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Debt: Greece’s and Consumer’s

July 9, 2015

I am not sure what is going on in Greece, what caused it or how they can get out of the problems they seem to be in.  I also wonder how Greece’s creditors expect to be repaid.  But, it is headline news, so it must be important.  However, my concern here is about consumer debt.

Some straight-forward advice is to never borrow.  However, that is not too practical since many people need to borrow to buy a house, pay for college, to cover huge unexpected medical bills or to invest in or start a business.  There are, though, many people that incur debt that they do not need to, and it is those cases that I will address now.

Credit card debt is a stranglehold on the debtor.  The combination of high interest rates and fees, ease in obtaining the debt and a stretched out payback leads to mounting debt loads.  But, this debt never goes away and continually increases to a point that it becomes a terrible burden.  Just look at some simple numbers.  Assume a $10,000 credit card debt will accrue $5,000 in interest… meaning that $15,000 will eventually need to be repaid.  This $15,000 will be paid back with after-tax dollars so someone in a 30% tax bracket will dedicate $21,500 of future earnings to pay back the $10,000 original debt.

Question: Was the benefit and joy from the original $10,000 purchase worth $21,500 of encumbered future earnings?

I believe borrowing should be at minimal levels and should only happen when it cannot be avoided.  To keep borrowing low (or not at all) you should examine what you are buying and consider that the “cost” is more than double what you are paying; and whether the amount of future income you are surrendering is worth whatever current gratification you think you are getting for that charge.

2 Comments leave one →
  1. 6hawthorne permalink
    July 9, 2015 10:28 am

    HI ED IT EASY TO GO INTO DEBT BUT HARD TO GET OUT OF ITBOB NAGLER

  2. Steven Oberg permalink
    July 9, 2015 7:59 pm

    Excellent advice. Buy what you can afford. Don’t get hooked into the consumer society. We should focus on what we need first, and then buy what we want, if we can afford it without borrowing.

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