Aside from the obvious reasons why one should self-enroll into a debt repayment program, there are some secondary reasons why leading a debt-free lifestyle is vitally important to long-term wealth. We will explore one here, but first, let’s clarify the primary reason why debt is bad — it restricts your ability to save.

With building wealth as our central theme, let’s assume we are like the average, every day American with $22,000 in credit card debt. Some of these cards have better rates than others, so we will also assume we pay only 14% per year on average for the $22,000 that we owe. This means that we pay our creditors $3,080 every year in interest costs. By sticking to a debt repayment program, we will turn this around and start paying ourselves, right? Not quite…

At first, it might sound like $3,080 is not all that much money to pay over the course of a year. But if you compound that same amount over five years and at that conservative 14%, that works out to $26,250 for the creditors. That’s the price of a new car. As consumers, it is unlikely that we could put $3,080 to work at 14%, but even if we could see a compounded rate of 10% over the same period, that same $3,080 works out to only 23,764 for us! In other words, a debt repayment program does not “level the field” as it were.

With the odds in the favor of large creditors as far as rates of return are concerned, we need to take a greater interest in our debt repayment program. The reason is simple: even though we walk away with less, our $3,080 in annual interest costs is better off in our pockets than the large creditors’!

To put this matter in greater perspective, let’s assume the average American earns $30,000 in annual after-tax income. By giving $3,080 to creditors, we are essentially giving away another 10% after we have already given away so much to taxes, medicare, insurance and everything else. Knowing what little benefit we get from our creditors, why would we voluntarily give them so much in return? It doesn’t make sense. A good debt repayment program will not only show us how to repay debt, but it will show us our individual cash-dilution rate and help figure out ways to reverse the trend.

With the above in mind, if our average debtor satisfies a debt repayment program and starts saving that $3,080 instead of giving it away, after a five-year period the after-tax income (within a Roth IRA in particular) will translate into a cash-APPRECIATION rate of roughly 8%. Again, not as nice as when the money was being paid out, but remember the odds are stacked against the average consumer. Since most people do not see salary increases to the same tune every year, 8% is not only decent, but it amplifies the reasons for adopting a successful debt repayment program.

In summary, once we understand our cash dilution rate and how our true debt translates into actual dollars and cents, we can adopt a successful debt repayment program that will not only help us repay debt, but start to build wealth.

Related posts:

  1. Finding the Right Credit Card Debt Program
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  3. Debt Consolidation Loans and Other Solution for People with Bad Credit
  4. 5 Steps To Eliminating Debt
  5. Do Away with Impulse Buys to Become Free with Debt Consolidation