The Cost of Maintaining Debt is Higher Than You Think!

Problem #60: If you have any debt at all, even a mortgage, you are currently borrowing to buy everything.

After a statement like that, I’m sure you’re expecting an explanation. Or maybe you’re thinking, “Surely you jest?” Actually I’m not “jesting” . . . and don’t call me Shirley. But let’s talk about maintaining debt. Actually I’m going to try and convince you to prioritize paying down your debt. . . just so you know.

Let’s look at a hypothetical scenario – or maybe not so hypothetical. Suppose you have a mortgage on your house of 150,000 at 4%. You have a car note of $17,000 at 6%. This makes your aggregate interest rate 4.2%. I think this is fairly typical situation. You may have more, or in a better case, less debt. The good news is; you also have a healthy “money gap”. Good work!

But we still have a PROBLEM. You see, you still don’t understand how debt works.

The Cost of Maintaining Debtmaintaining debt cost

Let’s explore this a little bit with some assumptions and using some hypothetical situations. So bear with me. By taking out a loan, you are buying something now that you don’t have the cash to buy. I think we all understand that. So you are exchanging your future money for something you want today like a house or car. The key here is “future” money. Because we’ve already established that you don’t have the money available today.

Using this future money comes at a two-fold cost. Not only can you not use that future money for something else – it’s tied up in debt repayments, but you also pay extra for that privilege. The “extra” is interest. In this case – 4.2%.

Are you still with me?

It follows that any money that you have today, right now, will have that cost associated with it. For instance, if you were to put it towards your debt, you would get a 4.2% return. You benefit by doing this, because you are saving future money from being paid by paying your debt early. But here’s the thing, if you don’t put it towards your debt, you are losing that 4.2%. This is the cost of choosing anything over debt re-payments.

So when you buy groceries and gas for your car, you are losing the benefit of saving future money – to the tune of 4.2%. But, but, but – these are necessities! Sure they are, and you do have to eat. But this is the cost of maintaining debt.

Think of your latest grocery bill. Ours was $119.65 at Aldi’s (which we love by the way). But that money is not going towards debt, so it comes at a cost . . . 3.875% in our case. So it really is like paying $124.29 for our groceries instead. An added $4.64/week. This is our cost for groceries. Yours may be different, depending on the interest rate of your debt.

Every time my wife buys groceries, she says, “I only spent $119.” Which is great, but it actually means those groceries cost us $125. Ugh. Because – debt – mortgage.

Which may not seem like much, but $4.64 compounded at 7% over 10 years is $3,494.

So there is a cost to maintaining debt, but what if you could re-coup some of that money? Or course I’m talking about investing instead of paying down debt.

You’ve heard the argument that many use when they are trying to justify investing instead of paying down their mortgage. They say smugly, “I’m at least as smart as Warren Buffet, so I can get, oh, at least a 15% return on my money in the stock market. Why should I pay off my 4% mortgage?”

Okay so no one I know claims to be as smart as Warren Buffet, but they do claim to be able to get 10-12% in the market.

So Does Investing Instead of Paying Down Debt Make Sense?

First, let’s just establish that you’re NOT Warren Buffet! You’re a regular Joe – I mean Chris – like me. The odds of picking single stocks are not in our favor. Every so often, someone hits it big by betting on a new startup company that does well. Think: Apple or Microsoft in the 80’s. Or Amazon, Ebay, or Google in the 90’s. But it probably won’t happen to you.

But the fact remains that you can do better than 4%. Historically, the market has averaged 7% (after inflation – not 12%) – which is indeed higher than 4%.

But you’re only netting a 3% return, because of the cost of maintaining debt. All the while you are spending like an oil sheik who just discovered Depending on the ratio of your spending vs investing, you’re probably not even breaking even.

Are you spending like an oil sheik who just discovered Click To Tweet

So, if you could invest All your income at 7% while you paid the minimums on your debt, then it would make sense. But NOBODY does this. Because of course you have to eat. So any money that you don’t invest or use to pay down debt has an extra cost to it.

The only investing that I know of where you are guaranteed a rate high enough to justify investing is inside your 401k to maximize the employer match. This return is simply too high to ignore, and most likely covers the cost of spending for necessities.


I already have debt, what should I do?

