28 November 2010

Closing in

As of today, I have paid off 46.8% of my debt- sooo close to my goal of 50% by the end of the year!! This is exciting for a few reasons- it's a big landmark, for sure, and also the sign that easier times are ahead.

Debt payoff is like a roller coaster- you start off slow, building momentum and making small bits of progress. But, thanks to how interest works, the more you pay off, the faster the rate of your success accelerates- so even though it took 3 years to get to the 50% mark, I have good reason to believe that it should take 12-14 months to pay off the remaining 50%. Why? Well, think of it this way- when you start off, you have a lot of debt accumulating a lot of interest. So as you pay it off, less of your money goes toward the principal (the money you owe) and more goes toward the interest you're being charged. But as your principal gets smaller, so does the amount of interest you're being charged, so more of your money goes toward the principle. Because of this, the same dollar amount chips away at larger and larger portions of your debt.

I think this is why it's hard for many people to stay with a debt plan- the initial efforts don't yield much result, which is disheartening and people often give up. But, the longer you stay with it, the easier it gets!

Interestingly, this is the same way savings work for you. The more money you put in savings, the more you have to earn interest on. So when you put 100$ in savings, the first month you may get 6 dollars in interest, assuming a 6% interest rate (I wish!). BUT, the second month, you get interest on 106 dollars, so instead of making another 6 dollars in interest, you get 6% on your 106 dollars, or 6.36. Over time, that compound interest (that's what it's called) makes a big difference!

I love math.

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