The Hidden Cost Of Credit
As a participant with American Preppers, I’ve learned about long-term survival tactics, food and food storage, bugging out, and some of the special equipment that would improve your chances at survival success. But, I know that some of you who want to do what is necessary to protect self and family are not able to do as much as you’d like. The reason comes down to one word – Debt.
Just as our country’s debt could plunge us into chaos, personal debt is at the critical stage. When I released my book, THE CREDIT DIET back in 2002, personal debt was just over a trillion dollars. Today that number is $11.4 Trillion or a 10 fold increase. And it’s what you can’t see about debt that really costs.
This column would like to share the benefits as well as the methods of eliminating debt without risk. Without disguising what you owe as a single payment stretched over 30 years. What you’ll find here are some easy to follow tips regarding credit, debt, and the elimination of monthly payments from your life.
For example, how long would it take to pay for a set of furniture costing $2,000 if you charged it using a store credit card making just the minimum payments? Some of you would be shocked to learn that it would take over 30 years. Others would shrug it off as the cost of getting what you want. However, let me share what you probably wouldn’t know.
The minimum payment on a charge like that would be about $38. (In all examples we will not be compounding rates, calculating tax consequences, or quoting specific interest charges. We will use worst case or best case examples to share the point. Every situation is different but principles are universal.) Taking that same $38 and investing it in silver, gold or for preppers, coins of real value (silver and gold) could be the difference in being able to trade with others.
If your metal investments earn 8% over 30 years you would earn a total of about $55,000 at $38 a month. If you found a way to earn 10%, just 2% more, you would end up with $85,000. At a rate of 12% your final total would be $132,000. And gold and silver go through the roof at 18% the total after 30 years would be $536,000. Folks, that’s a half a million dollars in the future for a couch you had to have today.
This is what I mean by the hidden cost of credit. It’s not what you see that can hurt you. It’s what you don’t see. Credit has two costs that can alter your future and neither of them is really talked about. You just saw an example of future cost for today’s comfort. You’ll never see these numbers on a financial disclosure of any loan document. They’re important numbers that you need to see and understand before you make a buying decision.
The second one is what I call the net payback. What that term means is that your payments are made in net dollars (earnings after all tax and other deductions). What you need to look at is how many hours you have to work to “net” enough to pay for a particular purchase. (To see if you’re in potential trouble with debt, email email@example.com and we’ll send you a free debt quiz. 7 simple questions to see if you’re in trouble.) In this case, let’s say your mortgage payment (not including tax and insurance) is $1,000 a month. If we assume that one third of your earnings are deducted for taxes (I know some are higher depending on state and local deductions) you would have to earn $1,500 to make that payment.
Since banks and other sources advertise the effective yield of potential earnings, you should calculate the “effective” interest rate you’re paying. To do that, find out what rate of interest you would be paying if your mortgage payment was at your gross earnings. For example, if $1,000 a month was reflective of a 7% mortgage and you had to earn $1,500 to make that payment, calculate what the rate would be on the same amount borrowed to reflect a $1,500 payment. In this case, the effective rate would be approximately 11.5%.
I’m being extreme to share what you may not have been considering when it comes to borrowing. After learning the hard way about the consequences of debt, I can conclude that all you do when you borrow is travel to your future earnings to pay for your past pleasures. Unfortunately, you can’t relive the past but you will have to live in your future.
John Fuhrman is the best-selling author of “THE CREDIT DIET – HOW TO SHED UNWANTED DEBT AND ACHIEVE FISCAL FITNESS” and is the founder of THE CREDIT DIET WEALTH CENTER. You can also visit John at www.creditdietwealthcenter.com.