One of the reasons so many people make big financial decisions is so that they can get ahead financially.
For a lot of people, this means buying a house and getting a mortgage, investing to the point where we have to sacrifice some other aspect of our lives or lifestyle and so on.
But realistically, getting ahead financially can only really start with repaying debt.
Here are three things we are missing out on if we carry debt.
1.
Interest It should not come as much of a surprise to anyone that the interest that banks and other lenders charge on mortgages, loans, lines of credit, credit cards and every other type of credit product is interest that we are missing out on ourselves.
But the equation is highly skewed to the advantage of the lender because we pay interest on the full amount borrowed, not just on the amount we pay back.
That means that if we owe $10,000 that bears interest at 10% per year, we are losing out on roughly $877 of gains (assuming a 300 per month payment).
While it may not sound like a lot, over 3 years, that $877 could have grown to $1,089 assuming a 7.
5% rate of return, which still much lower than the modest 10% being charged on the borrowed money.
Bottom line is that every dollar of interest you pay to a lender robs you of your ability to get ahead financially.
2.
Cash Flow By having to repay debt on a monthly basis, you are reducing the amount of available cash that you could use for other purposes.
This does not necessarily have to be investment purposes, but of course if that kind of money were invested rather than spent on debt repayment, you could make a tremendously positive effect on your financial situation over the medium and long terms.
So whether this reduced cash flow means reduced lifestyle or stunted investment growth, the end result is the same -- you cannot fully enjoy the freedom of being debt free until your debt is repaid.
3.
Earnings and or Assets Carrying debt means we have encumbered earnings or assets.
In other words debt means that someone has a claim on money we earn or assets we own (such as in the case of a car loan or mortgage).
If we boil it down to the basics, that means that a portion of every dollar we earn is essentially earned for someone else, namely the banker or lender from whom we borrowed the money in the first place.
Taken a step further, this means we force ourselves into working, often at a job we hate or are not 100% satisfied with, simply for the sake of making those debt payments.
Eliminating debt essentially frees us from such encumbrances and allows us a tremendous amount of freedom.
These are three fairly important things that we miss out on when we carry debt.
This results in a less abundant quality of life, which really tells us that if we want to improve our finances and get ahead financially, we really need to eliminate our debt.