How to Make Your Money Work For You, Part 1: Pay Down Debt 💵

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Interest on debt adds up very quickly. This is why it's important for you to pay off high-interest loans as soon as possible. 💳At the end of yesterday’s post, I briefly mentioned the concept of money of making your money work for you.  I know, many of your brains automatically went to investments and income.  And that's all good, and we'll talk about those topics later this week.  I'll go over the different types of investments and passive income sources and how you can make money from each.

But there's a preliminary step before jumping into the world of investments.  See, investments are a way to make your money work for you in that they make you more money.  But just as important, and frankly for most young people more important, is making your money work for you in a way that saves you money.

And by saves you money, I'm particularly talking about saving you money on interest payments to fat cat banks and lenders.

To illustrate this concept, let's talk about student loans.  Although what I'm about to say can apply to really any kind of debt, I know that one particular kind of debt plagues our generation more than any other, and that's student loan debt.  So we're going to talk about our imaginary friend Austin and take a look at his student loan numbers.  Here they are:

  • Austin has $30,000 in student loan debt.  This is known as his principal balance, or the actual amount that his lenders gave him to pay for college.
  • The term on his loans is 10 years.  This means that if he makes the minimum monthly payments specified by his lender, he will pay off his loans in 10 years.  Now typically, in the financial world, loan terms are considered in terms of months, so his loan term is more specifically 120 months (12 months/year x 10 years = 120 months).
  • The interest rate on his loans is 6%.

Let's plug those numbers into our trusty Loan Calculator below.  Go ahead.  I've already put Austin's numbers in there for you.  Just press the blue “Calc” button at the bottom of the box.

Loan Calculator

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See that number that popped up in the “Total Interest” box?  It's $9,967.42.  If Austin just makes the normal monthly payments on his student loans, he'll end up paying an additional $9,967.42 of interest in addition to the $30,000 that he originally borrowed to his lenders.  So instead of paying only the $30,000 that he borrowed, Austin will have paid $39,967.42.  That's almost $10,000 more.  That's $10,000 that he could have put toward those sexy, passive income-generating investments that we'll talk about later in the week.

So what's Austin to do?  Accept his fate like most of his Millennial peers?  No way.  Austin can make sure that he throws more than the minimum monthly payment every month toward his student loan debt so that he saves as much as possible on interest.

What if Austin could put just $100 more each month toward his student loans?  How much would he save?  Find out tomorrow.  🙂

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