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Debt Is Saving in Reverse

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Debt Is Saving in Reverse

The legendary fund manager and author Peter Lynch once wrote that "debt is saving in reverse." This is an apt description of what happens when your debts pile up. Not only are the interest payments likely to drain your wallet faster than just about any force known to physical science, but you're severely crimping your ability to save. And the one thing you need before you invest is the money to invest!

It's time to get your debt load under control. You can start today by visiting some of the Web sites that offer tools and resources to help you get back on track.

They Don't Call It "Debt Burden" for Nothing

Yep, the phrase "debt burden" is really appropriate. It doesn't matter whether it's a car loan, mortgage, student loan, home equity loan, installment loan, or credit card debt--the interest you have to pay for the privilege of borrowing money can vary from 5% to 20%, and sometimes even more.

The Difference Between Interest and Principal

Interest is any payment you make for the use of borrowed money. Principal is the money you actually borrowed from a lender. Any debt payment you make is made of up interest, principal, or a combination of the two.

Sure, some of this debt might be unavoidable (or so you are convinced), but consider this: If you carry an unpaid balance on your credit card with an interest rate of 18%, paying off that debt is the same thing as getting a guaranteed effective 18% return on your investment. There's no other place on earth where you can get a guaranteed rate of return of 18% on an investment!

Of course, no one is saying that all debt is bad for you. A student loan with an interest rate of 6% might be a pretty good deal. And if you can get a better rate of return from a savings or investment account, say 9% or 10%, it might not make sense to pay off that loan early with other funds. You will get a better overall rate of return by making regular monthly payments on the loan and saving or investing the rest.

Here's an example. If your credit card carries an interest rate of 18% and you have a $5,000 balance, it will take you five years to pay off the balance if you make monthly payments of $128 (a little bit more than the 2% minimum monthly payment required by most cards). Of course, you can't make any more charges on the card, either!

In those five years, you will have paid a total of $2,635 in interest! With that kind of return, it's no wonder the credit card companies are stuffing your mailbox with offers of pre-approved credit cards.

To put your savings plan in forward gear, you need to do three things:

  1. Get your spending in check.

  2. Start your saving and investing plan.

  3. Reduce the amount you're paying in interest on existing debts.

For help, you need turn no further than the sites and tools described in the following sections.

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