings account! Speak to your personal accountant about building your personal wealth by paying off your mortgage early.
Credit Card Debt. If you are only making minimum payments on your credit card debt, you are not financially wise. Making only minimum payments stretches the debt for years, costing you thousands of dollars in interest. For example, if you have a $5,000 balance on a credit card that charges 10.5% interest, it will take 65 months to pay off the debt at a $100 per month. That $5,000 is going to cost you over $1,600 in interest! However, if you make a $200 per month payment, your credit card will be paid off in just 28 months and will cost only $670 in interest. Increase to $250 per month and your $5,000 debt will be paid off in just 22 months and interest accrued will be just over $520.
Of course, the higher the balance and the higher the interest rates, the more dramatic the savings. With $12,000 in debt that is held at 16% interest, it will take 5-7 years to pay off the debt and cost over $5,200 in interest charges. Make a $500 payment each month and your debt will be paid off in 29 months and you will pay less than half of the interest charges.
It is always wise to pay off the highest interest rate loans first. Once you pay off your credit card debt, to preserve your credit rating, continue to use your cards wisely. Keep a couple of credit cards for monthly use and pay off balances in their entirety each month, when possible. Additionally, hold the highest credit limit credit card for emergencies. Consult with your personal accountant the best ways you can reduce your debt load to build your wealth and financial security for the future.
