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Before we enrolled in our debt management plan, many of our credit cards had very high interest rates, some as high as 29.99%. We were making very little progress on the actual balance of our accounts, our payments going mostly to line the pockets of the credit card companies.
I know I’ve paid an insane amount of interest to creditors because of our overspending. With the finish line of our debt management plan in sight, I wondered how different my financial picture would look if I had invested that money instead.
What I discovered SHOCKED me.
Ground Rules
First let’s set a few parameters for our exercise, just to keep it simple.
- Let’s ignore years 22-35 of my life. These are the years that we were racking up our credit card debt, and were surely paying interest during this period, but to keep calculations simple let’s ignore this.
- Our debt management plan will cover years 35-40 of my life. We will begin our focus here. We will calculate how much interest was paid to my Debt Management Plan during these five years, and instead make calculations based upon a consistent investment into the stock market during those 5 years.
- According to Yahoo Finances, the average annual rate of return of the stock market since 1926 is 10.5%. I know the market fluctuates, but those are usually short term changes. We’re talking about long term effects here, so we’ll use this percentage.
The Numbers
While enrolled in our debt management plan, we will pay a total of about $27,500 in interest. If we spread that out across 60 months, that’s about $458 a month. If we would have invested that $458 each month into the stock market at an annual return of 10.5%, we would have $35,490.74 at the end of the five years (The investment calculator I used to calculate these numbers can be found here).
Now, let’s say that we would leave that sum of money in the stock market for another 26 years. By the time we reached retirement age of 66, our investment would have grown to $475,920.36.
That’s right, almost half a million dollars!!!
You can debate the rate of return, but in the end the fact is that we have robbed ourselves of a huge chunk of money because of our financial irresponsibility. Our overspending gave us short term satisfaction at the expense of our long term financial security. Now every time I look at the numbers of our retirement accounts, and the projections of what we will have accumulated by retirement age, I’ll want to add half a million dollars to it and think to myself what could have been.
Are you using credit cards to finance consistent overspending? Have you ever thought of how much it will affect on your long term financial security?
It can sting when you see the numbers, but they surely don’t lie. I realized that I starved myself from these returns when I was paying interest on my credit cards. While there is nothing I can do now, it makes me more excited about investing and saving for the future.
The good news, Grayson, is that while I may have squandered a great opportunity, I am still young enough to put together a great retirement nest egg for my wife and I. That is definitely exciting! Thanks for your comment!
We’re totally against credit cards and debt in general. I had my short ‘stint’ with debt and I lost A LOT OF MONEY just by not saving and paying off my car in cash. Lesson learned. I never dared calculate how much money would be lost in 20-30 years, but the results, as you shown them, are staggering.
When it comes to saving for retirement, putting away money early makes time your friend. I hope this post resonates with people that are finding themselves just starting down the overspending / accumulating debt road and warn them of what they could be robbing themselves of. Thanks for sharing your experiences, dojo!
Wow! That is really crazy. The hubby and I often say that we want compound interest to be working FOR us, not against us… and this is a great example why! Thanks for sharing, and thanks for giving me extra motivation to leave my credit cards at home!!
I’m so happy that the post motivated you, Dee – that’s exactly what I was hoping to accomplish. Thanks for reading!
Don’t forget to celebrate that you’ve taken control and are now starting to get returns on your cash rather than giving it to the credit card company. It’s easy to kick yourself for your past but the fact is, you’re not in your past anymore and you’re building a responsible and more profitable future so congrats!
Great attitude, Stefanie – we’re definitely looking towards the future and what we can do from this point forward. Thanks for the support and well wishes!
That exactly what I was talking about in my debt hangover piece. On one hand you’re excited to have that paid off, but at the same time there is that emotion of how much money was wasted. Not only in interest that you paid, but lets think about that actual purchase itself. Did you really need X, Y, or Z (and by you I mean everyone, including me!)? I think that was the hardest part for me!
I didn’t even want to try to tackle how much we *could* have had if we would have been wise with our money and not bought a bunch of crap that didn’t bring us any value. I don’t even know how I’d quantify that….but I’m sure it would make the number a whole lot bigger! As Stefanie pointed out above, you have to just put the past behind you and move forward. Thanks for commenting, friend!
Travis, I hope you don’t beat yourself up too much. I think about how much you’ve saved by entering the DMP and persevering for ~5 years. The alternative would have been bankruptcy at some point, so you’ve done very well.
It’s an unfortunate reality, Kurt, but I’m not beating myself up too badly. We are proud of what we’ve accomplished and in a few short months we will put all our efforts into wisely investing money for our golden years. I hate to say we’re going to “catch up,” but I have no doubt that we will be just fine when the day to retire arrives. As always, thanks for your optimism!
Numbers don’t lie.
Thankfully, I’ve never been in “too” much debt though any debt is a negative.
Whenever I am questioning my decisions, I break out the calculator and the numbers tell me exactly what I didn’t want to see but what I must do. 😉
Thanks for sharing your experience (and unfortunate loss) regarding debt payback.
Much love
The Warrior
NetWorthWarrior.com
I wish I would have broken out the calculator about 15 years ago, The Warrior…live and learn…and share your experiences with the world – right?
I appreciate the little added (you can debate the rate of return) as a pet peeve of mine is people who assume a certain return 😉 I agree wholeheartedly with you, though, that it’s important to visualize what your debt could mean as far as missed chances to invest and take advantage of compound interest. While I think student loan debt is slightly different (again, up for debate!) I’m still super motivated to get into a financial spot where I have both an emergency fund as well as able to pay down more than the minimum each month (we pay…a lot…each month. And that’s for our minimum). Great post, Travis!
