Kevin O’Leary, also known as “Mr. Wonderful,” recently shared some advice on CNBC about financial success and the importance of proper budgeting. What was the biggest takeaway? That paying down debt should always be your top priority when building a budget.
Pay Down Debt Instead Of Spending Money On Coffee & Unnecessary Expenses
In the article, O’Leary says that “… if you have things that you’re paying interest on, you have to pay those off first.”
He goes on to use the example of a $4 cup of coffee. If you have debt – like student loan debt, a large car payment, personal loans, or credit card debt, O’Leary suggests that this is a luxury that you simply cannot afford.
A cup of coffee that costs $4 at a coffee shop costs only a few cents at home – and can be just as good. “You have to get rid of those expenses first,” he said. And he’s not just talking about coffee – the same analogy is true of a wide variety of unnecessary expenses.
It may seem harsh to say that you can’t pay for a cup of coffee, go out to eat, spend money at a bar, or pay to see a movie unless you’re debt-free – and it’s sometimes not possible to completely stop doing those things.
But his advice still makes sense. Paying down debt as soon as you can is so important because it frees up your money to do other things. Let’s explore this concept in further detail.
Paying Down Debt Lets You Spend Money More Freely In The Future
By paying off your debt today, you’re going to free up a lot of money in your budget in the future – and that money can be invested, saved, or even spent on luxuries like a $4 cup of coffee.
Consider the cost of paying down a credit card. If you have $5,000 in credit card debt at 20% interest, and you pay $500 toward your credit card each month, you’ll pay it off in 11 months –- and you’ll end up paying $515 in interest.
But if you can save more money and pay $1,000 per month, you’ll end up paying your debt off in just 6 months, and you will pay $265 in interest. By doubling your payments, you’ll also save nearly 50% in interest payments – and that money can be spent or saved elsewhere, rather than paid to a credit card company!
Then, in the future, you can pay your credit card down each month to avoid interest completely – and even get beneficial credit card rewards, setting you up for a better financial future.
Focus On Debt Payments When Budgeting
Foregoing luxuries in the short term allows you to pay off your debt more quickly – and in the long run, this will allow you to meet your financial goals more effectively. So follow this advice from Mr. O’Leary, and prioritize high-interest debt when making your budget!