A few days ago, I was discussing debt with a new client. The interest payments were killing him.
He said repeatedly that they were his primary motivation for getting out of debt. Then I asked him, “What are the other costs of having debt?”
He was unable to come up with an answer. I suspect he’s not alone.
What’s your answer? How do you calculate the cost of your debt?
I measure the cost in several ways: financial, emotional, physical and spiritual. Yes, even spiritual. More on that later.
Financial cost
Interest expense is the most obvious cost of being in debt, but it’s not the only financial cost. When we are in debt, we also lose the opportunity to invest the money we are paying the lender. It’s a double-whammy.
The power of compound interest – the force that Albert Einstein called the “Eighth Wonder of the World” – can work for you or against you. Imagine if those interest payments were making you money rather than the lender.
Emotional cost
Unlike an interest payment, the emotional cost of debt is not fixed. Depending on your circumstances, it can vary – widely.
If your debt is manageable, such as a mortgage that requires a monthly payment that is 25 percent of your take-home pay or less, the emotional cost is likely to be low.
However, if your debt load reaches a level that makes you stressed and fearful, the emotional cost can take a serious toll. Add a partner to the mix, and you could find that one of you is tolerant of debt and the other is not. Such differences can result in fights over money that exact an even higher cost.
Physical cost
Not only does constant worry tax us emotionally, it can wear us down physically, too. Long-term debt can mean long-term stress.
Chronic stress can manifest as chronic-health problems, such as heart disease, high-blood pressure, obesity or diabetes – all of which add to your financial burden, creating a vicious circle.
Spiritual cost
Spirituality can be defined in many ways. For our discussion today, I’m using it to mean living your true purpose and serving those you are meant to serve.
Debt can be an obstacle to achieving these deeply fulfilling personal goals. Debt can leave you stuck in a job you don’t love and drain you of the energy and drive to pursue your true calling. If this is the case, you are literally giving up your life for debt.
Yes, the cost of debt reaches far beyond that next interest payment. How is it affecting you?
Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. www.personalfinancecoaching.com.
