Byron Moore, CFP® and Mike Jones

Debt's Destructive Deceit

By Byron Moore, posted September 4, 2018
Originally published in the News-Star and the Shreveport Times on Sunday, September 2, 2018.
 

You knew debt was bad. bill shock_small.jpg

Maybe worse than you even thought.

But here’s the good news – the thing that makes debt worse than you thought can be the very thing that can make your situation better than you could imagine.

Most of us are familiar with interest rates. That’s what a lender charges a borrower for the privilege of using their money over a period of time. 

So a mortgage company charges a home buyer 4% to borrow money for 30 years to purchase a house. A car buyer may pay a bank 6% over 5 years to buy a car. A shopper pays a credit card company 18% to make consumer purchases. 

Other than the credit cards, most of those interest rates sound pretty low.

But now we need to consider another perspective on interest – interest volume. 

The volume of interest is the amount of interest charged during any specific interval of time. This is not the same as the rate of interest, as we’ll see.

If John and Mary take out a $200,000 mortgage to buy a house, and finance it over 30 years at 5%, their monthly principle and interest payment will be $1,074. Of that, 78%  of the first payment, or $833, will be interest. The interest rate is 5%, but for the first payment, the interest volume is 78%.

But doesn’t that get better as time goes on?

Sure. By the fifth year (month 60), the interest volume for the same mortgage example above is 71%.  So of the $1,074 mortgage payment, $766 is interest. By the tenth year (month 120), the interest portion of the loan payment is down to $679, or 63% interest volume.

Over the life of that 5%, 30-year mortgage, $386,343 worth of payments will have been made ($1074 x 360). So, for the privilege of borrowing $200,000, you pay an additional $186,343. 

That’s a 5% interest rate, but a 48% loan volume.

So that’s the bad news. 

But what if you could re-capture that cash flow? What if, instead of sending all those payments for all those years, you could manage to turn the tide and begin reclaiming those dollars back into your own pocket? 

The secret lies in strategy and consistency. Here’s one way to do it…

Identify inefficient dollars. If the dollars you are currently spending each month on debt payments were players on a team, they would be playing for the other side. We’ve got to identify dollars in your situation that are either lazy or inefficient. That is a very individualized process.

Prioritize your debt payoff plan. Not all debts are created equal. You need a plan for how to identify which debt should be paid off first. Remembering the difference between interest rates and volume will help in this selection process.

Payoff and re-deploy. Once you pay off a debt, you must immediately re-deploy the debt payment back into the debt reduction plan. Warning: this is financially easy to do, but a pivot point at which your own human nature may sabotage the process. Keep reading. 

Automat to succeed. If you leave this to chance or the consistency of your own willpower, my experience with clients is that your good intentions will fail. Human nature is powerful (and powerfully flawed!). Don’t rely on your good intentions (how well have they done up to this point?). Put your plan on autopilot.

If you’d like more free information on this process, send me an email (bmoore@argentadvisors.com) and I’ll send you a more detailed description.

Most Americans have an amazing potential within their grasp to free from debt and open to great opportunities. 

But the knowledge of what to do…and then doing something with that knowledge…is the key to freedom

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