To me, debt is a scary word. I personally don’t believe that any debt you have is good debt. Even a house payment every month is bad debt. The amount of money that you pay in interest is astonishing if you do the math. But we are told our wholes lives that things like car payments, house payments, and payment plans are just normal things you will have to pay for your whole life.
I personally believe this is how debt becomes a crushing force in people’s lives because you are trapped in “easy monthly payments” that pelt you with interest charges. You have little financial freedom and wonder why your hard-earned paycheck tends to disappear every month. I was lucky enough to spot this negative trend in college as a business major in finance classes calculating these things for myself. Luckily for you, I have found some resources to help you calculate how much interest you are paying with the debt you have. While I had to use excel spreadsheets, you are lucky enough to have this amazing website called nerdwallet.com.
This resource has incredible articles and tools to help you become debt free and maybe shed some light on how much you are really spending on your home or credit cards.
The first tool is called the Debt Payoff Calculator. This is a great tool to give you an idea of how much you are really spending.
Don’t Believe Debt is Bad, Check This Out
Before we start, I am not a financial adviser. I do have experience in finance working in banking and studying finance in college but I am not licenced. The following calculations were done using the Mortgage Calculator on nerdwallet.com as a baseline to show you how much you are paying in interest.
Let’s do a test run. Let’s say you buy a moderately sized house in Utah. Around $200,000, a 30-year mortgage, and a 3.9% interest rate. You put $0 down on the mortgage. Your house payment comes to around $1375 a month.
Without any extra payments, you are paying $139,601 in JUST INTEREST.
Let that settle in for a second. Take some time to think about how much money you just gave the bank. You basically paid double for your house. All your paychecks over the course of 30 years went to interest for a house. Right to the bank. It does nothing for you!
Now let’s say you decide to live in an apartment or town home for 30 years and save the money you would have spent.
You find a three bedroom for about $900 a month.
You pay that, it’s a sunk cost.
You take the house payment you would make, subtract the rent, and put the rest in savings.
So $1375-$900= $475 a month.
There are 12 months in a year so 12*30= 360 months.
So, you end up saving $171,000 instead of paying $339,601 for a house with interest. Sure you have a house that you can sell depending on how the market is doing. Let’s say the housing marketing is up and you sell it for $50,000 more than you paid for it. So you sell it for $250,000 to move to a bigger house or whatever you wanted to do; how much did you really make?
Well, the interest is a sunk cost.
So, you have to subtract the total cost of the house from how much you really made.
$339,601-$250,000 = $-89,601
To just break even, you would need to sell your home for $339,601. To make as much as the guy who was renting, you need to sell it for $421,000.
Let’s compare the situations. You just lost $139,601 to the bank in interest payments, and the person living in the cheaper apartment made $171,000. That’s a $310,601 difference thanks to interest on one loan.
Now some people reading this are thinking of the tax breaks you get and where is the financial analysis that comes with that. I also left out the cost of maintaining your house, HOA fees and taxes you owe being a home owner. I don’t have enough room to do a complete financial analysis for you, but using this tool is ideal for people wanting to know how much they are actually spending for their house, car, etc…and doing the math themselves to try and stay out of debt.
Imagine all the interest payments you are making between credit cards, car loans, cell phone payment plans, and even some clothing credit options.
And people wonder why they can’t retire at age 60.
What is cool about these tools is that you can use them for anything. Your credit cards, phone payment plans, car loans; you can do it with literally anything you purchase on a loan or monthly payment basis. The best part of this tool is that you can adjust how much the interest changes if you put extra money down every month. The slider feature allows you to get an idea of how much money you could save by adding a couple hundred dollars to your payment a month.
If you put an extra $200 down a month on the principle, you would save around $61,000 by the end of the loan period! Its a cool tool and they have a variety of other tools you can use on the website.
How is Your Financial Health?
The next tool I wanted to talk about is the Financial Health Score. It’s a simple tool you answer eight questions about your finances, and you discover how healthy your financial life is. The tool will also suggest what your biggest problem is and how to fix it.
Nerdwallet.com is an incredible tool you can use to keep yourself out of debt. I highly recommend using it so you can live the life you want to live and break away from the chains of debt so you can retire and have the life you want later.
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