9 Steps To Get Out Of Debt - Part 2
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.
Let's 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 you'll see why. Say you purchase
an $80,000 house on a 30-year mortgage at 6% interest. Over the
life of the loan you'll 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%, you'll 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.
That's 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,
you'd 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. Let's 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.