If you’ve ever needed motivation to pay off your debt, then here’s an interesting exercise:
Add up your total monthly minimum payments.
Most people don’t know this number. They might think they know it, but in actuality, they don’t.
Today, I’m going to show you three extra columns from my debt spreadsheet that I haven’t published here before. These columns show:
- Minimum Payment
- Interest Rate
- Priority
The “minimum payment” is the lowest amount of money I can pay on that line of credit each month. The “interest rate” is self-explanatory. And the “priority” shows which balance should be paid off first, second, third, etc.
(On a side note, you can see all the interest rates on my previous lines of credit that are now paid off.)
The first payment is for the loan I have through Prosper. The second payment is for my USAA credit card balance. And the third payment is for my Honda Odyssey.
We didn’t put any money down when we bought the Odyssey, which is why the payment is higher than a normal car payment. Fortunately, the interest is only 4.9%, so every payment I make decreases the balance by a fair amount.
But the real story here is that I’m paying $934.07 a month in minimum payments.
This means three things:
1. If I paid off all my debt, I’d have an extra $934 in cash flow every month.
2. To really make a dent in my debt, I have to pay MORE than my minimum payments. Let’s say somewhere around $1,500 a month to really see some progress.
3. If choose to pay more than the monthly minimums as I have suggested in #2 (let’s say $1,500 a month), then that means I’d actually free up $1,500 a month — and not just $934 a month as I have suggested in #1.
A Shock to My System
I remember the first time I totalled up all my monthly minimum payments. Do you know how much it added up to?
It added up to $1,128.33 a month. And when it was at its highest, my monthly minimums were $1,399.94 — nearly $1,400 a month!
That’s practically as much as I’m paying in rent every month. So, to put this in perspective, I could have rented TWO houses instead of one if I didn’t have any debt.
Anyway, the reason I share this information with you is because I think it’s a frightening yet healthy exercise to know how much you’re paying in minimum payments every month.
It’s not a pleasant thing to know at first, but it may provide you with the impetus you need to really knuckle down and pay off your debts.
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{ 5 comments }
Ryan,
I have $55K in debt and $35K in savings… should I use savings to pay off debt? The reason I have not done so to date is unpredictable job economy and my desire to have cash if I lost my job… Your thoughts.
Thank you for your awesome blog.
Wilson – Thank you for the compliment!
Well, I’m not a financial advisor, so please take my advice with a grain of salt.
Right now, I think you’re doing the right thing. If I were in your situation, I’d probably see what my monthly living expenses were and make sure I had 4-6 mos of living expenses saved up in case of a job loss.
That would be my baseline.
Any savings over and above that amount would then be used to aggressively pay off debt.
I’m self-employed, so my situation is a little different. In general, I like to have about 3 mos living expenses on hand just for peace of mind. When I have an income surge, I can then use the extra to pay down debt.
Under normal circumstances, I pay off my debt at a rate of about $1000 to $1500 a month. With a cash surge, I might pay off $2000 to $5000 at once.
Hope this helps!
Ryan
Well if we are only looking at the minimum payments on credit cards and car then my payments are right at $453.77 a month.
Lulugal – That’s not too bad. Less than half what my minimum payments are. :-0
Good information in this article- I think it is very important to know how much interest you are paying monthly. Not necessarily the interest rate but the actual total in dollars you are giving away every month. Concentrating on decreasing the amount of interest you pay will help you get out of debt faster as you will hitting principal instead of insterest. Good Luck
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