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Staying Out of Debt

I'm going to preach to you about staying out of debt. I think it's the best "ounce of prevention" you can possibly take to keep you in a happy financial state. I know too many people who didn't heed this advice, and they've spent years trying to get out of debt.

Debt is simply financial enslavement to another, and that's no fun at all. Worst of all, we choose to enslave ourselves, especially with consumer debt. We can choose much better. Let's look at the trap that awaits us so we'll recognize how to avoid it.

Debt is attractive because it is a bit abstract. Someone else handles all the money worry. You get your stuff right when you want it, and then make "easy payments" over time. Your things are purchased on plastic, so it doesn't seem like real money is being spent; it's more like simply a bunch of "numbers" on paper.

The problem is what's behind those "easy payments," and the amount of time we're talking about. People seldom stop to think and carefully consider any of this behind the scenes stuff until it is too late, and it has become a serious financial burden - a money drain chained to your ankle. That's why staying out of debt in the first place is so important.

I pay off my credit card in full each month. It is a convenience for me, not a necessity. The credit card company would like me to pay the minimum balance and start paying them interest. In other words, give myself a loan. I won't do that because I don't want to start digging myself a hole to hop into. A credit card is a means of making a transaction, it is not a means of giving yourself a loan.

If you're paying about 20% annual interest rate on a credit card, that can add up to lots of money in addition to the original amount financed. And, that can add up to financial trouble for those who aren't looking ahead. If you're looking ahead, you can be much better at staying out of debt.

One of my recent bills was about $2,500. (I know that seems like a lot of money, but I was making investments in my greenhouses, so it doesn't reflect my normal pattern of spending.) The minimum payment offered on my statement was $15. That's just a little over half a percent of the total bill.

It's not realistic to look at those minimum payments as "easy payments" because they don't include the interest that keeps piling up each month. The interest on $2,500 at about 20% is more than $40 for the first month - that's almost three times the minimum payment offered.

Logically, wouldn't you expect that the minimum payment would at least cover the interest? Of course, and it will on the next bill. If I were to pay only the minimum during the first month, the next month they will want about $65 as a minimum.

Warning, here comes the enslavement part. If I paid about $65 a month on that $2,500 bill, AND NEVER CHARGED ANYTHING ELSE ON THE ACCOUNT, at 20% interest, the bill would be paid off in 5 years, and I would have paid about $4,000 to clear the account.

In this example, I would have paid the credit card company $1,500 to use their money for 5 years. If I paid cash, I could use that $1,500 for something else.

The key to getting out of debt is staying out of debt to begin with. Think of debt as a great big dark bottomless pit - stay away from the edge and you'll not be the slave of another.