The most concrete benefit of getting out of debt is the payments you stop making. Add up what you pay each month on every credit card and loan, then multiply by 12. That’s the raise you get once the last balance is gone, and it’s money you’ve already paid tax on.
That yearly figure deserves more of your attention than the balance, which falls slowly enough to make quitting tempting. The balance is what you owe. The payment total is what paying it off buys.
Say your household pays $900 a month on a car loan and two credit cards. Once those are paid off, you keep $10,800 a year. Because the payments come out of take-home pay, keeping it beats a $10,800 raise, which would shrink once taxes came out. Invested every month at a 7% average annual return, the freed $900 grows to about $155,000 in 10 years, by our math.
The benefits aren’t only financial. Northwestern University researchers who studied 8,400 young adults found that those with high debt relative to their assets reported more stress and more symptoms of depression. In a 2019 study, 22% of people visiting debt advice centers in one German state had used sleep medication in the past four weeks, against 6% of German adults overall. Fewer bills also mean you need less income to get by, which leaves room to take a lower-paying job you want or ride out a layoff.
Work out your own number before your next payment is due:
- Count everything you pay toward each card and loan in a month, extra payments included, not just the minimums.
- Leave the mortgage out unless paying it off is part of your plan.
- Write the yearly figure where you’ll see it every time you make a payment.
- Plug the monthly total into the SEC’s compound interest calculator at Investor.gov to see what 10 or 20 years of investing it would build.
If paying off your debt fast means a lean year or two, weigh that against a raise that lasts as long as you stay out of debt.
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