The Cost of Debt Part 1: The 19 Year Money Hole

I find debt to be a terrifying word, and with good reason. To anyone who’s in it for themselves to earn money their own way, the idea of owing a dime of it to someone else, be it a person or worse, a corporate entity, should be anathema. Abhorrent. Sickening.

The worst thing about debt, is that few people realize just how unbelievably easy it is to get into it, and how incredibly difficult it can be to get back out. Let’s use credit cards as an example. They are, after all, extremely common. CreditCards.com quotes a study from 2010 performed by the Federal Reserve Bank of Boston that showed that there were approximately 176.8 million credit card holders in 2008 in the United States alone. That same study showed that the average US credit card holder had 3.5 cards. Each.  That’s 618.8 million credit cards in the United States. That’s over half a billion. The only word that springs to mind here, is yikes. That’s a lot of potential debt.

But the debt is far from the worst part. The real kicker here, is the interest. See companies such as those that issue credit cards don’t just lend you the money without expecting something in return. Oh no. For every month you’re maintaining a balance, they’re charging you interest. And that interest accumulates. I asked one of my associates to take a look at an old credit card bill of his for the purposes of this article. At the time he was maintaining a balance of about $2000, and just barely making the minimum payments. His interest rate was 12.9% annually, or 1.075% of his balance per month, making his minimum payment about $40 per month. If he had continued to only pay only that amount, it would have taken him 18 years and 8 months, give or take a month or two, to pay off his balance. He has two credit cards. The other one had a similar balance and an even higher interest rate.

Ouch.

Do you see the trap now? $4000 isn’t a lot of money. Not really. But when your income is limited and you can only make minimal payments, the interest adds up. On that one card alone, with its $2000 balance, his yearly interest was $258. Over a period of 18 years and 8 months, he would have been paying almost $58 000 in interest alone. Plus, you know, that $2000 he owed to begin with. On one card. Remember, he has two, and the interest rate on the other is even higher. I would just like to point out the average 9-5er doesn’t see that much money in a year.

Thankfully better budgeting, a change in career (he himself is now a Personal Independent Earner, and not a half bad one at that), and a little debt consolidation put him back on the right track and he is now almost entirely debt free. But it’s not generally that easy for most people.

And that’s just taking about people. This article is already skewing more towards the long side and I’ve only covered personal debt. I want you all to stop and think on this. If circumstances hadn’t changed, our friend we were just discussing would have been in debt for a little shy of 19 years. Can you imagine what that kind of debt could do to a business?

Mull that one over a bit, and we’ll be back on Friday to discuss the cost of debt to a business, and how it can set your path to PIE so far off course you may never find your way back.

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