One of the most depressing moments in your life is when you are trying to figure out how much money you are going to need for retirement and realize if you keep doing things as you are, you are going to have a (substantial) shortfall.
A key reason you may be coming up short is that you owe too much money.
We arent talking about deductible debt. (Your mortgage would be an example.) And we can even make the case for having certain kinds of non-deductible debt for things such as education loans. To us that is an investment in youror somebody elses future.
No, what we are talking about here is borrowing non-deductible moneyand that is exactly what you are doing everything time you charge something on a credit cardfor stuff that you might not even need, and then dont pay it off at the end of the month.
You know that being in debt is costing you money. But do you actually know how much?
Lets use a real example.
You are going on vacation.
About 80% of all vacations are completely charged and the average cost of a vacation, according to the people who track these things, is $3,155.
If you charge your vacation and pay it off within a month, no problem. But of those surveyed, half said they expected to pay for those vacations over time. And thats how these vacationsand any other credit card debt for that mattercan become very expensive.
If you paid for that $3,155 vacation with a credit card that charges you 17% in annual interest and paid only the minimum (2.5%, or about $79) each month, youd need 250 months (more than 20 years!) to pay off the vacation. Youd end up paying $3,797 in interestmore than the vacation itself cost. (And just imagine what would happen if you charged your vacations year after year!)Are you beginning to understand why paying non-deductible interest on your credit cards could be holding you back? Credit card interest is bad enough. It can scuttle the best financial plans, and late fees only add insult to injury. And of course, defaults can toss you into a world of financial hurt, making it difficult for you to do everything from getting a new credit card to securing a mortgage.If you are in debt, the potential solutions are straight-forward:First, dont take on any new debt.Second, refinance. Switch your credit card balances to a card that will give you a lower rate. (Refinance and get a lower mortgage rate while you are at it, if you can.)Third, if you are a homeowner, consider whether taking out a home equity loan to pay off your balances is the way to go. As you know, the interest rate will not only be lower, but it is almost always tax deductible. (The tradeoff, however, is that you are pledging your house as collateral for the loan. A default could be disastrous.)Finally, pay off those credit cards, and all other non-deductible debt, as aggressively as possible.(If you have more than one credit card with a balance due, concentrate on paying off the one with the highest rate first.)Being in debt is a lot like being overweight: You know what you have to do to get in shape, the question is, Are you willing to do it? The purpose of this section is to help you figure how.
