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The High Cost of Debt

Everyone understands that loans cost money. There are fees to obtain the loan and there is also the interest. When we obtain a loan, in my experience, the total amount of interest we pay over of the life of the loan is right there in black and white.

However, there is a cost of debt that I didn't truly understand until later in life. You not only lose the money you spend on interest, you lose the potential future value of that money had you invested it instead.

When you invest at a young age, your returns compound over time. The time does the heavy lifting so that after 30 or 40 years most of the money you have will be money you earned on investments rather than money you earned yourself and saved.

If you invest $10,000 by the time you are 25 years old, earn 9% investment return, and leave the money alone until you are 65 it will grow to $314,000. $304,000 of the $314,000, or 97% of the total, is your return on investment. I consider that free money.

The key to generating wealth without having an enormous income is to start early and let time do the work.

Another important consideration in terms of investing is avoiding scams, high fees, and rip-offs. I wrote a brief article on this topic: A Simple Approach to Investing.

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Monday, 12 November 2018

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