Calculate how much your debt costs you per month

As you all know, April is Financial Literacy Month. To celebrate, my weekly contributions throughout the month will cover basic techniques to raise your financial awareness. In my opinion, raising awareness is the first step to tackling financial literacy!

When initially dealing with the problem of debt, many people suggest creating a list of each and every individual debt. I wholeheartedly agree. Creating a list of each and everything you owe is the best place to start dealing with a debt problem.

When creating a master list or your debt, you’re striving to accomplish two things:

  1. You want to ensure you’re fully aware of the scope of your debt.
  2. You want to create a spark that will help build momentum

Of course, simply completing your list usually knocks off the first one. The only trick is to ensure that it’s complete. Be sure to obtain your free credit report and verify you haven’t forgotten about any debts or loans.

Lighting a Spark

For some, having a master list of all their debts will be enough of a shock to help build some momentum. I know the first time Courtney and I compiled all of our debts ($87,000+ over a dozen various loans) we were frustrated.

We were frustrated at ourselves for letting the situation slowly creep out of hand. We were frustrated at out lack of awareness. But, most of all, we were determined to leverage this frustration into change.

Our initial master list of debts had only four columns for simplicity. This helped prevent us from getting bogged down in the minute details of each debt. For each debt we recorded the:

  • name of the debt
  • total amount
  • interest rate
  • average monthly payment

We didn’t record account number, payment terms, origination details, or contact information at first. We just wanted an easy-to-read summary for quick reference.

But we didn’t stop there. We decided to take it one step further and calculate just how much interest we were paying on a monthly basis.

Calculating Your Monthly Debt Costs

We started by adding an extra column to our master list: Cost Per Month. We quickly reviewed each of our debts to see what portion of the payment went to interest and what portion went to principal. We recorded the average amount we paid in interest in this new column.

For example, most bills on our revolving debt had an “interest accrued during this period” or some similar verbiage directly on the bill. Many installment loans (mortgages, car payments, etc…) also have this featured, though you may need to look at an amortization table for your loan.

Note: An amortization table is simply a chart that will show you how much interest you are paying over the life of an installment loan. On nearly all traditional loans your first few years of payments with be mostly interest, with the last few years of payments being almost all principal.

Once Courtney and I had gathered the data on our monthly interest, we added up the totals. The number was staggering. We were paying roughly $1000 just in interest on our debts per month. $1000 dollars per month even without a mortgage! (A new mortgage could push that on it’s own!)

Obviously, nothing about our debts had changed. But looking at them in this light provided a new spark. We were even more frustrated that we’d sold out so much of our freedom at such a young age!

Other Perspectives

Maybe creating a list doesn’t cause things to really sink in for you. Maybe calculating your debt on a monthly basis simply makes it seem more manageable. Different types of people need different motivation!

Here are some other simple calculations that may provide different perspectives:

  • Calculate your interest paid yearly! For simplicity, just multiply your monthly number by 12 (it will be close enough). Does viewing how much you pay annually have a bigger effect on you?
  • Break it down daily! Divide your monthly interest paid by 30 (again, close enough) and see how much you’re paying per day. We were paying over $30 per day just to finance our debt! That’s a lot.
  • Calculate how much interest you’ll pay over the entire life of your debts! This gets a tad more complicated to do, but you could estimate how much interest you’ll pay in total. Lenders now have to supply these numbers to you when you get a loan. Feel the true weight of the burden!

Recognizing the effect our debt had on our life was paramount to our financial turnaround (which is still in progress). It played a major role in our quest for financial literacy.

The number one factor in raising awareness was creating a master list of our debts. But taking it a step further and exploring creative ways to view how much interest we were paying fed our momentum further!

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There are 46 comments to "Calculate how much your debt costs you per month".

  1. Sam says 06 April 2010 at 04:07

    I recall with great detail creating such a list with Mr. Sam in late Decembmer 2006, our debt topped $55,500 (which did not include mortgage debt).

    Knowing, in accurate terms, how much debt you owe, felt to me, like the first set to AA, we were facing the music, admitting the scope of the problem.

    Our list included (1) company, (2) type of debt (student, other, credit card), (3) total amount owed, (4) minimum amount due on a monthly basis, (5) due date on a monthly basis, (6) interest rate and date of expiration of any interest rate deals (at the time we had a couple of 0% credit card deals).

