Have you ever had a conversation with a friend or acquaintance about how they are only paying the minimum payments on their student loans because the interest is so low? Many people fall into the trap of keep debt around as long as possible, because they’d rather do something else with their disposable income. This is a pretty huge debate in the personal finance community, so I am going to lay out a few reasons why I think paying off debt early and often is the way to go.
It will free up your best wealth building tool: your income
Your income is the best tool you have for building wealth. When all of your money is coming in and going out the next day by dozens of bills to pay, you have nothing left over to save and give.
It takes away financial risk in your life
You may have no problem paying the monthly payments now, but what if something happens that changes your life? If you lose your job, have a death in the family, or a medical emergency, the last thing you want to think about is a student loan or a car payment. The less debt you have, the less financial risk you have.
It allows you to give more generously
Why pay interest to the bank when you could be giving that extra money to your church or favorite charity? It’s tough for broke people to be givers. If you pay off your debts, you’ll have more disposable income to give back to others.
You’re not getting rich off of an interest spread.
One common argument is that people would rather invest their money and make 7 or 8 percent, rather than pay off their student loan at 5 percent. First off, that 3% spread isn’t going to make you rich, and most people that make this argument aren’t factoring in taxes and fees with the money they are investing. Plus, if you pay off debts quickly, you’ll be able to contribute more to investments and build up cash much faster than before.