Getting out of Debt Takes Time: Here’s how You can Speed up the Process with Roll Over Payments.
It can be difficult to get out of debt quickly. The average person should be debt free by the age of 58, unless you choose to extend your payments. Otherwise, you could potentially be making payments for another two decades before you become debt free.
Now, if you were to use a more disciplined budget and well-planned payments, you could be done by age 39. This “Quick Route” can clip off at least 16 years of monthly debt payments.
The trick is to use Roll Over Payments.
Roll Over Payments
These will help you pay off each debt quicker as time passes. Here are the steps:
Start with minimum payments on each of your loans.
Take the loan or debt with the highest interest rate, typically credit cards, and add $50 to the payment. (see our PowerCash post for ideas on coming up with this money.)
Once the first loan is paid off, “roll over” what you were paying into the next debt.
The idea is to keep the total monthly cost the same price until you are debt free. The rate at which your debts disappear grows quicker as time passes because a greater percentage of each payment is applied to your balances while your monthly cost never changes. Why should you choose the Roll Over Method? The answer is simple: Interest. If you’re using the minimum payments or the recommended plans set by the lender, it could take half your life to pay off all your debt.
Let’s look at an example:
The average American College student graduates at 22 years of age with student loans and credit card debts, and by age 28 buys his or her first home, with total depts equaling nearly $300,000.
$40,000 Student Loans
$5,000 Credit Card Debt
$250,000 First House Purchase
Grand Total: $295,000
We’ll take this graduate through three different routes. The Standard Route, then the Extended Route, and finally we’ll use the Quick Route, which involves Roll Over Payments. These scenarios assume the graduate starts making payments on his or her credit cards and student loans at age 22 and buys his or her first home at 28.
The Standard Route
The Standard Route is what credit companies and lenders recommend. If this is the graduate’s choice, he or she will be debt free around the age of 58. It will take a total of 36 years to complete. It’s a whole lot of time but it’s the standard for a lot of people. Here is what the graduate will end up paying on the Standard Route:
Student Loan: Repaid $53,400 ($13,400 interest) 10-year term: finished at age 32
Credit Card: Repaid $8,702 (3,702 interest) Using minimum payments: finished at age 37
Mortgage: Repaid $483,480 ($233,480 interest) If a first and only loan on a 30-year term: finished at age 58
Total: Repaid $545,582 ($250,582 interest)
The Standard Route is a viable option but will end up cost a substantial amount of interest.
The Extended Route
This is the financially unsafe option. On this route the graduate won’t be finished paying off the loan until he or she is 88 years old. We’ve also adjusted the mortgage to be more realistic, assuming the student has had a mortgage on multiple homes through his or her life. Additionally, this route assumes the individual carries a $5,000 balance on his or her credit card indefinitely, making a minimum payment but never paying off the balance:
Student Loan: Repaid $77,400 ($37,400 interest) Extended 25-term loan: finished at age 47
Credit Card paid $106,000 ($66,000 in purchases plus $40,000 interest… which is insane!) –$150 monthly payments.
Mortgage: Repaid $1,971,600 ($1,118,042 Interest) After upgrading homes every 10 years while doubling mortgage each time. By the age of 58, the graduate will have a million-dollar mortgage that won’t be paid off until he or she is 88. Yikes!
Total: $2,155,000 ($1,195,000)
Obviously, this not the preferred option. The graduate will spend his or her entire life in debt. The interest will grow to the point where it’s unpayable. If it’s unpayable than you’re going to financially fall apart. The extended route is the longest route to paying off your debt and the quickest route to bankruptcy.
The Quick Route:
This is the best option because it uses Roll Over Payments. It takes some effort, but it literally pays off in the end. By adding just $50 to the minimum payment of the account with the highest interest rate (in this case, the credit card debt) while rolling each payment into the next loan, the monthly cost will never change, but the debts disappear at a rapid rate.
Credit Card: $5600 ($600 interest) paid off at age 23.3
Student Loans: $50,560 ($10,560 interest) paid off at age 29.3
Mortgage: $410,420 ($160,420 Interest) Paid off and debt free at age 41.6
Total Paid: $467,180 ($172,180 Interest)
Compared to the standard route this is a massive difference. You would save almost $80,000 thanks to the Roll Over Payments. The main bonus however, is saving 20 years off your time in debt. That’s more time to live your lifestyle debt free.