Debt is a Wealth Killer

Did you know that interest is a silent killer?

 

We all realize we pay interest on money we borrow regardless if that is for a home, a car, or credit card debt. What you may not realize is how much, in interest you are paying per day. Most people get the idea that the lower the rate the less interest you will pay but I bet most people do not know how to calculate how much interest they are paying per month or how to figure out the daily rate of interest.

There are a couple different ways to calculate interest and to make things easy for this post and to help readers get an idea of how much they are paying and how they can figure this out for themselves I am using the Bank Method which is what most banks use and it is also called the 360/365 method.

 

Here is a quick example of $1,000 of debt that you would pay interest on.

Principle = $1,000

Rate = 8%

Daily interest = $0.22 (1,000 x .08/360)

Monthly Interest = $6.67

One thing you probably did not know is that your mortgage company compounds your interest on a daily basis. So that means that all the daily interest on your mortgage is actually added to your principle amount every day.

What does that look like?

 

Principle = $250,000

Rate = 4%

Daily interest = $27.78

 

The next day you do not simply add another $27.78 to your loan. Your principle amount is now $250,027.78

New principle = $250,027.78

Rate = 4%

Daily interest = $27.78

 

The fourth day your new principle amount is $250,111.12

New principle = $250,111.12

Rate = 4%

Daily interest = $27.79

 

This pattern will continue until you make another payment and a portion of the interest is paid along with a small portion of your principle balance.

Credit cards work a little different in that the daily rate generally remains the same for the month. Regardless the daily rate is something that many do not take into consideration when then maintain those seemingly small balances on credit cards.

Credit card also usually have a significantly higher interest rate than mortgages do for several reasons beyond the scope of this article.

Here is a small table I put together based on a balance of $1,000 at different interest rates. Find your rate and then figure out how much your balance is to determine your daily rate.

Rate            Daily Amount                   Monthly Amount

1.99%          $0.06                                   $1.66

4.25%          $0.12                                   $3.60

5.5%             $0.15                                   $4.50

7.5%             $0.21                                   $6.30

10%              $0.28                                  $8.33

12%              $0.33                                  $9.90

15%              $0.42                                  $12.60

18%              $0.50                                  $15.00

23%              $0.64                                  $19.17

Anything higher than 23% and you need to ditch that card.

You can see that if you have $10k in debt the interest payments alone can seem daunting. There are techniques you can use to pay off your debt which you can read about here.