What’s the Optimal Payment Strategy for Becoming Debt-Free in 2023

What’s the Optimal Payment Strategy for Becoming Debt-Free in 2023?

In 2010 I was a slave to credit card debt. A whopping $25,000 accumulated interest on an income that barely covered my monthly payments. I felt like Sisyphus pushing his boulder up the mountain only to watch it roll back down again.

But then something clicked. I realized that most financial advice is based on outdated models and flawed assumptions. Banks make money from debt, not from helping people pay off their loans. They use mathematical tricks like interest rates that decay over time and hidden fees that add up quickly.

The optimal payment strategy for becoming debt-free in 2023 requires a different approach. It’s all about velocity, rate decay, and cash-flow redistribution.

First, calculate your debt’s effective interest rate. This is the actual cost of carrying debt, not just the nominal rate listed on your loan documents. To do this, you’ll need to factor in compounding interest and any fees associated with your loans.

Next, prioritize your debts by their effective interest rates. You should focus on paying off high-interest debts first, like credit card balances. Then move on to lower-interest loans like mortgages or car loans.

Now here’s where most people go wrong: they pay more than the minimum payment each month. Don’t do this. This just allows the bank to keep making money from your debt while you’re stuck in a cycle of payments that never seem to end.

Instead, calculate how much you can afford to pay each month without going into poverty or sacrificing your savings. Then allocate 90% of that amount towards high-interest debts and 10% towards lower-interest loans.

But what about the remaining 10%? This is where cash-flow redistribution comes in. Take that extra 10% and invest it in a tax-efficient manner, like a Roth IRA or a high-yield savings account. The goal is to build wealth while you’re paying off debt, not just accumulating more interest charges.

Now here’s the math: assume you have $25,000 in credit card debt with an effective interest rate of 18%. You can afford to pay $500 per month without going into poverty. If you allocate 90% of that amount towards high-interest debts, you’ll save over $5,000 in interest charges by paying off the debt in just over three years.

But what if you invest the remaining 10% each month? Using a tax-efficient strategy like a Roth IRA, your returns could be around 7%. This would add an extra $1,500 to your monthly savings. By investing and paying off high-interest debts simultaneously, you can cut your payoff time in half.

In conclusion, becoming debt-free in 2023 requires more than just cutting expenses or “budgeting harder.” It’s about understanding the hidden mechanics of the debt system and taking control of your finances. By focusing on velocity, rate decay, and cash-flow redistribution, you can pay off debt faster, build wealth, and finally break free from the cycle of financial servitude.

So don’t believe what banks tell you: the only way to get out of debt is to take matters into your own hands. Take control of your finances, calculate your effective interest rate, prioritize your debts, and invest in a tax-efficient manner. The payoff could be life-changing.