Every once in a while, I like to listen to a little Dave Ramsey. And while I don’t agree with a lot of the things he says, I do concede that he does a good job of motivating people to pay off their debt. His secret is how simple and doable he makes paying off debt seem. Listen to him talk and you can’t help but feel like you’ll be able to crush any debt really fast.
Take the typical call he gets from someone asking about how to handle their student loans. It usually goes something like this.
Someone calls in talking about how they have some astronomical amount of student loans - $200,000 worth, for example. Maybe this caller will make a decent salary, $100,000 perhaps. Dave will then tell them that with a little grit and determination, they should be able to get out of it in just a few years. Live on $50k per year, throw $50k per year at the loans, and you should be done within four years. $200,000 divided by $50,000 equals four years. It sounds simple enough.
Of course, anyone who’s been in debt repayment mode knows that paying off debt isn’t quite that simple. There’s much more to it than just paying back what you borrowed. I find that when many people get started with paying down their debt, they get frustrated that it seems to be taking longer than it seems like it should.
That’s how I felt anyway. I made $110,000 as my starting salary out of law school. It still took me over two years to pay off $87,000 worth of student loans. With that income, it seems like I should have been able to pay off my student loans even faster than I did.
The issue is, when it comes to debt, you have two things that are going to slow down your debt repayment journey - interest and taxes. It’s good to understand the impact both of these factors will have on the speed of your debt repayment.
Paying Interest Will Slow Down Your Debt Repayment
It seems pretty obvious, but you’d be surprised at how many people forget or don’t seem to understand that they have to pay interest on top of their debt. The fact is, debt isn’t free. If you borrow money, no matter what, you’re going to have to pay back more than what you borrowed.
My own debt repayment story is a good example of how much interest can impact how fast you can pay off your debt. For me to pay off $87,000 worth of student loans, I had to spend $102,000. That’s a pretty big number I had to pay back - about 17% more than what I actually borrowed. And that’s with me paying off my debt just a few years out of school. If I had taken longer, I would have paid even more interest.
If you don’t know how interest works, it’s generally pretty simple. Just multiply your debt by your interest rate. That tells you how much interest your debt accrues in a year. If you have $100,000 worth of student loans at a 7% interest rate, you’re looking at approximately $7,000 worth of interest per year. If you really want to see how much your debt costs, try calculating how much interest your debt costs per day. To do that, just divide the total yearly interest by 365. You might be surprised at the number you see.
The key takeaway with all this is that paying off your debt doesn’t just mean paying back everything you borrowed. You’re going to have to pay back more than that. That’s why your debt will seem to take longer than it should to pay off. Throwing $50k per year at a $200k loan won’t get the job done in four years.
Intuitively, we all know this, but for some reason, a lot of us seem to forget how much interest can slow us down.
Paying Debt Requires Using Your After-Tax Money
The other thing that most people forget about debt - and what I think really makes it a pain to tackle - is that debt has to be paid with after-tax money. If you’re an aggressive saver with your pre-tax retirement savings, you’ll find that you’ll be able to accumulate money pretty fast. It’s not so difficult to build up savings when you’re able to save all of it without having to pay the government first.
The same isn’t true with paying off debt. Writing a $1,000 check doesn’t actually cost you $1,000. You have to remember that you first have to pay state and federal taxes, as well as FICA taxes. This can add up to a lot of money - and it means less money that you can use to throw at your debt.
Writing a $1,000 check really requires you to earn more than $1,000 to have $1,000 to spend. That’s a pretty significant difference that’s going to dramatically slow down your debt killing abilities. Even worse, when you’re in aggressive debt repayment mode, you can’t really do much to reduce your tax liability since you need all of the money you can get your hands on.
What Can You Do?
Given these two things that are killing your debt repayment ability, what’s can you do? Here are my thoughts:
- Refinance Your Loans. You’ll pay less interest if you refinance your loans down to a lower interest rate. If you’re in a position where you’re making a good salary and plan to pay off your student loans as fast as you can, it makes sense to refinance using a company like SoFi, Commonbond, or Earnest. Websites like Credible are also great ways to find lower interest rates. I wasted a year paying higher interest rates than I needed to simply because I didn’t know about refinancing my student loans. If I had realized it sooner, I could have saved more money and paid my debt off faster.
- Hustle To Pay Off Your Debt. Paying off your debt is going to be painful, no matter how you slice it. The key thing to remember is, the sooner you get rid of your debt, the sooner you’ll be able to devote more of your resources towards other goals. And when you’re debt-free, you’ll have so much more freedom to do what you want.
