Debt is a passionate topic to me. Why? Because a poor understanding and use of debt can determine the financial success or failure of an individual and a family.
Debt can be insidious. It can creep up on you gradually until you find that you owe an unmanageable amount of it. Low interest rates have not helped. Nor has rapidly rising house prices which have allowed lines of credit to grow along with the house values.
In my opinion, lenders also have a lot to answer for. They have a way of making you feel happy when they solve your immediate problem by offering you more credit. It buys you some time but it actually lines their pockets, not yours. And don’t be fooled; if you finally get to a point where you are in a financial corner, they will show no mercy.
I don’t think that most people realize just how much of their hard earned money they are happily handing over to lenders. It isn’t about the monthly payments, and whether you can make those payments, it’s about how much interest you are handing over to them in total. Let’s look at an example.
In a more extreme case we have a credit card with an interest rate of 19%. If you carry a $5000 balance, you are paying the credit card company $950 a year. That’s nearly 1/5 of the balance. If you do this regularly then in ten years you will have paid them $9500. How long do you have to work to clear $9500 after taxes? And why would you willingly do this?
How about a line of credit? The interest rates are lower for sure, say 7%? These balances are higher so let’s use a $50,000 line of credit. That’s $3,500 a year you are voluntarily handing over to the lender. In ten years you will have paid over $35,000 in interest.
Remortgaging has become very popular too. Again, it feels good to get all that other nasty debt rolled into a mortgage at a 3% interest rate. But if you take that $50,000 we mentioned above, and take another twenty five years to pay that off, even assuming rates don’t rise (which they will), you will have paid $20,813 in interest on that $50,000. Ouch!!
Ok, I’ll end my rant now. I just want you to think about how hard you work for your money, and whether it makes any sense at all to keep handing over this kind of cash to institutions that regularly report record profits. Wouldn’t it make more sense to begin re-evaluating your priorities so that you can start buying the stock of some of these companies and receive dividends from them instead?
We are not debt consolidators; however we help our clients to get on a plan that will increase their wealth, not drain it dry.