Hoping my little paradise will return more than my debt’s average interest rate.
I compile all my net worth data around the 10th of the month, which is when all my monthly payments are done
Utilities on rental property
Consumer loans (used to buy some land and invest)
Monthly credit card balance paid in full
Then between the 10th and the end of the month, I usually have no moves on my account and can have a clear look at my net worth.
The liabilities column of my net worth is decreasing regularly with the monthly mortgage and loan payments, but it has been a while since I have made an extra payment towards my debt.
Paying my mortgage early, in spite of the amazing feeling that it could bring to be mortgage-free doesn’t make financial sense to me. My interest rate is at a super low 2.29%. I have a 3% savings account. No way I am repaying that early and making the bank some money. I repaid part of my 7% loan earlier this year and when it was time to buy a property lamented not having the cash at hand.
This time I wondered what was my debt average interest rate, to see if it makes sense to repay any debt early.
HOW TO CALCULATE THE AVERAGE INTEREST RATE ON YOUR DEBT
Calculating it is pretty easy. Line up all your debts and interest rates.
Debt A $1000 at 5%
Debt B $5000 at 3%
Debt C $25000 at 7%
Total owed $31000, but at what rate?
Multiply the amount owed by the interest and sum it.
Divide that by the total amount owed 1950/31000= 6.29%.
My debt has an average interest rate of 4.73%. Every month, over hundreds of dollars are paid in interest towards that debt.
While I don’t have the cash to cover my debt instantly, I should get the money from the flat I sold in Paris next month, and a good chunk could go towards my debt. It will not.
Here is how I view this debt: it is a cheap loan to allow me to invest my money in more rewarding assets. I mentioned earlier that I own 56 bulls as part of a cattle investment. This investment alone is covering my debt interest payment. And I invested a fraction of the debt in it.
Every month, as I repay the interest and some principal on my loans, I pay less interest and my net worth grows.
So instead of repaying my debt, all my extra money will go towards fixing my house in Guatemala, and developing the 90 acres of land behind the house. I would like to sell plots for people to build houses on, maybe a green development or something, the ideas are pretty vague at the moment, but I think I can return much more than the 4.73% that I would get by paying off my loans.
I would always recommend that you pay your debt early, specially consumer debt. In this case, because interest rates are low, and my normal payments are already covered, I think it makes sense to pay interest for a few more years.
Have you ever calculated your average interest rate on debt? Does it make you want to pay it faster or keep with normal payments?