Your debt is going to be harder than you think to pay off. That’s just a fact given how debt works. You should recognize this and go into your debt repayment with eyes wide open. I’ve said before that paying off debt is never easy. But if you understand the obstacles that are in your way, it should be easier to stay motivated and stay on track.
It might take you longer to pay off your debt than it seems like it should. If that’s the case, you’ll at least know why. But stay motivated. If you keep at it, you’ll eventually get there!
More Recommended Ebike/Scooters
Check out these other ebikes/scooters I've had the chance to do a review for:
- GEN3 Outcross Bike – The GEN3 Outcross is a solid, affordable fat tire ebike that does a good job of doing what I need it to do. It works great for city riding, giving me a smooth ride in all conditions. It’s works really well as a winter ebike since the fat tires give it good traction over snow and ice. Check out my GEN3 Outcross Review.
- Himiway Escape Bike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Bike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
- M1 Finance ($10) – This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $10 for opening an account. Check out my M1 Finance Referral Bonus – Step-By-Step Guide.
- SoFi Invest ($25) – SoFi Invest is an easy brokerage account bonus that you can earn with just a few minutes of work. Use my SoFi Invest referral link, fund your SoFi Invest brokerage account with $100 and you’ll get $25 of free stock. I also have a step-by-step guide for the SoFi Invest referral bonus.
- Moomoo (5 free stocks) – Moomoo is a free investing app currently offering 5 free stocks (usually worth around $75-$100) if you open an account using a referral link and deposit $2,000. Read my Moomoo referral bonus guide for more information.
- Webull (5 free stocks) – Webull also gives you 5 free stock valued between $3-$3,000 each if you open an account using my referral link. Here’s a guide I wrote about how to earn your free stocks using Webull.
- Robinhood (1 free stock) – Robinhood gives you a free stock valued between $2.50-$225 if you open an account using my referral link.
- Public (1 free stock) - Public gives you a free stock valued between $3-$70 if you open an account using my referral link.
More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- Chime ($100) - Chime is a free bank account that offers a referral bonus if you use a referral link and complete a direct deposit of $200 or more. In practice, any ACH transfer into this account triggers the bonus. This bonus is easy to earn and posts instantly, so you’ll know if you met the requirements as soon as you move money into the account. I wrote a step-by-step guide on how to earn your Chime referral bonus that I recommend you check out.
- Digital Federal Credit Union ($100) – Digital Federal Credit Union (DCU) is a free, nationwide credit union that I recommend to readers for two reasons. First, DCU has a $100 referral bonus if you open a free DCU checking account with a referral link. Second, DCU has a saving account that gives you 6.17% interest on your first $1,000. Check out my in-depth post on how to set this account up.
- Upgrade ($100) – Upgrade is a free checking account that’s currently offering a $100 referral bonus if you open an account and complete three debit card transactions. These bonus terms are easy to meet, so it’s well worth doing this bonus as soon as you can. Importantly, this bonus says that it’s now scheduled to end on January 31, 2023. As long as you get your account opened before January 31st, you should be eligible. Here’s a post I wrote with more details: Upgrade $100 Referral Bonus – Step By Step Directions.
- SoFi Money ($275) – SoFi Money is a free checking account from SoFi. They’re currently offering a $25 referral bonus if you open a SoFi account with a referral link and deposit $10. You can also make an additional $250 as well if you complete a direct deposit. This is a good bank that is also 100% free, so you won’t have to worry about managing this account. Here’s a post I wrote with instructions on how to earn your SoFi Money bonus: SoFi Money Referral Bonus: Step By Step Guide.
- Current ($50) – Current is a free fintech bank that’s offering new users a $50 referral bonus after signing up for an account using a referral link.Current is an easy bonus to earn and also gives you access to three savings accounts that pay you 4% interest on up to $2,000. That means you can put away up to $6,000 earning 4% interest. That’s very good and makes Current an account I recommend to everyone. Check out my step-by-step guide on how to earn your Current Bank bonus.
- Fairwinds Credit Union ($100) – Fairwinds Credit Union is offering a referral bonus for users that sign up using a referral link. Fairwinds has no fees or minimum balance, so this is a particularly easy bonus to earn. Since this is a smaller credit union, my gut instinct tells me this offer won’t be around long, so if you’re in a position to meet the bonus requirements, grab this bonus before it’s gone. Here is my step-by-step guide on how to earn your Fairwinds Credit Union bonus.
