For a long time, I carried credit card balances and recently explained why I decided to stop. I further mentioned that as an active trader, I took steps to reduce and eventually eliminate the cost of commissions. Through all of this, it occurred to me that since I am routing money from my income to my savings, I should be considering how interest payments affect my net income.
The realization is that interest payments on any debt I carry gnaw away at my net income and there are no lifestyle changes I could make to address it besides eliminating the debts. If I am bringing home an income of $50,000 a year while the total interest paid for credit card debt and other loans adds up to, say $10,000, then I am essentially bringing home a net of $40,000 a year. My debtors own the extra $10,000 before I even spend a dime on anything else.
Owing to the fact that interest payments can cut into what I bring home in such a significant way, I find it essential to eliminate as many items that require me to pay interest. I can then use that money for something that is actually useful instead of enriching companies for the rest of my life. That $10,000 is thrown into the hands of debtors for the convenience of having money I did not make arrangements to have beforehand.
Getting one’s finances in order takes time and therefore requires patience, planning and implementation. Many of us are not inclined to calculate the amount we pay out in interest because it will likely be a shocker. Additionally, a large number of us are unaware of the interest rate we are paying on our debts, but it is important that we have that information and do something about it.