If you’re in debt, every purchase is debt

Student loan debt is huge among people in their twenties, ranging from a few thousand dollars into the six figures. And yet, those same twenty-somethings are going out to dinner, picking up trendy throw pillows at Target and booking plane tickets, stating that they “can afford it.”

You can’t afford it. Even if you’re diligently making your minimum payments. Even if you’re diligently making double your minimum payments.

The cool thing about money is that it’s fungible¬†– that means that it can be used for a whole bunch of purposes. So, when you get your paycheck, you get to decide what you spend it on. Yay capitalism!

What that means is, every time you make a $20 purchase instead of using that cash to pay down your debt, you are essentially agreeing that this purchase is worth an extra $20 of debt.

Just because you don’t put the purchase on a credit card, doesn’t mean you’re not paying with debt.

Let’s take a super simple case study:

Say Suzy has $20,000 of student loan debt at 6.8% interest. Her minimum monthly payment is $230.16 over 10 years – she’ll eventually pay $7,620 in interest.

Now, let’s say Suzy cuts her budget by about $20 a month – cutting out a single dinner out. Now, she’s paying $250/month on the same loan. She pays off that loan an entire year earlier and saves herself nearly $1000 in interest – paying $6,718 over the life of the loan.

If she cuts her budget by $100 instead, paying $330/month, it’ll take 6.3 years and she’ll pay $4,570 in interest.

You can play with your own numbers by using this student loan calculator, but the moral is always the same – increasing your loan payments will always always benefit you. And the flip side of that is that not increasing them (by dint of making frivolous purchases) will always hurt you.

Now, obviously you won’t be able to direct 100% of your paycheck towards your loans, since most of us have some level of expenses that we just can’t get rid of – rent, groceries, bills. I’m not even saying you can never meet a friend for coffee until your loans are paid off. However, every time you do, ask yourself if it’s worth increasing the length of time you’ll be paying off your loans and the amount of money you’ll end up spending.

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