I always viewed debt as something that you have. You hear all the time, it’s the American way. The average American according to the interweb carries over $100k in debt.

This statistic is incredible, but it helps solidify the idea that if everyone else has debt than I am no different. For a long time, I believed that. I was given my first credit card in college and had a $500 limit. I barely used it but once in a while, I would charge something and then pay it off. I wish I had stuck with that plan.

It was not until when I was on my own making good money did I start down the path of truly being in debt. I had great credit and it was almost a game to see what kind of deal I could get at the stores when they would offer zero-percent financing for furniture or electronics.

The furniture store gave me a $10k limit to buy a dresser and a kitchen rack. The electronics store gave me $5k to purchase a laptop, this is how they keep you in debt.

First Major Purchase

My first major purchase was a vehicle that I leased. I had no idea how bad of an idea it was until a few years later when I still owed $10k on a nearly four year old car with over 70k miles. Luckily for me it was a Toyota and held it’s value, but I paid quite a bit more than that car was worth.

Simple Math:

Vehicle Cost: $25,000
Lease Payment: $365/mo 48 months
Residual Value: $12,500 * refinanced a few months early

Refinanced Loan Amount: 14,000
Payment: 471
Total cost of ownership of vehicle: $29,593
– Took seven years to pay off the vehicle.

But I had a nice car, and a good job and it was just the American way. Sadly this is the debt dilemma. We justify our purchases by how it makes us feel. In most areas in the US it is necessary to own a car, and getting a loan is not always the worst thing to do, but look for better options.

We can’t always pay in cash, but you can buy used, and finance through a credit union or find a lower interest than the dealership. I was persuaded by the notion, how much payment can you afford?

The dealer will always make the payment work, especially since they only have their best interest in mind. Once it is off their lot and the bank accepts the loan, it is now the banks problem.

The Pitfalls of Debt

We fall into these pitfalls of debt. The low interest payments, the zero down, the zero percent for two years and then don’t pay them off when it matures, and getting hit with all the accrued interest.

I also fell into the trap of trading in the car before it was paid off and rolling in whatever I was under into the new loan. That automatically makes the vehicle much more expensive than it is worth.

So how do you avoid this? Do your research. Find the vehicle, figure out what you are willing to pay and look at loans if you cannot pay in cash. If you can buy used that would be the best option but sometimes dealers do have incentives to financing and payments.

Calculate the Cost of Everything

The scary part of all of this, you can calculate the cost of everything you purchase on credit by adding the amount of interest paid over time. It would probably embarrass all of us if we did this simple calculation.

I keep a spreadsheet now. Part of my get out of debt plan that compounds my interest on each card I owe. It was borrowed from a sheet that uses the avalanche method to pay off debt. Each debt that I owe was put into this formula and it shows the compounding interest. The number is ridiculous and now that I see the true cost of ownership on credit I am taking all the necessary steps to be truly rid of debt.