Say you borrowed $25,000 for school. Or you have $25,000 of debt spread over multiple credit cards, and maybe a car loan. How many years are you stuck with that debt? It depends how many years it will take you to gross a couple hundred thousand dollars.
If you’re paying 15% of your income towards debt (which isn’t a bad amount!), you’ll need to earn more than $165,000 to pay it off (and that’s not even including interest). This can take 3 to 5 years or more depending on your income.
Yes, really.
$25,000 / 15% = $166,667
But wait! That’s your net income! Being taxed at ~20% like myself? You’ll now need to gross about $208,000 in order to pay off your $25,000 debt using 15% of your net income. Again, not counting for interest, so you should aim even higher.
$166,667 / 80% take home pay = $208,333
Ouch.
The more debt you have, the more you’ll have to earn to take care of it. Yes, it’s depressing, but maybe it can also be motivational. The greater percentage of your income you put towards debt, the faster it will disappear. There are a few things you can do to make the debt repayment process easier:
- Consolidate your debts at a lower interest rate. You might qualify for a better interest rate that you’re currently getting. Check your free credit score to see where you stand, then negotiate a rate with your creditors. I’ve always been careful to pay bills on time and hold different kinds of credit (regular bills/contracts, student loans, credit cards, line of credit) to keep an excellent credit score to ensure I get the lowest rate.
- Increase the frequency of payments. Paying $50 bi-weekly will save you more interest than $100 once per month. When my employer switched from monthly to twice-monthly cheques, the first thing I did was automate debt payments every payday.
- Or increasing the amount you pay. This is both the most difficult and most effective step. Increasing your payments will make your loan go away faster and reduce the overall amount you pay. This is my least favorite step since it means removing cash from my disposable income, but until you’re debt-free, your money isn’t really yours anyway.
No matter what you choose, getting out of debt is rarely a good time — but it’s better than staying in debt forever, so do what you can now so you don’t have to do more later!
Ouch describes it pretty well! I’d rather look at the savings numbers for early repayment, less depressing!
ugh it’s so depressing. I did this for my own numbers and let’s just say I’m really happy I’ve already paid $13,250 of my student loan because it is freakin’ miserable!
One of the hardest for us was that bloody mortgage. Just looking at what it costs us eats us up inside. I agree with Pauline, I’d rather look at the savings, actually that’s what we did when we saved to pay this hunkachunka mortgage … be gone, soon!! Cheers! Mr.CBB
Lucky you Alberta has really low income taxes :D I’m currently paying about 30% of my net income towards debt. May seem like a lot but I can’t help it. I’m actually forced to pay that much because interest on my debt alone eats up around 25% of my income. I really like your formula. I think it represents how much money I’d have to earn to pay off all my debt within a short period of time. Using the number from my last net worth update, I would need to make $1,190,000. Or about $2,000,000 of pre-tax income using an average income tax rate of 40.5% which is probably not far from anyone making that kind of income. Cool, now all I have to do is find a job that will pay me two million dollars a year and then I’ll be debt free by the end of the year. Piece of cake (゜_゜)
ack! $2 million! Yikes hahahaha
Good luck with your job hunt ;)
Alberta’s income tax isn’t actually that low until you’re making low to mid six figures.
That is.. depressing! Unless you actually make that much money every year.
hahaha I sure don’t (yet?) but it’s ok if you’re debt takes >1 year to pay it off.
Payind off debt sucks but it sure is an awesome feeling when it’s finally done!
We pay (or save toward paying) way more than 15% of our income to get rid of my girlfriend’s student loans because we want them gone! We will feel much more free after they are gone because at one point they were more than our mortgage! It sucks but we will have so much extra money after it is done to use toward other goals!
It always hurts to see numbers like that. Thankfully the only debt we have left is our mortgage. Even with that we try and send in an extra payment a year to knock off some of the extra interest. Over time it takes a number of years off which is awesome!
Hello,
I am just wondering why you would only be taxed at 20% when you are grossing that much? In Alberta you would actually be taxed at 36. Also if you earning that kind of money why can’t you be making more than 15% debt repayment per month? What are you doing with the other $7k per month you would be bringing home?
I never stated a timeframe — it might take someone 3 or 5 years to gross $200,000 depending on their income.
I used 15% because it’s commonly suggested amount. I said nothing about what I pay or what I think people “should” or “can” pay.
Weird I was just running some debt repayment numbers using the 15% rule of thumb for debt and the 35% rule for housing. I currently pay about 40% or more of my take home pay towards debt. It’s allowed me to pay of $16k in debt last year, only $19k to go!
I’d throw in a clarifying sentence up at the top somewhere, such as “How long would it take you to earn that amount of money and pay off your debt if you are putting 15% of your income toward debt.” …Even though it doesn’t say so in the post, it reads to me (an apparently a few others) that the 15% means you would need an annual salary of that amount, which I get is not at all what you’ve written.
20% is a fairly low effective tax rate, for most people :-) I’d say you could safely switch the 80 to 75 and it would be more representative of most ppl.
PS – I now think of you when I see Gail on TV. Specifically last night on Lange and O’Leary.
Edited! Hopefully it’s clearer now.
I actually don’t even now what rate I’m taxed at which is why I put the ~ before the percent… now I’m thinking I should go back and edit and actually say “approximately” lol
My favorite thing is texting Gail. I hope she’s ready for me to send her a photo of every purchase I’m contemplating from here on out so she can talk me out of it. Unless it’s plants or tea, of course, which she said you can never have too much of.
That cat is Ho-larious. Debt is a tricky topic, and not as clear cut as “pay it down immediately”. If you have the means, and you know how to generate a return in excess of your weighted debt APR, it doesn’t make sense to pay it down as quickly as possible from a strictly financial/math standpoint. However, this ignores the emotional boost of paying off a source of debt. Seems like you are on your way!
You might want to mention that the credit score site you link to is only good for US residents. Just mentioning because your blog here has a fairly Canadian feel to it, but I couldn’t make it past the initial signup with my Canadian address and lack of US social security number.
Good point, Hilary.
I’m Canadian, and so Gillian, but third writer for MAG, Erin, is American. The bulk of my readership is from the US so I’m trying to get a better balance for both countries going forward. I’ll be more detailed in future posts!
Oh wow, Bridget, this is a powerful illustration. It really opened my eyes. Thanks for writing.
gross, right? it really changes your perspective to look at it from this angle =\