11 Life-Changing Reasons to Pay Off Debt
It’s a big decision to pay off your debts. You likely have been living with debt your whole life and it might seem impossible to be completely debt free. No credit cards, no car payments, maybe even no mortgage. Is that even possible? Yes. It is.
I remember when we started paying off our debt. It felt overwhelming and the small progress we made at the start felt like a tiny drop in a giant bucket. But I was determined to see it through to the end and I can tell you that every sacrifice and mindset shift is 100% worth it.
Becoming debt-free is an amazing feeling and it has financial, emotional, and psychological benefits. You will stress less, plan better, and improve your net worth.
1. Increase Your Net Worth
Your net worth can help you figure out how you are doing financially. To calculate your net worth, you take your cash, investments, and other assets and subtract your debts. The number you are left with is your net worth.
- Assets – Debts = Net Worth
Most people try to invest to increase their net worth. However, paying off your debt has the same impact because it reduces your liabilities.
For example, if someone has $10,000 invested and $6,000 in debt their net worth is $4,000.
- $10,000 – $6,000 = $4,000
If they invest $1,000 their net worth now looks like this:
- $11,000 – $6,000 = $5,000
However, if they use that $1,000 to pay off debt it has the same impact on their net worth and reduces their monthly payments going forward. This gives them even more money to invest later.
- $10,000 – $5,000 = $5,000
The less money you owe, the higher your net worth. As you pay down your debts, every extra payment helps improve your net worth.
2. More Spending Money
Eliminating your debts can give you extra spending money. For example, the debt snowball method can help you pay off your debts and free up cash in your budget. Once your smaller debts are paid off, you no longer need to pay the minimum payments on them. Instead, you can put more money towards your larger debts or have a little extra spending money.
If you have a lengthy debt payoff timeline ahead of you, budgeting a few dollars for yourself each week can keep your sanity in check. It can allow you to enjoy the occasional small treat in life without going overboard.
Yes, it’s smart to roll as much cash toward your debt snowball as possible. That said, it can also be important to give yourself a small boost in guilt-free spending cash to stay motivated on your debt payoff journey.
3. Less Debt = Less Stress
Debt is stressful. It can feel like a never-ending burden that you have to carry around all the time.
A recent study by the American Psychological Association shows that 60% of Americans deal with “significant stress” about money in their lives. Much of this is due to overwhelming debt.
One of the huge benefits of paying off your debt is the ability to break free from the anxiety it causes and finally see progress towards your goals. As you pay off those debts, you no longer have to worry about them.
Having a plan to pay off your debt can lower your stress and give you hope for your financial future.
4. No More Debt Collection Calls
When you start implementing your debt payoff plan, you will be able to give your debt collectors a repayment plan. Knowing what you can pay each month will help when negotiating with them.
Once you strike a deal (in writing) with debt collection agencies, the harassing phone calls interrupting your Sunday dinner should disappear. If they don’t, you have a plan in place for dealing with them quickly.
As you pay off debt collectors, you won’t have to worry about what is happening with your debts or how they will affect your credit. The peace of mind and silenced phone calls can boost your financial confidence.
5. Increase Your Credit Score
A huge benefit of paying off debt is the fact that your credit score will improve.
One of the most important factors that impacts your credit score is called “credit utilization.” This is how much of your total available credit you are currently using. If you max out your credit cards, this could severely hurt your score.
If you have a $10,000 limit on your credit card and carry a $9,000 balance, you are at a 90% credit utilization for that card. It is a good idea to remain under 30% utilization at any given time.
As you pay off debts, your credit score may improve. In addition, the more you pay down your debt, the better your “debt-to-income ratio” becomes. The amount of total outstanding debt in relation to your income will decrease, potentially giving you a better score.
Related: Check out our custom Debt-to-Income Calculator here.
If you have a higher credit score, you might qualify for better loan rates (such as a mortgage) and lower insurance premiums.
6. Simplify Your Monthly Bills
When you have several outstanding debts, your financial life can feel like a mess. Part of this is because you have to deal with multiple creditors, due dates, and payments on each of your debts.
As you organize and eliminate your debt, you’ll have less to keep track of and juggle.
Once you’ve simplified your finances, you can start to focus on your monthly bills and negotiate better rates. It will also be easier to make progress towards your financial goals once your debts out of the way.
7. Fewer Money Fights
According to a study by Ramsey Solutions, fighting about money is the second leading cause of divorce. Furthermore, stressing out about unpaid credit cards and other debts can put an increased strain on your relationship.
Making progress on paying off debts can have a profound impact on your relationship. If you and your partner are both on board with a debt repayment strategy, it can help you work together as a team.
The Ramsey study also concluded that nearly two-thirds of marriages start off in debt. While this is not something that can be avoided in many situations, couples should try to tackle debt head-on to avoid becoming a statistic.
Making a monthly budget is the first step. You can then put together a debt payoff plan that will help you create a financial roadmap for your money.
Related: Check out how the Undebt.it Snowball can help!
8. Own Your Stuff
A huge benefit of paying off your debt is that you will own your assets. Whether you had to take out a loan for a new couch or you have a mortgage on your house, paying off the debts associated with those items gives you ownership of them.
Watching your 85” LED TV is way more fun when it’s yours. Driving a paid-for car just feels better. Owning the deed to your home is one of the best feelings money can buy!
No matter what your debts are, paying them off turns you from a debtor into an owner.
9. More Money to Invest
Paying off debt is an important goal, but ultimately you want to be able to invest and retire someday.
As you pay off your debts, you free up extra cash to start investing consistently. Whether you put a few more dollars in your 401(k) plan or open a Roth IRA, paying off debt can help you invest more money.
You can even join the Undebt.it 52-Week Saving Challenge to save over $1,000 in the next 12 months. Investing those funds will go a long way toward retirement.
10. Retire Earlier
When you are trying to save for retirement, debt can be a huge barrier. Getting rid of monthly debt payments may help you retire earlier.
By paying off your debt, you are freeing your future self from unnecessary payments. Additionally, since your debt payoff journey will help you lower your expenses to pay off more debt, you can use your savings to maximizing your investments.
As you max out your retirement accounts and continue paying off your big debts (like your mortgage), you will move closer and closer to retirement.
11. Give More
Once you repay your debts, you will have the ability to give more to the things that are meaningful to you. Eliminating minimum monthly payments and interest means hundreds (or even thousands) of extra dollars will be available in your budget.
Better yet, you don’t have to wait until you’ve paid all your debts. Even paying off one debt can allow you to give a few dollars to a cause you care about.
Whether it’s a local charity or family in need, paying off debt lets you give more to what matters to you.
Enjoy the Benefits of Paying Off Debt With Undebt.it
Paying off debt can have a profound impact on every part of your life, not just your finances. This is why it is important to come up with a realistic debt payoff plan to strategically tackle your debt and pay it off quickly.
The Undebt.it Debt Snowball tool does exactly that by showing exactly when each of your debts will be paid off. It’s a simple tool to organize and supercharge your debt payoff journey!
If you are ready to get off the debt hamster wheel and take charge of your finances, try Undebt.it for free to see for yourself.