I’m sitting here going through our finances, trying to to see what else I can do to get ahead in life. I’d say I’m pleased with where we stand at this stage. But I’m always analyzing ways to turn weaknesses into strengths, or rather how to mask them.
So here’s my current scenario. We have student debt. I’ve said this on the kinja-verse a few times before so I don’t feel it’s too personal considering I’ve already revealed it in other contexts. We are paying it off as scheduled, but let me be honest about its presence (here comes the car part!): “Why finance this new Lexus when you can pay off your student debt instead?”
And we’ve only recent begun paying it. It’s a bill we can afford comfortably right now, mind you. No one’s sacrificing overpriced coffee or local craft beer. But the opportunity cost is eating at me. That’s X times 12 NOT being saved annually. Or used for a myriad of other things that we value or want or need. More importantly to me, that’s money that we can’t use towards a loan for buying another house in the future.
So I sat down with a burnt cup of coffee and starting looking up all the loan details, avenues, etc. Then I came to a crazy proposition: what if we just paid off (at least) one of the loans in full right now? The risk is obvious: a substantial amount of cash (savings) *zip* gone! The household and inhabitants potentially vulnerable, etc.
But consider the arbitrary scenario as follows: suppose we said that any money allocated to student loan payments would be directly routed to savings if the payments did not exist. Now let’s say I had a debt (THESE FIGURES ARE MADE UP!) of $40,000, at 6%, as a ten year loan.
If I make payments as scheduled: Total money LOST on the debt over ten years is $53,289.83 (value of loan plus interest).
That’s over $13k left on the table by not paying it off today (Math: you spend 40k today, you save $444 times 12 months times 10 years, or rather, you save $53,289.83, spend $40,000, net $13,289.83).
Now what’s the problem? Well, with the above example, it would take about 7.5 years to recoup those lost savings initially spent the first day. So, yeah, 2.5 years of pure profit, but 7.5 of trying to breaking even. Not to mention actual real-life considerations: What if someone loses their job? What about a large medical bill? What if we have kids?
I guess it’s a matter of outlook. Do I want peace of mind and be debt free, or panic over a thin looking savings account? Do I want to flush a (fictional) $444 down the toilet every month for ten years?
This is an oversimplified example, as it does not take into account monthly savings that would have been acquired anyway, income, other expenses, etc. Still, fun to think about. It’s just that right now I don’t have children, and I don’t have a car payments, stuff like that, so this could be the best opportunity to dig into the debt I might ever have, unless something major happened like a huge pay raise.
These are the kinds of posts that happen when the weather outside is really crappy.