The Secret to Crushing Debt
If there is something that I have been asked many times since we paid off our mortgage it’s “What’s the secret to crushing debt?”
Is there really a secret formula to crushing debt? In a word: Yes. There are methods that will help you crush your debt that are quicker than others. The real secret isn’t just how you view your debt, but how you view your money over your whole life.
The Rule of 72 – A Quick Primer
If you aren’t familiar with the rule of 72 it goes like this:
You have an interest rate, let’s say 10 percent, and you want to know how long it will take for your investment to double. All you need to do is take your interest rate, 10, and divide it into 72. So for our 10 percent it would take 7.2 years for your investment to double.
It’s by no means perfect, but it’s a great rule of thumb if you want a quick way to know how long it takes an investment to double at a given interest rate.
What does this have to do with debt?
Your debt is someone else’s investment, and it’s costing you. I’ll repeat that because it’s so important:
Your debt is someone else’s investment.
If you owe $10,000 and are paying 10% interest, over 7.2 years you will pay $10,000 in interest alone(assuming you’re not paying it down). That’s right, if you only pay the interest, in just 7 years the cost of that item will double for you. This is the real secret. The secret is to realize that a dollar borrowed costs you double when you count the interest on it.
Start to Look at the Lifetime Cost of What You Are Buying.
Let’s say you are buying a house, and you get 5% interest rate on your mortgage. The mortgage on your house is $200,000.
With the rule of 72, it will take about 14.4 years to double. That’s right, in less that 15 years you will pay $200,000 in interest if you don’t pay down the principle.
Rich people know this. They know that when they borrow money from someone, they should try and clear out their debt quickly so that they aren’t paying interest to someone else.
When you start to think this way, you are starting to think the same way that the rich do.
Rich people don’t think of things as the immediate cost, they think of them as the cost over their lifetime. That $6 coffee isn’t just $6 it’s worth $12 over the next 15 years. So they pass on the coffee, knowing that it’s long term cost is at least double the original amount.
What This Means to You
When you are living with debt, you know it’s there, but you don’t think of it in terms of everyday purchases. It’s just a payment you have to make every month.
But when you realize that the $500 Apple Watch you just bought could have saved you another $500 in interest had you put it down on your debt, then you start to look at your spending differently. You think twice about spending double on the items you are looking at because you realize that they aren’t worth the real price you are paying.
That’s the secret. Look at the amount you are spending today and double it. That extra money could go on your debt and save you a lot of money down the road, unlike your Apple Watch that will most likely be replaced several times in that same time span.
Put some extra money down on your debt today
Getting better with your money is going to mean thinking about your money in a different way. Most people look at money in the terms of here and now. They think: “I have $200 and that can buy me $200 worth of stuff”.
Rich people look at the same $200 and think. “If I put that money down on my loan I will be saving myself an extra $200 over time. Is what I want really worth $400?”
Sometimes it’s worth it, other times it’s not. The key is to use this secret in thinking about your money.
Making this small change in how you look at your expenses will go a long way to paying off your debt.
Image Credit:https: London Scout