I see a lot of people who have 401K savings accounts, and then borrow money against them. That’s nuts.
When it comes to money, debt, savings, and investment, you don’t want to be paying interest, you want to be earning it.
There’s more to say about this than I can write in one average post, but let’s look at credit card interest. Let’s say the rate is 18% and you carry a balance each month that grows and grows.
The Rule of 72 tells us that the amount of time it takes for the money to double is the interest rate divided into 72. So 72/18 = 4 years. So if you let that balance ride for 4 years you are paying double.
Let’s say you walk into a store and buy new shoes for $65 and put them on your credit card. If you let the balance roll over and only pay the minimum, in four years you have paid $65 in interest on those shoes for a total of $130. If you don’t pay the card off, they keep getting more expensive.
To be even more cruel, the shoes are probably worn out or out of date before you pay them off, and you have to buy another pair – on your credit card.
There’s the cost of the thing, and the cost of borrowing the money to buy the thing.
Financial ignorance is very expensive and keeps people doing dumb things and staying broke.
Being disciplined to put off immediate wants, (think of the marshmallow test) and investing rather than borrowing is the chief dividing factor between the haves and have nots….
All true. The credit card trap is not good no matter how you look at it. I call it painless spending with a vacuum in your pocket if the discipline to pay off the bill in full once it arrives does not exist. Unfortunately for todays youth they are not taught about this potential economic credit card trap in school and they certainly are not taught about investing. Sad.