How Much is Your Debt Really Costing You?

Debt is a topic I bring up fairly often, in my newsletters. Why? Because it is something most people need assistance with. It’s an interesting topic, as everyone sees debt differently. Some people avoid it at all costs, some see it as a necessary evil, some people don’t have a choice but to incur some, and others rack it up because they don’t care. But what exactly is debt?

According to Merriam-Webster, debt is, “a state of being under obligation to pay or repay someone or something in return for something received: a state of owing.” Being in debt means you received goods or services without paying for it and as such are liable for that amount. You incur debt because you received goods that you could not afford (or chose not) to pay up front. Now, some people will tell you that there are good and bad debts. That is because some types of debt give you tax advantages, or will end up being worth more than you spent. Regardless, all debt has a cost. This cost is the interest rate.

Most people don’t realize how much that interest rate actually affects them and what their debt is really costing them. Let’s do the math real quick. Let’s focus on credit cards. Credit cards usually have interest rates anywhere from 0% on an introductory period to 29.99% annually. Now what does this mean to you? According to Bankrate.com the average interest rate on credit cards in the US is 16.67% (for easy math let’s assume it is 16%). According to NerdWallet, the average family has $16,061 in credit card debt (lets assume $16,000 for easy math). So if you have 16,000 in debt and you are paying 16% interest then, each year, you are paying $2,560 in INTEREST. That’s almost $215 a month just going to you having that debt!

How much better off would you be if you didn’t have that debt and were able to put it into savings? Well assuming you are getting a net 5% return…in 5 years you would have accumulated $14,568…in 10 Years $33,265…in 30 years $178,288. How much better off does that put you? How much easier are your retirement or other financial goals now? This is the true cost of your debt! How does that sit on your stomach? Does that change your perspective?

Don’t be discouraged though! There are many strategies we can use to help you get out of the debt trap! If you would like help creating a plan to tackle your debt.