Wouldn’t it be nice if you could pay off that 30 year mortgage 4 years earlier? Or unload your student loan and credit card debt ahead of schedule? Of course we’d all love that, but usually when someone talks to you about paying off your debts sooner, it means increasing the amount you pay each month. While this can be a sound debt-reduction strategy, it won’t work if you don’t have any extra room in your budget for increased payments.
Well, what if we told you there’s another way to pay of debts quicker, WITHOUT increasing your monthly payments? I know, I know, this might sound like a scam, but what we want to share with you is simple math. No offers, payments plans, or gimmicks – just math.
The basics:Take your monthly debt payment and divide it by two. Then, instead of one larger monthly payment, make two smaller bi-weekly payments.
This strategy will allow you to technically make one extra monthly payment per year. Here’s how that math breaks down:
There are 52 weeks in a year
If you are making bi-weekly payments, that means you are making one payment every other week
When you divide 52 weeks by 2 (bi-weekly payments) it equals 26 payments per year
Since two bi-weekly payments equal one regular monthly payment, you would divide 26 by 2 in order to compare the amount of half payments you’re making to the number of larger monthly payments normally made. 26 divided by 2 equals 13. Due to the number of days in each month varying, you end up making 13 larger monthly payments/year as opposed to the regular 12 monthly payments.
Ultimately, this will allow more of each payment to be applied to your principal balance as well as decrease the amount of interest accrued.
The results: Soon, you will be a few months ahead of schedule and eventually the debt is paid off way ahead of time.
An example: This strategy will work on any interest-accruing debt, but let’s use a mortgage for example.
Mortgage amount financed: $200,000.00
Interest Rate: 4%
Monthly payment: $954.83
Take the monthly payment of $954.83 and divide it by 2 = $477.42
Pay $477.42 every other week instead of $954.83 monthly.
Your mortgage would be paid off in 26 years, 4 years ahead of schedule, and you’ll save yourself $21,905 in interest!
Other variations: If you make weekly payments instead of bi-weekly, then you will save even more money and time.
Now, it’s your turn. You can use this bi-weekly calculator to see how much you can save with this strategy! Once, you have the numbers figured out, we recommend setting up the payments to automatically come out so you don’t have to worry about keeping track of when to send them in.