    That first step is important, and highly motivating, by the end of January 2007 we had the debt paid off.

  2. Sarah Grace says 06 April 2010 at 04:10

    I am wondering if people count student loans in this. Most literature has said that student loans are good debt, and if we have a good interest rate then just pay it off over time and don’t worry about it, but I am uncomfortable with the high amount I have (and as a couple it is well over 100k). I have been focused on controlling credit card debt but the student loans make me a little sick. I don’t even think I could handle those numbers. Should they be put in a different category?
    Do some people think of a mortgage that way too?
    We just have a small credit card balance and no other types of loans except student loans.

  3. Melissa says 06 April 2010 at 05:49

    Hi Sarah-
    If the debt makes you “a little sick” I would count it and try as hard as possible to pay it off. It doesn’t matter if other people call it “good debt”– if it makes you uncomfortable you have to go with your instincts and make yourself feel in control again.

  4. Nancy L. says 06 April 2010 at 05:56

    It took me a little while before I was ready to take a look at the amount of interest I was paying. The reason for this delay is that when I began to own up to the problem, I realized that there was a very real danger that if I moved my debt around to get a lower interest rate I might be tempted to use the cleared account to ring up *more* debt. So while I started by listing my debts, I worked for probably a year to just get to a point where I had shifted my purchasing habits into a cash only system. (My budget was stretched thin, so it took me a long while to swing around to a point where I could handle not only the steady monthly obligations, but the occasional car repairs, birthday gifts, etc.) Only when I felt like I’d gained control of my finances in general did I feel it was time to look at the interest rates and start to search out ways to get rid of the highest rates.

  5. Ivis says 06 April 2010 at 05:58

    I have found that the new “cost to pay off at minimum payment” and “cost to pay off in 3 years” information on my credit card statement is the most motivating thing yet! Love that.

    I ignore my mortgage for the time being because it is just like rent to me. It’s not going anywhere and until I get equity I’m not going anywhere with it.

  6. Nadia says 06 April 2010 at 06:11

    @ Sam,

    You paid off all that debt in a month?

  7. uncertain algorithm says 06 April 2010 at 06:22

    Thinking of interest in terms of the hours you work also helps. For an example, if you think about two thousand dollars in terms of the amount of hours it takes to pay the two thousand dollars off, there’s less of a desire to owe on debt. The goal of paying off debt as soon as possible, from a time standpoint, makes a great deal of sense.

  8. Shane says 06 April 2010 at 06:44

    @#2 Sarah

    I heavily consider student loan debt, along with my recently acquired mortgage. Many people consider those good debts, but when you have no “bad debt” the “good debt” looks pretty bad. And having higher amounts in student loans makes you want to pay them off to free more cash flow. I would suggest fully funding a Roth IRA before maximizing payments on student loans though.

    I will mention though that I just paid off the remaining balance of $3k for one of my student loans yesterday. The catch is that it was a Parent PLUS Loan that my dad signed for, mistakenly thinking he was cosigning a loan for me. I’ve been paying on this loan for 4 years since I started college, and I’ve had a hard time with him reminding me how it has effected his credit for refinancing his mortgage. So I paid it off to cut off the liability.

  9. Brian C. says 06 April 2010 at 07:06

    As an accountant, one of the cool things I did for a while with my debt was consider it another account in my personal finances, only it had a negative balance.

    At the time, I had just been laid off, and while I had already started a new job, I was about to get married and didn’t want to cut my finances too close. So I took out a loan to help pay for the ring. I simply put the loan amount, plus the total interest, into my finance spreadsheet as an account with a negative balance. That way, I never forgot about it, and I could see a true picture of how much money I really had at the time.

    I only needed the loan to float me for a few months, and I easily paid it off early right after the wedding. Because I had structured it this way in my own personal finances, paying it off early gave me some “income” because of the interest already on my books that I didn’t have to pay.

    Unfortunately, now that I just bought a house, this logic doesn’t work out as nicely because I’d be negative for years, but that was a little game I played with my mind when my debt was small. (Though I’m strongly considering it with my home loan.) Oh, the games we CPA’s play with what little money we have.

