Here is a not so fun fact: In 2011, our first full year of educational loan payments, we spent $20,751.71 on interest. Interest! That doesn’t include the amount we paid towards the loan itself.
Keep in mind, we went into our loan payments knowing we wanted to pay them at a faster rate than the 10 year plan. We did this because when we did the math we found out that we’d be paying over $500,000 in interest if we paid them on the 25 year plan. Five hundred thousand dollars is a lot of money and it is even worse when you say half a million dollars instead of five hundred thousand. Half a million dollars. Just think about that for a minute.
It still blows my mind that we wasted almost $21,000 on interest even though we paid extra towards the principal every month.
Ready for the fun facts?
Since then, we have drastically reduced our interest payments and here is what we spent on the following years:
Notice a pattern? Me too, and I like that pattern.
I could be bummed that we’ve wasted $43,875.07 on interest, but I’m trying to be positive instead. We are on schedule to finish paying Tom’s loans by 2017 which means that we won’t be wasting more than $50,000 on interest. While it still sounds like a lot, it’s nothing compared to what we would have wasted if we’d chosen to pay off those loans over 25 years.
I like to think this means we can buy a $450,000 house once we pay them off. That makes total sense, right? Maybe not. I guess that math doesn’t work out the way I’d hoped.
How did we stop wasting so much money on interest?
Very simple answer: we lived way beneath our means in order pay off our debt. We still do, but now we have a little more wiggle room.
How can you do it?
Easy. Just follow this advice and pay it off as soon as possible. It doesn’t matter if it is a student loan, a car payment, a house payment or a credit card bill. If you have high interest rates, you are throwing away your money. Try the snowball effect and start with your smallest loan. Focus on eliminating that one first, then move on to the next.
Keep in mind, I’m not talking about low interest rates. Some of our education debt had 9% interest. If you are lucky enough to carry a 1.5% interest rate on your loans, you are doing well. Look at your interest rates, do the math, and figure out if you need to pay off your high interest rate debts.
Remind yourself with every purchase that you could be putting money towards your debt instead. Tom and I play this game a lot. We will talk about picking up coffee randomly and then decide we should put that $10 to the loans instead. And then we do that. We go home, Tom immediately logs into his account and makes a $10 payment. No payment towards debt is too small. It all adds up.
Even better advice: try not to get into debt! I wish we had the option not to go into debt in order for Tom to go to law school. That wasn’t an option for us even though we both worked hard to save money and make money while he was in school. We both held multiple jobs while completing our graduate degrees. Sometimes you have no choice but to get into debt. You do, however, have a choice on how quickly you can get out of debt.
Tom and I will continue to live beneath our means so we can make higher payments to his loans and knock them out as soon as possible. To us, it is worth living frugally so we don’t waste money on interest.
Have you looked at your interest rates to see if you are wasting money?