How to find the sweet spot for paying extra on a debt

If you have debt, some of the mandates are clear to you:

  • Pay it off, obviously.
  • Pay down a single debt at a time. Pay either the highest interest rate debt first (which makes sense on paper) or the lowest-sized debt first (which works) or some combination.
  • Pay as much as you can, to get rid of the debt as fast as possible.

It’s that last directive that I want to talk about today.

If you’ll notice, that’s the most nebulous of them all. “As much as you can” doesn’t really give you a roadmap. How much “can” you afford to put down on a debt?

Obviously, I could hide behind saying “everyone’s situation is different”. But I want to try and inject a little more to the discussion.

Because this is also a “more” situation, talking about you one should be doing “more”, without identifying what that “more” is.

And if you’re wanting “more”, you’ll never achieve it. As there will always be more.

I want you to feel satisfaction in your plan. I want you to achieve maximum impact.
So if you’re paying down a debt, what real difference would paying more do? Is there a sweet spot?

Let’s find out.

Example 1: Student loan

Let’s say you have a $30,000 student loan at 6% interest. And let’s say the minimum payment is $300.

At that rate, you’d pay off the loan in 11.5 years.

(I used this calculator to get all my numbers. It’s stupidly easy to use.)

If you paid $400 a month, you’d pay off the loan in about 8 years.

$500? 6 years.

I graphed this for you.

Notice something interesting here: there are diminishing returns on extra payment amounts made.

The difference between paying $300 and $600 is about 7 years, but the difference between $600 and $900 is lest than 2 years.

At some point the curve bends toward pointlessness. That first extra $100 makes an impact. That last $100 doesn’t matter.

If you had some extra money, instead of just putting down “as much as you could”, look at this chart. What would make the most impact, and still feel like it was sustainable?

Notice I’m not talking about interest versus principal numbers here. I want to talk about time, not interest. Because really, what do you care about? How soon until you’re done?

Example 2: Mortgage

Here’s another example: a mortgage.

Say you’ve got $200,000 left to go. Your payment is $1,500 a month, 4% interest.

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You’ll pay that thing off in about 15 years.

Give a $250 boost, and you’ll pay it off in 12 years. A $500 boost? 10 years.

Here’s the graph.

Again, the most impactful dollars you can spend are the first dollars you add. Each additional dollar makes less of a difference.

If you had $500 extra to spend, you could save that 5 years. But is it really worth spending $500 extra beyond that to save 2 more years ? Maybe. Maybe not. That’s up to you.

Your sweet spot is there

Obviously if you can pay something off quickly, you will, but I don’t know about you, but I can’t pay off my mortgage right now.

But I can see if some extra payments are worthwhile.

I encourage you to take a look at your own situation. Where is the sweet spot where you could make a change, add some money to pay down a debt, and really notice a difference?

Wouldn’t you be more interested in paying more if you knew just how much impact that extra money would have?

If you need help with this exercise, you can always write me and I’ll do what I can to help.

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