Over the past few years, I have become more and more convinced that the single biggest challenge most people face when it comes to achieving financial independence is the interest expense they pay on credit card debt, student loan debt, home mortgages, consumer debt, and other liabilities.
[mainbodyad]Think about it like this. If all you have is $25,000 in credit card debt, the problem isn’t the debt itself so much as it is the $7,500 per year in interest expense you would owe the bank if you had a 30% APY. That is $625 per month in interest expense that you must pay toward your credit card debt without every paying off a penny of the principal. That is money you could have been using to buy high quality dividend stocks, invest in bonds, purchase shares of your favorite mutual fund, use as equity toward the acquisition of an apartment building, or even spend on a vacation for your family each year.
Credit Card Debt Proves Compounding Is a Double-Edged Sword
For people deep in credit card debt, you learn the hard way that compounding is a double-edged sword and that it can work in reverse.
The cycle gets especially brutal when the interest you owe on your credit card debt exceeds the payment you make to the bank so that you are starting to pay interest on your interest instead; this is called negative amortization. It’s the flip side of the Janus coin of an investor who begins to earn interest income on the interest income he collects from his investments.
Credit card debt is so dangerous and so poisonous that I would do anything to avoid it, even if it meant selling a car and riding a bike, selling my house, or switching to off brand food and never eating out until the balances were repaid. You cannot go through life as a slave to the money you owe.
How do you know if you have a credit card debt problem? The best advice I ever heard on the subject came from Suze Orman, who said the very first month you cannot pay your credit card off in full, you have a credit card debt problem. That is wise advice for those who want to escape the credit card debt prison.
50% of Americans Have No Credit Card Debt and 1 Out of 3 Own Their House Outright with No Mortgage
[mainbodyad]You already know that 1 out of 2 Americans has no credit card debt – absolutely none. Yes, that is 50% of people in the United States. When you walk down the street, every other person you see owes nothing to the credit card companies. This isn’t anecdotal, it’s based on data from the Federal Reserve, which sees the entire banking system.
Furthermore, 1 out of 3 Americans also owns their home outright with no mortgage. What is stopping you from being part of that group? Your behavior. It all comes down to your choices and priorities. If you aren’t willing to cut expenses for fear of how you look to your coworkers or neighbors, you are putting your pride above your family’s wellbeing.