We talk a lot about debt. What is good debt? What is bad debt? Debt has become a common way of life which most people can relate to. But do you know how much money that debt costs you each year? With an economic degree, I often like to come back to opportunity cost.
Nov. 4, 2020
Many people are carrying debt as what has become a usual way of life. But have you considered how much it costs you to carry debt? As of June 30, 2020, the Federal Reserve Bank of New York stated that the aggregate household debt balance stands at $14.27 trillion.
Carrying debt is expensive, and if you are carrying debt, you need to be aware of the cost of maintaining that debt is. Nobody ever gets rich by being in debt. If you are interested in building your wealth, the first thing you need to do is to work your way out of debt.
The best action you can take is to stay away from credit card debt. It has become common for people to carry credit card balances, but do you know how much it costs you to maintain that credit card balance? It can be a costly habit, as most credit card companies are charging 20% interest rate. Think about how that adds up.
For example, if you are carrying $10,000 on your credit card from month to month and your credit card charges a 20% interest rate, compounded for 12 months, that debt is costing you $2,193 to carry for the year. If you have it for three years, it will cost you $8,131, and five years will cost a crazy $16,960!
It may sound outrageous to some to be carrying $10,000 credit card debt; however, it has become a common practice for many. People aren’t thinking about how long they’ve been carrying the debt and at what rate; their thoughts tend to be around just making payments and ends meet from month to month. But when you realize how much money you are paying in interest fees over the length of the time you carry that debt, that truth can jolt you into reality.
Imagine paying $16,000 of interest expense within five years to carry $10,000 worth of debt on your credit card. Let that sink in.
The best way to pull yourself out of debt is to find a cheaper interest rate to carry that debt at and work hard at paying off that debt, and any other debt. It is recommended to pay off your most expensive debt first and work your way down the least expensive until all of your consumer debt is paid off.
Debt robs you from:
1. Money – It has been demonstrated that to borrow money; it costs you money. It is advised not to use your credit card for purchases unless you are confident that you will have the funds to pay off that bill at the end of the month.
2. Health – when people are having trouble paying off debt and making ends meet and are generally short on cash, this is stressful. And stress is detrimental to health . If you have been carrying debt for years and stressing out about it regularly, imagine what it is doing to your health.
3. Freedom – when you owe money, you are a slave to your debt. You must work to pay off that debt, and when you are over-leveraged and have no extra money to use, your choices are limited. You lose the freedom to have your money working for you.
The bottom line is carrying debt is an unhealthy behaviour that can lead to an unhealthy lifestyle. The best thing you can do for your peace of mind is to make it a habit to walk away from the instant gratification of purchasing something, save for it, and pay cash. Chances are if you walk away from it, you’ll likely forget about that item, resulting in saving money.
By Melissa Houston, Contributor
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