  10. Naomi says 06 April 2010 at 07:27

    It is loan principal, not principle.

  11. Beth says 06 April 2010 at 07:30

    Nice post, Adam. It is true that what motivates one person will not work on another. I really like the idea of looking at the interest in different ways and figuring out which one makes you the maddest. For me it’d be the daily number. $30 a day in interest? I could buy a new book every day with that money! Or a nice bottle of wine.

    Sarah — to take a page from Suze Orman (even though I’m more a Dave Ramsey person) it’s your money — or in this case, debt — and only you know how you feel about it. I do not subscribe to the “good” debt/”bad” debt philosophy. It’s debt so it’s bad….. For me.

  12. LiveCheap.com says 06 April 2010 at 07:51

    @Sarah
    Student Loans = Good Debt

    The two reasons why student loans are considered good debt is they fund something that will likely increase your earning potential and they usually have low rates. Both of these assumptions are dubious for many people. There are scores of people getting $50K plus loans for degrees that have little value and many times the money is being spent for non-academic expenses. Student loans had rock bottom rates in the 2003 – 2007 timeframe but they are much higher now.

    Why Student Loans aren’t as good as a mortgage is that there is nothing that you can sell to pay off the debt. If you spent $100,000 getting your M.D. then maybe there is an solid expected future cashflow that makes this investment worth it, but if it was spent getting a degree in basket weaving and the student dropped out after 5 years, there is no way that I would consider this “good debt”

  13. Nicole says 06 April 2010 at 08:10

    Just looking at the credit card interest for the first month (generally when the company has somehow missed a payment I sent in) is enough to keep me from doing credit card debt. It makes me sick to have to pay $50 or more a month on essentially nothing (that’s not counting the late fees). I’ve never really understood how other people can willingly pay that much to rent money.

    Sarah– If you have low interest high student loans and high interest low credit card debt… don’t switch that to high credit card debt and slightly less high student loans. Since it’s bothering you, throw what you can at the student loans and pay them off early, but not if it means you’re getting into a negative debt cycle with the credit cards.

    Do pay the smaller credit card debt (with higher interest) off first, otherwise it will get much harder to pay off any of your debts for exactly the reasons that Baker is illustrating in this post. More money each month will go to debt servicing and less will go to pay down any principal.

  14. David Wilcoxson says 06 April 2010 at 08:12

    For me, the ‘Monthly Interest Paid’ was what shocked me so much. When you look at how much money you’re paying to interest each month, you start thinking about where that money could be going, like a savings account, investment account, etc…

  15. jeffeb3 says 06 April 2010 at 08:29

    Do you have to take the bank’s “interest paid” value from the statement?

    Isn’t it the same as principal * (rate%/12). You already have that info in your spreadsheet. It may be a little different if it’s compounded daily vs. monthly but it’s pretty close non the less.

    for example, $10,000 * (0.20/12month) = $166.67/month

    I don’t have non-mortgage debt, so I don’t know when they compound the rate.

    @Sarah To me, I look at debt the same way I look at investments. If I invest in the stock market, there’s a 50% chance that it will be in the dumps when I want to cash out (that’s the risk) and an average return of 12%. I look at that as a 6% expectation value (broadly estimating). In Bonds, there may be a 10% chance of it being in the dumps when I want to cash out, with a 5% rate of return (typically speaking) so that’s an expectation value of (1 – 0.1) * 5 = 4.5%. For a student loan, there’s a 100% chance of me paying it back, so if the interest is 3%, then the expectation return is -3%. If you had the money in the bank right now to pay it off, and you invested it at 4.5%, you would make enough from the interest in your investment to pay off the interest payment each month.

    However, if your student loan is 5%, then you are playing a riskier game, and you’re probably going to need do whatever helps you sleep at night.

    Keep in mind also, that part of student loan interest (as well as mortgage interest) is tax deductible. If you pay 5% interest, and all of it is tax deductible (never true, because you get a standard deduction) then you’re really paying 5% before tax, which is more like 3% after tax (5% * 0.6).

    Remember all those fractions in school? Do you remember asking why they were useful?

  16. ctreit says 06 April 2010 at 08:57

    This is a great exercise. When you know how much debt really costs you, you can make a much better decision whether having debt or even adding to it is really worth it to you personally.

