Posted by: blondechief | August 8, 2008

Know the cost of your Debt.

One day out of curiosity and possibly a little boredom, I took the time to calculate what my debt costs me each day.  Each day, every day, seven days a week…..

I know most people that know me would probably describe me as more than a little “obsessive-compulsive”, but that is another post for another day.  So anyway, if you take the time to make those calculations it may just be a “wow, I could of had a V-8 moment”.  I will show you an example below.  Only a few simple calculations are needed and if you really love your spreadsheets and have a lot of bills you can organize a handy worksheet for yourself.

Multiply the outstanding balance by the annual percentage rate (APR) and divide this number by 365 (days).  That is the cost of your debt on a daily basis.

Credit Card          Balance $5000.00     APR 15%  ($5000.00 x 15%) = $750.00 /365 = $2.05 per day interest

Auto Loan                         $15,000.00 x 7% =$1050.00/365 = $2.88

Mortgage                          $90,000.00 x 6.5% =$5850.00/365 = $16.03

($2.05 + $2.88 + 16.03 = $20.96 in interest charges per day) Ah, the beauty of compound interest.

This exercise should give you a new perspective on where your money is going.  You have committed your future earnings to instant gratification.  A lot of arguments I hear is that mortgage debt is okay, everyone has a mortgage, who really pays for a house with cash and besides look at the great tax deduction you get. That is simply not true.  Debt is debt by any other name.  And yes there are people who pay cash or choose to rent rather than own.  As for the tax deduction, that is just a feeble justification, because you are spending $1.00 to get a tax deduction of 28 cents. And unless you have a large, new mortgage, the standard deduction is usually higher. So if you do not include your mortgage in this exercise then you are only deluding yourself.

Knowledge is power, so arm yourself with the truth about what your debt really costs you and you will make wiser, more informed decisions.  I make it a point to question everything.  I pay attention to how the credit card companies and banks calculate their interest.  Do not fall into the “victim” routine by not educating yourself.  Anytime during a conversation I hear someone say, “Well, they said…….

     the dow is down because…………………

     chargrilled food causes cancer………………………

     the baby boomers are living longer, that is why health care costs are so high…………………

and on and on and on.  I do not just accept this media hype as fact.  Question your belief system and stop running on automatic (that is a nice way to say, get your head out of the sand)  and stop being at the mercy of the next wave of nonsense that sets you adrift.  Take charge of your debt and take charge of your life.  You can do this by being informed, asking questions, there is no such thing as a dumb question, and challenge any and all beliefs you may have.  Happy calculating.

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Responses

  1. Great Thought. As a business owner, writing a check to the government for taxes makes you realize that TAX is an expense, not a REFUND or Savings Plan. It forces you to focus on where THAT money is going. When you make LOAN payments, you often forget how much is interest. I can’t wait to take some time this weekend, to do my calculations and see how much “Debt is costing me” on a daily basis. I’m sure it will make me think before making another purchase on credit. (Delayed gratification should win over instant gratification)

    Thanks for your thoughts today!


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