The secret to repaying debts quickly and saving on interest charges is to continue to pay the same amount each month until all debts are repaid. As one debt is paid off, apply that payment amount to another debt.
To move forward with the same example, the current monthly payment is $850. If you pay an additional $180 each month that means $1030 of total monthly payment, your debts will be repaid in 7 years and 10 months and you will avoid $23.617 in interest charges.
As you noticed, by simply allocating $180 you save $23.617 meaning if you allocate more monthly payments you will save more and more!
Debt Reduction Plan
If you follow your Debt Free/Reduction Plan, you will save $23,617.86 in interest which is equivalent to 39.5% and have your debts paid off in 7 years and 10 months and not 13 years and 2 months.
There is a very important note to take in consideration. If for example you have a debt of $5600 with 3% of interest, you will not pay 3% each month, this amount decrease accordantly. The following table will explain step by step how to calculate the monthly interest rate.
Debts to pay:
Month | Balance | Monthly Payment | Interest* | How to calculate new balance |
January | $5600 | $680 | $14 | ($5600-$680) + $14= $4934 |
The new balance for the next month is $4934 | ||||
February | $4934 | $680 | $12.34 | ($4934-$680) + $12.34 = $4266.34 |
The new balance for the next month is $4266.34 | ||||
March | $4266.34 | $680 | $10.67 | ($4266.34-$680) + $10.67= $3597.01 |
The new balance for the next month is $3597.01 | ||||
April | $3597.01 | $680 | $8.99 | ($3597.01 – $680) + $8.99= $2926 |
The new balance for the next month is $2926 | ||||
May | $2926 | $680 | $7.32 | ($2926 – $680) + $7.32 = $2253.32 |
The new balance for the next month is $2253.32 | ||||
June | $2253.32 | $680 | $5.63 | ($2253.32 – $680) + $5.63 = $1578.95 |
The new balance for the next month is $1578.95 | ||||
July | $1578.95 | $680 | $3.95 | ($1578.95 – $680) +$3.95 = $902.90 |
The new balance for the next month is $902.90 | ||||
August | $902.90 | $680 | $2.26 | ($902.90 – $680) + $2.26 = $225.16 |
The new balance for the next month is $225.16 | ||||
September | $225.16 | $680 | $0.56 | |
* Interest calculation
$5600 x 3% = $168/12 months = $14 as interest for the 1st month
$4934 (new balance) x 3% = $148.08/12 months = $12.34 as interest for the 2nd month
$4266.34 x 3% = $127.99/12 months = $10.67 as interest for the 3rd month
$3597.01 x 3% = $107.91/12 months = $8.99 as interest for the 4th month
$2926 x 3% = $87.78/12 months = $7.32 as interest for the 5th month
$2253.32 x 3% = $67.60/12 months = $5.63 as interest for the 6th month
$1578.95 x 3% = $47.37/12 months = $3.95 as interest for the 7th month
$902.90 x 3% = $27.09/12 months = $2.26 as interest for the 8th month
$225.16 x 3% = $6.76/12 months = $0.56 as interest for the last month
So each month the interest decreases depending on the new balance.
Now that you have completed these examples, you will be able to easily calculate and manage your debts and know exactly how much you will pay and the time to payoff all your debts and the most important how to re-create a debt reduction plan and save money and time!
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