Get rid of unnecessary debt

  • High interest consumer debt prevents financial independence
  • Tackle the debt as soon as possible and then prevent further debt
  • High interest debt is expensive
  • Having debt decreases investment opportunities

Unnecessary debt is the biggest blocker to your financial independence. The only debt in my opinion that is necessary is a mortgage, but only because it would take too long to save the money needed to purchase a property. All other debt such as credit card or car loan is unnecessary, if you have any of these types of loans, you should try to pay them off as quickly as possible. As these type of loans usually carry a high interest rate, for example, credit card interest rate can be as high as 19 to 20%.

This could be your first victory; become debt free. Once you do, you have made a substantial effort to financial independence. This would be a good short-term goal – financial independence and indeed retire early are very much long-term goals.

If you are not be able to afford to pay more towards your loans then I would suggest that you start looking into getting extra income from a side hustle or picking up extra shifts, or doing a weekend job, do something, as the debt will keep you in a low place for a long time. Until you get rid of that debt, it will be near impossible to become financially independent.

What do you do if you do have unnecessary debt?

  • Stop increasing your debt, i.e. stop using the credit card
  • Pay off as much as you can each month. This is going to hurt but it will be worth it.
  • If you can, transfer your debt to a lower interest credit card of loan
  • Once it is paid off, you could still use your credit card but pay it off in full each month.

How much will the debt cost you?

It will depend on how much your debt is, the interest rate, and how much you are paying each month. For example, a €5,000 loan with an interest rate of 18% will take over seven years to pay off when making €100 per month payments. After you have paid off the loan, you would have paid a total of €8,594. That is €3,594 extra which is 71% of your loan.

Pay off high interest first

If you have a more than one debt, let’s say two credit cards and a car loan then you should first see how much interest rate is on each debt. Then try to pay off your highest interest rate loans first as they are costing you the most to maintain. Once that loan is paid off then attack the next highest interest rate.

Lost Opportunity

Once you have paid off your small loan(s) then it is recommended that you use the same payments to either build up your emergency fund or add to your investment account.

Every €100 that you are not paying in debt can go towards investments. If you were paying €100 per month to pay off a debt but you now invest it, you could watch it grow to €16,326 using compound interest at 6% in 10 years.  

Year Savings
/ Yr
Total Savings Interest
/ Yr
Total Interest Balance
1 € 1,200.00 € 1,200.00 € 38.65 € 38.65 € 1,238.65
2 € 1,200.00 € 2,400.00 € 112.97 € 151.62 € 2,551.62
3 € 1,200.00 € 3,600.00 € 191.75 € 343.38 € 3,943.38
4 € 1,200.00 € 4,800.00 € 275.26 € 618.63 € 5,418.63
5 € 1,200.00 € 6,000.00 € 363.77 € 982.40 € 6,982.40
6 € 1,200.00 € 7,200.00 € 457.60 € 1,440.00 € 8,640.00
7 € 1,200.00 € 8,400.00 € 557.05 € 1,997.05 € 10,397.05
8 € 1,200.00 € 9,600.00 € 662.48 € 2,659.53 € 12,259.53
9 € 1,200.00 € 10,800.00 € 774.22 € 3,433.75 € 14,233.75
10 € 1,200.00 € 12,000.00 € 892.68 € 4,326.43 € 16,326.43
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