How Much Does Your Debt Cost?

Written by Matt - 20 Comments

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Back in April of 2009, I was already mad at my debt. It wasn’t until I conjured up the idea of tabulating how much interest I was paying, however, that my eyes were finally opened to the enormous power my debt had over my ability to retain my own hard earned money!

Here is the story of what pushed me over the edge and ignited an unquenchable fire that will burn hot until that glorious day when our last debt obligation is finally met…

The backstory

Already four months into our Debt Free Adventure, I was working tirelessly to gain control over our monthly cash flow. I was angry at our debt, and consumed with the idea of establishing disciplined management over our monthly expenditures. This was not easy.

Because neither my wife nor I were experienced budgeters, getting a handle on ‘where every dollar was going’ was not something that came naturally to us. Maybe you can relate.

Being sick of our paycheck-to-paycheck lifestyle gave us a lot of motivation, but we needed more. We were committed to budgeting, but I knew it would be hard to sustain the necessary level of intensity and passion. After all, changing our relationship with money was akin to reinventing your golf swing.

Regardless, we knew it was essential if we were ever going to master our money. So I set off in search of the necessary motivation. Then one happy day in April, I found it!

I discovered how much my debt cost

I’m not talking about how much my payments were. I’m talking about how much my debt was costing me. How much I was paying each and every month for someone to lend me money. What if that money was no longer vanishing into the silk pockets of banking geniuses? What if it was going straight into my pocket and staying there?

To find and sustain the necessary passion, all I needed to do was calculate how much money I was paying in interest every month, print the amount off in HUGE NUMBERS, and stick it on my fridge. Every month it makes me mad. Every month I strive to make that number go down as much as possible.

Want to know what’s even better? This simple exercise will help bring the whole family on board. Show the number to everyone, and explain how this amount can be yours every single month if you can just buckle down get out of debt. From that day forward, everyone will see that number on the fridge — every month.

This simple idea helped us develop a lasting financial philosophy to apply to our family finances. A financial mission statement of sorts to embody the spirit of our Debt Free Adventure — “sacrifice now to benefit later.” Think of it kind of like the more popular but less cool, “Live like no one else, so you can live like no one else.”

Your homework

That’s right… I’m assigning homework. Don’t worry, it’s easy, and it won’t be graded. Well, I won’t be grading you… I can’t promise the same for Nickel.

Do yourself a solid and set aside 30-60 minutes to complete the following:

Write out a list of all debts on which you are paying interest (or will be paying interest, like that six months “same as cash” couch that you bought). For whatever reason, the simple act of writing it down and having a physical copy is much more powerful than creating a spreadsheet.
Identify the interest rate of each debt and record them on your list. You shouldn’t need this for the calculation, but it’s good to see those numbers staring you in the face.
Record the actual amount of interest paid last month for each and every one of your debts. In other words, separate the principal from the interest and record the latter.
Add all of your interest payments together to discover exactly how much your debt is costing you.
Get mad at how much your debt is costing you. The goal here is to inspire a lifestyle change resulting in increased financial discipline.
Repeat this exercise every month and watch your progress. This will help remind you of how much your debt costs you, and watching that number shrink will help you stay motivated.

Although I started this exercise in April of 2009, I didn’t realize how powerful it was until I did it again six months later. I now intend to do this every month until I am completely debt free.

I know that I told you do this by hand, and you should — at least at first. Over time, however, you should be able to transition to a spreadsheet to more easily track your progress. If you have any clever ideas for a spreadsheet template, please let me know. Better yet, whip something up and drop me a line.

Spread the word

If you already have a handle on all of this stuff… Awesome! Now go help someone else see the light. I know you know someone who needs your help. You’re probably thinking of them right now, so… Go help!

My goal is to get each and every debtor that I run into to complete this exercise as soon as possible. I’m going to be like that annoying buddy of yours who sells Quixtar or Herbalife and will never let a conversation go by without bringing it up. Why? Because I know it will help people.

