YNAB BLOG

25% of My Monthly Budget Goes to Interest??

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On any given day my feelings about my debt range between “yeah, we’re chipping away at it, slowly but surely” and “I’d sell one of my kidneys to get rid of this blasted debt.”

Lately I’ve been in a kidney-selling state of mind. Maybe that’s why I pushed Mike to pay off his $38,204 of debt in the next 18 months (you can do it, Mike).

See, I think it takes a certain rage to get out of a big pile of debt. If you can’t dig down and find a real hatred for your debt – a recognition of how it’s ruining your life – it’s too easy to fall into the trap of “well, we’ll be out of debt someday, we hope.” And the problem with that way of thinking isn’t that it’s untrue – making your payments on time will eventually get you out of debt. It’s only a true hatred of debt that will accelerate your debt freedom timeline and cure you of the borrowing habit.

Many of you have already summoned the proper rage against your debt, using it to snowball your way to freedom.

If you’re still on cruise control, believing the lie that debt “isn’t such a big deal, after all, my interest rates are low”, here’s how to generate some real loathing:

Calculate how much interest you’re paying every month, then acknowledge what else you could be doing with that money.

Here’s my interest per month table:

Loan Payment Interest Rate Interest Last Month
1st Mortgage $1,109.49 3.99% $760.32
Deep Shame 2nd Mortgage* $437.90 8.625% $375.79
Residential Lot Loan $158.39 10% $106.65
Student Loan 1 $21.44 0.625% $3.02
Student Loan 2 $75.58 0.625% $10.65
Totals $1,802.8 $1,256.43

*I call it the Deep Shame 2nd Mortgage as a joke. I’ve told you before I don’t see shame as a productive emotion. I’ve forgiven myself for taking on this debt, and now I just want to be rid of it.

$1,256 is close to 25% of my monthly budget. If that didn’t make me furious, I don’t know what could.

Some might try to soothe my rage. “Mark, your only unsecured debt is your student loan, and you’re paying less than 1% interest on it. The rest of your loans are on real property, and property appreciates!”

Meh. My properties don’t feel much like investments (although I’m hoping to sell the residential lot in the next 18 months). All I see is the twelve-hundred-stinking-dollars-per-month I could use for:

  • Retirement savings.
  • Home remodeling.
  • Family travel.

“Anger is an unhealthy emotion!” some will shout. You’re right, it is. Fact is, you only need to get into an anti-debt rage for a few hours to completely transform your life.

It’s simple:

1. Summon the rage.
2. Use the rage to overcome your fear of seriously acclerating your debt elimination.
3. Set up automatic payments based on your accelerated plan.
4. Protect those payments at all (reasonable) cost.

Back in 2010 I used this method to pay off a huge pile of debt. Every 16th of the month $4,500 automatically left my checking account. Every 15th of the month I’d have some anxiety about whether we could or should be sending out those massive payments.

Thanks to my wife’s support, we managed to keep the snowball rolling long enough to pay off some large balances. We lost momentum when our business could no longer afford the huge payments, but we made real progress in the meantime.

So, if you haven’t already, get angry for just a few hours. Just long enough to set a new course toward debt freedom. Then stay on that course.

Updated to add: If you read through this post, you won’t find anywhere that I say I regret buying my home or going to college. I love my home, and I enjoyed college (although I’ve questioned the strict ROI of a college education). This post is simply about hating interest and motivating myself to pay off my debts as quickly as I’m reasonably able. 

46 Responses to “25% of My Monthly Budget Goes to Interest??”

  1. Simon Thomson

    Totally agree. Channel that anger.
    If sport & fitness is your thing then put the Rocky soundtrack on and get the eye of the tiger for debt reduction! Winning the fight against debt.
    Maybe your a jedi warrior who refuses to turn to the dark side and get into the red (light saber). Use the force and all that stuff….whatever gets you motivated.
    I have my goal stuck on the fridge and I say it to myself on my drive to work. I don’t even put the radio on anymore it’s just me talking to myself!

    Reply
  2. Ted

    I am not sure why the rage over home mortgage debt. You don’t see the rage over rent? Rent is worse. I wouldn’t call a mortgage (real estate) an investment but it is shelter and much needed shelter and better than rent.

