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.
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.
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?