A Reverse Sale
"Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't...pays it."
It is incredibly convenient to spend money you don’t have! That is why so many of us are willing to pay interest. Yes, we know about the “horrors” of interest rates and how they are actively working against us. But that hasn’t stopped us.
Would you take out a loan with a 10 percent interest rate? I certainly wouldn’t. Ten percent is terrible. Yet the average credit card interest rate is around 15 percent—and that number can skyrocket if you miss a payment or two.
If you are like most of us, you probably pay just enough on your card not to worry about it. You cover the minimums, maybe a bit more, but don’t take the time to calculate the real cost of using credit. The debt may go up or down, but it remains fairly consistent. Most of us tend to hold debt over long periods of time.
But do you understand how much maintaining debt really costs you?
Interest rates become particularly destructive the longer a debt exists. Let’s say you have a balance of $1000 on a credit card and your interest rate is 15 percent (most credit cards compound interest monthly instead of annually, so it actually works out to be higher than a simple annual rate of 15 percent).
- After one year, you will owe $1,161.
- After three years, you will owe $1,564.
- At the end of five years, you will owe a whopping $2,107.
Based on the average interest rate in the United States, your debt will have more than doubled in five years! In other words, every purchase you make on a credit card can end up costing you twice as much. If you buy a $4 coffee, you’re actually paying $8. If you buy a shirt on sale for $35, you are actually paying $70. It is a reverse sale! Instead of the amazing price you think you’re getting, you are actually paying someone a ridiculous premium.
If you want to get out of debt swiftly, this can be a life-saving first step: Mentally double the price of every purchase you consider making.
Is this item worth double what the price tag reads? This question makes most purchases an easy yes or no and almost completely removes the desire to buy impulsively. After you are out of debt, you can start looking at the tag as the “real” price again, but until then, you might as well assume you are paying double.
- I am meant to prosper.
- I have gifts and talents that are completely unique.
- My financial history has no bearing on my future. I create my financial future.
For the next week, double the price of every item before you purchase it. Ask yourself, "is it worth the cost"? At the end of the week, consider whether the price of maintaining debt (or buying impulsively) is really worth it.