The Best Way to Apply Extra Payments to Debt (DRS #4)

This is the 4th post in the Debt Repayment Plan Series! If you’re new to this series, start here.

Another important part of creating a debt repayment plan is knowing how extra payments will affect the life of your payments. This is incredibly important because this can make a pretty significant difference in the life of your loan. Extra payments are everything when it comes to paying off debts early. But are you using the best approach?

What Extra Payments?

In a previous post, I mentioned I have a goal to save $7,557.97 this year. Unlike many others, the purpose of me saving that money is not to create a large savings account, but rather to help pay down my debts. Originally, I planned to pay one lump sum at the end of the year.
After I started entering in the information into my debt reduction calculator, I realized paying a lump sum was not the best option. I learned if I spread the total amount out over the course of the year, I would reduce my overall interest and life of my loan.
Now before I jump into my personal example, we need to go over a few things.

  1. Making extra payments monthly, or any extra payments at all, will make a difference in your repayment plan.
  2. I always pay more than my minimum payment, so any examples specifically relating to my payment strategies show a “snowball” of my monthly extra payments.
  3. You can repay your loans with any strategy that fits you well.
  4. All examples shown can be applied to either the Snowball Method or the Avalanche Method.
    1. Both examples have the lowest balance debts with highest interest rate and vice versa.
  5. If you want to use the same spreadsheet I do, please download it here.


Personal Example

Here is the original estimated payoff plan for my current debts:
Best Ways to Pay Down Debt | Furry Finches
If I add a $7,500 payment in December:
Applying a Large Extra Payment
I will save myself $1,042.08 in interest and move my payoff date up six months to November, 2019.


If I spread out the payments:
Spreading Out Extra Payments
I save myself $1,197.44 in interest with a payoff date in November, 2019. That’s an extra $155.36 saved on interest!
I might as well pay extra on my debts as I save up towards the total goal to reduce my overall interest costs.

Obviously, it goes without saying that the best time to add extra payments towards debt is as soon as possible. Immediately. Now.


Example 2

Now I realize my personal example might not be the most helpful to you. As a result, I’ve created an example, and provided examples of how adding even a small amount above the minimum payment can really pay off.
This example includes a credit card balance of $5,000, a student loan balance of $30,000, and a mortgage of $100,000.
Extra Payments on Debts | Furry Finches
As you can see from the chart above, even an extra $20 a month can be a HUGE difference overall.

  • Paying just $20 above the minimum payment saves you a total of $1,440 in interest and knocks years off the life of your first two debts.
  • Paying $100 above the minimum saves you $5,523 in interest and makes your overall payoff date a whole year sooner!


Best Practices

The absolute best practice for paying off debts is to always pay more than the minimum payment. If you can’t manage that on a consistent basis, don’t fret. Any extra payments you can make along the way will reduce the life of and total interest on your loans.
If you’re doing a personal challenge to apply as much as possible to a debt, be sure to pay as you go because it will make a difference.
Now go forth and save, my lovelies!
The Best Way to Apply Extra Payments to Debt | Furry Finches Debt Reduction Plan Series

How do you apply extra payments?

Check out the next post, 4 Tips for Controlling Your Spending.

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