The terrible cost of debt, quantified

https://gcs.thesouthafrican.com/2019/06/f86721d3-municipal-debt.jpg

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual for Building Liberating Wealth on a Low to Medium Income.

Step 4: Get Out of Debt

The man who never has enough money to pay his debts has too much of something else.

– James Lendall Basford

‘Get out of debt.’  Yes, it’s easier said than done.  But this is a basic, essential step that cannot be avoided.  You will not be financially free until your debt situation is under control.  But don’t worry, I’m going to teach you some MMA moves to get you there faster.  You’re going to smash those debts like you’re playing a one-sided Mortal Kombat game.

This step comes before investing for a very good reason.  Your debt is costing you.  A lot.  Your wealth is going backwards.  There’s little point making investments until your consumer debts are paid off.  As mentioned earlier, a mortgage debt may be an exception.

Here’s an example to illustrate: say you borrow $20,000 to buy a car, at 6% interest.  It takes you five years to pay it back.  Do you want to know the total cost of the car, including interest?

$23,199.

And if it takes ten years to pay it back?

$26,645.

You burnt $6,645 dollars.  Imagine what else you might have done with the cash.  The higher your debts and their interest rates, and the longer it takes you to pay them back, the more money you are throwing down the drain.

This is a primary reason why so many people never achieve any level of financial freedom.  It is like they are in a hamster wheel, constantly struggling just to meet the minimum payments on their debts, and never managing to actually save and invest money.  If you have debts, you must take serious action.

https://www.gannett-cdn.com/-mm-/c9aae70f6fb78b741dd1f63f57a890af8255e7a6/c=0-484-4132-2818&r=x1683&c=3200x1680/local/-/media/2017/03/06/Phoenix/Phoenix/636244227399563714-hamster-wheel.jpg

            To figure out how much a loan is really costing you, punch your original loan amount (the ‘principal’), the interest rate and the number of years you’ll take to pay it off into this online calculator and see the unbearable truth:

www.bankrate.com/calculators/managing-debt/annual-percentage-rate-calculator.aspx

            Now you’re starting to see why those friendly bank/credit card/car yard fellows were so eager to lend you the money in the first place, especially if you’re the kind of person who often makes only the minimum payment.  It’s almost free money for them, month after month after month.  Remember that hypothetical $6,645 extra you paid for your car?  It didn’t disappear – it went to the lender.  Your poor financial habits are making someone else rich.  There you were thinking your creditors were hoping you’d pay it all back quickly – not so!  The slower you are, the more they profit (so long as you are meeting your obligations).

If you are only paying back the minimum monthly amount allowed (an amount which credit card companies keep deliberately low), you’ll take a ridiculously long time to pay off the total.  You’ll keep on paying and paying and paying . . . for nothing.  And the total amount you end up repaying will keep on rising.

            Obviously you don’t want to do this.  The sooner you repay the debt, the less you’ll pay overall, and the faster you can actually start building wealth.  Hence, we must deal with debt before we take a step further.  If you have any consumer debt, you must read this chapter and follow through.  I know some of you would like to stick your heads in the sand and ignore it, but that is not an option if financial freedom is your goal.

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2 comments

  1. Pingback: The end of the froth. – Dark Brightness
  2. JaXX · February 13

    “Imagine what else you might have done with the cash.”

    I pointed out something similar to a guy I knew back when I was in my early 20s while he was buying a 50 thousand-dollar hot rod ute (on credit of course).
    I told him he’d be much better off to buy a second-hand, cheap car and invest the rest instead.

    His response was:
    ‘Yeah, but you can’t pick up chicks with a share portfolio!’

    How do you argue with that, lol…

    Liked by 2 people

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