How much money do you throw away? Are you careful to only buy what you need? Do you shop the sales and online bargains to find that 70% off deal? But how much do you spend on interest payments each year? Have you ever stopped to consider what amount of your income goes funding credit payments? Or how much more you would have had if you could have kept that money instead? Or are all these questions the things of nightmares and send you running before you can glimpse the truth?
Money Lost on Housing
If you have a mortgage, you are typically paying the bank over $7,000 each year to live in the house you are slowly buying back from them. An average of $7,621 is spent on the interest of the home each year, and $228,000+ over the course of the thirty year mortgage. Most people don’t realize that they end up paying the bank in interest the equal of around 70%+ of their home value. Making the cost of their house almost twice what it’s worth! How many years of our lives do we lose to these payments? How many extra work hours does it take to earn that $228,000 of interest? Is it worth it?
Instead, if home purchasing was approached differently, most of us could easily afford two homes by middle age. If people would do a bit more research. Find better ways to manage payments(link). Have more patience with the home buying process. And, very importantly, realize that mortgages are a retail product the banking industry sells to make large profits for themselves. There would be little need to spend decades of our lives drowning in huge debts and struggling to make ends meet.
Just think, being smarter with home buying and paying off your mortgage can make you an extra $7,000 each year! What could you do with that? Family vacation. Kitchen renovation. Financial independence and early retirement. The cash reserve to leave the job you dread day after day, and pursue a career you love. The possibilities are endless…
Money Lost on Credit Cards
How about the vilified credit cards? With last year’s average household card balance coming in at $16,048 , and interest bearing accounts being a 13%+ APR at minimum, it’s easy to see these households could be paying upwards of $2,000 interest annually. That’s a lot for the privilege to carry that plastic around in their pockets. Sadly, for many people $2,000 in annual interest is a conservative number, if they only pay the monthly minimums.
Money Lost on Education
Now we all agree student loans are a big pain in the a$$, no matter what we think of higher education. Many students start out very uninformed of the impact these loans will have on their futures. It’s hard to put a number on this one since everyone’s situations are so different, but I feel we do our youth a disservice placing such emphasis on an experience they will be paying for a majority of their working lives.
$26,700 is the average balance on student loans right now. Students are told the amount of money they will have to borrow to pay for tuition, but little is ever addressed about the long term impact the loans will have on their finances. Many graduates will be paying for their education for decades.
On average, a four-year college student will be repaying loans for 21 years. For many, that means after marriage, after kids, after buying a home…and after gray hair…they are still paying for their education.
Nearly one third of student loan owners are not making significant impact on the balance of their principal debt five years after graduation. And sometimes the lifetime interest costs 50% of the original amount borrowed! So take that $30,000 education stick an extra $15,00 on, that’s what it could end up costing.
Money Lost on Transportation
Car loans, probably the number two most rationalized and excepted debt, right after mortgages. Depending on who you talk to car loans can be considered helpful and acceptable, or to be avoided at the cost of working within walking distance. There are always extremists on either end of the spectrum. But here’s what we do know about the impact vehicle loans have on personal finances:
For last year, 2017, the average car loan was $30,534 at a 4.21% APR on 60 month loans (5 years). Making monthly payments, on average, $565. $56 of those monthly payments going to interest, for grand totals of $675 per year and $3,380 over the five year period. These numbers don’t seem too bad compared to the interest costs in other areas. Many people still chose to borrow money for their vehicle purchases, especially since rates are (comparatively) low and affordable. If you do consider to take out a car loan just understand that the interest still adds up to about 10% of the loan’s original amount, on average. So talking that salesman down $1,500 might not have made such a big impact on the overall cost of your wheels.
Auto buying trends are also changing. While the interest rates have continued to decrease for the past decade, the term lengths are increasing. Borrowers get better rates, but are spending more time paying them off. And that’s not the only change. There are more drivers leasing their cars, up to about thirty percent of all new car transactions are leases. And more and more people with the best credit scores are purchasing used vehicles. Maybe they’re realizing paying top dollar for an immediately depreciating asset isn’t the best use of their money and credit.
Interest cost summary:
Money lost on home debt/mortgage: up around 74%
Money lost on credit card debt: 10-100% depending on repayment habits
Money lost on student debt: up to 50%
Money lost on car debt: up around 10%
What’s the answer? As with any problem, there are at least as many ways to get out of it as there were to get into it. Being realistic about the true impact that debt has on our lives is a huge step in the right direction. Creating habits and lifestyles that will make us more intentional with our money and spending is another. If we really want to thrive, educating ourselves and making a solid plan for the future is a must.
Are you in debt and losing money every week to interest payments? I have a solution for that!