    Student loans – I know Mark does not value an education but true facts are that it opens a lot of doors and definitely increases your chances of earning significantly more and at the very least to have a less physical labor component which is truly hard on your body.

    These two types of debts people should not get upset about. It is other debt. Car debt in not totally evil as well but is great to avoid if you can.

    For those out there who are thinking that they shouldn’t do school or buy a house because of debt I would rethink that hard and fast.

    Reply
    • Simon

      I doubt Mark would say he does not value an education. That sounds like your twisting his words. You can still be educated without going to college or university. I would say that you should think what your going to achieve with further education. There are plenty of degrees out there but they don’t all open the the doors to a great career.

      Reply
    • Right track?

      enable much? buying a home is not a right, and a cruel as it may sound, there are some who should not do it. (At least not right now). Your comment about rent is dead wrong. Rent has its appropriate place in life. Some people have zero desire to own a home. Rent is good. Some people don’t make enough to support the true cost of home ownership (and I am not just talking about P.I.T.I.). Rent is good. Let’s not forget our brave men and women who serve our country in the military, and others who move alot. Rent is good.

      Debt is a cancer. The longer you allow it to live in you, the greater its impact on your financial health and well-being. I would argue that this is also true of your physical health and well-being as well. Debt takes your most powerful wealth-building and philanthropy tool (your income) and gives it to others.

      Try this exercise for a moment: What would it be like to have NO payments? What would it be like to not be shackled to debt? What would you do with an extra 500/month (average car payment in america)? What would you do with an extra $1000/month (average first mortgage in america)?

      If the prospect of either (or both) of those questions brought you momentary joy (lifted your spirits or brought even the slightest smile to your face) you begin to see the value of not having payments. If you cannot even imagine the prospect, get some good people (a support system) around you, for I fear the cancer of debt has deeply affected your psyche.

      Remember, “normal” is broke. Normal believes “I’ll always have a car payment. or “I keep my mortgage payment for the tax deduction”…

      Reply
      • Kenneth

        “Debt is a cancer. The longer you allow it to live in you, the greater its impact on your financial health and well-being.”

        Very well put!

        Reply
    • Keri

      I hope to own my home some day and have shelter without rent or mortgage. I hope my daughter can get a valuable education without the debt myself and my husband incurred. I’m personally done with taking out loans. Any time you borrow you put stress on your financial future and you pay more for the same thing.

      Reply
  3. Christina Eftekhar

    Mark,

    Would you be willing to share the spreadsheet you used to calculate this information? You can make the info generic, of course. Thanks!

    Reply
    • mark

      Hi Christina – I’m happy to share anything. You’re wondering how to calculate your interest cost per month?

      The calculations are pretty simple: I just opened my statements from all the debts you see above and looked at the interest vs principal breakdown from last month. Then added them to get my total interest cost.

      It’s an imperfect calculation because the loans are amortized, so the interest cost goes down every month. My calcs are just a snapshot in time, used for motivation to accelerate payoff.

      If that’s not helpful, let me know and I’m happy to help out any way I can.

      Reply
  4. Jodie

    First, I’m so jealous of your .625% rate on your student loans. Mine are 6.12% (and I owe almost $41,000) and I joke that I’ll just have them until I die.

    I’m so much less concerned with those and my mortgage than the rest of my debt. I’m focusing on everything else–my student loans were a fact of life for me to get the degrees I needed, so I could get the job I have. And without this job and my employer’s commitment to the neighborhood it’s in, I wouldn’t have my own house–and my mortgage is $400 less than what it would take to rent an apartment in this neighborhood. So I happily took on those debts and will get around to them eventually, but for now, it is what it is.

    And referencing what Ted said above, I also don’t see how car debt is completely bad. I’ve never owned a new car. But my 1998 vehicle won’t last forever and I’m focusing on getting out of CC debt in the next 15 months so I can finance a brand new car (or lease, since I’m the perfect candidate for that) shortly thereafter. And again, it’s a debt I’m okay with taking on.

