How interest is crippling your wealth building efforts.

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One of the cardinal rules to wealth building is starting off early. This has been on my mind quite a bit lately as I’m looking for ways to begin building up a nest egg. I got into the investment game reasonably early: I began investing in a mutual fund at the age of 19 at the urging of my parents, actually it was more or less involuntary. They had the man come to the house with all the papers drawn up and essentially forced me and two of my siblings to begin putting in $50 a month. When I say forced obviously I could have chosen not to, I did feel a little ‘thrown to the wolves’ but I got over that.

I withdrew my mutual funds at age 22 and have not invested anything since, mainly because I got into a bunch of debt and then started getting out of debt again. Investing just hasn’t been all that important so far but now that I’m getting everything else sorted out I need to begin thinking about the future and with that I realized how much I’ve been hurting myself financially in the past few years (and you probably have to):

Source below

In 2010 the interest on my mortgage was about $3,100, the interest on my student loan last year cost me about $600, the interest on my MasterCard was much smaller, probably only about $50 for the year and I spent about $140 in bank fees over the year.  A grand total of $$3,890. That’s a pretty big number just for the privilege of having all this debt. I can’t do much about the bank fees (other than finding a free bank account which is proving virtually impossible) but the rest? It’s all interest I’m paying to the bank just so I could buy stuff before I could save up for it. Now, the student loan can be excused, at least partially… but the house could’ve waited longer. I could’ve saved up more and there’s really no excuse for the interest charges on the credit card.

I only make about $40,000 a year, after I pay tax there’s not much left. Why am I spending $3750 servicing debt when I can barely afford to!? It’s frustrating to say the least. That $3750 put in an account somewhere yearly, earning 5% annually would grow to more than $375,000 by the time I’m 60 and still kicking it. Hello! I’ve just lost three valuable years of investing that stupid interest! You may have to read that a few times to let it really sink in, think about it in terms of what it’s costing you. (Check out this debt snowball calculator or this compound interest calculator) I’m sure you want a nice retirement just like I do, is it worth it to you to have that STUFF right now at the cost of $375,000 in the future? I didn’t think so either.

Get in the game early, even if you’re not interested in investing anything at all, hire someone to do the dirty work for you when you’re young. Begin in your twenties, heck… start off when you’re 16 with 10 bucks a month and you’ll be ahead of all your peers when it comes to some serious wealth building.

For more on wealth building check out a few of these sites & finance-related blogs; (I’m sure I missed a ton of great ones!)
The Motley Fool: www.fool.com
Money Sense: http://www.moneysense.ca/
The College Investor: http://thecollegeinvestor.com
Buy Like Buffett: http://buylikebuffett.com/
Invest it Wisely: http://www.investitwisely.com/
Early Retirement Extreme: http://earlyretirementextreme.com/
Wise Bread: http://www.wisebread.com/
Dave Ramsey (on investing): daveramsey.com

IMG source here.

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2 Comments

  1. Interest can absolutely be crippling. But, as you alluded to, so can skipping out on investing. Especially when you’re missing out on the opportunity to deposit money within an account with tax-benefits such as a Roth IRA.

    However, in your circumstance, I don’t think all of that is really lost money. Sure, if you had cash for a house that would be nice and dandy, but if you were renting a house your rent payment would be similar to the total of your mortgage payment I’m assuming. So at least this way you’re keeping some of the money in principal, as opposed to losing it all when you pay rent.

    When given the choice between having no debt and having debt, I agree, it’s better to have no doubt. But sometimes in the short term we need to take on debt to achieve some of our goals, such as going to college or purchasing a home. So I wouldn’t be too hard on yourself for taking out debt for those two items. The credit cards and bank fees, of course, should be worked on. I have to do the same, haha. Those bank fees will sneak up on your if you aren’t careful.

  2. Thanks! Yes, rent would actually be at least double my mortgage payment a month around here. I do plan to pay off the house eventually and will probably have a mortgage again on a future house. It’s nice though to put into perspective how much interest that loan is really costing especially since you just don’t see it… you just see the mortgage payment coming off and then get a yearly statement. Indeed my point was mainly to create awareness about the cost of borrowing.

    I’ve finally bit the bullet re: bank fees, I’m going to open an ING Thrive chequing I think, no more bank fees from next month on!

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