The rate of return is debatable…..but the actual number isn’t important – the fact that the number would be significant is. Glad to hear your motivated, DC……enjoying following your journey over at Young Adult Money!
I think your regret indicates that a fundamental change is happening, so while I hope you’re not going to be too hard on yourself, I see your remorse as a good thing. It’s a bad feeling that you won’t want to feel again, and it will keep any future temptation back into debt at bay. I’ve heard it said that when you start dealing with your money problems, you realize it was never really about money to begin with. It’s all about the person you see in the mirror. In your case, that person is clearly changing for the better! I can only hope that the same will prove to be true for me.
Great point, Prudence…..if I didn’t give this sort of thing a second thought, one could be worried that I haven’t really gained a better perspective through my debt repayment journey. I’m thankful that my eyes have been opened, and I care just a little bit more about where my money is being applied. The posts that I’ve read over at your site clearly shows that the same change is occurring with you as well, Prudence…keep it up!
I love the math in this article…it can’t be beat.
Sadly, when people say, “Well, I’ll invest later,” they don’t realize that that time which turned your 30k into a half million is gone….wasted.
Sweet article.
There always seems to be time to invest “tomorrow,” right? Next thing you know you’re knocking at the door of your golden years. Gotta love an article with math, right Joe? Great to hear from you!
I have certainly thought about the money and years we wasted with credit card debt, but I also celebrate what having that debt has allowed me to do. Paying off a large amount of debt in a relatively long time showed me what is possible. Without that debt, I doubt I would have ever thought about a different life than working crazy hours until I was old because that’s all I knew. Now I feel like we can do anything. I’m sure you feel the same way.
I do indeed feel the same way, Kim – Vonnie and I are coming out of this with a strong marriage and much healthier perspective on what is important in life. That’s definitely something to celebrate! Thanks for reading, Kim!
Those numbers are rough, Travis. But the pain of debt, and the impact that it has on your day to day life is very real. Its painful enough just watching your entire paycheck get eaten by minimum payments alone.
True story, Jefferson – and we’re only 4 months away from getting that part of our paycheck back!
Awesome and eye-opening article, Travis. The biggest long-term effect our debt has had on us is the emotional stress from the weight of it. The money loss is secondary to the emotional stress, at least for us, but even more dangerous. Can’t wait till it’s gone.
Oh, the emotional stress of debt – I bet both you and I could write a book on that subject. Keep pushing at it, Laurie – you’re making progress!
Yikes!
Well, there’s nothing you can do about it now except move forward. I think most people wasted a lot of money in their 20’s…I know I did! I try not to think about it.
Yikes indeed, Holly – I’ve accepted what’s done is done and we’re moving forward. My goal for this post is to serve as a warning to others that may be headed down this same road. As for me, I’m full steam ahead on playing “catchup” as of February when our DMP is complete!
Wow, that’s an incredible sum, Travis. But you’re right to look at the bright side: you and your wife are still very young. If you save for retirement with the same dedication that you used when you paid off debt, you’ll be far, far ahead of the vast majority of people.
“You and your wife are still very young” <---- bless your heart Paula, you're my favorite person for the rest of the week. LOL. We are going to do more than save for our retirement with dedication, we're going to attack it with everything we've got! Thanks for stopping by, my friend!
Hi Travis,
Knowing how much debt costs you it can actually benefit your retirement savings as you realize the missed opportunity cost. If you didn’t have that experience you might only put the minimum into retirement accounts, which really doesn’t build wealth.
Great point, Charles – unless you know where you really stand in relation to your goals you have ZERO chance of obtaining them. Thanks for the support, and for reading!
Wow, those numbers are pretty incredible Travis. I was a heavy gambler in my late 20’s and it would be interesting, and sad, (mostly sad actually) to run the numbers on what I pissed away with the bookie and what it could have grown into if I had invested it.
Sometimes lessons are easily learned, and sometimes they’re…..well…a little more expensive I guess, right?
Wow, that is quite a bit of money Travis! But the good thing is, your debt is almost paid off, and you are making smart financial decisions now!!! 🙂
Better late than never, right MacKenzie? Hopefully others can learn from our mistakes – great to hear from you!
I really wish I would have considered the long term effects of debt before I got into debt. Sometines you paybthe your credit card bill and then it gets eaten up by interests. In the end you feel like you never paid anything in the first place.
I know how feels, Romona – like it was yesterday. The only way we would have ever gotten out of that trap is through the DMP that we enrolled in which reduced our interest rates. Hind sight is always 20/20!
lets just concentrate on what you have accomplished instead of the ”what ifs”….It kills me to think about that kind of thing…our DMP is 0% which is nice but we still have a bunch of other debts (lines of credit etc) which have interest attached to them.
Your DMP is 0%? That’s great Catherine….that should help knock those creditors down for sure! Love following your story!
I have myself on a strict rule for credit cards. I only use the card for minor expenses such as gas or groceries (whichever I can reap the cash back benefits from) and make sure to only spend what I know I can pay off. It’s worked so far, but the convenience of the card is an ongoing battle!
It’s SOOO easy to just use that card and think that you can come up with a plan to pay it off later. Don’t give in, Terry – keep spending ONLY what you can pay off each month – thanks for your comment!