In today’s economy, carrying debt has become commonplace for many people. From student loans to mortgages to credit card debt, the idea of owing money is often viewed as a necessary part of life. However, many do not realize the long-term impact of carrying debt, and just how much it can drain your finances. According to the Federal Reserve Bank of New York, the aggregate household debt balance reached $14.27 trillion as of June 30, 2022. This staggering figure highlights the widespread reliance on debt, but also underscores the hidden costs associated with it.

Debt, especially high-interest debt, can be expensive and significantly hinder your ability to build wealth. If you’re serious about improving your financial situation, one of the first steps is understanding how much carrying debt is costing you and why getting out of debt should be a priority.

The True Cost of Credit Card Debt

Credit card debt is one of the most pervasive and costly forms of debt. While using credit cards may seem convenient, the interest rates that come with carrying a balance can be detrimental. Many credit card companies charge around 20% interest, meaning that if you carry a balance month to month, you are paying a steep price to do so.

For example, consider the financial impact of carrying a $10,000 balance on a credit card with a 20% interest rate. Over the course of one year, that debt will cost you $2,193 in interest alone. If you carry that debt for three years, the total cost rises to $8,131. Keep that balance for five years, and you will end up paying a whopping $16,960 in interest, just to maintain a $10,000 balance.

This illustrates just how costly it can be to carry debt over time. What may seem like a manageable monthly payment quickly balloons into a massive financial burden when compounded interest is factored in. Unfortunately, many people fail to consider the long-term consequences of carrying credit card debt and simply focus on making minimum payments to get by each month.

How Debt is Robbing Your Wealth

Debt has a significant impact on your ability to build wealth. Each dollar you spend on interest payments is a dollar that could have been invested or saved for future financial goals. Debt not only drains your resources but also limits your financial flexibility and freedom. Here are some of the key ways debt holds you back:

  1. Money: As demonstrated in the example above, borrowing money costs money. When you’re constantly paying interest, you’re losing out on opportunities to grow your wealth. The more debt you carry, the harder it becomes to save, invest, or even enjoy financial peace of mind.
  2. Health: Debt can also take a serious toll on your health. The stress of trying to manage debt, make payments, and stay afloat financially can lead to anxiety, depression, and other health issues. Constantly worrying about money can impact your mental and physical well-being, and prolonged stress can have lasting negative effects.
  3. Freedom: Being in debt means you’re tied to financial obligations that limit your freedom. You become a “slave” to your debt, forced to work just to keep up with payments. This leaves little room for financial flexibility or the ability to make choices that align with your personal goals. Whether it’s traveling, investing, or starting a business, debt severely restricts your options.

Breaking Free from the Debt Trap

If you’re serious about improving your financial health, getting out of debt should be your top priority. Here are some strategies to help you reduce the cost of debt and work toward financial freedom:

  1. Refinance or Consolidate Debt: One way to reduce the cost of debt is to find a lower interest rate. By consolidating your high-interest credit card debt into a lower-interest loan or refinancing your debt, you can save money on interest payments and pay off your debt faster.
  2. Pay Off the Most Expensive Debt First: Focus on paying off your high-interest debt first. Once you’ve eliminated the most costly debt, move on to the next. This method, often called the debt avalanche approach, ensures that you are tackling the debt that is costing you the most money as quickly as possible.
  3. Avoid Adding New Debt: One of the best ways to stay out of debt is to avoid taking on new debt. Resist the urge to use your credit card unless you are certain you can pay off the balance at the end of the month. By only borrowing what you can afford to repay in full, you prevent interest from accumulating and stop the cycle of debt before it begins.

The Long-Term Benefits of Being Debt-Free

Imagine the financial freedom you would have if you no longer had to worry about making payments on debt. Instead of paying interest, you could be investing that money, saving for retirement, or even enjoying life more fully. Here are some of the benefits you can expect once you’re debt-free:

  • Increased Savings and Investments: Without debt, more of your income can be allocated to savings or investments. Over time, these investments can grow, helping you achieve long-term financial security.
  • Improved Financial Flexibility: Being debt-free gives you the flexibility to make decisions that align with your goals. Whether it’s changing careers, starting a business, or traveling, you’ll have the freedom to pursue what matters most to you.
  • Reduced Stress and Improved Health: Debt is a significant source of stress for many people. Eliminating debt can reduce anxiety, improve your overall well-being, and give you peace of mind.