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Compelling Wealth Management Conversations is a program designed to help provide philosophical and historical context and perspective to keep investors “buckled in” and stay the course during uncertain times (and when have times not been uncertain), while providing a framework to help identify the best opportunities going forward.
With the overall amount of student debt rising, total interest payments can be reduced by paying off higher interest loans faster.
Principal Interest 0 500 1,000 1,500 2,000 2,500 $3,000 Student Loan Credit Card $2,043.31 $2,412.99 $43.31 $412.99 $2,168.07 $2,095.44 $168.07 $95.44 Principal Interest 0 500 1,000 1,500 2,000 2,500 $3,000 Student Loan Credit Card Pay Off Your Highest Interest Debt "Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it." —Albert Einstein $320 to credit card $320 to student loan $80 to student loan $80 to credit card Scenario 1: Total interest cost = $456.30 Scenario 2: Total interest cost = $263.51 $2,000 credit card debt at 15%, minimum monthly payment $80 Bills: and $2,000 student loan at 7%, minimum monthly payment $80 Slide is for illustrative purposes only. 33
Before you do anything else, pay down those high interest-bearing credit cards. Einstein said it best, "Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it." It’s that simple. You can’t effectively grow your retirement fund and potentially compound returns in the equity market if you are consistently allocating money to fund your debt interest burden.
Which loans do you pay off first? Those with the highest interest burden. In the example we consider $2,000 of credit card debt at a 15% interest rate and $2,000 of student debt at a 7% interest burden. If you have $400 to allocate to your debt burden each month, then make a minimum payment towards the student loan and pay the rest to the credit card company. You will pay significantly less in interest over time.
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How our investment teams think about these big-picture trends shaping our lives.