Your Debt Costs You More Than You Know
If you want to take a truly sobering look at just how much your debt really costs you, follow this simple guide to figure out what your monthly interest amount paid is. Once you complete the exercise you will have finally developed a proper relationship between you & your debt!
This article will address the following:
- What is interest & how destructive is it
- How much interest I pay out each month
- How I calculated that amount
- The anger I gained toward my debt after completing this exercise
- The incredible motivation this information gives you
- Real steps we can take to lower, reduce, & eventually eliminate the interest we pay
What is Interest & How Destructive is it?
While there are several definitions of “interest”, for the purpose of this article we focus on the interest amount paid toward our debts and will define interest as a fee paid on borrowed assets; and/or the price paid for the use of borrowed money.
Simply put, interest destroys your ability to build wealth by taking your hard earned money and misappropriating it toward paying rich people (the people who loaned you the money.) I will demonstrate this fact by listing my interest amount paid from last month (March of 2009).
How Much Interest I Pay Each Month
Please note that I will have to pay these amounts each & every month until I eliminate the associated debts. However, on the bright side, the amounts will lower each month as I lower the principle debt amounts.
- Mortgage 1 (80%) – $592
- Mortgage 2 (20%) – $296
- Student loan 1 – $165
- Student loan 2 – $120
- Auto payment – $52
- Credit card 1 – $30
- Credit card 2 – $19
- Credit card 3 – $11
- Credit card 4 – $8
- Total interest amount paid for March 2009 – $1,293
Let it be stated that this is approximately 20% of our gross family income (amount after taxes). A convincing explanation of how this interest amount paid greatly hinders our ability to save and become financially free is simply not necessary; the numbers speak for themselves.
How I Arrived at the Above Amounts
Follow these simple steps to find out your monthly interest amount paid:
- Write down a list of all your loan amounts including your mortgages, student loans, auto loans, credit cards, etc.
- Either look at the statement each account mailed you last month, or log into their associated web sites to find the amount of interest (a.k.a. finance charge) you paid over the past month.
- Write down the numbers you find above next to the associated accounts
- Calculate your very own monthly interest amount paid.
After completing the above steps, you will most likely be filled with anger! I was.
The Anger I Gained Toward My Debt
Before I completed this exercise I was certainly angry about the amount of debt I had, but now that it has been so plainly laid out in front of me I have entered into an entirely new realm of DEBT HATRED!
Similar to how the bible teaches us to HATE SIN, I am learning more & more to have a righteous hatred toward my debt. It gives new meaning to Proverbs 22:7, “The rich ruleth over the poor, and the borrower is servant to the lender.”
It is important that we use this information as motivation to push us into a much more passionate, much more driven, much more functional stratum of debt repayment & elimination.
How to Channel Your Anger Into Motivation
This step is simple but crucial. You must not allow yourself to slip into the trap of becoming overwhelmed. You must realize that you are the only one who can turn this around. You must stand up and fight. You must take control of your own financial destiny and your own financial freedom!
Consider, meditate, and memorize this quote and use it as a daily battle cry against your debt: “A journey of a thousand miles begins with a single step.” ~ Lao Tzu
Solidify in your mind the realization that you got yourself into this mess & just the same you are the only one who can get yourself out. Now stand up and take responsibility for your own actions and commit to establish a new financial mission of debt free living. A mission that will change your existing relationship with your creditors. A mission that will enable you to take control of your own financial situation. A mission that will allow you to finally begin building your own wealth with the money you have long been squandering on interest and debt. A mission strongly fortified with direction and goals.
Real Steps to Reduce, Lower, and Eliminate Interest & Debt
I would like to start this section by happily reporting that Credit Card 4 from above was eliminated with this past months payment! That means that I will now be paying $8 less interest every month, and when I add in the reduction of principle of the other debts, that number actually grows to $12.
By using a focused, goal oriented approach, in one month I was able to lower my monthly interest amount paid by $12. I will use this amount as motivation and will keep track of how much I reduce my interest amount paid each month. You should do the same.
- Hold on to the list you formulated above.
- Call each creditor & attempt to get your interest rate lowered. This can give you a HUGE jump start in lowering that initial amount. DO NOT skip this step!
- Each & every month record the interest amount paid for each debt.
- Calculate your total interest amount paid every month.
- Track your progress by listing your lowered amounts.
- Place these monthly amounts somewhere you can see them every day, like your refrigerator.
- Balance your focus by paying off both small debts & high interest debts. I use both of the following methods in tandom:
- The Dave Ramsey snowball method of paying off small debts first to motivate yourself & see entire debts eliminated
- Focusing on the highest interest debts – doing so will be the fastest way to lower your interest amount paid
- Some would say reward yourself once a month by treating yourself to something you want, but for me the lowered amount of interest I’m paying is reward enough. Use what works for you.
The more we eliminate our interest amount paid each month, the more we can use toward paying ourselves. This disciplined approach, if properly employed, enables us to begin building wealth and will help guide us down the road toward our ultimate goal of FINANCIAL FREEDOM.
DFA exists to help you become debt free. If there is something you like or dislike; something you would like to see more of or less of, no matter how trivial it may seem to you, please let us know. The best way for us to improve for your liking is to hear it straight from the horse’s mouth. If you have been reading but have never commented, I encourage you to do so now.
Baker @ ManVsDebt says
Wow, I really enjoyed this article. I love running the numbers like this.
I have to admit I am new to your blog, but I am impressed. Definitely adding you to the readers and am excited to read your new content!
Keep it up!
Alan Schram says
Wow, when you add it up, it certainly is a lot of money every month! I think between my fiance and I, we probably pay only a hundred dollars or so in interest (our student loans are currently interest-free), but to my mind, any money spent in interest is wasted money.
Good blog. I’m looking forward to following.
Wow Alan, I am jealous!
I will be there soon…patience…