While perusing my ever growing backlog of feed reader favorites I ran across an article that caught my eye from One Caveman’s Financial Journey. He makes the point so many of us who have been paying off debt for some time have all thought: I Could Be Rich If I Didn’t Have All This Debt. No kidding! As I sit down to pay bills each month, and schedule yet another debt snowball payment, I just cringe at the thought of all the good I could be doing with that money.Just this week I retired an old debt consolidation loan that’s been hanging around so long I thought it was a pet (to borrow Dave Ramsey’s line). The loan represented debt from our early years of marriage, and some leftover debt related to the pursuit of my online degree. We are still not quite debt free, but getting close! It felt so good to rid ourselves of that loan payment. When we signed up for the loan a couple years ago we opted for a shorter repayment term, and a higher monthly payment, in order to get a better interest rate. The drawback to that plan was we were stuck with a $375 monthly debt payment. We whittled away at the loan, faithfully making the minimum payments, and throwing any extra earnings at it to get it paid off quicker. I’m glad we did, but now that it is gone I have reflected on how much money that loan diverted from our other goals.
Economists define “opportunity costs” as the cost of pursuing one choice over another. It can be applied to the world of personal finance in a variety of ways. In our case, the opportunity costs of choosing to go into debt and make payments for a couple years were missed opportunities to save and invest that same money so it would be working for us, not the bank. We now find ourselves behind on college savings, our own retirement, and have struggled to keep up a fully funded emergency fund. The $375 we were sending towards debt repayment could have helped fund those goals all along. Now, we’ll have to play a little catch-up to get back on track.
Non-Monetary Opportunity Costs
My wife and I have always wanted to be better givers, and want to instill a giving spirit in our children. However, it is hard to help others from a position of weakness. Over the years we’ve heard of friends, family and neighbors going through some hardship and wished we could help. Having to pass on those opportunities was a painful reminder of how much weaker we were, financially, for carrying debt. I’m sure there are others out there with similar desires to be givers, but weighed down by similar circumstances. I’d venture to say if more households were living a debt free life fewer shelters would have bare cupboards, and fewer worthy charities would be closing their doors. If any good can come from this recent economic fiasco it’s that people are finally starting to think about reducing risk from their lives. And paying off debt is a great way to start.