After you buy the necessities, you need to concentrate on eliminating debt. You see debt is an enjoy-it-now-pay-later system. It’s a giant pyramid scheme that you are building. Once you start using debt, you are paying for things today with tomorrow’s money. And these are things you need. Of course you need to eat and have shelter. But by keeping debt around, you are doing it (existing – or living) in the most inefficient way possible.

inefficient mansion

Ok, so that’s not exactly true. You could be living in this house with 15 bedrooms and 22 bathrooms with just your wife and 1, 2 or 3 kids. But that’s not you – or me.

What you should be doing is spending today’s money for things today. That means cash only (or debit cards). Don’t risk tomorrow’s money with debt. This is how you become a slave. You have no freedom of choice, because a part of your future income is required to pay back the money you borrowed. For something that you no longer enjoy or possibly even have.

So how much is your debt costing you?

Let me know in the comments, and if you haven’t yet subscribed, please do so. It’s free, and you’ll get a e-mail every time a new post comes out. Seems much more efficient to me than having to come back to the blog every few days, and catch-up.

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  1. That comment about future money being tied up in debt payments was a new way of looking at it for me. Also,you never mentioned to me about the added cost to daily items because we have debt. That is also a new way of looking at it for me and certainly puts a new spin on it. Looking forward to paying our mortgage off so we can pay exactly what we think we are paying.
    PS. Why would I call you Shirley? It is not even remotely close to your name. Or am I missing something…

  2. Hmm interesting post. I’m not sure I agree with all these points. If I have $1 and it earns 7% in an index fund vs. putting $1 towards my debt, the math will always work out in the favor of earning the 7%. I don’t think you have to put all your money towards investing, or towards debt payoff for that matter. To me, debt payoff is a personal comfort choice. If I don’t struggle to pay for my mortgage and car payment, then I should invest instead of paying those off because in the long-term it’ll work out better. I think the narrative across the personal finance bloggers that debt payoff is the best way is false. You should evaluate your money decisions one dollar at a time, not in aggregate. One dollar may be better here vs there, but not all dollars are the same in this regard.

    • I appreciate the comment Lance. Most people would not necessarily be bold enough to comment when they disagree, but that’s how we all learn. Discuss, see both sides, and draw your own conclusions and make your own decision. My point, which is often voiced elsewhere as you mentioned, is that if you get “x” return by paying down your debt, then you also don’t get that return by spending the money elsewhere. Which makes it a cost. And I don’t think you can choose necessarily which dollars you apply that cost to.
      Again, thanks for the feedback.

      • I’m going to have to side with Lance here to some extent. Sure you are right if I spend x paying down debt I don’t get it elsewhere… But let’s assume for a minute you would spend the same amount of money, debt or no debt. In that case the money allocated to debt payments can only be interchangable with investments as those are the two remaining choices. In that case 7 percent is always a better choice then three, all else equal and not dealing with the risk monkey in the room. Debt should be a tool not a way of life. A tool shouldn’t decide how much you spend.

        • Thanks for the comment. I don’t necessarily disagree with it, but I don’t think you can look at just a portion of your money that way. Debt is always going to be a drag on your cash flow both now and in the future. And until you see it for what it is, you’ll always be stuck in the cycle of buying things you can’t afford.
          And I think debt is only a tool if you don’t actually need to use it. Otherwise it’s slavery and oppression.

  3. I don’t think it’s healthy to think of spending money at the grocery store as a way of losing future money. Yes, you can control how much you spend there, but at the end of the day you have to eat. You have to spend money to live. You have to spend money on transportation costs (even if you walk to work you need a good pair of shoes and appropriate clothing for the weather.)

    Now, using that formula for all the extras in your life (whatever extra means to you) is a great way to motivate yourself to pay off debt-especially high interest consumer debt.

    I am torn about whether paying off a mortgage should be an absolute priority over everything else. Of course there are instances where it would be. But for me, I’m not sure. Our mortgage is less than what we were paying in rent. I have to live somewhere, and in my town rents go up every year but my mortgage stays the same (property taxes do go up, though.) Does it make sense to throw all my extra money at my mortgage when instead I could be saving it for rental property that will increase my monthly cash flow?

    I never thought about how spending money in one place and not towards debt might increase the cost of whatever it is I’m buying. I am going to have to ponder this more. Thanks for giving me something to think about!

    • Look, I understand we need to eat, and that it’s really not negotiable. Along with the other necessities like shelter and transportation. I’m not trying to encourage suffering for the cause of paying down debt. But I am trying to get folks to understand and think more about the debt they have. And hopefully take action to pay it down.
      I appreciate the feedback, and I’m grateful for you stopping by. 👍

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