Make no mistake about it… I want this to become the next personal finance phenomenon. Hopefully, this article and simple homework assignment will inspire you to pursue a debt free life. It worked for me, so please give it a try.

It’s already catching on!

Here’s a quick list of others who have already experienced the power of this exercise:

Interest Amount Paid – Establish a Proper Relationship with Your Debt – My attempt at working this calculation
How much Interest are YOU Paying? – My second calculation, sixth months later… Notice how it is $58 less!
Do You Know How Much Interest You Are Paying Each Month? – Patrick says you should, “get ready to be shocked!”
How Much Interest Do I Pay? TOO MUCH! – MyJourney said his calculations made him “sick to [his] stomach!”

Now it’s your turn… If you just want to go through the exercise, print off your amounts, and stick them to your fridge… Great. Please let us know about it in the comments. If you are a PF Blogger, go through the exercise, and write a post about it… Maybe I can talk Nickel into adding your post to the list above.

However you do it… Just make sure you do it.

In closing

Think of it this way… That money can either flow out of your wallet OR into your pocket. Which do you prefer? The choice is yours!

Published on November 12th, 2009 - 20 Comments
Filed under: Debt Reduction
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About the author: Matt is a thirty-something IT manager and blogger who wants to help himself and others get out of debt. He writes about personal finance and debt-free living at Debt Free Adventure.

20 Responses to “How Much Does Your Debt Cost?”

1
Brian Says:
November 12th, 2009 at 8:09 am
A quick calculation shows that i am paying out $178 a month towards interest between my student loans and my recent car purchase.

Yeah. It makes me angry. I am just happy i am working to get through my debts as quickly as possible.
2
Katharine Says:
November 12th, 2009 at 9:03 am
Hrm, I should run this calculation, but my student loans haven’t gone into repayment yet. I’ve been putting the money that would go to paying my loans towards building a small cash cushion.

I’ll have to bookmark this and do it after Christmas, when all my loans have been paid once.
3
Evan Says:
November 12th, 2009 at 9:04 am
Matt,

Thanks for the idea! My interest payments were STAGGERING and I don’t even have credit card debt lol
4
MikeS Says:
November 12th, 2009 at 9:37 am
Overall about $1,200 a month for me with over a $1,000 of that for my mortgage. Still have student loans we are working off for my wife, but at 3%, they don’t contribute much. Have 1 car loan (gone in 2 years) and a little credit card debt (gone in March, if all goes to plan).
5
Bodark Says:
November 12th, 2009 at 10:38 am
Excellent Post Matt. Really.
6
Lynn Says:
November 12th, 2009 at 12:20 pm
Between my husband’s student loan and our HELOC we pay about $245 in interest. I don’t even consider our mortgage in these amounts because it adds an additional $1950 in interest each month. AAGGHH!
7
CB Says:
November 12th, 2009 at 12:30 pm
I read that before “easy credit,” pre-WWII, it was hard for the average American to really save very much. So Americans were striving to save some. After the advent of the ubiquitous credit card, the typical American was in the position of perpetual debt. Just getting to zero debt is a goal.

There is something a bit off about such a situation, and the fact that the economy is based on consumer spending, but the U.S. off shored its manufacturing, and because schools here aren’t “good enough” to produce the higher-paying workers we need at corporate offices, we need to import labor.
8
John DeFlumeri Jr Says:
November 12th, 2009 at 1:04 pm
It is shocking the first time we actually admit our situations, but until we put it on paper, we can’t analyze it, maybe we don’t want to be truthful with ourselves.

John DeFlumeri Jr
9
lostAnnfound Says:
November 12th, 2009 at 2:12 pm
I can’t wait to try this. I’m already a little steamed when earlier this year I figured out how much we let ourselves get into debt and set up a repayment plan for that. This really ought to light a fire under us when we see the money we are losing every month just in interest (not to mention the principle that is being paid back for things we shouldn’t have bought or saved & paid cash for instead).
10
Storch Money Says:
November 12th, 2009 at 2:26 pm
This is an interesting exercise. When I first got serious about personal finance, the moment when I was “scared straight” was when I added up the total amount of debt I owed. I had no credit card debt, but between mortgages, student loans, and a car payment it was horrifying to realize that even with strong income I had already spent years’ worth of earnings.

