By: Amanda Reaume
From your credit score to your net worth, there are a lot of numbers to keep track of if you want to be on top of your finances. One number that most people should know – but often don’t – is their daily interest cost. Your daily interest cost is how much you’re paying per day towards interest. Your number might just surprise you. It could also motivate you to pay off your debt faster.
A Reality Check
I first heard of the idea of calculating your daily interest cost from Melanie Lockert, who founded the blog Dear Debt. After graduating with her master’s degree, Melanie found herself with over $81,000 in student loan debt that had accumulated over the course of her studies.
But despite carrying around a large amount of debt, it wasn’t until Melanie calculated her daily interest cost, and discovered that she was paying around $11 per day towards interest alone, that she realized how serious her situation was. This led her to make changes to her lifestyle in order to pay off her debt faster. According to Melanie, “It was important for me to keep in perspective just how much money was accruing daily.”
Knowing the daily financial damage motivated Melanie to cut back on unnecessary expenses and to find a way to make extra money. She said, “A $5 coffee drink suddenly seems expensive when I’m paying double that in interest per day. It also made me re-evaluate my work and my hourly rate.”
How to Calculate Your Daily Interest Cost
Calculating your daily interest cost is fairly simple. For Melanie, the only debt she had was from her student loans, so she used this equation:
(interest rate) x (current principal balance) ÷ (number of days in the year) = daily interest
If you have more than one source of debt (ex. credit card debt and a car loan) you should calculate the daily cost of each debt separately and add them together.
Also read: How I Ruined My Credit Score>
Why You Should Calculate Your Daily Interest Cost
The most important reason to calculate your daily interest cost is so that you know what you’re paying. Knowledge is power. If your daily interest cost is low, you can pat yourself on the back. But if your daily interest cost is higher than you would like, knowing the amount can motivate you to take action like Melanie did.
After all, knowing this number puts both your spending and your earnings in perspective. Melanie suggest that you, “Compare that amount to how much you make per hour. Compare that to how much you spend on coffee. Compare that to everything and see where you can cut back and earn more.”
How To Lower Your Daily Interest Cost
If you have a high daily interest cost, the first thing you might want to do is look into whether you can refinance or consolidate your loans at a lower interest rate. This is an immediate way to make a real impact on the amount of daily interest you’re paying. Just make sure to choose consolidation loans that will allow you to pay them off faster by putting more money towards the principal each month.
Once you have consolidated your loans at the lowest possible interest rate, you can start planning how you’re going to pay them back. Since your goal is to lower your daily interest cost as quickly as possible, it’s important that you start by paying off the loans with the highest interest rates. Once you pay off the loans with the highest rates, you should then start paying off the loans with the next highest rates until you’ve paid off all of your debt.
As you pay off the loans with the highest interest rates, not only will your daily interest cost decrease significantly, but you’ll also have more money to put towards the principals of your other loans.
To help accelerate the process of paying back your debt, you might also want to focus on making more money to put towards your loans. While asking for a raise should be the first thing you consider, Melanie also suggests, “taking on side hustles, lowering your expenses, or selling your old items.”
Melanie did a little bit of everything to pay off her loans since, as she says, “I was so motivated to pay more towards my debt after seeing how much money I was essentially wasting.”
A Great Motivator
People who are in debt often focus on their annual interest rate or their monthly payments. But a number like your daily interest cost is a great reminder of how much you’re paying towards servicing your debt every day. For that reason, calculating your daily interest cost can often be an eye opening experience. Once you know what yours is be sure to use it to help motivate you to take action and get rid of your debt as quickly as possible.
About the Author: Amanda Reaume
Amanda is a freelance writer and the creator of the blog Millennial Personal Finance. After graduating from university with no debt, and $40,000 in savings, Amanda wrote the book The Complete Guide to a Debt-Free Education. She is also the author of a personal finance book aimed at Millennials called Money Is Everything.