  17. chacha1 says 06 April 2010 at 09:03

    @ Nancy L #4, you make an excellent point. Finding out exactly where you stand is an essential first step, but then you have to accept and embrace the spend-less-than-you-earn lifestyle.

    Also, knowing that you’re paying $X a month in interest is only motivating if you know you have some cash flow available to start retiring the debt. If you genuinely can’t squeeze out an extra dollar, it will only make you feel worse to know how much your past spending is costing you.

    As long as you’re worried about emergencies, you’ll never feel comfortable about your cash flow! Once you have a comfortable emergency fund and have successfully converted your mind to living on less than you earn, THEN you can attack debt.

    I feel soooo much better now that I’ve got two months’ rent in the savings account – and I don’t even pay the rent, DH does. It makes me completely comfortable with slamming 60% of my take-home pay into debt repayment. And I still have enough left over to buy us a life (quality food, coaching, travel, etc.) and security (HSA, 401(k), insurance).

    @ Sarah G., if the loans trouble you, then they’re not good. Pound down the credit cards, then make a plan and pay those suckers off. Your education – just like a house – isn’t worth a thing until *you* own it.

  18. Meg says 06 April 2010 at 09:10

    Sam (#1) – you paid off $55,000 in one month?!

    I agree with everyone else – getting that wake-up call as to how much you owe, and how much you’re throwing away in terms of interest, is what a lot of people need to get motivated.

  19. Kevin says 06 April 2010 at 09:35

    I have a method that gives me a rough estimate of how much my debt costs me each month. I am focusing on getting rid of it.

    When I started, my debt was costing approximately $305.69 each month. As of this moment, it’s costing me approx. $240.47. A difference of $65.22 a month (a savings of $782.64 a year and growing).

    I still have a long way to go. It’s a lot of low interest debt so the amount of interest crawls down slowly even with big payments.

  20. Kevin S says 06 April 2010 at 10:12

    I think that student loans used to be better debt than they are now. The interest rates on my undergraduate loans were flexible and I consolidated to lock them at less than 4% but my wife’s more recent loans are fixed at rates from 6.8% to 8.0%. It seems insane to me that a home mortgage has a lower interest than an education.

    A graduate will still come out ahead in the end but it seems like the federal student loan system has been taking advantage of the lack of student lobbyists.

  21. Paul in cAshburn says 06 April 2010 at 10:14

    When I had debt (other than mortgage), I kept a spreadsheet that listed the company, the interest rate I was paying, their phone number, and my account number (with all but the last four digits masked as an “x”). If I lost a card, I had the number to call… and, I knew what my accounts looked like – both individually and in toto.
    Then, I created a monthly entry for each account that listed the balance, amount due this month, date due, and amount paid this month.
    I then summed all credit and loans so I could see how much I owed, how much was due each month, and how much I paid each month – for all debt.
    I didn’t think of putting an entry that showed how much interest I was paying every month on each account. That probably would have motivated me toward paying off debt sooner… wish I had thought of it then.
    I still keep that spreadsheet, but it’s pretty boring now because amount due equals amount paid for everything but my mortgage.
    By the way, by NOT having any other debt I am able to make double payments on my mortage. Watching the amortization rate with all that extra principal is fun!
    Keep reading GRS, and join the fun as soon as you can! 🙂

  22. Crystal says 06 April 2010 at 10:22

    I’ve even started refering TO my credit cards by how much interest I pay a month! Instead of saying ‘Capital One’ I say ‘my $28 per month card’ just out of habbit. Confusing to others, motivates me

  23. LisaD says 06 April 2010 at 11:39

    I got my first CC statement with the “cost to pay off at minimum payment” section yesterday. What an eye opener! I pay off monthly so it’s not a problem but still, I think some people are going to be surprised by that.

    I’m slaying a Parent Plus student loan right now. Besides the mortgage it’s my only ongoing debt. “good” debt doesn’t cut it in this case, I just don’t want to make monthly payments for 10 years or pay that interest. Besides, I think the whole “good debt” thing only matters when you are trying to justify the loan. Once you have the debt it’s all “bad”.

  24. RyanQ says 06 April 2010 at 11:46

    So I have $22,920.51 in student loan debt at an 1.625% rate. I pay the minimum, which is around $107 per month. Is this considered bad debt? The payment doesn’t really phase me at the moment.