Adding up the interest paid per month could have a similar effect for people.
11
Courtney Says:
November 12th, 2009 at 5:40 pm
about $820 in mortgage interest and about $8.50 in student loan interest. Which, in the 25% tax bracket only works out to about $622 total per month.
12
John Says:
November 12th, 2009 at 6:49 pm
For the last few months my interest cost per month was less than $25 for my student loan. I also have some credit card debt that was on a 0% introductory rate. I was also paying $425/month for rent.

Now that I bought a house things are going to get shaken up a bit. Between interest, tax and insurance my mortgage cost is $488 + principal for now, which I will be able to reduce by $61 once I get PMI knocked off in March. The credit card debt is going to lose it’s 0% interest and it will be increasing to about $40/month interest cost. So right now my debt is costing me $426/month. Within 6 months I’ll eliminate PMI, which is to me a cost to have debt. In 6 months I should be around $330/month and I have eliminated rent cost.
13
JerryB Says:
November 12th, 2009 at 9:10 pm
Last month’s interest paid was $147.50 all of it mortgage interest. In March of this year I paid off the last of my consumer debt (Never again shall I wallow in the pit of burdensome debt).
I’m contemplating taking some of my funds and paying down the mortgage even faster. Do I really need 24 mo of EF spread between Savings, CD’s and non-retirement investments?
14
SoCal104 Says:
November 12th, 2009 at 11:28 pm
$2,500 for the mortgage interest and that’s it. Strange going from zero payments to having a payment that high but it was the one thing we were willing to go into debt for. Everything else is paid with cash. Working on how to pay down the mortgage early.

With interest rates on investments so low, hard to justify even paying interest on the mortgage at the very low rate that we have.
15
Jack @ Master Your Card Says:
November 13th, 2009 at 7:29 am
Very good exercise. It is startling how much it can cost for the privilege to spend more than you earn. I recently took out a personal loan for 1000 and only received 960 off the bat. And if I hold onto it for he full term, I will be paying back about a hundred more than I borrowed. Even on a small scale, debt can be very expensive. Everytime you don’t use credit, it’s like you are paying yourself.
16
Matt Jabs Says:
November 13th, 2009 at 7:40 am
So many things are a matter of perspective.

For me, paying $1,200+ in interest on debt every month makes me just about cry every time I think about it.

Imagine if you had to pour $1,200 into car repairs or home repairs every month! No one would do it. We would draw a line in the sand. Well… I have drawn my line in the sand on paying money to be in debt.

My life has changed… big time. And I love it.
17
Financial Samurai Says:
November 13th, 2009 at 9:22 am
Matt – Are you saying I can’t say “thank you” to the organizations for lending me the money to live a lifestyle beyond my wildest dreams?
18
BG Says:
November 13th, 2009 at 11:11 am
My debt is costing me $600 a month (mortgages), which is $7,200 a year. Being in the 25% tax bracket, means the last $9,600 of my income is going solely to paying interest.
19
Matt Jabs Says:
November 13th, 2009 at 11:15 am
@FS – Ha!

I like the way Dave Ramsey puts it… “can we PPPLLLLEEEAAAASSSSEEE borrow some of your money to buy things we can’t afford? Pplleeaassee?”
20
FreeMyInterest Says:
November 16th, 2009 at 6:35 pm
I’ve always known how much interest I’m paying per month (down to $830/month from a high of over $1,200 yay!). An engineer’s brain will do that to you. But man, posting that number on the fridge would get me really angry. And likely get the boy on board too. I’ll have to try that. I imagine that one simple act would increase snowflake payments 500%!

Type of rates
- CD rates
- Money Market rates
- Savings rates
- Mortgage rates
Money to invest
< $10,000
Term
Up to 1 year
Money to invest
< $10,000
Desired Loan Amount
Loan Type
Refinance Purchase
State

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