Debt Amortization Calculator
Paying off your debt will yield a higher than antipicated rate of return because the savings are untaxed guaranteed profits. This debt amortization calculator will show you just how much money you could be saving by increasing your payments on a particular debt. First enter the current principal balance owed and its attached interest rate. Then enter the amount you’re paying per month on this debt, as well as a dollar amount you could add to that payment.
Once you’ve provided the required information, press “Compute Return on Debt Investment.” You’ll see the number of months it will take to pay off your debt if you stay the course and the number of months it will take if you increase your monthly payments. You’ll also be provided with interest costs, both unrevised and revised. Your interest savings (ROI) will be spelled out, as well as your guaranteed rate of return. In the end, it will be obvious just how much money you could be saving by adding a little bit to your monthly payments.
Investing in Optionality
There is a lot of debate about whether you should use your money to pay down accounts that are in the red or if you should invest it in a portfolio instead. And there are good arguments for either course of action.
At the most basic level, paying your creditors will reduce your monthly expenses, leaving you with more money to play with (and potentially invest). And you can improve your credit score in the process.
On the flip side, investing now could help you earn more money even as you pay off what you owe, albeit more slowly. So, which is really better for your finances?
The truth is that when you run the numbers, you'll see that one option is consistently better than the other in terms of both risk level and financial solvency. Paying what you owe first is almost always going to work out better for you in the long run.
Your broker may try to tell you differently, and if you don't know a lot about financial decision-making, you could be tempted to take his advice. But if you speak with a financial planner or simply use common sense, you'll see that paying off financial obligations is the way to go.
Here are just a few reasons why paying off lenders is a better option, complete with lower risk and higher return, than contributing to an investment portfolio and playing the stock exchange.
Access to Cash
This is a major factor to consider when trying to determine how best to allocate funds. Whether you've gotten a raise at work or you've enjoyed a recent windfall, you might have extra cash on hand that you could either put towards lowering what you owe or increasing what you earn.
But you need to consider what each will do for your current financial situation. Paying off the balance on a credit card or the remainder of an auto loan more quickly will do a couple of really great things for you.
For one thing, you'll free up some space in your budget, giving you more cash every month to allocate as you see fit - including putting money towards retirement or other investment accounts.
You'll also reduce the amount you would have paid in interest had you not paid the principle on loans early. And you'll give your credit score a boost in the process.
So what do you get from putting your extra cash into investments? There's no way to tell. No matter how you spend your money on Wall Street, there are no guarantees that it will come back to you, much less with interest.
Let's look a little more closely at the nitty-gritty of what we're discussing here. You should start with an understanding that some loans actually work to your benefit.
Your mortgage, for example, benefits you in a couple of ways, apart from the fact that you'll own a home once you've paid it off. For example, you likely enjoy a pretty low interest rate on this type of lending.
But you also get to write off the interest you pay each year towards your mortgage, saving you on your income taxes. And paying down a mortgage does wonders for your credit score.
What we're really talking about when we say it's better to pay off what you owe than it is to invest is high-interest, compound debt, such as what you carry on your credit cards. The interest on such financial obligations is often high to begin with (say 7-10%), it can increase dramatically if you fail to make at least minimum payments (double or more the original interest rate), and it compounds monthly (or even twice a month in some cases).
Such bills need to be paid off as quickly as possible. There is absolutely no investment available on the stock exchange that stands to earn you more than you'll end up spending to pay off the interest on your credit cards if you dawdle.
But what about high-interest investments? First of all, high-interest investments also come with high risk, which means you are more likely to lose your shirt than earn a significant amount of money.
And even then, high-interest stocks tend to offer only about 8-10% per year. So if you're really, really lucky, you might earn as much as you would have spent paying off your credit cards, and there is absolutely no guarantee that this will occur.
On the other hand, paying off credit cards fully guarantees that you will no longer owe that money and you can curtail your interest costs.
Your Financial Standing
When deciding whether to pay off outstanding accounts or invest your money, it's not a bad idea to think about where you stand financially and how prepared you are for the future.
Financial pundits and planners recommend that you have at least six months' worth of salary socked away just in case of accident, injury, job loss, or other disasters that leave you unable to work and earn a steady income. If you don't have this amount of money saved, paying down what you owe is more likely to help you reach your goals quicker.
Not only can you start socking away the money that would otherwise go towards your creditors once you've paid them off, but should you lose your job, you'll have fewer bills to pay. And if your income isn't currently steady, you're better off paying what you owe now so that you don't miss payments and incur fines, increased interest, and black marks on your credit during lean times.
Everyone says that investing when you're young is an essential part of preparing for retirement, but you need to understand the difference between putting money into retirement accounts and playing the market. The former is much safer, for starters, and often you can gain extra benefits like pre-tax contributions and even employer matching in some cases.
Investing in a stock portfolio is always a gamble, whether you're young or old. But you may be able to recover when you're young. Unfortunately, people tend to owe more in their youth thanks to student loans, pricey purchases (car, home, etc.), and misuse of credit.
So you can see why paying down financial obligations first, in particular those that entail high interest rates, is worth a lot more than throwing the dice on an investment portfolio.