- OnJuno ($60) – OnJuno is a fintech/neobank that is currently offering a $10 referral bonus if you open an account using a referral link and make a deposit of $50 or more. You will also get 1000 JCOIN. The 1000 of JCOIN is cryptocurrency. At the time I'm writing this, it'll be worth about $50. Check out my OnJuno referral bonus guide here.
- Varo ($30) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $30 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
- Novo Bank ($40) - Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. In addition to being a good bank bonus, Novo is also a good business checking account. It has no monthly fees or minimum balance requirements and operates a good app and website. Indeed, it’s the business checking account I currently use for this blog. Check out my post on how to easily open a Novo account.
- Albert ($150) – If you can manage to do a real direct deposit, Albert is an easy account you can use to earn a referral bonus. Here’s a review about Albert I wrote. And here’s a step-by-step guide on how to earn your Albert referral bonus.
- Netspend ($20 + 5% Interest Savings Account) – Netspend is a company that provides 5% interest savings accounts. If you sign up using my referral link, you’ll get a $20 signup bonus once you make your first deposit into your Netspend account of $40 or more. That means you get a 5% interest savings account and a free $20 to start! Make sure to check out my in-depth guide on how to set up these accounts.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $250 if you complete a direct deposit.
- DCU. Digital Federal Credit Union (DCU) is a free, nationwide credit union that I recommend to readers for two reasons. First, DCU has a $100 referral bonus if you open a free DCU checking account with a referral link. Second, DCU has a savings account that gives you 6.17% interest on your first $1,000.
- Novo Bank. Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. It’s the business checking account I currently use for this blog.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $10 for opening an account.
- Personal Capital. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
I’m a big fan of paying off debt early… interest can take such a hit on your finances! And I never thought about the after-tax aspect, but you are right! Here’s to hustling away debt 🙂
It stinks when you’re in debt payoff mode simply because you’re forced to keep your income as high as possible in order to pay off debt quickly. I always think best thing to do is just crush that debt as fast as you can so you can get on with doing what you want to do.
Ugh interest and taxes, you’re telling me. I’m looking at what it’ll take to pay down our mortgage early and the interest is killer. I’m going to throw every dollar of side-hustle money toward it though, plus we’ll plan on paying it off within 20 years (instead of 30) maximum.
It’s easy to get discouraged, but setting up a system to just automatically take care of it – even slowly – will be helpful.
Making it automatic is definitely key. Keep it out of your hands!
“Your debt is going to be harder than you think to pay off.”
No kidding, I’ve been getting discouraged lately at how slow this process is actually taking me. It has been since March since I have been taking my debt serious and it is going to be a slowwww process.
Keep pushing at it though! Once you get through that wall it starts going faster.
FWIW, paying off debt can also be easier or quicker than you think because….1) You may get a promotion, raise and unexpected bonuses over the period of your repayment, allowing you to dedicate increased income to the repayment as long as you avoid lifestyle creep. 2) Mortgage and student loan interest are deductible up to a certain amount. The tax refund from this can go towards paying off more debt. 3) In fact, the majority of tax refunds should go to debt when you’re aggressively paying off debt. Ideally, you’d avoid a tax refund obviously, but lump sum payouts like tax refunds and bonuses make it really easy to take big chunks out of debt without much mental effort or discipline.
When I graduated with my bachelors, my initial loan balance was higher than my starting salary but my salary nearly doubled over the course of the 3.5 years that my debt took to payoff. I also made a rule for myself where 80% of all bonuses and tax refunds would go towards debt, and I allowed myself to spend the rest. So all in all, the outlook was pretty bleak when I initially started to payoff my debt, but it turned out much better than I expected. It taught me the financial discipline and frugality that will now allow me to retire early which almost makes the whole debt ordeal worth it since I learned an invaluable life lesson.
On a personal note, the hardest thing for me when paying off my debt is: the opportunity cost of my capital.
As an optimist – I see investment opportunities everywhere (not always a good thing).
I want to pay off my debt, but my natural inclination to want to outperform the interest rate of my debt – makes paying off my debt harder than it seems.
The opportunity cost thing is a tough one for me to argue against and its the most common thing I hear when people say they don’t want to pay off their debt. It’s tough because in hindsight, we can see we can make more, but who knows what the future holds. If I hadn’t paid off my student loans, I’d be sitting on over $100k in investments right now. But I always see that in hindsight. I really didn’t know what the future would hold.
I really like your article. I agree with most things mentioned above. I personally prefer to pay off debt as soon as possible. It also depends on situation, size of debt and many other factors.
For sure – personal finance is personal. For me, paying off my student loans has opened up a lot of opportunity for me, simply because I have that anchor off me.