We all know that debt is bad. Having debt means that we are spending more than we are making. While some instances debt is required, such as for the purchase of a new home, in most cases, debt is a bad thing. In this post, I am hoping to show you just how much debt hurts you financially. I hope to open up your eyes so that you stop living a life in debt and start saving for your future.
How Debt Hurts You – Interest
Unless you pay off your debt immediately, you are accruing and paying interest charges. This hurts you because you are paying more than what the price tag of the item states. If you buy a jacket for $100 but only make the minimum credit card payment each month, that $100 jacket isn’t costing you just $100, it’s costing you more when you add in the interest charges. By the time you pay off the jacket, you could have paid $120 or more for the jacket depending on your interest rate.
When I was in debt after college, what woke me up to change my spending ways was looking at my credit card statement each month. I know it’s not fun to analyze it, but it needs to be done. There should be a section on the statement that tells you just how much interest you’ve paid over the course of the year. When I saw this number, I immediately knew I had to make a change. If you can’t find this on your statement, then you need to manually perform the calculation. Just make sure you are sitting down.
I had paid over $500 in interest charges in 10 short months. Everything I bought, that I thought was “on sale” or “a bargain” turned out to not be that way. In fact, when I took into account the interest I paid, I ended up overpaying for all of that stuff! Talk about being an idiot financially. Make it a point to look at the interest you’ve paid for the year. It might just be the wakeup call you need to stop overspending. (And if that isn’t a wakeup call, then think about how many years you’ve been paying interest and multiply the years by your annual interest amount. Yikes!)
How Debt Hurts You – Compounding
When you are in debt, you are paying money each month on debt instead of investing it. In other words, you are working for your money and not having your money work for you. Here is an example of what I mean.
If I have debt, I have to go to work to earn a paycheck. After all, I have a bill every month that I have to pay. I am working for my money. But, if I didn’t have that debt, I could be investing the money instead. The money that I invest will not only grow over time, but many times, the investments will pay me money as well, in the form of dividends. In essence, my money is working for me.
Look at it this way, if you are in debt $1,000 you might end up paying $1,250 back to the credit card company to settle the debt. If you saved $1,000 you would end up with more than that a few years later from the appreciation of the investment as well as income that the investment paid you. Would you rather have nothing other than some new clothes in a few years or a few thousand dollars? Personally, I would take the money.
The next time you are thinking about buying something that you don’t have the cash for, stop and think for a minute. Ask yourself what you really want out of life. Are you tired of living paycheck to paycheck? If so, then stop spending money you don’t have.
Do you want a life where you had the money to take a vacation if you wanted to? If so, then start saving your money and allow it to work for you by growing over time. That item you are thinking about buying might make you feel good today, but a week from now, chances are the good feeling will have worn off. Trust me, I’ve been there before. Learn to stop giving into instant gratification and start allowing your money to work for you. You’ll find that in the long run, you’ll be a much happier person.