The word “disinterest” is actually too mild to describe my feelings toward paying interest. Quite frankly, I really hate paying interest. On anything! Mortgages, auto loans, credit cards, anything! Paying interest, in my opinion, is a complete waste of net worth.
Interest and Appreciating Assets
Well, I take that back. Paying interest is not always a complete waste of net worth. Sometimes paying interest can be a not-so-bad thing if it means that you can secure in appreciating asset. What I mean by “appreciating asset” is something that you own that will gain value over time. For example, a house or a business might be considered an appreciating asset because they should both gain value over the years.
Interest and Depreciating Assets
What really drives me nuts is the concept of paying interest on a depreciating asset or, even worse, an intangible asset. The reason I don’t like paying interest in general is the fact that you get nothing of value in return for the interest payment in itself. Sure, you get money to purchase whatever it is your purchasing, but you have to pay all of that back anyway, so in my mind that doesn’t really count. At least with an appreciating asset, even though you are paying interest and losing net worth there, at least your asset is maintaining and (hopefully) increasing its value so that the loss of net worth with the interest payment isn’t as significant. When you take out a loan to purchase a depreciating asset (one that loses value over time), then it’s a double-whammy. Not only are you losing net worth with the interest payments, but you are also losing net worth as your asset depreciates. A car is a great example of a depreciating asset. As the car accumulates miles and gets older, its value decreases.
Interest and Intangible Assets
Intangible assets are assets that you can’t physically touch, such as a college degree. For the sake of this topic, I am also going to consider credit card purchases to be intangible assets. But isn’t a college degree a good thing? In most cases, absolutely. However, other than a potentially higher salary that you might not have been able to earn otherwise, a college degree has no monetary value. You can’t sell it. Sure, it will probably pay itself off in the long run if you make a higher salary that you could have without it, but you can’t actually go out and sell that asset. That is why I really, really don’t like the concept of student loans.
Then there are credit cards. I have a love-hate relationship with credit cards. I love the security aspect with credit cards and the fact that they earn you rewards as you use them, but there are also two things that I hate about them. One, they have extremely high interest rates. Two, it is easy to get caught up in large amounts of credit card debt and it is hard to get out of that debt. It can be mighty tempting to use credit cards to buy things that you can’t afford, which is how that debt piles up and interest starts getting charged in the first place.
Avoiding Paying Interest
Here are some ways in which I avoid paying interest:
- I do not purchase things that I can’t afford with the cash that I have on hand (with the exception of my house). I keep my budget in an Excel spreadsheet in Dropbox on my phone so that I can always look at it. I typically have a rough idea of how much money is in a fund at any given time, but if I am not sure whether or not I can afford something with the cash that I have, then I can check. If I can afford it, great! I buy it. If I can’t afford it, then I don’t buy it. I don’t put it on a credit card to be paid off next month, I simply don’t buy it.
- I treat my credit cards like cash and pay them off entirely every month. I do not spend the entire credit limit every month just because I can. If I don’t have the cash, I don’t use the credit card because I won’t be able to pay it off before interest gets charged.
- I make additional principal payments to my mortgage loan. The sooner I can pay off the mortgage, the sooner I will no longer have to pay that interest. I also did this with my car payments when I had them. I took a two-year loan and paid it off in a year and a half.
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This is for educational purposes only and is not intended to be used as personal financial advice. I have not taken in to consideration anyone’s specific situation. This simply based on my opinions and how I personally handle my budget and finances. If you would like one-on-one personal budgeting advice, please click the Budget Coaching button below or contact me to set up a free consultation call. Also, if you haven’t already, sign up for my monthly newsletter! I will be sending out exclusive content each month and you will get a free budget guide as a thank you for signing up!
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