27 Apr Keep Those Lazy Dollars Working AKA – Using Your Dollars and Saving Thousands!
You’ve used your dollars to quickly build your emergency fund. Now you can shift your attention to getting out of debt. How can you accelerate paying down debt without touching your savings? You can use a similar strategy used to build your emergency fund to minimize the interest you pay on loans.
Let’s begin by adding a bit more information to our example.
You have a 30-year mortgage with an interest rate of 5.5 percent. Currently, the balance is $233,058. Let’s assume that with the $1,000 left at the end of the month, you decide to begin investing $300 toward achieving your long-term goals. This leaves you with $700.
We’re going to use the same strategy we used in your savings account. Instead we’ll use a line of credit. Let’s assume the bank charges you six percent interest.
Solution: The mortgage will be paid in full in a little over 14 years. This is dramatically faster than using a biweekly payment system. Let’s look at the results after the first twelve months.
We’ll start by using the daily interest system used in Canada. After twelve months, the balance has dropped to $214,676 and you paid just $106 in interest on the line of credit. This has saved you $43,720 in interest over the life of the loan.
Using the average daily balance system used in United States, the loan reduction is similar; however, the interest paid will range between $25 and $40.