Time is good for wine, but it’s very bad for debt.
Blue Lobster
Though it should be obvious to everyone, I’m going to say it again. Debt is not wine.
Hear me now! Time makes debt get worse. This is not a secret. Nor should it come as a surprise. The longer you keep it, the worse it gets. And there is no limit to how big a debt can get.
You know how they say that fine wine gets better with time? Debt is the complete opposite. Debt get WORSE over time. Due to the impact of compounding interest, all of your debts will get bigger the longer you keep them around.
Gangrene gets worse with time too, but only so much. Eventually, flesh that is infected with gangrene is removed. Gangrene has an end life. Debt is worse than gangrene because it can go on indefinitely. For those in the cheap seats who insist on pedantic accuracy, it is true that both gangrene and debt end when the host/debtor dies. However, I’d like to see you get rid of debt (and gangrene) before you shuffle off this mortal coil.
Debt gets worse over time.
Time is the ally of the creditor and the enemy of the debtor. When you borrow money, you’re a debtor and you’re obligated to repay both the amount your borrow and the interest on that debt. Think of the interest rate as the price you pay to borrow money. You might need $1,000 to fix your vehicle. If you borrow money, the creditor is going to charge you interest. For simplicity’s sake, let’s assume you borrow $1,000 for 1 year at a rate of 5% per year. At the end of the year, you have to repay $1,050 to your creditor.
And if you can’t repay your creditor, the interest rate of 5% continues to compound that debt. At the end of the second year, you’ll owe your creditor $1,102.50 (=$1,050 x 5%). At the end of the third year, you’ll owe your creditor $1,157.63 (=$1,102.50 x 5%). And the amount of money owed just keeps going up until the debt is paid.
Take a look at your credit card statement. How much interest is being charged on your credit card balance when you don’t pay the full balance every month?
So there’s two factors impacting the growth of your debt: time and interest rate. You know how when you invest your month, you want a really high rate of return so that your investments grow really big, really fast? Your creditor feels the same way about the debt you owe them. I can assure you that your creditor does a happy dance when you take out an 8% car loan, or a 19.99% credit card loan. The higher the interest rate you pay, the better rate of return your creditor is getting.
Do yourself a favor. Take a pen and a piece of paper and physically write out how much interest is charged annually on your current credit card balance if you let your monthly balance roll over each month. Now add on another year’s worth of interest. For good measure, keep doing this calculation for 10-15 years. The resultant number should make you slight nauseous.
Take a look at this list of facts about credit cards in Canada. Two years ago, the average credit card debt was $4,240. And since this is an average, there are some people with much higher balances! Plug the average number into the compounding calculator of your choice and watch the numbers jump, year over year… I feel sorry for the person who doesn’t have the high income to wipe out this kind of debt in a month or two. High interest debt can balloon very, very quickly.
Wine ages well. Debt…not so much.
Again, debt is not wine. Here’s another simple way to tell the difference between the two. Seeing the end of one makes you sad, but ridding yourself of the other will bring you financial contentment.
When my wine is all gone empty, I’m sad – even if it wasn’t a great bottle of wine. Yet when my debts are all paid off, I do a little happy dance and smile brightly for the rest of the day.
Do what you need to do to get rid of debt. Maybe you give up cable and other streaming services for 12 months? Trust me when I tell you that they will always re-start your subscription. Cook at home a little more often than you normally do. You can continue to get take-out or delivery, but just get them one or two days less each week.
The time will pass anyway. Pay off your debts and start investing your money so that you can pursue your heart’s truest desire. Once your money is going towards your investments instead of towards paying off debts, then time will be working for you instead of against you. And wouldn’t that be a really, really good thing?