A lot of people casually borrow money based on need or because that’s what everyone does. Nobody saves up and pays cash for a vehicle anymore, instead they just finance their new vehicle so that they can have their car now, and after all, everyone does it so it can’t be that bad, right? Debt is all around us, and it’s becoming more and more a part of our every day life. We borrow money for homes, cars, gasoline, food, and just about everything one pays for anymore. Nobody’s ever really stopped and taken the time to ask, is this transition to a debt based society a smart idea? Are there benefits to simply saving up and paying for things? Let’s find out.
The basic idea of debt involves around you borrowing money, and paying a fee (interest) to do so. This allows people and companies to invest their excess currency into those people who are short and need extra currency. The lenders will then get their money back at a later date and get interest for doing so. It sounds pretty simple and reasonable, but things are not all cookies and cream for the borrowers.
The problem is that debt comes with instant gratification, and the pain of paying it off comes later. People enjoy the instant gratification of getting what they want right now without having to pay anything up front, and then get stuck in a bunch of payments. At first, it doesn’t hurt too much because people can easily afford the payments. Their savings might go down a bit, but then they keep borrowing more. Eventually they start to feel a squeeze, but they enjoy the instant gratification, so they keep borrowing. Eventually there becomes a point in which they’re up to their eyeballs in debt and wouldn’t be able to borrow any more. They find themselves in the mid five figures of debt, and freak out because they’re not doing so well financially.
Of course none of this is a conscious decision, but it happens all the time. People keep borrowing and borrowing, enjoying their new found toys, but eventually there becomes a point when it’s just not tenable anymore. It’s very easy to see how so many people keep getting into debt, but
it’s definitely not a winning game plan, and the reason for this is compound interest.
If one were to borrow money and not have to pay any interest, it really wouldn’t matter how long it took them to pay it off, because they could pay the money off as slow as they wanted to and never have to pay anything extra in interest. This isn’t how the world works though, interest builds up and snowballs over time. If you borrowed $200,000 on a home and paid 7% interest over 30 years, you’d end up paying over $500,000 for that house! These numbers get much worse when you start talking about rates close to 20% in the credit card game. If you have $25,000 in credit card debt, it’ll take you decades to pay it off, and you could pay for your purchases countless times over.
Using debt on a regular basis is not a winning game plan. It’s so easy to get into, but almost impossible to get out of.