Thursday, January 29, 2015

Interest – the discussion begins…

Yes, I know it has been more than a week since my last post.  I warned you upfront that I am a lazy girl, and random gaps in posts are, regrettably, a symptom.  Anyway, here it is – the overdue net post!

The concept of interest fascinates me, from the mathematical perspective and also from the implications.  Interest is powerful, and like any power it can be used for either good or evil.  It can help you build wealth or it can take debt from bad to worse.  

I hate debt.  Debt is the anti-savings. It unbalances the balanced money formula (wealth = income - expenses).  It weights the expenses rather than increasing the income.  The whole debt business is negative – negative net worth, negative interest.   To make matters worse, debt has quietly infiltrated many aspects of modern life until it has become acceptable, even expected.   For many people, it feels unavoidable.  Unfortunately, I am no exception.  

Hello!  I have debt.  And that debt is not free; it earns interest against me.  

Every dollar I pay in interest on debt is a dollar completely wasted.  I might as well have taken a dollar out of my wallet, torn it up into little, tiny pieces, and then thrown it in the air like confetti.  At least that would be more fun than handing that same dollar over to a big evil bank where it will be used to line the jacket of the CEO’s $5,000 suit.  While I’m sure not banks are evil and CEO’s need clothes just like the rest of us, it is still very poor judgment on my part to just go around throwing away my hard-earned money. 

I like to think of debt and savings the same way – in terms of interest rates.  Debt is a negative interest rate; it is always a loss.  Saving in cash has no interest; I’m not losing anything, but I’m not gaining anything either.  Saving in an interest earning asset is ideal.  Money is the perfect little worker – it doesn’t need sleep, and it never gets tired.  

Interest can either work for me or work against me.  I can either use it to build wealth or use it as an excuse to throw money away.  It's a simple decision - debt or asset. I want my money to work for me, not against me.  So, I need to make sure all of the negative is good and gone before building the positive.  

So what am I actually saying?  I've been looping around these concepts at a high level, but haven't really said anything particularly practical.  So here it is.  

First, don't go into debt if at all possible.  Never put more on a credit card than you can pay back in less than a month.  Pay cash for major purchases: cars, houses, etcetera.  Second, if you already have debt, pay it back as soon as possible.  Pay more than the minimum.  Attack that debt with everything you have.  Third, put any leftover money to work.  Small interest rates are good, but big ones are better.  Get the most bang you can find for those hard earned bucks.  

The bottom line is that we need to shift the balance of power from compiling debt to increasing income.  It's as simple as that.  

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