    So yes, I have problems with the interest I’m paying thanks to poor financial decisions I made in the past. But I don’t think it’s healthy (for me) to be upset about my education, owning my house, or, eventually, a car I can rely on for years instead of worrying every day that it will die.

    Reply
    • Right track?

      Jodie,

      First, I think that it is awesome that you are attacking CC debt with a vengeance. Secondly, it is great that you have the foresight to say “my current vehicle will not last for ever, I better plan for that eventuality”. These things will help you win with money. Having said that, why not pay yourself payments and buy a vehicle with cash? Regarding Leases, Leasing is the MOST expensive way to drive a car (http://www.consumerreports.org/cro/news/2011/04/resurgence-of-car-leasing-may-not-be-good-thing/index.htm). (there are MANY other sources for this, but Consumer Reports was the first search result in Google.

      I’ll have to call hogwash on the “new vehicles are far more reliable, than older ones” argument. A well-maintained vehicle is generally reliable. New cars break down, too. You don’t need a new car, you need a reliable one. Do research and determine what vehicles score high for reliability. Then, save and pay cash. Because you have identified the need, you can now set and work toward the goal.

      Finally, if you are going to borrow money for something, it should NEVER be for an asset that does not appreciate. Borrowing on depreciating assets puts your financial well being in jeopardy. It is not hard (at all) to end up in a situation where the loan exceeds the value of the collateral. I would argue, in most cases -especially on new vehicles, that event would occur the moment you drive off the lot.

      Reply
      • Jodie

        At this point in time I cannot save up to pay full cash for a car within 18 months. I’ll have a decent downpayment, but that’s it. So for now, financing whatever my next vehicle will be is my only option. It might not be a brand new 2014 (or 2015), but I want something less than four years old. A new car, if it breaks down, is probably covered under warranty–which makes it more attractive to me.

        Reply
        • Scott

          If you have enough for a decent down-payment on a new vehicle, you have enough to pay cash for a reliable vehicle, until you can afford a newer vehicle.

          Nothing wrong with buying a new vehicle now, if you’re comfortable living beyond your means. But don’t pretend it’s a necessity. Used can be VERY reliable, and is smart. Leasing…really??? I’m not sure what’s worse, leasing or making payments.

          Reply
          • Jodie

            I never said it was a necessity, but it is something I’m comfortable with at this point in time. I’ll have to finance used as well. What I consider a decent amount to put down would not get me the reliability and type of vehicle I’m looking for.

            Reply
      • Kenneth

        Agree about the “new vehicle hogwash”. It’s a want, not a need. Cars are 4 wheels, tires, brakes, engine, battery and connectors, and engine belts. Change the oil, change the tires and brakes, change the battery, clean the connectors, check and replace as needed the engine belts, and check tire pressures. In a sense, a well maintained older car can be as reliable as a new car, because you have more of a habit of checking your car. My friend is driving a 1998 Plymouth Acclaim, it gets 30 mpg, and the air works! It’s very reliable because he stays on top of the vehicle with a weekly inspection..

        Reply
        • Ulf Benjaminsson

          Sweden – the 4th largest nation in Europe by area, and thus, /huge/ car nation – maintain one of the oldest car pools in the world. Mandatory annual checkups help catch issues way before they become problems.

          I bought my first car in 2002. It was a Mitsubishi Galant -89, three previous owners. I used it for four years and sold it with profit when I moved to university.

          My father drives a 40 year old Volvo Amazon, my mother a 1958 Ford Fairlane – and the retractable hardtop is still functioning.

          A neat thing with otherwise tax-happy Sweden: once a machine passes 30 years it’s technically a veteran car, and thus exempt from taxes and cheaper to insure. Owning these vehicles cost less than owning a 50cc scooter. :)

          Reply
  5. Cynthia

    I appreciate this perspective on percentage of budget spent on interest. It’s yet another metric to consider.
    Personally I’m at 1/8th of my budget; 4% of that is auto and 96% is mortgage. Honestly that’s the best I can do right now, and I’m comfortable. My retirement is 25% of gross income.
    Keep the challenges coming.

