Any money you’re putting toward monthly debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition repayments isn’t going toward your savings. The sooner you pay off your debts, the sooner you can put your money into an investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition that will earn you interest.
Keep in mind that when you pay back a loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition or a credit card, you’re paying it back in after-tax dollars. In other words, you must earn money to pay back the debt, plus interest, and you must pay taxes on that money. If you’re in the highest tax bracketTax bracket The rate at which you pay tax, based on your income level.+ read full definition, you may have to earn more than $200 to pay off a $100 debt.
If you have debts and investments, you may be paying more interest on your debts than you’re making on your investments.
5 ways to reduce debt
- BudgetBudget A monthly or yearly estimated plan for spending and saving. You work it out based on your income and expenses.+ read full definition a set amount each month.
- Get rid of high-interest debt first.
- Consolidate different debts into one.
- Set up an automatic savings plan.
- Make an extra mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition payment.
Learn more about how to manage debt.
Use this calculator to see how even small amounts of money saved add up over time.