| The True Importance About the Importance of a Debt Repayment Program |
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| Written by Chris Blanchet |
| Sunday, 19 July 2009 09:40 |
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Adopting a debt repayment program obviously makes sense for most of us. We understand that debt is bad and it impedes our ability to save, but what does debt really do to our financial ability to achieve wealth and prosperity? We will take a look a closer look, in dollars and cents, at how debt really impacts our savings rate and makes us poorer.
Adopting a debt repayment program obviously makes sense for most of us. We understand that debt is bad and it impedes our ability to save, but what does debt really do to our financial ability to achieve wealth and prosperity? We will take a look a closer look, in dollars and cents, at how debt really impacts our savings rate and makes us poorer. Keeping the wealth building theme in mind, we will take a look at the average American who owes $22,000 in credit card debt. Assuming this average American has been able to get better rates on credit, we will use an average annual interest rate of 14% (instead of the more typical 19%). At this rate, with this much debt, our average American pays $3,080 in interest charges to his or her creditor every year. A debt repayment program will turn this around and put that amount in our pocket, right? Wrong. At first, it might sound like $3,080 is not all that much money to pay over the course of a year. But if you compound that same amount over five years and at that conservative 14%, that works out to $26,250 for the creditors. That's the price of a new car. As consumers, it is unlikely that we could put $3,080 to work at 14%, but even if we could see a compounded rate of 10% over the same period, that same $3,080 works out to only 23,764 for us! In other words, a debt repayment program does not "level the field" as it were. With the odds stacked in the creditor's favor when it comes to rates of return, we should take a greater interest in adopting a debt repayment program. Why? Because not only is $23,764 is better than nothing, but it allows us to keep our $3,080 instead of giving it to corporations that enjoy much larger earnings than we do. To make matters worse, if our average American earns $30,000 in after tax dollars every year, he or she is giving away more than 10% of those after-tax dollars to a creditor. With after-tax dollars being as precious as they are, why give away even more of them? It makes little sense why this average earner would not stick to a debt repayment program that can not only help him or her understand how much of their after-tax dollars are being diluted by debt payments, but how to reverse that rate. In terms of improving the cash dilution rate, if the average debtor manages to complete a debt repayment program and starts saving that same $3,080, results will appear rather quickly. After another five years of compounded returns (rather than payments), we will start to see a cash APPRECIATION rate of roughly 8%. This is based only on the interest component (not the actual amount we paid out). Although 8% in our favor doesn't compare to the 10% dilution when we repaid the debt, we have to remember that the odds are stacked against us. This only underscores the reason for adopting a successful debt repayment plan. And besides, how often does the average American see an 8% raise every year? In summary, once we understand our cash dilution rate and how our true debt translates into actual dollars and cents, we can adopt a successful debt repayment program that will not only help us repay debt, but start to build wealth. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Chris Blanchet has more than 16 years of experience in the finance services industry. He is the author of the Debt Repayment e-book, Help Fix My Finances which serves as the foundation of the personal finance program of the same name. His debt-free blog can be found at How To Repay Debt.com. |