  25. DreamChaser57 says 06 April 2010 at 12:19

    i think the ultimate goal of any personal finance strategy is to reclaim your income from debt irrespective of the type (credit cards, mtg, student loans). it makes sense to prioritize your debt, and credit cards for obvious reasons should be the first thing on every household’s “hit list”.

    however, student loans should not get a pass, the fact that they are widely regarded as “good debt” does not change the fact that if you cannot afford to pay them you can go into default, your credit will be adversely impacted, they are not dischargeable in bankruptcy, you have to carve out money every paycheck to service the loans, interest is constantly accruing, if you are lucky enough to have fed loans there are statutory limitations to economic hardship, unemployment deferments, your debt-to-income ratio suffers for years on end limiting your capacity to qualify for a MTG, money spent servicing the debt can be devoted to investments, retirement, etc. I know it’s mind numbing and overwhelming – but keep in mind the Chinese proverb the journey of a thousand miles begins with a single step. I sincerely believe that “single step” is awareness.

  26. Patrick says 06 April 2010 at 12:28

    Sounds like Shock therapy! 🙂
    Truthfully, sometimes it takes a large catalyst to invoke change.
    The number one step in changing anything is, first, understanding where you currently stand. Only then can you map out a plan to move forward. Even if it means moving through a mountain of debt. I applaud those who brave the mountain.

  27. matt6 says 06 April 2010 at 12:46

    I think what people fail to pay attention to is the interest rate vs inflation on long term student loan debt. If one looks at if from the banks perspective on a 2% or 3% fixed student loan, the bank wants you to pay that off as fast as possible so that they can then re-lend at a higher rate. If I have a $50k SL @ 2.5% fixed over 30 yrs, I am laughing at the bank and NEVER paying that off early. The only way one should pay that off early is if the bank treated your debt as a bond where one only paid the NPV (net present value) which would be much less than the $50k.

    Understanding long term lending rates, and understanding yield curves can greatly improve one’s understanding of their own personal financial house.

  28. Ronnie says 06 April 2010 at 12:59

    People have a tendency to presume that student loan payments are fixed. Umm, not if you have private loans. Mine were 8.4% in 2006, have dropped to 3.3% now, and I’m sure will start to climb quickly once the Fed starts raising interest rates.

    Student loans DO NOT NECESSARILY equal good debt. A debt that you can never get rid of and that will follow you around all the days of your life does not, in my humble opinion, equal good. Student loans MAY increase your earning potential, but are not guaranteed to do so.

    While I don’t stress my student loans, I’m not going to sit around and let the bank have my money for the next 30 years either, and I have 2 loans under 2% interest rate for the life of the loan. Matt6 mentions a $50k SL @2.5% fixed, well take that and multiple it by 10, and that what me and my boyfriend have to pay. Thirty years my bumpkiss.

  29. Budgeting in the Fun Stuff says 06 April 2010 at 13:01

    The only interest we pay is for our mortgage and one car loan. The mortgage will be paid off by 2017 and cost us $30,000 in interest. The car loan will be paid off in 2011 and will cost us about $3500 in total interest.

    After that, we plan on buying all future cars with cash and only owning one other house in our lives…even that will hopefully be a small loan due to cash reserves for a large downpayment.

    Interest lost to debt makes me cringe, but sometimes it’s understandable (like mortgages)…I’d still pay them off as quickly as possible though.

  30. Jonas says 06 April 2010 at 13:07

    I think I could say I have always had my head on straight when it comes to debt. I have only one credit card, and that is for when I really need money at the time. And I have no debt on the card. The only real debt I have is my student loans, which is a lot. Since the banks took a dive, I have been forced to pay my loans back in a 10 year frame. I just paid my car off last summer, so now I am trying to save money. But with all my loans added together, I am being force to pay $1610 a month for 2 years, and then it drops down to $1500 for 2 years, and then $1400 for the last 4 years. The first two years was interest only payments. That allowed me to get my car paid off and my credit card paid off.

    I tried consolidating 5 times, but every time I wasn’t approved even with a cosigner. Finally I said screw it. I have been working two jobs and hopefully I will be getting a third job this summer at an old factory who said they will hire me around June. 🙂 That should help a little.

