Interest Payments on Debt Affecting American’s Financial Futures.

How many of us stop and think about how much interest we pay on mortgages, student loans, auto loans and balances on credit cards over our lifetimes. More importantly, do we realize how the amount of interest we pay over a 30 or 40 year period is affecting our accumulated savings for retirement years.

Although it appears there is a trend for taking on less debt as reported by the Federal Reserve for the end of July (Report), the average American consumer has a long way to go to be debt free. 

So how much debt are Americans carrying and how much interest do they actually pay over their working lifetimes?

Mortgage Debt:  Average Mortgage today is $210,000 . (Report)           

Student Loan Debt: Average per household is about $12,000. (Report)

Auto Loan Debt: Average per household is $12,560. (Report)

Credit Card Debt: Average per household is $8329 (Report)

This means that a typical middle class family in the United States owes lenders right around a quarter of a million dollars.  What is also true is that if they are typical, they will carry a good portion of this debt for anywhere from 30 to 40 years and pay somewhere between $200,000 and $400,000 of interest for the privilege of having good credit.

There is nothing inherently wrong with this scenario.  Long term loans on homes, student loans and cars have meant low monthly payments for millions of consumers and probably more than anything else has fueled our economy for the last fifty years or more. 

What leveraging these large sums of money from lenders has also done however, is created the mentality of instant gratification based on if they can afford the monthly payment or not.  In our typical example of $250,000 of debt, these households will pay more than a $1000 of interest each month for most of their working lives. Is it any wonder that so many Americans that have seen their 401K plans lose 40 or 50% of their value in the last few years are concerned about going into retirement without the kind of nest egg they had hoped for. 

Wonder if they would have been able to save even half of the money they had been paying to interest on debt?

Maybe even more tragic is the prospect of having 25 years left on a mortgage when they reach retirement age.  People in this situation are left with some pretty poor options if they reach age 60 or 65 in this financial situation.  Social Security was never meant to cover mortgage payments.

The solution to this financial nightmare is like most good things in life, keep everything in moderation.  Buy your dream home, get the education you need, buy the cars that suit your lifestyle but just as you work hard to attain all these material things, work just as hard to pay them off.  Shorten up the period of time you make debt service payment in your life from 30 to 40 years to 15 to 20 years. This will save thousands and thousands of dollars of interest payments and even more importantly allow you to save more money for a longer period of time to take advantage of the magic of compound interest.

If your goal is to someday earn more interest than you pay, chances are you will not have to ever worry about having enough money when you want options later in life.  Living a debt free life style is not new, it just went away for about 30 years.