IB. MANAGE DEBT
"Debt is like any other trap, easy enough to get into, but hard enough to get out of." — Henry Wheeler Shaw
Debt is a pervasive issue in the United States, affecting individuals across all age groups and income levels. As of 2023, the total household debt in the U.S. reached approximately $17 trillion, with significant portions attributed to mortgages, student loans, credit cards, and auto loans. Mortgage debt alone accounts for the largest share, exceeding $11 trillion, as many Americans aspire to homeownership despite rising property prices. Student loan debt remains a significant burden, particularly for younger adults, totaling over $1.7 trillion. This financial strain can delay major life milestones such as buying a home, starting a family, or even saving for retirement.
Credit card debt is another critical issue, with Americans collectively owing over $1 trillion. This type of debt often carries high interest rates, making it challenging for individuals to pay off balances and avoid escalating financial stress. Additionally, auto loans have surged, driven by the increasing cost of vehicles and a consumer preference for newer models. The average auto loan debt now stands at nearly $23,000 per borrower. These debt burdens are exacerbated by economic factors such as inflation, wage stagnation, and the high cost of living, which together create a challenging environment for many Americans trying to achieve financial stability.
When purchasing items with loans or credit cards, the additional amounts paid can be significant due to interest rates and fees. Let’s take a look at some statistical examples to illustrate this:
Credit Card Purchase:
- Scenario: Buying a $1,000 laptop with a credit card that has a 20% annual interest rate (APR) and making minimum payments of 2% of the balance.
- Outcome: If you only make the minimum payments, it will take you over 9 years to pay off the debt, and you will end up paying approximately $1,811 in total. That’s an additional $811 in interest—almost doubling the cost of the laptop.
Auto Loan:
- Scenario: Financing a $30,000 car with a 5-year loan at an interest rate of 6%.
- Outcome: Over the life of the loan, you will pay $4,799 in interest. This means the total cost of the car rises to $34,799.
Personal Loan:
- Scenario: Taking out a $10,000 personal loan for home improvements with a 3-year term at an 8% interest rate.
- Outcome: The total interest paid over the 3 years will be approximately $1,290, making the total amount repaid $11,290.
Mortgage:
- Scenario: Buying a home with a $300,000 mortgage at a 4% interest rate over 30 years.
- Outcome: Over 30 years, you will pay $215,609 in interest, making the total amount repaid $515,609.
These examples demonstrate how interest rates and the length of repayment can significantly increase the overall cost of purchases made with loans or credit cards. Being aware of these additional amounts can encourage more strategic financial decisions, such as paying off balances more quickly or choosing loans with lower interest rates.
"Live like no one else now, so later you can live like no one else." - Dave Ramsey
The Total Money Makeover Updated and Expanded: A Proven Plan for Financial Peace Hardcover – May 14, 2024 by Dave Ramsey (Author)
The Total Money Makeover will give you the tools and the encouragement you need to:
- Design a sure-fire plan for paying off all debt–from your cars to your home and everything in between using the debt snowball method
- Break bad habits and make lasting changes when it comes to your relationship with money
- Recognize the 10 most dangerous money myths
- Set aside enough money to pay for unexpected expenses and emergencies
- Save enough money for your retirement
- Live like no one else, so later you can LIVE (and GIVE) like no one else!
This new edition of The Total Money Makeover includes new content that will help you tackle marriage conflict, college debt, and so much more.