    Reply
  6. Make Debt Work for You

    I’m with the commentators above–the first mortgage and the student loans should not be viewed with anger or derision. At those interest rates, you’d be foolish to ever pay down early. (I’ll totally concede that the Residential Lot Loan and the 2nd Mortgage should be paid off asap. Those interest rates are too high to let stand for long).

    But I think you’d benefit more by discretely paying down your highest interest loans first. As to the low-interest loans, moreover, I also think there’s more benefit to letting them ride at the lowest monthly payments. That will free up income you would otherwise be snowballing into those debts for investment.

    The math on this is simple. Even if you only earned five or six percent on those investments that would otherwise be going to pay off your low-interest loans, you’d still be making more in the long run than you would benefit by paying them off early. By paying off the mortgage early, for example, you’d effectively be giving yourself a 3.99% interest rate. If you invest and earn 6%, you’re ahead by more than 2%.

    Of course, there’s a psychological benefit to being entirely debt free, but if you can stomach carrying some debt (especially those student loans), make those loans work for you rather than raging against them.

    Reply
    • mark

      Your math is sound, and it’s a great comment. As a chronic borrower I’m just more comfortable with the idea of being totally debt free. The habits and disciplines of paying everything off will set me up to apply the same energy to retirement savings.

      But, to your point, I will start saving aggressively for retirement once everything is paid off other than the first mortgage.

      In other words, I’ll pay off the ugly debt and the student loans, then establish the retirement savings habit, then use extra money to work on the first mortgage.

      Reply
      • Make Your Debt Work for You

        Totally understood! I get the psychological benefits–and if borrowing can be or is a problem, knock that debt out.

        I’m ok with leveraging myself and my credit, but our only outstanding debt is a mortgage (3.25%) and my wife’s student loans (6.55%, sadly). We’re throwing extra money at the 6.55% (lots of it, actually), but have no intention of paying down the mortgage any more than the bare minimum.

        If we had more outstanding debts than that, I imagine I’d be snowballing them–but maybe not if I could nail down the same paltry rates you’ve got on your student loans (lucky sod!).

        Reply
  7. Jim Davies

    I’ve been going through this and just this week finally came up with a plan. I really haven’t had any additional money I could throw at it so I bit the bullet and did the next best thing. Consolidated two 12 year loans with smaller payments and a massive CC debt into a 401k loan with a 5 year pay off. Best part is all the interest from it goes back into my 401k and if I do manage to save some money, it’s reasonable that I might get it paid off in four years instead. I’m so excited. :)

    Reply
  8. Julie

    My only debt is my mortgage and it’s only been recently, with a large homeowner’s insurance claim, that I discovered how much control the bank can exert when they technically own the house. All the money flows through them (at a snail’s pace) and repairs to be made must be approved by them if we want the money to actually make the repairs. It’s been a ton of red tape that we wouldn’t have to deal with if we didn’t have the mortgage.

    After your post, I found a mortgage debt calculator. Even dumping an extra 200 bucks a month toward it (which I think is all I can do for now) still means I’m in debt for the next twenty years…

    Reply
    • mark

      But starting with the extra $200 per month establishes the habit, and I bet you’ll add to that snowball over time. And twenty years is a lot better than thirty!

      Reply
  9. Micro

    You intrigued me to check out how much my student loan interest is sucking out of monthly budget. I wound up with a total of ~$222 each month which amounts to about 4% of my monthly income. On the surface that doesn’t look too bad, but that could give me an extra $38,000 if I could invest it over 10 years at 7%. Thanks for the extra motivation to continue to smite this loan demon.

    Reply
  10. brad

    I know a lot of people make distinctions between “good debt” and “bad debt,” and view mortgage interest as okay. But when you think or talk about how much you paid for your house (or when looking at the price of a new home), I think it’s best to use the entire amount: not just the principal but the interest. Because that’s what you’re actually paying, and that’s what you’d need to make back in order to come out ahead.

    It’s one thing to say that you bought your house for $140,000, but if you took out a 30-year mortgage with 0% down and you’re paying another $100,000 in interest (this is just a guess, I haven’t run it through my mortgage spreadsheet), you’re actually paying $240,000 for your house. If you could cut the interest in half by taking out a shorter-term mortgage, paying down your principal more quickly, and/or saving up for a higher downpayment, the cost of your home will be much less.

