The invention of credit is what really kicked capitalism into gear. And now our daily lives depend on credit, or debt which has become the more familiar term.
Business exist and grow because they are able to borrow. Credit cards make it easy for us to buy stuff. And the houses we live in and the cars we buy are all mostly affordable because of debt. Banks at any given time have lent out more then 10 times the amount of money their clients have deposited.
But debt is not free money. It’s has to be repaid, and there is a commission of sorts that the lender charges for the use of their credit. This commission is presented as a per cent of the total outstanding owed, and assessed periodically until the loan is paid off.
It’s always clear how much we agree to pay for a house, car, product. But what’s not so clear is how much we spend in the end after paying all of the interest. On a $300,000 mortgage you’ll end up paying over $500,000 after 30 years after interest(tax deductions of the interest may be beneficial for some), and that doesn’t include taxes and insurance. For a 20k car loan, your cost after 5 years will actually be 22k. These assume a 4% interests rate. Credit cards charge a around 20%!!
It’s a beautiful thing if you can use your debt to make money. Borrow 300,000 to buy a house that you can then rent out for more than your monthly costs. Open a business that in time pays off the loan and starts to pay you. Pay with a credit card to get rewards points and then pay off the balance each month before interest is charged.
If the burden is on you already, how much stress does your debt cause? The stress itself could be obstructing your ability to work productively and spend less so as to pay down the debt. And if all else fails there is no shame in filing bankruptcy…..well it might be more bearable than the burden of suffocating debt.
Step one in optimal investing is debt awareness, whether it’s your personal debt or the debt your investment owes.
I’m no economist but there seems to only be a certain amount of debt that individuals, companies and countries can incur before it becomes a house of cards.