    My problem is…I want to get married…but I don’t have NO money to even rent. I still live in my parents basement…lol…I know…and I will be 25 this May. So my only hope now is for my gf…to help me out with rent for at least 8 more years.

    Does anyone have tips or suggestions that might help maximize my funds by any chance?

    I am even collecting pop cans to help cash them in for cash..ugh!

  31. Paul in cAshburn says 06 April 2010 at 13:17

    @matt6 #27:
    I’d recommend saving $50k (building the account at whatever rate you can afford) so you could pay off the loan if you wanted to…
    I remember being told when I bought my first house: “Every dollar in debt cuts your buying power by $2.” I don’t know if that rule is valid, but it made an impression on me.
    Not paying off a debt because of interest vs. inflation “savings” seems risky to me – unless I had the wherewithal to pay it off sitting there ready to go when/if needed.
    Just a thought. I do understand your point.

  32. Sarah says 06 April 2010 at 13:22

    I think the question “are student loans good debt?” is answered in the original post. See how much interest it’s costing you each month and see if that’s a problem. Also note if the rate is fixed or not.

    We have one student loan for around $10k that is 2.7%, has a payment of around $75 a month, and costs about $20/month in interest. Not a problem.

    I have another student loan for about $35k at 6.8% and of the $290 payment each month, $220 goes to interest. That makes me sick, especially when I calculated that paying $100 extra each month would have the loan paid off 12 years early. So I’m paying extra on this loan.

    A third student loan we have is $5000 and has a rate of 5.5%. About half of the $48 payment goes to interest. I’m planning to pay it off early because then I can use that $48 each month to pay down the big loan. The loan at 2.7%, I’ll make the minimum payments until the end.

  33. matt6 says 06 April 2010 at 13:28

    I think what I am trying to say is that banks are out to screw consumers. If one understands the bond market. A $50k bond @ 2.5% interest is suddenly worth MUCH less than $50K bond when interest rates move to 3%. So why would a consumer who has a below market rate ever pay the bank back in full early. (and yes my assumption is that a 2% to 3% fixed student loan rate over the course of 30 yrs will be MUCH lower than market rate).

    Personal finance seems to lack the connection to corporate finance and how businesses manage debt payments. Just trying to convey a different point that makes people understand when paying off debt early is to their detriment (sp). (again my original assumption is people have cash flows (greater income than debt payments and invest) — so just a different way to think of debt.

  34. Ely says 06 April 2010 at 13:54

    I have a student loan I’ve been pretty much ignoring. Monthly payment is about $120, of which $100 is going to principal, and I’m halfway through the 10-yr life of the loan.

    It’s got a tiny interest rate, so it’s a pretty low priority for me. Before I throw extra money at that I’ll be setting up my e-fund (in progress) and maxing out my retirement accounts. By the time I do that it’ll probably be paid off anyway. 🙂

  35. Nicole says 06 April 2010 at 13:56

    @32 Matt– because personal finance isn’t always about optimizing money, it’s also about optimizing happiness, security, etc. If a debt is bothering someone, they can either rationalize the debt or they can get rid of it. There’s no obvious answer to which of those two mechanisms is easier or better for someone’s utility function. If a person has a strong distaste for debt, there may be a stronger present value on lifetime happiness attacking it constantly than there would be sticking the money elsewhere and making a higher interest rate.

    Companies are risk neutral. People are not. Companies don’t put things like likes and dislikes in their utility functions. People do.

    (Also, if you want a rational reason to get rid of student loan debt– it can’t be discharged during a bankruptcy like other debt. Not that anyone ever plans to go bankrupt.)

  36. Kim says 06 April 2010 at 14:01

    We have been debt-free (including the house) for 15 years. Let me just say it is infinitely more fun to send $2000 to savings and investments every month than to some finance company. I can’t tell you how much freedom from debt has enhanced our lives.

    There is no such thing as “good debt”.

  37. jackie says 06 April 2010 at 14:20

    @sarah
    I think of the “good debt” “bad debt” thing as it’s a good debt to get into in the first place, which is not at all the same thing as being a good debt to hold onto. Taking out a student loan presumably increases your earning potential for your whole career. That’s no reason to hold onto the debt though. Paying it off isn’t going to cancel out your degree!

