Debt – Why you must become debt free!
Debt and Why It Slowly Crushes You!
Debt is the worst possible thing you can do for your financial freedom. Debt crushes you in the form of little payments each month that stand like a road block preventing you from applying your payment towards your principle. Not only is it a roadblock, but it is a roadblock that gets bigger and bigger with everyday that passes! There are some things about debt that you need to understand.
It’s All (mostly) About Percentages
We get caught up in big numbers because they catch our eyes. We dismiss little numbers because they seem insignificant. But the most important thing about debt is, its all about percentages! Paying 18% on a $1,000 for a Credit Card seems like nothing compared to paying 2% on $15,000 car loan for 5 years. But again its all about percentages! Lets look at the numbers for the credit card debt compared to the loan!
The Car loan Principle Payment is $250, now factor in the 2%, the total payment comes to $263. Over 5 years that LOAN will only cost you $775. Not bad at all.
The Credit Card bill of $1,000 at 18%, if you made the minimum balance payment of 2% ($20) each month, it will take you almost 12 years to pay that simple $1,000 off and you will end up paying $1,286.66 in interest. So total you will be paying $2,286.66 for the credit card debt! Check out Bankrate website for all sorts of calculators on what your loans are costing you!
Credit Card Debt is the WORST Kind of Debt!
Credit Cards are wonderful tools if used properly. Last year my wife and I made $500 dollars by just using our credit cards. The key to this is staying disciplined and not purchasing anything that you do not need. You have got to stay disciplined, and pay it off on time! The average credit card interest rate is around 18%. That means that if you have 1,000 dollar carry over on your credit card you are gaining interest of .50 cents the very first day! Now here is the kicker, the next day that .50 gains gain interest on it and this continues until you are able to get it paid off. If you are thinking about opening a credit card or looking for balance transfer, the folks at NerdWallet have got it down to a science!
Debt – With a High Interest Rate
Not all debt is bad, it is debt coupled with a high interest rate that will bury you. The key to managing your money properly is maximizing your money. Let’s go back to the car loan of 2% over the next 5 years. So you are trying to decide on what to do with an extra $200 dollars a month, invest it or pay off your car loan. The stock market will return on average 7% and your car loan is only 2% so (rough math) you will be gaining an average of 5% on your money over per year over the next 5 years. And the earlier you start investing the better off you will be! Want to find more money to invest? Read my post about keeping your money.
