Significant Financial Pitfalls – Interest


In our exploration of the intricate world of personal finance, we’ve uncovered some eye-opening insights into the impact of taxes on our money. As we venture into part two of our series, we’ll look deeper into additional financial issues that can devastatingly erode our hard-earned money. In the first installment, we discussed the realization that the average American pays more in taxes over a lifetime than on essential needs like food, shelter, and clothing combined. 

Now, let’s investigate an additional financial pitfall that often goes unnoticed, affecting both individuals and businesses alike. 

Paid Interest

Along with the taxes that we are forced to pay over our lifetime, is there another destroyer of our wealth that has embedded itself into all aspects of our society? It’s the interest paid to credit card companies, banks, student loan lenders, and other institutions that lend money and charge interest. Economic studies confirm that “paid interest” ranks as the second-largest expense in your life, following closely behind taxes. The good news? Unlike taxes, you have direct control over the interest you pay out over your lifetime.

In the financial landscape, you’ve probably encountered terms like “Annual Percentage Rates,” “Mortgage Rates,” and “Interest Rates,” carefully presented by the federal government, financial institutions, mortgage companies, and banks. However, the real culprit isn’t these shiny objects—it’s the “Volume of Interest”, the total amount of actual dollars that you’ll pay in interest over your lifetime. It’s not just about losing the dollars spent on annual interest; it’s also forfeiting the potential interest earnings you could have accumulated if that money had remained in an interest-bearing account.

Let’s break it down with an example: imagine buying a $250,000 home with a 30-year loan with a 4.5% annual interest rate. Your monthly payment might seem manageable at $1,262. However, over the life of the loan, the interest portion fluctuates from nearly 80% in the first 15 years to less than 1% by the 30th year. Surprisingly, while your annual rate is 4.5%, the Volume of Interest or the amount of money you actually pay in interest over the life of the loan is a whopping 82%.

Here’s the catch: this 82% “Volume of Interest” rarely surfaces in financial discussions, especially not from bankers or loan officers keen on selling their loans. Based on conventional thinking, many of us are taken in by the allure of low annual interest rates and high FICO scores. But, what if we took a moment to consider the truth behind these transactions? It might just inspire us to seek a better way to save, leverage, and borrow money.

So, with a fresh perspective, let’s re-examine the conventional and traditional approaches to handling our money. Together, let’s explore how we can make wiser, more prosperous decisions moving forward.