Turning debt upside down

We all know (or should know) that debt erodes our spending power. If we are carrying $100 @ 5% interest, that means that is $5 less we have for ourselves. Might as well give ourselves a 5% pay cut.

Some of us are better, we don't carry debt (well at least not the crippling credit card type). We pat ourselves on the back for not paying interest to the banks - but we don't save. Somehow every penny we have, gets spent.

Even fewer of us manage to actually save some money (the pay yourself first principle). Even if we only stick it in a bank account or a GIC, we earn a little bit of money - sort of like a reverse debt.

My best line of credit charges me 6%. My best savings account pays me 4%. They are both with President's Choice Financial.

Let's say that I decide I need a new computer and borrow $1000 to purchase it. In the end I pay an extra $60 ($1000 x 6% = $60). Money that if I hadn’t spent it could buy a nice dinner for two for Sofia and me.

Let's say that I have the cash and buy it for cash. Great! I do not give away any extra money and don't have to feel miserable for spending an extra $60 that gave neither me nor Sofia any added pleasure.

Suppose, instead, I decide not to buy the computer and put it in the bank instead. Now I earn $40 ($1000 x 4% = $40). Money I can spend to buy a still decent dinner for two for Sofia and myself.

(Yes, I know my math is a little simplified, but it is the point, not the math that is important for me.)

Next time you choose to carry some debt on your credit card think of the interest (go look at your statement and see what the interest is). Is it $50 in interest? Do you realize that is $50 you are spending but getting no enjoyment out of (unless you enjoy giving $50 to the credit company). It is always better to save for things (yep, you need to have a longer term outlook). It is even better still, to spend money that grew for you - it turns debt upside down: instead of getting no satisfaction from money you laboured for, you get satisfaction from spending money you did not have to labour for.


tin-tin said…
that's why as much as possible i don't pay in credit. hehe
We use Gold Visa for groceries, gas and everything we buy including restaurant meals and all the supplies needed inmy husband's office like paper towels, TP etc. The points we get for travel are amazing...every two years they pay for 2 tickets to BC or the equivalent. We never even pay it late...that'd make me mad paying even a few dollars extra!

Buying on credit can be a positive experience as long as you always pay it off every month. If you can't, better to hide the card or as my friend does, sew it into the hem of your drapes!!
KayMac said…
When I got divorced, I was supposed to have a very nice settlement...then my ex lost his job and I lost my settlement. My daughter had no health insurance. I have spent the past 3 years getting out of debt, paying off a hospital bill for her...and learning how to budget. Hopefully by the first of the year i can start to save some money. But it feels great to finally have some breathing room
Matt said…
I always spend what I have. Does that work for me? No. Do you want to know about my debts? No.
Barbara said…
We pay cash for our cars and never carry a balance on any credit card. I refuse to give them any more of my $ than I have to. Much of the civilized world is heavily in debt, including one of my children. It would make me very nervous.
Richard said…
Hmmm ... maybe I was too subtle.

I have no problem with credit cards. I always pay them off in full.

I was simply making the point that many people think little of bleeding away a bit of their money as credit card interest charges, yet never imagine that a little bit of creative thinking can reverse the effect. It is called passive income.

Interest from a bank account or a GIC is one sort of passive income.
freckled-one said…
Yikes.. I just bought a car and today I recieved the statement for the first time... I put myself in debt for the next half of the decade..
Richard said…
freckled-one: a common truism is that money goes like water. Most people will spend all that they have without thinking about it. It is necessary to use the B word - budget.

Mind you, budgets do not have to be onerous. I follow a pretty simple one - I put 10% away for my nest egg, the rest I spend (I try not to, but things always come up). I am working at putting aside 5-10% for indulgence every month (some might call it guilt free crazy money), while focussing the rest on debt reduction and savings.

I hate long term loans. They sound good at the outset, "Only $200 a month". After a time, they get very tiring, "When will I be finished paying that $200 a month".

I avoid buying things on those kinds of terms (mind you, mortgages and cars are the general exception).

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