Why you should pay off debt and invest at the same time
KEY TAKEAWAYS:
✔ Paying off debt is important, but so is investing in your financial future. You can do both.
✔ Lowering your debt payments can free up money so you can start investing.
✔ One of the benefits of investing is compound interest, where your money makes money so your savings grow faster.
Today, the challenge for most Canadians is how to become debt-free and save for the future at the same time. The good news is that you can do both, and the long-term payoff will be worth it. Here’s how to lower your monthly debt payments so you can find the money you need to invest and get yourself on the path to a better financial future.
Lower your debt payments
You have a lot of control over how much you pay toward debt every month. Most lenders are happy to adjust the terms of a loan when it means you can keep making on-time payments and build a solid credit score. Here are two ways to lower your monthly cost of borrowing and free up some extra cash to start investing.
1. Change the terms of the loan
Loan amortization is the set length of time that it takes to pay off a loan. Talk to your lender to see if they will let you extend the length. By increasing the time it takes to pay off your loan, the payments will go down. You’ll pay more interest, but you’ll free up some extra cash for investing.
For example, imagine you have a loan for $8,000 at 9.9 per cent:
| Loan amount: $8,000 Interest rate: 9.9% |
Term 1 | Term 2 |
| Loan length: | 3 years | 5 years |
| Monthly payment amount | $257 | $169 |
Total savings: $88
You save $88 on every loan payment by extending the loan from three to five years, and you can start investing right away.
2. Consolidate debt
A debt consolidation loan is a good strategy if you have several high-interest debts, such as credit card balances, loans, and lines of credit. This type of loan pays off all your debts while providing one monthly payment that is usually lower than your combined debt payments. With a lower payment amount, you can start investing.
If you’re not sure which of these approaches is right for you, connect with an easyfinancial representative at one of our 400 branches or call 1-888-502-3279 for no-cost advice on borrowing and loans.
Start investing sooner, not later
Now that you’ve freed up some money by lowering your payments, you can start to invest it. And when it comes to investing, time is your friend. Thanks to the simple idea of “compound interest,” the money you invest can earn money on its own just by being in the bank and staying there. It’s not a lot in the beginning, but it can make a huge difference over time because the interest you earn gets calculated each month based on the money you contribute PLUS the interest you earn. So, you are earning interest on the interest you earned for free. And that’s how the compounding effect makes your money grow faster.
Here’s an example:
| Ali invests $100/month but earns no interest. | Liam invests $100/month that earns 4% compounded monthly | What Liam earns with compound interest | |
| After one year | $1,200 | $1,326 | $126 |
| After 10 years | $12,000 | $14,874 | $2,874 |
| After 30 years | $36,000 | $69,735 | $33,735 |
Liam earned $33,636 in compound interest because he found the money to invest, started early, and kept going.
Resources that can help
Extending the amortization of your loans or consolidating debt will help to free up money to invest. It will take you a little longer to be debt-free, and you will pay more interest, but your investments will already be growing. There are many online tools that can help you calculate your loan payments based on different terms, and others that show the effect of compound interest. Try running the numbers on your own using resources on easyfinancial.com:
- Experiment with various loan amounts and amortization lengths on the easyfinancial website.
- Estimate if a debt consolidation loan would help you reduce your monthly costs.
- Add up how much your investments could earn over time with our savings calculator.
Create your path to a better tomorrow
At easyfinancial, we offer personal loans with flexible payment terms to fit any budget. If you are looking to kickstart your investment plan by better managing your debt, talk to us about how borrowing can help. Connect with an easyfinancial representative at one of our 400 branches, or call 1-888-502-3279.
Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter