Many of us are opposed to being in debt. I am no exception. Despite any logical argument I can frame for others, on some instinctual level, I do not like debt. And yet, I am going to try to convince you today to think twice before pre-paying your cheap debt.
Recently, I went through 2 months of training on debt. More than ever, I know that paying off cheap debt is a financial suicide. Let’s walk through some numbers and make it more scientific.
Here is the deal: you can pay off your mortgage, student loans, etc. and be free or you can continue making payments but be better off a few years down the road. Let me quantify this. Imagine you have a $400k mortgage with 20 years to go, a $20k car loan with 5 years to go and about $20k in student loans with 10 years to go…. your total monthly payment is about $3k. Let’s say your mortgage is at 4.25%, your car is at 1% and your student loans, at 4% (all realistic given our current interest rate environment). Let’s also imagine that you have an extra $200 per month to do whatever you want with. Here are 3 scenarios, see which one you prefer: Read More