When you make a decision to get into debt, you’re also making a decision not to do many other things. Here are the three biggest opportunity costs of not paying it off.
Opportunity Cost #1 – Your Future Retirement
This cost will affect the day-to-day existence of possibly a third of your whole life. Some people may think that since retirement is so far away, they don’t have to be concerned about it yet.
But retirement planning is a lot less difficult the earlier you do it. If you wait until 15 to 20 years before you retire, you’ll have a more challenging time saving for a successful retirement. And to save adequately, you’ll need to eliminate your debts ASAP.
Why? People are living longer and longer, yet our employers and Social Security are providing less and less. As you decide what to do with the dollars that come into your hands, keep an eye out on your retirement.
Because if you’re 25 years old and want $600,000 by the time you’re age 65, you’ll need to save about $175 every month with an 8% annual return.
But if you wait until you’re age 35, you’ll need to save about $410 a month (more than double) to accumulate the same $600,000 at retirement.
Opportunity Cost #2 – Paying Less Interest
Debt forces you to give your money to someone else, for something you bought in the past. Ideally, we should spend it on things we need now or will want in the future, such as a nice retirement or college education for our kids.
Paying off your debts sooner means that interest won’t accumulate as quickly, which leads to your debts getting paid off even faster. Then the money that you waste on debt will be freed up for more beneficial uses.
Let’s take a look at a specific example. Suppose you owe $25,000 at an interest rate of 20 percent. If you made just $500 in monthly payments, not only would it take you over 9 years to pay off, but you’d also be paying a total of over $29,000 in interest over the life of the debt. That’s more than the debt itself!
But what if you doubled your monthly payment to $1,000? If you did this, you’d get rid of your debt 3 times as fast (less than 3 years), and pay over a third less interest (about $7,600). With the money you saved from interest, you could do something nice like purchase a car with cash! I hope this inspires you to look for ways to pay down debts faster.
Opportunity Cost #3 – Your Own Well-Being
I think it’s pretty obvious that financial pressure affects our overall life, leading to stress, anxiety, unhappiness, and even relational challenges.
And this financial pressure probably doesn’t come from having too much money. Rather, it’s likely to come from owing a lot of money to others.
As you improve your financial situation, my guess is that you’ll also improve other areas of your life, such as your emotions and even your physical health. I hope this is enough inspire you to get out and stay out of debt.
Can you think of other opportunity costs of not paying off debt?
Photo by fussy onion