Debt is, without a doubt, an incredible burden on not only your wallet but also on your relationships, well-being and confidence. Beyond the obvious interest on credit cards or loans, the real price of debt is reflected in other areas of your life. Understanding the real cost of your financial decisions can tend to help you make better choices, and ultimately keep you out of debt.
So, what is the true cost of debt? While most people calculate the cost of debt as the actual cost interest paid towards a loan or credit card. For example, if you borrow $2500 at an interest rate of 10%, you would pay $250 in order to get that loan, and therefore the total cost of your purchase was not in fact $2500, but $2750.
That is a simple calculation, and for many people, it can take them months or even years to pay off a loan. As interest continues to accumulate over time, it can be difficult to know how much you’ve truly paid for an expense.
In addition to the financial cost of the loan (i.e. interest), what many people fail to realize is the lost opportunity with that money. That is, what could you have done with that money instead? If you’d invested it, you could have actually made money. If we look at the example above, if you had invested that $250 instead of paying it towards interest, you could have potentially turned it into a thousand dollars if you put it into an interest earning savings account.
The Non-Financial Implications
While debt has financial repercussions, there are also other physical repercussions. People who deal with financial stress are twice as likely to report poor overall health, four times as likely to suffer from sleep problems, headaches and other illnesses, and more likely to experience strain in their personal relationships. Chronic stress can lead to complications like heart conditions and diabetes, among the most serious, and can even lead to excessive weight gain, hair loss and depression.
In the end, the real cost of debt is different for every person and family. Managing your finances effectively and striving to pay down your debt (and not accumulate any more) is the only way to reduce your financial stress.
If you’re struggling with debt, contact us today for a free consultation.