Most debts (the ones that make you cry into your morning coffee anyway) are the ones
that are incurred for a period exceeding one year. You've probably seen or heard
advertisements that go something like this:
Buy your 'Wiggly Snoogle' for this special one time limited offer today - 24 easy
monthly installments.
Beware - this is where you can fall into the deadliest trap of them all. The interest
rates are usually above average and you're stuck into a long term contract. Yes,
getting your Wiggly Snoogle with the 25,000 features sounds like a good idea because
of the easy monthly payments; especially if you compare it to the one time lump sum
payment. (By the way, using the 'lump sum' to 'monthly payment' comparison is a well
known sales technique to separate you from your hard earned cash.)
Let's take this out of the realm of philosophy with a real world example:
You borrow $ 10,000 to buy a new car. Over a 48 month period - that's 4 years of
monthly payments - you will be paying an additional $ 2,000 in interest. So, your
$ 10,000 vehicle is actually costing you $ 12,000. The cost of that debt is a whopping
$ 2,000. If you had taken that $ 2,000 and invested it over the same period, it could
have grown to $ 3,000. Instead, it has disappeared into someone else's pocket - never
to be seen again.
This is where the lenders make their money. The longer they can have you in their
clutches, the longer they can smile all the way to the bank and you groaning on the
way to work.
Now I'm not saying that you shouldn't have a car - it's just an example of the REAL
cost of debt. Sometimes debt is unavoidable, but as a species we've become too complacent
about debt and we jump into it without thinking.
This article uses dollars and is obviously USA centric, however the principles may
be applied to all forms of debt, be honest with yourself