How many times have you heard the statement, “we live in a debt-fueled economy”? More than you want to acknowledge, I’m sure. Well, we all know it’s true. It’s getting worse by the year. The sad reality is that we’re not taught how to become debt-free and therefore remain in a loop of borrowing, increasing interest rates, and bleak payoff terms. It’s hard to get ahead let alone stay on track.
Here are some staggering statistics to put the debt crisis into perspective. Magnify Money shared the following information on January 23, 2019:
The Federal Reserve raised interest rates four times in 2018 – that means consumers will be paying billions more for borrowing
Consumers in the US paid $110 Billion in credit card interest fees in 2018 – an increase of 13% over the previous year. This year we could be looking at $122 Billion. By the way, that’s 45% more than just five years ago.
The average APR on credit cards is 16.86% – an increase of 4% points in five years
Revolving credit and retail credit card balances are over $1.04 Trillion
Our country carries $686 Billion in credit card debt that we do not pay in full each month
The average credit card balance is $6,438 – for each card. Most Americans have 3.1 cards
The numbers are staggering and certainly cause for concern. How do we get control and help ourselves break the cycle? What’s the best way for you to pay off your debts? What are the ways to pay off debts? Who do you turn to for help? So many questions and so many different answers.
Most people don’t consider the true cost to borrow money. We have the obvious interest charges, but have you thought of the fact that someone else is controlling your finances. Your money is profiting the lender and depleting your wealth. Consider the time lost. Lenders control the term of payoff. The longer you owe, the more you pay. Debt consumes your time year after year.
Let’s do some math to show you just how this works:
You buy a $200k home – the interest rate is 4.5% – the term is 30 years – your monthly payment $1,013
After 1 year you will have paid $3,226 on the principal and $8,934 in interest (that’s 73% of your payment on interest only)
After year 2 you will have paid $3,460 on the principal and $8,700 in interest (that’s 72%)
20 years into paying you have spent $243,000 – you still owe $97,000. YOU BORROWED $200,000! The cost of borrowing is not in your favor.
At 30 years you will have paid a total of $365,000 – 82% of that is interest
Take a few minutes to run your own numbers here.
We all want things and the majority of the time we need someone to help us fund that thing. That’s fine and there’s nothing wrong with it. What is wrong is the way the lender now has control over your time and money by dictating when you pay and how much you pay. There’s got to be a better way.
Having control of your debt is very important. Obviously, you should not owe more than you can pay back, based on income and debt ratios and borrower’s terms. Many people borrow and borrow and borrow just to try and get ahead. The fact is, that doesn’t work nor does it help you gain financial independence.