Consumer
Debt is a Negative Investment:
Avoid It Like the Plague By J. Andre Weisbrod
Consumer Debt is the black
hole of finances.
It can suck up the weak
person and subject him to virtual indentured servanthood.
I am sure you have seen the investment charts which show
the growth of money at compound interest rates. To fully
understand how dangerous debt can be we need to take the
growth chart and turn it upside down. Think of debt as a
negative investment. The rules of compounding are still
in place, only the debt usually compounds at a higher
rate than most investments!
The chart below shows the
effect of debt on net worth. The account above the line
is the growth of a $1,000 annual deposit into a
relatively aggressive investment having an assumed 10%
per year total return. The account below the line is a
$1,000 annual loan at 15% where no interest or principal
payments are made. The time frame is 20 years.
Note that
taxes are not factored into the equation. Since most
investment returns are taxed and most consumer debt is
not tax deductible, the effect of consumer debt on net
worth is even worse than shown.
------------------------
Affect on Net Worth ---------------------------
| Annual |
Addition |
Rate |
In 5 Years |
In 10 Years |
In 20 Years |
In 30 Years |
| Investment |
$1,000 |
10% |
$ 6,716 |
$ 17,531 |
$ 34,950 |
$ 63,002 |
| Debt |
$1,000 |
15% |
($ 7,754) |
($ 23,349) |
($ 54,717) |
($117,810) |
| Net Worth |
-- |
-- |
($ 1,038) |
($ 5,818) |
($ 19,768) |
($ 54,808) |
Over the years I
have seen many people who were in financial trouble. More
often than not their difficulties were a result of too
little investing and too much borrowing. Their negative
investments increased their stress and prevented them
from fulfilling their family and business obligations,
which in turn hurt their relationships with family,
friends and business associates.
Consumer debt is
debilitating debt. With it a person purchases, with
someone else's money, goods that have depreciating value
or services that result only in a temporary pleasure or
relief. Financing a big screen TV or a cruise are two
examples. These result in an immediate decrease in net
worth. And that is why they are dangerous to your
financial health.
This is nothing new. It
was a problem even thousands of years ago. Consider the
Old Testament book of Proverbs, which observes, "the
borrower is the slave of the lender." (chapter 22,
vs. 7)
Avoid consumer debt like
the plague.
Copyright
1997, J. Andre Weisbrod
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