  38. matt6 says 06 April 2010 at 15:31

    @ Nicole –
    I do agree with you that people’s emotions and “fears” of debt create irrational financial decisions. And maybe people should run their financial houses with less emotion and more statistics/mathmatics.

    And I would disagree that personal finance is not about optimization of money. Everyone is trying to optimize the money they make, the return they get on their money, and create lowest possible risk to their future. We are each CFO’s of our own finacial house.

    While paying off debt is never a bad decision.. there are many instances which paying off debt is not the “Best” financial decision.

  39. Nicole says 06 April 2010 at 16:11

    matt6– Money isn’t what’s important, utility (or happiness) is. Finance is about optimization of money, personal finance isn’t. Personal finance is personal. People’s tastes enter into it.

    It’s funny because I’m reading JD Roth’s book right now and his opening chapter is about how money isn’t what’s important in personal finance. Another of his main tenets is quoting Voltaire, “The perfect is the enemy of the good,” something that is illustrated in great detail in The Paradox of Choice.

    Your best decisions may be the optimal rational decisions, but not everybody is alike. Many people benefit from satisficing, from following their own needs, wants, and goals. Everyone is not trying to optimize the money they make– some of us are more interested in satisficing on time.

  40. Dalene says 06 April 2010 at 16:19

    Like Sarah, my student loan debt freaks me out. (just over $70k). However, it’s my ONLY debt.

    I have a spreadsheet that lists my two loans. It calculates my current balance, my payment, any extra payments, how much is going to interest and my pay off date. Every month I can pay extra, my pay off date is earlier and earlier.

    It defiantly helps out when i have those freak out days, and makes me feel more in control.

  41. bethh says 06 April 2010 at 16:53

    I’m so so so close to paying off my student loan, which is my last bit of debt (I rent). It started at about 17k in 2004, with a ~3% interest rate, so I could have just paid little bits on it forever. However I calculated how much of my money was going to interest, and decided that even that not-huge amount was not acceptable.

    Now the balance is just under 2k, and if I raided my emergency fund I could pay it off altogether. I’m trying to force myself to be patient and do it the slightly-slower way – right now I’m on target to be paid in full in October, and expect to bump it up to August with extra payments that I scrape together. I may crack and pay it all off before then; we’ll see. I think delaying it will let me bask in the debt-free glow, but maybe I’m wrong!

  42. quiviran says 06 April 2010 at 21:29

    This exercise can be a real eye opener. Even more enlightening would be to do the analysis before the debt is incurred. I shudder at the amount of money I wasted on interest over the years. The eye opener came when I calculated the interest per day. Why would I spend that much money each and every day to make a banker richer? Never again.

  43. David/Yourfinances101 says 07 April 2010 at 04:00

    You know, I never did this, even when my debt was at its worst.

    Maybe I should have, it may have motivated me more.

    However, I knew it was awful–I never really saw the need to put an actual dollar amount on it.

  44. sandy says 07 April 2010 at 10:48

    Yesterday was our “Independance Day”…we paid off our home mortgage! What a great feeling! We still have 2 car loans (a CD comes due in Sept., and will knock out one of these). We are done with a 30 yr, 6.3% fixed mortgage, in exactly 11 years. If my figures are correct, that means that we will have kept $165,000 in our pocket rather than handing it over to the bank in the form of “good debt” interest (over the next 19 years)by aggressively prepaying the mortgage. With 2 girls coming up to college age, that extra cash flow will come in very handy!
    Several years ago, I figured this out as a way to motivate us to pay it down fast…we were paying about $15/day for the home mortgage interest. Plus, we had a car loan, too, which was about $5 per day. We pay our CC off every month.
    Like Kim, I look forward to being completely debt free…I look at money flow like this…I’d rather cash come in one hand and right back into one of our pockets, than cash coming in, but flowing to banker’s pockets. Whose pocket do you prefer putting cash into?

  45. Nicole says 07 April 2010 at 11:24

    Congrats, Sandy!

  46. Money Funk says 07 April 2010 at 13:10

    Ya, it really hurts when you figure out just how much interest you are paying on those debts monthly. Makes for a great wake up call!

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