Debt Elimination – A Lifestyle Choice
_The American society is built around debt. Everything is bought on credit, and we all pay the price. The price of debt is interest; that tiny number with a percentage sign in it at the bottom of your credit card statement.
What most people don't understand about interest is how much it costs in the long run. You see “10% interest” and there's never really much thought of it, as you squeeze your budget to fit your monthly expenses, perhaps only by making the monthly minimum payment.
The real cost of interest is long term. Interest is the percentage of your average balance you'll pay for every year you have in debt. Thus, if you have a thousand dollars in debt, and a 10% interest, rate, that debt costs you one hundred dollars extra. Which doesn't sound so bad – until you realize that the monthly payments on your credit cards will take you about 20 years (on average) to pay off.
That 10% adds up. The generalized rule of compound interest is the Rule of 72. Divide 72 by the number of percentage points in your interest rate, and you'll find the number of years it takes for your accumulated interest to equal the basic principal of the loan. Thus, using the example above, in 7.2 years, you would have paid an extra thousand in interest.
So now that you know how interest works from the perspective of the banks, let's look at how to make it work for you. There are some basic techniques you can use to work your way out of debt quickly, and with a minimum amount of trauma to your lifestyle.
First and foremost, retire your credit cards – put them some place safe, like a safe deposit box, and allocate every extra dollar you have to paying them down. You never want to pay just the minimum balance, always try to pay them down by double that amount, or more.
Having trouble finding the extra money to put into the credit cards? Take a serious look at what you're spending. It's never a pleasant experience, but you should accumulate three months of regular receipts for rent, utilities, luxuries and groceries, and start to look for things you can trim back.
Are you paying $20 per month for premium cable channels you no longer use? How much do you spend every month on eating out at fast food restaurants?
With a little bit of fiscal discipline, you can get yourself out of debt in short order. Once you do, talk to your bank about certificates of deposit and money market accounts, so that the power of compound interest can work for you, rather than against you.
What most people don't understand about interest is how much it costs in the long run. You see “10% interest” and there's never really much thought of it, as you squeeze your budget to fit your monthly expenses, perhaps only by making the monthly minimum payment.
The real cost of interest is long term. Interest is the percentage of your average balance you'll pay for every year you have in debt. Thus, if you have a thousand dollars in debt, and a 10% interest, rate, that debt costs you one hundred dollars extra. Which doesn't sound so bad – until you realize that the monthly payments on your credit cards will take you about 20 years (on average) to pay off.
That 10% adds up. The generalized rule of compound interest is the Rule of 72. Divide 72 by the number of percentage points in your interest rate, and you'll find the number of years it takes for your accumulated interest to equal the basic principal of the loan. Thus, using the example above, in 7.2 years, you would have paid an extra thousand in interest.
So now that you know how interest works from the perspective of the banks, let's look at how to make it work for you. There are some basic techniques you can use to work your way out of debt quickly, and with a minimum amount of trauma to your lifestyle.
First and foremost, retire your credit cards – put them some place safe, like a safe deposit box, and allocate every extra dollar you have to paying them down. You never want to pay just the minimum balance, always try to pay them down by double that amount, or more.
Having trouble finding the extra money to put into the credit cards? Take a serious look at what you're spending. It's never a pleasant experience, but you should accumulate three months of regular receipts for rent, utilities, luxuries and groceries, and start to look for things you can trim back.
Are you paying $20 per month for premium cable channels you no longer use? How much do you spend every month on eating out at fast food restaurants?
With a little bit of fiscal discipline, you can get yourself out of debt in short order. Once you do, talk to your bank about certificates of deposit and money market accounts, so that the power of compound interest can work for you, rather than against you.