A few weeks ago, there was a discussion in our Facebook group: Making Frugality and Finance Fun about the cost of a day’s interest for your debt. It’s pretty eye-opening to calculate the amount of interest you accrue each day. If you (or your spouse) aren’t motivated to make headway on paying off your debt, breaking down the interest to a daily amount might be a great way to put it in perspective for you.
I calculated how much interest our student loans would be gaining each day had we not made the choice to focus on paying them down.
Just for the record, on our Income Based Repayment plan, we were not (and still aren’t) required to make any payment on lour loans because our income is low compared to our family size. It would have been really easy to ignore our loans. Of course, the loans still accrue interest even though we don’t have any payments due.
We started out owing about $130,000. The interest rate was 6.8% Here’s the math:
$130,000 x .068 = $8,840 in interest each year
$8,840 / 365 days = $24.22 in interest each day
It makes me sick to think that we were accruing over $700 a month in interest before we decided to crack down on our student loans and work our tails off to be debt-free.
Now we owe around $77,000. The interest rate is at 6.55% (lowered because we signed up for automatic withdrawal of our $0 monthly payment!). Here’s the math for us now:
$77,000 x .0655 = $5,043.50 in interest each year
$5,043.50 / 365 days = $13.82 in interest each day
Much better! Of course I would much rather be keeping $13.82 in my pocket, but it’s a lot less than what it used to be.
Calculate Your Daily Interest
The simplest way to calculate your daily interest is to follow the formula I used above. Remember to use a decimal to represent your interest rate (6.55% = .0655).
(Current Loan Balance) x (Interest Rate) = Interest Accrued in a Year
(Interest Accrued in a Year) / 365 days = Daily Interest
If you have multiple debts, calculate the daily rate for each of them and then add them up to find out how much interest you accrue each day. The good news is that if you are working to pay off your loans, the amount of interest you accrue each day is going down. If you are actively working to pay off your debts, you might want to re-calculate each month to see the amount of daily interest gradually go down!
Attitude is Everything!
Thinking about your loans this way can either be really depressing or really motivating. If the thought of your daily interest accrual is going to send you into depression, don’t focus on it. Don’t let the thought of your daily interest make you feel helpless. Here are some tips for staying positive and motivated while paying off debt.
The most important thing is to do something.
If you haven’t started yet, it’s time to get started paying off your debt. If you feel like you don’t have room in your budget to make progress on your debt, I encourage you to work through the Frugal Fresh Start Challenge. You’ll find ways to cut expenses and budget better so that you can free up money to put toward your debt.
How about you?
- Have you calculated your daily interest on your loans?
- How does knowing your daily interest affect your motivation?