Debt.
One small word strikes fear in the hearts of many. The worst four letter word? Perhaps. But why is this? Is debt evil? It can be when used incorrectly. Debt can be used to keep you down or bring you up. How you use it is up to you. I am here to teach you about debt and discuss ways to remove yourself from the burdens caused by a high debt load to free yourself to do the things you want in life.
Over the years I have grown a love-hate relationship with debt. Mostly hate. Yes, debt has allowed my wife and I to purchase our home and to make sure we had transportation to work. These are good things. But it also has kept us from doing the things we want to do. Student loans, car payments, mortgage, credit cards. You can feel the interest piling up all around!
That is what will keep you down. The interest. There are two parts to any loan payment, principal and interest. Let’s discuss them in depth:
Principal vs. Interest
Principal
The principal amount paid is the money you are returning to the lender that was borrowed. You goal is to get the outstanding principal balance to ZERO. Once zero, that loan is officially paid off and you can move on to either the next loan balance or you are free of the debt burden that is holding you back! Though it may seem like the principal balance is your enemy, the real threat is the interest charged on the outstanding principal balance. Let’s discuss interest next.
Interest
Interest is the amount a lender charges you to use their money. When you begin making payments on a loan, the majority of your first payments are made up of a large amount of interest and small amounts of principal. On a typical 30-year mortgage, you will end up paying almost twice the purchase price of your home because of the interest! If that’s not a reason to pay off your debt, I don’t know what is. Let’s look at a quick example.
The chart above shows the breakdown of total interest and principal paid by year on a typical 30-year mortgage with an interest rate of 4.25%. The interest portion of your first year’s payment is staggering. Over 70% of your payment! That is money not going toward the amount you owe, but right into the pocket of the lender. All because they loaned you money. It isn’t until year 14 until you have almost a 50/50 split and year 15 until you finally pay more principal than interest. Overall, with the scenario above of a 4.25% interest rate, you will pay an additional 77% of the original loan value in interest alone! For a $300,000 mortgage, you will end up paying $531,295. That is insane!
Credit Card Debt
The above example uses a typical 30-year mortgage. Mortgage rates are currently at all-time lows. What about different types of debt that have significantly higher interest rates? Depending on the type of debt you have, the interest charges can make it seem impossible to climb out of the debt hole. Credit cards have notoriously high interest rates, averaging over 16% even in this time of depressed rates! That means for every dollar you borrow, you are charged $0.16 each year. While this may not seem like a lot think of it this way. If you were to have a $10,000 balance on a credit card for an entire year, that is $1,600 in interest you would be paying on the card before you begin paying down any of the actual amount you borrowed. Now that is a hole that is hard to dig out of!
These interest charges can really keep you from living the life you deserve but with the right mindset and dedication, you can remove the debt burden from your life forever. My goal is to give you the tools to rid you of your debt burden. It is time you start living the life you dream of living each day!
What’s Next?
Freeing yourself of debt will not be an easy process, however, the tools I set forth will allow you to build an action plan that you can stick to, week-to-week, month-to-month, year-to-year, until the day comes when you are no longer burdened with life-dampening debt. This process will take hard work and dedication but at the end of it all, when your debt free and financially independent, you’ll be smiling.
In the following posts, we will begin discussing debt and different strategies to use to bring your debt down. I believe in you. Together, we will face this challenge head on.
Please leave a comment with your thoughts on the subject and subscribe to the Dead Debt website to make sure you are notified of the next entry on the website. If there are any topics that you would like discussed, include that in your comment below! Remember, when your debt dies, your life will RISE!
Good job Ray! It’s important that people understand the impact of interest on borrowing, especially with high interest credit cards. It’s blinding. Will be interested to read your thoughts on how someone should approach their overall debt that is spread out over multiple “loans”. What should they be tackling first?