Step 2 - Understanding the Impact of Debt Knowing the full impact debt is having on your life will help you understand how truly important it is to get out of debt and will help keep you motivated to pay off your debt. This article will help you to understand the consequences of debt, both financially and otherwise. Lets start with viewing the financial cost of debt. Compounding interest has been called the Eighth Wonder of the World, and I hope after reading this article youll see why. Say you purchase an $80,000 house on a 30-year mortgage at 6% interest. Over the life of the loan youll pay a total of $172,670.55, over double the price of the home. If you were to purchase the same home with a 15-year loan at 6%, youll pay about an extra $200 per month, but the total cost of the loan will be $121,515.38, saving you $51,155.17. Could you use an extra $51,000? You can see how borrowing money can cost you much more than the amount you borrowed, and by paying it off sooner you can actually save your self a lot of money. Thats just half of the equation though. Say you opted for the 15-year mortgage, but instead of just having an extra $51,000 in spending cash, each month you continued to make your mortgage payment of $ 675.09 by investing that same amount for the second 15 years at 6% return per year. At the end of the same 30-year period, instead of just having your house paid for, youd have your house paid for and an extra $196,328.80 in cash. That should help with your retirement. The previous example is dramatic because of the amount of money involved, but sadly as far as amount borrowed compared to amount paid, it is a modest example. Lets look at an example with a credit card. As stated in the previous article, the average American household has $7,500 in credit card debt, at an average interest rate of 18%. Paying off this $7,500 of debt by making the minimum payment, which under the new law is 4%, you will pay $11,915. This is a drastic improvement over the old law of 2% minimum payment which would have cost you $28,863. I can not stress enough how much paying a little bit extra each month drastically reduces the total amount you pay. There are other impacts to debt besides just financial ones. The first is that it adds to stress. At a minimum, it reduces the amount of money you have to spend each month, making it more difficult to get by. Depending on how bad the situation is, it could cause a lot more stress from bill collectors constantly harassing you, to possibly having your possessions repossessed or having to file for bankruptcy. It is also one of the leading causes of arguments between married couples and can even lead to divorce. In addition to the financial, social and mental strains debt adds, it can also reduce your freedom. How, you ask? For one, it can hamper your ability to get approved for future loans. For example, if you want to buy a house, you may not be able to if you have a large amount of outstanding debt. Or, say you want to make a career change that will require you to take a temporary pay cut. If a large portion of your monthly income goes towards paying off debt, this may not be an option for you. |
