It’s very easy to say “I want to be debt free” and come up with a plan so that in some number of years you are debt free. But what you may not even consider is that focusing on being debt free may end up costing you money in the long run.
The above chart represent two scenarios. The blue line represents paying the minimum amount due on each debt and then putting the payment into some interest earning account until 30 years have gone by. So let’s say I owe $100 a month on a credit card and in 2 years it’s paid off. For the next 28 years I put $100 a month into an interest earning account.
The purple line represents the debt focused mindset. As debts are paid off the payment is applied to the next highest interest bearing account. Money isn’t put into an interest earning account until all the debt is gone.
The interesting thing is that until I start earning about 6% in an interest earning account, it’s best to just throw my money at debts. But, if I can get more than a 6% return somewhere else it’s better to just put the freed up money that was paying debts into the interest earning account.
At the end of 30 years with a 10% annual return on investment I’ll have $360,000 more than had I worried about paying off all my debts first. The sum of the remaining debt is far less than that so I end up ahead overall.
So sometimes it pays to not worry about debt.
