Sep
27

How $10,000 in Debt is NOT Just the Opposite of Saving $10,000

I’d like to address a common misconception about money that may also provide a little boost in motivation for getting out of debt. Often we make a purchase thinking that an extra $10 or $20 or whatever in debt isn’t so bad. It’s a little disheartening that we didn’t save that money, and we don’t like to think about the extra effort it will take to get out of debt, but it can’t be that bad right? Wrong.

 

Let’s break it down. Suppose you have considered trying to start saving some money. But you have other expenses that seem to get in the way, and you think it can’t be THAT much of a difference to spend a little and put off saving for now. Let’s say you build a debt of $10,000 and don’t put any more on that credit card. At the average 18% that credit card companies are charging, it would take you 13 years and 6 months to pay off that debt if you were to pay the $400 minimum monthly payment. The amount of interest you would pay over that time would be $5,873. So your total cost would be $15,873.

 

Now, on the other hand, what would happen if you were to instead put money into a money market account that pays you 2% (I’m using the money market as an example – you could certainly stand to gain more from an investment account). We’ll start from the day you reach $10,000. Say you don’t put any more in for the next 13 years (almost the same time it would take to pay off the $10,000 debt). You would end up with $12,966.

 

So at first glance it appears fairly close. You either spend $15,873 or you save $12,966. Even my eye quickly tells me that’s about a $3,000 difference. But it’s WAY more than that!! It is actually a negative $15,873. So the difference between the debt and savings is really $28,839. That is almost 3 times the $10,000 that you are considering spending or saving. It really adds up! So when considering whether to take on debt or to put some money into savings, remember how big the difference can be.

Twitt

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1 Comment on How $10,000 in Debt is NOT Just the Opposite of Saving $10,000

  1. What is Debt? And What is Credit? says:
    January 3, 2012 at 9:55 pm

    [...] are stealing from their future, it doesn’t mean you have to follow suit. See this article on the difference between debt and saving, how $10,000 in debt is NOT the same as saving $10,000. Getting into debt robs you of funds that [...]

    Reply