Instant gratification has become the norm in our modern era. We have, at our fingertips, access to more information than has ever been available in any other generation in any other time period in the history of the world. We have cell phones, computers, handheld gaming systems, television, and radio just to name a few. Technology is advancing at an explosive rate. Advertisers pour billions of dollars into the many media streams in the hopes of luring consumers into the purchase or consumption of their product.
With this sense of culture in mind, it is not a stretch to imagine that self restraint and patience are not as commonplace as they may have once used to be. I have already addressed the relationship between time and money, but there is another factor that can really have a profound effect on both your money and your time. This factor can change all the rules. This factor is debt.
We have at our disposal credit, loans, cash advances, and many other forms of leveraging other people's money. These tools allow us to achieve the purchase of a good or service now and pay it back over time. Usually an interest rate is attached to the loan of money and the end result is we end up paying more than the initial purchase over time.
A person decides to take out a personal loan. The details are as follows:
Amount - $5,000.00
Interest rate - 10.95%
Term of loan in years - 5 years
Monthly payment - $108.59
Total interest paid - $ 1,515.25
Total payments with interest - $ 6,515.25
Usually, a loan such as this is used because the person taking out the loan does not have the $5,000 available. For the use of this money, the person must pay an interest rate of 10.95% over the life of the loan which totals an additional $ 1,515.25. This is one of the costs of using other people's money. The benefit is a lower monthly payment over time for the use of the money now.
What's Under the Surface?
There are other costs involved here, but they are not readily apparent at first glance. Let's think about the scenario a little deeper. Let's go back to the same employee from the last article, Your Money: Part 2 - Time and Money. As a reminder, this person works 40 hours per week and earns $15.00 per hour.
Keep in mind this person did not have $5,000 at their disposal in the first place.
Just the monthly payment alone requires 7.24 hours of the person's time ($108.59 divided by $15.00 per hour = 7.24 hours). Again, this is also assuming best case scenario because the $15.00 an hour is being used tax free for our purposes. This is of course not real life.
Over the life of the loan, the person paid $ 6,515.25 in both principal and interest. How much of the person's time was also traded for this loan? Divide $6,515.25 by $15.00 per hour and we find that the person has to work a total of 434.35 hours. This translates into 10.86 work weeks (434.35 hours divided by 40 hours) assuming the hours worked equal 40. Again, this is excluding taxes.
This person's money also has other pressures on it in the form of daily living. What has just happened here is the person has created a new, on-going, obligation for their time and money. This is a debt obligation.
Debt also increases the risk to a person's financial well-being. Imagine if an emergency comes along or perhaps a disability occurs. The person is still obligated to the debt and the lender wants their money. They want it every month plus interest. This was the agreement.
If this new emergency is financial in nature then the person likely does not have the resources to pay off the new obligation in full. They did not have the initial $5,000, that's why they took out the loan to begin with. If the person finds that they need to, in fact, get another loan to pay off the arrival of this new financial responsibility then a new loan schedule starts and the person's time and money has just received even more pressure.
This is not to say that there are not occasions in which credit and loans can be helpful tools. In an emergency, they might be one of the only resources available. However, keep in mind credit and loans are still only tools. I would like to take that one step further and call them luxuries. They are not something that everyone needs and they are especially not something everyone deserves.
Debt takes a clear head and a lot of understanding to use correctly. Think very hard about your time, your money, and your sense of peace before you consider taking on debt.