    Interest is the cost of “buying” money. Just as you pay for a car or a shirt, you pay for money when you borrow it. We should spend as much attention to the price of the money we buy as we do when we comparison-shop for grapefruits or gasoline.

    Reply
    • Make Your Debt Work for You

      I agree, to a point. You also have to consider what you could do with the extra income that you’d keep–if you can invest in retirement plans (IRAs, 401ks, etc.) and capital investments that get you a better return than what you’re paying in interest, then you would be better served, in the long run. It’s not simply the cost–it’s also the opportunity cost.

      Reply
      • brad

        True, but in analyzing opportunity costs people often make optimistic assumptions: i.e., they do an analysis where the money they avoid in interest is 100% invested in a retirement plan or other investment that returns an assumed rate. But the reality often turns out that they’re not so disciplined and don’t actually invest it all, or the actual rate of return ends up being significantly lower.

        When you have a mortgage, your interest rate is certain and the outcome can be predicted with a higher degree of confidence than most of the alternatives. The true opportunity cost is actually pretty hard to pin down (easy in theory, harder in practice).

        Reply
        • Make Your Debt Work for You

          Sure, but this place is all about discipline, right? If we’re budgeting and giving every dollar an assignment, why not just automatically invest that extra money? It’s not hard to beat 3% (or even 4% or 5%). Take that money that you’d throw at the mortgage and put it in your IRA(s) until they’re maxed out each year. Same with your 401(k)(s).

          Also, if you’re willing to pay off your mortgage early because you worry about the discipline it takes to save, why would that worry change once the mortgage is paid off?

          Sorry, don’t want to get defensive. Just want to point out that the numbers bear out that it’s not always best to pay down debt faster than prescribed, especially when it’s low-interest /and/ going toward an asset that appreciates.

          Reply
          • brad

            No offense taken! I agree that low-interest debt isn’t a high priority to pay off; I was just pointing out that the opportunity costs aren’t always as clear-cut as a spreadsheet might tell us. The same thing happens in analyses of a Roth vs. Traditional IRA, for example. When comparing the two, the outcome depends strongly on whether you invest your tax refund from the traditional IRA. Many people think, “sure, I’ll do that,” but when the refund check arrives they often forget their best intentions and spend it on other things, maybe investing just a portion of it.

            The other thing to consider is that low-interest debt, spread out over decades, amounts to a big pile of money. You’d really have to maintain discipline over a long period of time to come out on top. Life has a funny way of foiling our best-laid plans: you decide to set aside $x per year for retirement but then one day you get the news that you’re expecting a baby, or you lose your job, or your car dies, and suddenly you find yourself needing some extra cash. Most people start reducing their retirement contributions at that point.

            Reply
            • MYDWY

              These are great points, brad! Definitely food for thought. Having had that exact baby dilemma in the very recent past, it’s hard to definitively state that I’ll invest $[XX] per month or year. Making sure I set up automatic deductions and investments each month (or per paycheck) certainly helps, but I did have to suspend IRA saving for one year right after we bought a home and welcomed a new little one to the family.

              Also, while I’m confessing. I fell off the strict YNAB bandwagon a little over a year ago. I still budget in my mind, but should get back on and make sure all my dollars have an assignment.

              Castigate me, YNAB crew!

              Reply
  11. mark

    Just added this bit to the end of the post, as some commenters seem to think I’m criticizing home ownership and/or higher education:

    “Updated to add: If you read through this post, you won’t find anywhere that I say I regret buying my home or going to college. I love my home, and I enjoyed college (although I’ve questioned the strict ROI of a college education). This post is simply about hating interest and motivating myself to pay off my debts as quickly as I’m reasonably able.”

