Rich in Debt: The Real Cost of Debt

The average American will spend between $25,000 to $40,000 in interest over a ten year period. This sad reality is what keeps most Americans living paycheck to paycheck, impedes the ability to build a proper savings, and eliminates most American's from being able to invest wisely.


The Real Cost of Debt
Debt has direct and indirect costs; and it's often the indirect costs that are the most expensive. The direct costs of debt are obvious and most noticeable by consumers when they make a minimum payment and see little diminished impact to the principle debt amount. Creditors, as a business, see fit to get paid first, then allocate the remaining payment towards principle. Even in simple interest loans, such as in auto loans, you'll often see a sizable portion of each payment allocated towards interest. Most people do not need any lessons in understanding the direct costs associated with debt.

What is often more obscure are the indirect costs associated with carrying debt. The one area that should concern most debtors are the opportunity losses they commonly experience. Opportunity losses in investments, financial security, careers, and lifestyle.


Investments
While it may be true that leveraged investors are capable of participating in more investments than a cash investor, a non-leveraged investor has the ability to invest in safer financial instruments. Since leveraged investors are borrowing money at interest their investments must provide a return that exceeds that cost. As most investors know, there is a direct correlation between risk and reward, meaning, that if a higher reward is expected the associated risks must also be higher. Since these investors recognize some of their investments will lose significant value, they must hedge there investment bets in a way that their overall financial strategy yields a return to cover their inevitable losses. Of course, if the overall strategy does not yield the minimum expected return, financial disaster lurks in the shadows.

Cash investors are able to invest is far less volatile areas; primary reason, the cost of their money is far less expensive. They are able to benefit from lower yields, along with less risk exposure, netting returns that match/exceed their leveraged counterparts.


Financial Security
People do not go bankrupt for losing everything; they go bankrupt for losing more than everything. By consumers living outside their means they raise the potential of a third-party making the decision of what they'll lose. They raise the potential that a bankruptcy judge can order assets surrender, accounts liquidated, wages garnished, losses that can easily exceed any perceived gains that were realized by using credit. Consumers commonly make long-term monthly financial commitments based on short-term stability.

The one center card to their financial house of cards is often the income derived from a job; two income households are often twice as likely to feel their house of cards shaken – why, because they too live outside their means. Income loss, even temporary income loss, easily can destroy their credit and take away the items they purchased with credit (cars, vacation homes, timeshares, etc). Debt builds an entirely false sense of financial security, if anything, debt builds financial insecurity.


Careers
Just as leveraged investors must realize higher gains on their investments, consumers in debt must earn higher incomes to sustain not their lifestyle, rather, to service their debt. The higher the debt the less career mobility that consumer will be allowed. These people cannot simply wake up one morning and decide they want to start a business, or take a chance with a different company, they are controlled by their financial obligations not their personal career interests.



Lifestyle
People in debt must work. They must maintain a higher level of income to sustain their interest expenses. For those in debt, the prospect of retiring early, taking months off work, truly owning real assets outside their primary home simply becomes an unattainable dream. Consumers that are burdened with debt must conform their lifestyles to match the limitations that debt presents them.


Priority: GET OUT OF DEBT!
The sooner consumers discover ways to manage themselves out of debt the sooner they will be able to move on and discover wealth. Sadly, for many consumers there is no clean way to getting themselves out of debt. Meaning, they have buried themselves so far into debt it will be nearly impossible to get out of debt without harming their credit score. For most, getting out of debt will require a significant reduction in spending habits, it will require significant interest rate deductions, and in some cases, creditors settling the debt for less.

Consumers must also learn to increase their cash savings while paying off creditors. Remember, often significant interest rate deductions and debt settlement will render those credit accounts closed, as credit accounts close, your dependence on a cash emergency fund will increase.

The biggest benefit of maintaining a strong cash account is you'll quickly move from a debtors mentality to an owners mentality. You'll own more and owe less.