Apr 24, 2023
When it comes to getting a handle on their finances, Americans hear it over and over and over: Pay off your debt.
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But if the message isn’t having its intended effect, it’s often not because the recipient is simply ignoring good advice. For many, eating into your savings to do it represents a somewhat scary prospect.
So the big question is, why pay off those loans and debt? With America headed towards a possible recession predicted by some to begin mid-2023, now marks an opportune time to start the payoff process. Let’s consider the three top reasons you should send your debt packing as soon as possible.
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1. You’ll save money
How can spending big on payments lead to saving? Though this might seem contradictory, the reasons are as close as your credit card statement. Interest charges, fees and penalties have a way of piling up and if you have a credit card with a sky-high APR, you’re only making a small dent in your debt with that monthly payment — or next to none at all.
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When balances pile up, credit cards turn into finance killers. The Federal Reserve of New York tallied total credit card debt as of December 2022 at $986 billion, far surpassing the pre-pandemic high of $927 billion. Per household, this amounts to a balance of $5,910 as of late March 2023, according to Experian.
To get an idea how this adds up, chew on this: A $1,000 balance on your credit card, paid off at $29 per month, will take four years to wipe out and cost you an extra $435 in interest assuming you have a 19% APR. So much for snagging that high-ticket item while it was on sale.
2. You’ll reduce stress
Money reigns as the top stressor among Americans. The American Psychological Association found in a March 2022 Stress in America survey that 87% of Americans were stressed over the prices of everyday items due to inflation: the highest level recorded since 2015.
Meanwhile, the Money and Mental Health Policy Institute has found that about half (46%) of people in problem debt also have a mental health problem. In a survey of nearly 5,500 people who’ve experienced mental health problems, more than four in five (86%) said that their financial situation had made their medical situation worse.
By contrast, reducing your debt creates a righteous circle. Less financial stress promotes better mental health, which in turn frees up energy and personal resources you can harness to get out of debt for good.
Read More: Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
3. You’ll increase financial flexibility
As those who’ve paid off cumbersome sums will gladly attest, money once paid to soaring debt can be turned into an emergency fund, or to meet other savings goals. Having cash readily available means you can weather the budgetary dips without falling into a financial hole.
But there is clearly much work to do. A recent survey by Prudential revealed that 50% of the 4,800 respondents had less than $500 or no emergency savings fund. And nearly 4-in-10 (39%) of both millennials and Gen Z report having no emergency savings at all. A $500 brake repair for a car, then, could wipe out the typical fund — or worse.
Putting aside small amounts of cash in painless ways (like direct deposits or automatic withdrawals into a money market fund) marks a shift in the right direction. A monthly commitment of just $50 will turn into $600 for the year and $6,000 by the end of a decade.
Not only will this snowball in time: It can also form the foundation for smart investment that multiplies what you’ve saved — and can in turn save your finances.
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Amy Legate-Wolfe is an experienced personal finance writer and journalist. She has a Bachelor of Arts in History from the University of Toronto, a Freelance Writing Certificate in Journalism from the University of Toronto Schools, and a Master of Arts in Journalism from Western University. Amy has worked for Huffington Post, CTVNews.ca, CBC, Motley Fool Canada, and Financial Post. She is skilled at analyzing trends and creating content for digital and print platforms. In her free time, Amy enjoys reading and watching British dramas on BritBox. She is a mother and dog-mom to a Wheaten Terrier.
