This
is a nasty 4-letter word. Perhaps it
doesn’t have its origins in the Anglo-Saxon heritage like so many of our other
4-letter profanities, but where-as 4-letter words may sound coarse or uncouth, DEBT is vulgar to the core of
our well being.
Let
me enlighten on the definition of debt:
1.
Debt
is an obligation owed by one party (the debtor) to a second party
2.
Something
owed, such as money, goods, or services.
3.
The
condition of owing: i.e., a young family always in debt.
4.
An
offense requiring forgiveness or reparation; a trespass.
While
we may argue and disagree about the value or the disgrace of “bad words” in
society, I think we can all agree that debt is a curse to all who are
obliged. Is there good debt versus bad
debt? Should one live totally free from
debt and is that even possible? Good
questions.
Answer: maybe
and maybe
In
my very first blog and in each subsequent blog, I talked about the fact that we
don’t live in debt. When I expressed
that, I was referring to consumer debt, versus the debt of home-ownership. So, we do owe money for the mortgage on our
property and therefore are technically in debt.
But……let
me explain. In 1991, when we “purchased”
our first home, we “bought” it for $39,000.
We carried a 15-year, fixed mortgage and paid approximately
$385/month. At that time, I was still
paying off my student loan. But, both my
husband and I were working full time, and we did not have any children to
support. So, not only were we easily able
to pay our monthly mortgage payment, and my student loan, and all our other
expenses, we were also able to save money.
Even
back then, over 22-years ago, we lived by our rule of not carrying any consumer
debt. If we used our credit card to make
a purchase, each month we would pay off the balance. We would accrue mileage points and then use
the points to get free airline tickets so we could visit our families in
Pennsylvania. Rather than the credit
card company making money from our credit card purchases, we actually made
money from the credit card company by getting several free airfares. That particular credit card company decided
they didn’t want us as “customers” anymore and sent us a letter declining us further
credit. Why? They didn’t want to
keep losing money on us!
Make no mistake. Credit card companies are in the business to
make money….lots of money. The less you,
the debtor, pays each month, the more money the credit card company makes. Of course you already know this intuitively,
but let’s look at this numerically:
How do credit card companies figure the minimum monthly payment?
The
minimum monthly payment is based on the account balance rather than the
particular interest rate. It's typically around two percent of the account
balance.
Both
the minimum monthly payment and the account balance are stated on the credit
card statement. The monthly minimum percentage can be calculated by dividing
the minimum monthly payment by the account balance. The following is an example
of how to compute the minimum monthly percentage on an account with a balance
of $1,000, and minimum monthly payments of $20 and $25:
|
Account
balance
|
Minimum
monthly payment per statement
|
Calculation
|
Minimum
monthly percentage
|
|
$1,000
|
$20
|
$20
divided by $1,000
|
2.0%
|
|
$1,000
|
$25
|
$25
divided by $1,000
|
2.5%
|
The following table illustrates how
much you will save in interest if you make more than the minimum monthly
payments on a credit card with a $1,000 balance and a 19 percent interest rate.
|
$1,000
credit card balance
19 percent APR 2 percent minimum payment |
||
|
Monthly payments
|
Time to pay off debt*
|
Total interest you will pay*
|
|
Minimum (Starts at $20 and goes
down a little each month)
|
22
years
|
$2,400
|
|
Fixed $20
|
8
years
|
$1,000
|
|
Fixed $30
|
4
years
|
$450
|
|
Fixed $40
|
3
years
|
$300
|
*years
and amounts have been rounded-off.
Notice that the total interest paid on the original debt of $1,000 is MORE THAN twice the original
debt.
But
here’s the thing….
American Household Credit Card Debt Statistics: 2013
The
average US household credit card debt stands at $15,216, the
result of a small number of deeply indebted households forcing up the numbers.
Based on an analysis of Federal Reserve statistics and other government data,
the average household owes $7,098 on their cards.
Oodles, that’s how much.
For
those of you who already carry a hefty consumer debt, it’s a slow slog out and
I would like to talk more about that slog, but in a separate blog entry.
Now,
when it comes to mortgage debt, or student loan debt, it gets a bit trickier.
With respect to whether or not to carry mortgage debt (i.e., purchase a home
versus renting) is a personal choice; each carries certain benefits and risks.
So,
my one piece of advice with respect to mortgage debt is this: make sure to
carry no more mortgage debt than you can realistically manage and play the “what
if” game. For example:
What if my spouse/partner or I lost
our job? Could we/I still pay the
mortgage?
As
tempting as it is to go for the maximum you can borrow to buy the house of your
dreams, I urge you to NOT do
that. As the anti-NIKE slogan might
go:
JUST DON’T DO
IT.
I
urge you to build yourself a safety zone and give yourself plenty of breathing
room for bad financial things to happen.
If they don’t happen…WAHOO! – you’ve got savings for whatever you’ve
ever dreamed about doing. But if they do…guess
what…you’ve got yourself that proverbial financial safety cushion and that’ll
make the handling the bad financial thing just a bit easier for you.
I’ve
already gone on my rant about student loan and student debt and how I feel that
what we’re doing to our newly educated college folks is an absolute sin.
And
just so you know, as of June 2013 the average student loan debt (undergraduate)
was listed at $32,054.
I
really love Ted talks. I found a Ted
talk that not only talks about the crippling impact of debt, but also discusses
the importance of 5 financial rules. I’m
going to end this blog entry and I encourage you all to take the next 11
minutes to watch this:
Next blog I’d like to explore a few more “D” items; “DIY”, discounts and dependents…and whatever else comes to mind.
It's time for a
disclaimer:
I’m not a financial
planner, nor am I a business guru. What I am is a very practical person with
(as my mother always said) “a good head on her shoulders”. I have good common
sense and am old enough to trust my inner core and follow my instincts.
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