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Depressed business man

Analyzing the Cost of Your Debt

Depressed business man
Depressed business man

The debt that you carry from month to month has a cost. You might think the cost is simply the amount

of interest you pay, but when you understand both the concepts of opportunity costs and the time value

of money, you’ll see just how expensive your debt really is.

Exploring Opportunity Costs

When you choose to take on debt, you are forfeiting income for a period of time in your future in order

to pay back that debt. You could, instead, have used that future income to invest in stocks, bonds or CDs

that pay interest. You could have used it to invest in a retirement account and gain a tax savings. It

might also have been used to pay for a future emergency that now will instead need to be paid for by

creating even more debt. You also could have used it to improve your home or other assets so they are

worth more upon sale. All of these alternative uses are “opportunities” that you forfeit when you decide

to take on debt.

Understanding the Time Value of Money

Did you know that the money you have available to you right now is actually worth more than the same

amount will be in the future? It’s true. Between inflation, which decreases the buying power of your

money, and the potential to grow today’s funds to accumulate larger balances in the future, your

present-day dollars have a much higher value. But when you tie your free money up in debt, you

squander that present value—because that money is now obligated to pay off a debt and interest rather

than grow or exert its true buying power. And while you will have free money later after you pay off the

debt, that won’t be as powerful as having the money now would be.

Between the time value of money and opportunity costs, your debt could be costing you a comfortable,

stable, independent future. In order to really measure the cost of your potential debt and determine

whether it’s worth taking on, you need to consider these two costs and how they will impact your future

plans and goals.

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