    Reply
  12. Marissa

    I’ve summoned the rage, but can’t seem to find anywhere else to pull from to put towards our snowball. It’s extremely irritating. Not only that, but our budget varies a lot from month to month. We aren’t going further into debt, but our net worth has reached a plateau. I emailed you our budget a couple weeks ago but I can imagine you probably won’t get to it for a while since so many people have started doing that…

    Reply
    • mark

      The squeaky wheel gets the oil, and that means your budget is up next. Look for an email from me this afternoon. :-)

      Reply
    • mark

      Just emailed you. You’re with hotmail, so you might want to check your junk/spam folder (hotmail seems to like to send emails there).

      Reply
      • Marissa

        I wasn’t trying to be a squeaky wheel, but I appreciate your help! I got your email…Just getting everything together to send bavk to you.

        Reply
  13. Kenneth

    The “What did you do to improve your finances today?” thread in YNAB forums has a LOT of interesting ideas to save a little here and a little there.

    A few years ago I got angry at myself for the financial mess I was in, and making little to no progress getting ready for retirement. Over time, these are some of the changes we made:

    Brown bag my lunch to work every day
    Cut our eating out expenses to under $100/mo
    Traded gas guzzlers for two 4 cyl 35 mpg sedans, now paid in full
    Reshopped our insurances saved $85/mo
    Refinanced our primary home mortgage at 2.55 percent, 60 month ARM. Paid it off in about 2 years.
    Changed our $150 Verizon plan to two $10 Airvoice plans keeping our iPhone 5s but losing “data”.
    Got rid of cable tv and installed antenna in attic so we get crystal clear local channels
    Bought YNAB and planned our cash flow monthly
    Our free cash flow is about $3,000 a month, $2,200 goes to our $71,000 HECL ($2,000 principal approximately), and $800 is “available to budget”

    If only we had done this years ago. It’s too late for us (I’m 63 and still working) but many of you younger folk have the opportunity to really get the ball rolling.

    Reply
  14. Stacie

    I just cringe every time I see the finance charges on my credit cards (yes, plural). This debt and my impending student loan repayment are what made me look for help, and brought me to YNAB (yay!). So, yes, I’m at the angry stage. Right now I’m looking at how much of my income I can send toward my debt without feeling like a broke college student (because I’m not in college anymore!).

    My current plan is to pay $400 a month on my lowest CC debt, and then make $100 payments on my other 2 cards. Card #1 has a balance of $800, Card #2 is $1500, and Card #3 is $2500 (give or take, obviously, and I’m not using them anymore!).

    Once Card 1 is paid in two months, then Card 2 will get payments of $500 (3 more months), then finally Card 3 will receive payments of $600 (4 more months). Thinking that I can be free of this debt in 9 months is a really fantastic feeling.

    Reply
    • mark

      Great plan, and nice work. What will you do with the spare $600 once the credit cards are gone?

      (In other words, how long will it take you to pay off your student loans while rolling a $600 snowball?)

      Reply
    • mark

      I actually don’t know how I managed to get the rates so low. After the loans went into repayment, I answered a letter that talked about consolidating them to a lower rate. This is what I ended up with. Sorry, I wish I had a more intelligent answer!

      Reply
      • Nate

        I wish you do too! But thanks for answering. A majority of my debt is student loan debt. I started with 64K and some change in July of 2011. I have about 45K left and am trying to throw 2250 a month at it. I recently paid off my truck loan and I have a little bit of credit card debt that I would like to get paid off really quick and then I am going to start with the highest interest student loan first and hopefully it snowballs down to ZERO!!!

        Reply
  15. Todd

    Our only debt was my stupid student loan. Because we paid on the loan any time we got a few extra dollars, I had a spreadsheet that tracked the daily interest. At one point we were spending enough on interest to pay for a (cheap) meal at Wendy’s. When we only allowed $30 for dining out each month, it made me mad that I was feeding Sallie Mae more than my wife! Our original plan was to pay it off in 36 months. By throwing every extra dollar (I once sent a $20 payment) at the debt, we erased it in 18 months!

    Reply
  16. Ted

    My point is that if you have a home and in many places in this country it isn’t much more than rent and you consider home a debt but so you think rent is better than I think you have looked at it wrong. As for Mark not valuing education, I suggest you read his post a few weeks back about the value of College.

    I consider myself debt free but I still have a mortgage.

    Reply

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