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9 Steps To Get Out Of Debt - Part 2
By: Jeremy Zongker
Step 2 - Understanding the Impact of Debt
Knowing the full impact debt is having on your life will help you understand how
truly important it is to get out of debt and will help keep you motivated to pay
off your debt. This article will help you to understand the consequences of
debt, both financially and otherwise.
Let’s start with viewing the financial cost of debt. Compounding interest has
been called the “Eighth Wonder of the World”, and I hope after reading this
article you’ll see why. Say you purchase an $80,000 house on a 30-year mortgage
at 6% interest. Over the life of the loan you’ll pay a total of $172,670.55,
over double the price of the home. If you were to purchase the same home with a
15-year loan at 6%, you’ll pay about an extra $200 per month, but the total cost
of the loan will be $121,515.38, saving you $51,155.17. Could you use an extra
$51,000? You can see how borrowing money can cost you much more than the amount
you borrowed, and by paying it off sooner you can actually save your self a lot
of money.
That’s just half of the equation though. Say you opted for the 15-year mortgage,
but instead of just having an extra $51,000 in spending cash, each month you
continued to “make your mortgage payment” of $ 675.09 by investing that same
amount for the second 15 years at 6% return per year. At the end of the same
30-year period, instead of just having your house paid for, you’d have your
house paid for and an extra $196,328.80 in cash. That should help with your
retirement.
The previous example is dramatic because of the amount of money involved, but
sadly as far as amount borrowed compared to amount paid, it is a modest example.
Let’s look at an example with a credit card. As stated in the previous article,
the average American household has $7,500 in credit card debt, at an average
interest rate of 18%. Paying off this $7,500 of debt by making the minimum
payment, which under the new law is 4%, you will pay $11,915. This is a drastic
improvement over the old law of 2% minimum payment which would have cost you
$28,863. I can not stress enough how much paying a little bit extra each month
drastically reduces the total amount you pay.
There are other impacts to debt besides just financial ones. The first is that
it adds to stress. At a minimum, it reduces the amount of money you have to
spend each month, making it more difficult to get by. Depending on how bad the
situation is, it could cause a lot more stress from bill collectors constantly
harassing you, to possibly having your possessions repossessed or having to file
for bankruptcy. It is also one of the leading causes of arguments between
married couples and can even lead to divorce.
In addition to the financial, social and mental strains debt adds, it can also
reduce your freedom. How, you ask? For one, it can hamper your ability to get
approved for future loans. For example, if you want to buy a house, you may not
be able to if you have a large amount of outstanding debt. Or, say you want to
make a career change that will require you to take a temporary pay cut. If a
large portion of your monthly income goes towards paying off debt, this may not
be an option for you.
About the Author:
This article has been provided courtesy of Destroy Debt. Destroy Debt offers
great debt relief articles for reprint, and tools and advice that provide the
debt help
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