Updated: Jan 19, 2021
Save HUNDREDS OF THOUSANDS of dollars by retirement by chasing the highest rate
See How the Biden Presidency Could Change Student Loans:
A wonderful article on opportunities for handling and understanding student debt: https://www.bankrate.com/loans/student-loans/rates/#biden-student-loans SAVING MONEY WITH STUDENT LOANS
The Counter Intuitive Money Making Magic
Odds are that at some point in your life you were shown how you could save thousands of dollars by paying off your student debt as fast as you can rather than just pay the minimums. If you were ahead of the curve you might have asked, "But what would you have done with the money if you were just paying the minimum?" And this is where the trick that can save you HUNDREDS OF THOUSANDS of dollars by the time you retire!
Allow Me to Elaborate
Let's use a real example that we used for someone trying to make the most of their money. Imagine that your total student debt was $23,072.60 and you had $500 to throw into student debt but your minimum payment was $236. You could throw all of the $500 you have budgeted into student debt and once you paid it all off start investing it into and S&P500 index fund. Here is roughly what that would project forward to:
Now For the Moment We've All Been Waiting For!
For the next example let's say you only invested the minimums and took the rest and invested it instead into an S&P500 index fund:
$500 total monthly budget - $236 minimum monthly payment = $264 left for investing or student debt payoff
Your projected growth would look something like this:
That's a staggering $292,662.81 more at retirement than putting all of it into your student debt!
How Does This Work?
Just like how you want to pay off your loans with the highest interest you also want to look into seeing where your money can grow with the largest interest. Whether it's making you money or losing you money you want to look at the interest rates first. For example, if you had a credit card debt balance that was losing you 26% you would want to tackle that instead of investing the money if you couldn't find a method around it. This whole concept is called opportunity cost and it is our favorite topic.
Opportunity cost is the loss of potential profit from choosing one option over all other alternatives.
The individual who we did this for had a student loan total that is much lower than the national average. This means that for the average person this would amount to a MUCH HIGHER number than we estimated. Of course the S&P500 index yearly performance and the rate of your student debt loans are subject to vary but these are very strong estimates of what to expect. This example is from an individual with student debt rates around 4% on average. It is possible that the student debt loan rate exceeds the rate of return on investing and it would be better off paying the debt. The key is to follow the rates.
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