Part of Oak Street Advisors’ 10 Financial Commandments for Millennials series, we go through the advantages of paying down common and often necessary consumer debts such as car loans, mortgages, and student loan obligations.
If you’ve made it to the 8th Commandment congrats, you have established a strong financial foundation; we also know you’ve paid off your high interest credit card debt—but now it’s time to start pecking away at the larger consumer debts weighing down your net worth.
I’m referring to debt typically considered “necessary” for most Americans—student loans, your mortgage, car loans, business loans etc. These are loans with normally reasonable interest rates and longer payoff schedules. Paying them down may seem almost unattainable but be assured, if you commit to doing so you will save a lot of money.
For example: adding $100/month to a $500,000 mortgage at 4.5% interest will save $36,240 over 30 years. That seems abstract, like you will never really see that savings—but your net worth doesn’t lie.
What Should You Start Paying Down First?
We discuss the two different debt payoff methods in Getting Out of Credit Card Debt: The 2nd Financial Commandment for Millennials. Our advisors tend to favor the Snowball Method, so we’d recommend starting with the smallest loan first.
The thinking is as follows; Paying off a car note early not only saves interest but also increases monthly cash flow by eliminating the monthly car payment. The money that would have been allocated to the car payment can now be used to pay down student loans or add monthly principle additions to the mortgage.
Paying down your mortgage or student loans is not sexy financial planning advice—but doesn’t saving tens of thousands of dollars and eliminating all debt down sounds pretty awesome?