How long do you think a company would stay afloat if it spent more than it made? Months? Years? Ok, that’s a little unfair since many companies have outside investors who are willing to send millions of dollars it’s way to continue operating. Do you have anyone sending you millions of dollars to continue your lifestyle?
Didn’t think so.
Me neither!
But a lot of people live a lifestyle and spend their money as if they did have some outside source of financing footing the bill for their latest impulse. Since we don’t have a Sugar Daddy investor, instead we often turn to other entities willing to help us buy that new Jeep and iPad Pro. There are so many lenders these days under so many names that make themselves SO available to us that it’s hard to even categorize them. Banks, credit card companies, and numerous others continue to successfully market to consumers and convince us that they are the way we should get that stuff we just can’t live without.
In fact, the average American in 2018 had $38,000 in debt, not including home mortgages! And credit card debt is 25% of that amount on average. That’s almost $10,000 in credit card debt alone. With an average interest rate of 18.61%, we are getting absolutely DESTROYED by credit cards.
If you’re in this average situation, it will take over 2 decades to pay off this debt! And that only assumes you stop racking up more and more charges today. (Math is: $10k in debt at 18.61%, paying $300/mo which may be more than many people actually pay.) During your payoff of the $10k in debt, you actually paid over $20,000 total. (So anything you bought was functionally twice as expensive as you thought it was when all was said and done.)
What if you were on the other side of the equation and instead of paying 18.61% interest on top of the money you borrowed, you were EARNING 18.61% interest? If you were the credit card company you’d have made a little over $10k on someone borrowing that money from you and slowly paying it off. But the amount is getting paid off over time and thus the chunk that they can charge interest on is always shrinking. Sounds nice, but we aren’t really getting the feel for how enormous that 18.61% is and how powerful it really is.
What if you could invest that $10k and watch it grow and compound on itself at that same $18.61% rate? Let’s pretend you found a magical stock market index fund that guarantees that rate of growth every year. (This is guaranteed growth is both impossible and doesn’t exist so don’t believe anyone who promises you such firm and distinct gains) The money is growing and growing at this massive rate for the same 21 years it took to payoff that debt at ever-increasing amounts. The first year you get paid a lovely, but relatively modest $1,860. Pretty nice but we are just getting started. By year 5 your interest earnings alone are $3,684. By the end of the first decade the total interest you’ve earned is a cushy $45,122. The second decade is where things really get interesting though. The 11th year’s interest alone nets you more than the whole initial investment at a whopping $10,260. Are you starting to feel the POWAH? (Power) Just wait. Year 15’s interest earnings alone are over $20k and year 19’s are over $40k! At the end of the 21 year period, your $10k turned into a massive beast of $360,000! Sign me up!
Just for fun let’s pretend like this investment was real and you left that $360k for another 19 years for a total of 40 years. You started with that same $10k, earning the same 18.61% you are willing to fork over to any credit card with nice enough rewards and app design. After 40 years, the account would have an insane total of $9.2 MILLION DOLLARS! $9,217,000 actually. This is absurd. That interest rate is absurd. Everyone in the world would be scrambling to invest in that magical fund you found if these returns were possible. (The stock market has averaged around 10% overall, so 18%+ is far better)
The big question is this: Does your desire for a temporary and small lifestyle boost justifyTHAT level of pain? I was assuming before writing this post that a lot of people don’t really feel how insane the rates are that they gladly sign up for via credit cards (and other debt). If you were one of those people I hope you feel it more now. It’s downright absurd. We should laugh in the face of companies who send us “Special Offers” that we are “Pre-Approved!” for their little plastic rectangular thievery devices. We should scoff at them for thinking we are so foolish and gullible.
Obviously I’m not claiming all debt is terrible and must be avoided at all costs. We would have very little chance of ever owning a home if that was the case. Plus mortgage rates are incredibly low, so they are a different situation than optional spending with extremely high credit card rates. We personally borrowed over $180,000 to buy our house a few years ago. That is a ton of money. It puts us well above the average debt level for someone in our age category. The average debt for someone under 35 is $67,400. Doubling that to account for my wife and I puts the average at $134,800. Yowza. We are far behind the curve there. Since the purchase we have paid the mortgage down to about $127,000 which puts us just a little ahead of the average. However, we have ZERO consumer debt. So our entire debt load is being charged at a low rate of 2.875%. Having the payment at all is annoying and our cash-flow situation would be much improved by it disappearing.
While you can’t earn the kind of massive interest on your investments that credit card companies earn on you, you can choose to stop making them richer and start making yourself richer. Paying off any high interest debt (Higher than 5%) as soon as you can and investing as much as possible once that is done will drastically reverse the “Normal” trends that plague Americans. Most of us willfully opt into the kind of limiting and damaging debt that we then have to work so hard to free ourselves from. In a similar, but more time consuming way, we need to opt out of the beliefs that more stuff will make us happier and the only way to make that happen is through consumer debt.
Abacus Fitness and Money 