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Baraka_Guru · 04-20-2008, 06:41 PM

"Be industrious and frugal, and you will be rich." —Benjamin Franklin

A great start to a very useful thread.

I want to discuss debt in my initial post. This is mainly because I am currently in a very frustrating position. Many of my financial dealings are conducted with the use of debt. For example, I have outstanding student loans, I carry credit card debt month-to-month, and I use overdraft monthly.

This isn't because my spending is out of control; it is a result of coming out of a limited financial position, going to school longer than expected, living in a city with a high cost of living, and currently earning a lower-than-comfortable salary. What I want to discuss is the cost of interest expense and what it means for the frugal aspirant such as myself.

It is surprising how many don't realize the impact of carrying debt and its nagging compound interest expense. Compound interest in itself is a fascinating thing, but it is a financial ogre if it works against you. To me, if I remove the non-tangible benefits of why I acquired the debt in the first place, paying for interest is like cold hard cash turning to dust and being blown away by the wind. And this happens every month. This happens to a few hundred dollars of my hard-earned money every month! This, for the privilege of having something that I would not otherwise be able to afford. But what is the real cost? It's quite frightening, actually.

If you were to calculate the real cost of using debt to pay for things, you might be astounded, if not disgusted. What if I told you that that television you see at a great deal would cost you twice as much if you were to buy it on credit and pay the minimum payment each month? Well, that is exactly what happens. What if I also told you that the frugal minds who wait to make the same purchase with cash by tucking away a small amount each month instead will be able to afford twice as much TV as a result? That's right. By sidestepping poorly handled credit and paying with cash means you will effectively pay half as much as the minimum-payment debt handlers would. This means you can get a bigger TV at the same value, or, if you wish, a surround sound system as an add-on—for the same value.

By simply waiting to make that purchase, you can get more than those who can't wait. This is the very nature of compound interest and our desire for immediate gratification. It takes strong willpower, but the frugal mind will prevail if it is disciplined.

That said, what of my own position? Well, let me tell you, I'm in no position to be buying TVs, not even on credit. My current debt-management cost is too high—so high that I have virtually no disposable income. So what do I do? Well, I need to stop making reactive purchasing decisions. I need to stop paying for lunch and start making more money-saving decisions, and I need to start accelerating my debt repayments. I need to eliminate my credit card debt so I can stop maxing out my line of credit that I use to carry me over month to month. Meh, a tight spot, I know.

But things will start to change for me. I'm starting to get some extra income with freelance jobs. This money will be going directly to debt repayment. All of it. I won't look at it as "Hey, extra money! Let's get the things I've been wanting all this time!" No. It is for paying for things I've already bought and haven't paid for yet. Things that are costing me twice as much as they should...or more.

Interest expense is like turning hard-earned dollars into dust. But if you throw those dollars at the debt instead, then it will slow the process. One encouraging way to look at it is this: Making a payment on a debt that carries an 18% interest rate is kind of like buying an investment with an 18% return. The only difference is one is preventing a penalty, the other is soliciting a bonus. Either way, the real value is the same. Think it through.

04-20-2008, 06:41 PM	#7 (permalink)
Baraka_Guru warrior bodhisattva Super Moderator Location: East-central Canada	"Be industrious and frugal, and you will be rich." —Benjamin Franklin A great start to a very useful thread. I want to discuss debt in my initial post. This is mainly because I am currently in a very frustrating position. Many of my financial dealings are conducted with the use of debt. For example, I have outstanding student loans, I carry credit card debt month-to-month, and I use overdraft monthly. This isn't because my spending is out of control; it is a result of coming out of a limited financial position, going to school longer than expected, living in a city with a high cost of living, and currently earning a lower-than-comfortable salary. What I want to discuss is the cost of interest expense and what it means for the frugal aspirant such as myself. It is surprising how many don't realize the impact of carrying debt and its nagging compound interest expense. Compound interest in itself is a fascinating thing, but it is a financial ogre if it works against you. To me, if I remove the non-tangible benefits of why I acquired the debt in the first place, paying for interest is like cold hard cash turning to dust and being blown away by the wind. And this happens every month. This happens to a few hundred dollars of my hard-earned money every month! This, for the privilege of having something that I would not otherwise be able to afford. But what is the real cost? It's quite frightening, actually. If you were to calculate the real cost of using debt to pay for things, you might be astounded, if not disgusted. What if I told you that that television you see at a great deal would cost you twice as much if you were to buy it on credit and pay the minimum payment each month? Well, that is exactly what happens. What if I also told you that the frugal minds who wait to make the same purchase with cash by tucking away a small amount each month instead will be able to afford twice as much TV as a result? That's right. By sidestepping poorly handled credit and paying with cash means you will effectively pay half as much as the minimum-payment debt handlers would. This means you can get a bigger TV at the same value, or, if you wish, a surround sound system as an add-on—for the same value. By simply waiting to make that purchase, you can get more than those who can't wait. This is the very nature of compound interest and our desire for immediate gratification. It takes strong willpower, but the frugal mind will prevail if it is disciplined. That said, what of my own position? Well, let me tell you, I'm in no position to be buying TVs, not even on credit. My current debt-management cost is too high—so high that I have virtually no disposable income. So what do I do? Well, I need to stop making reactive purchasing decisions. I need to stop paying for lunch and start making more money-saving decisions, and I need to start accelerating my debt repayments. I need to eliminate my credit card debt so I can stop maxing out my line of credit that I use to carry me over month to month. Meh, a tight spot, I know. But things will start to change for me. I'm starting to get some extra income with freelance jobs. This money will be going directly to debt repayment. All of it. I won't look at it as "Hey, extra money! Let's get the things I've been wanting all this time!" No. It is for paying for things I've already bought and haven't paid for yet. Things that are costing me twice as much as they should...or more. Interest expense is like turning hard-earned dollars into dust. But if you throw those dollars at the debt instead, then it will slow the process. One encouraging way to look at it is this: Making a payment on a debt that carries an 18% interest rate is kind of like buying an investment with an 18% return. The only difference is one is preventing a penalty, the other is soliciting a bonus. Either way, the real value is the same. Think it through. __________________ Knowing that death is certain and that the time of death is uncertain, what's the most important thing? —Bhikkhuni Pema Chödrön Humankind cannot bear very much reality. —From "Burnt Norton," Four Quartets (1936), T. S. Eliot Last edited by Baraka_Guru; 04-20-2008 at 06:50 PM..