Financial Ground Hog Day – The Cycle of debt
It used to be, when someone mentioned Groundhog Day, they were referring to that special day in North American folklore where a groundhog would emerge from its home and people would gather round to see if the groundhog would cast a shadow. If the skies were clear and a shadow was seen, legend was that winter would continue on for another 6 weeks. If it was cloudy on this day and no shadow was seen, spring would be arriving early.
The meaning of Groundhog Day changed forever in 1993, when a movie by the same name was released, featuring Bill Murray as a weather forecaster who gets trapped in a time loop, forcing him to re-live Groundhog Day over and over again.
Debt can be a lot like the movie, with a twist. Not only can it seem like you are doing the same thing month after month with little effect on the amount of debt owed, the frustration can be compounded as your debt often doesn’t just stay the same, it can continue to climb higher and higher.
That is the thing about debt. It always comes at a cost, and that cost is interest. So, not only are you trying to pay back the original amount owed, you are also saddled with the ever accumulating interest on top.
But what happens if you are paying your minimum payments each month? Wouldn’t the debt decrease? Yes, but very slowly. Even if you weren’t to touch that credit card again, here is an example of what would happen if you continued to pay your minimum payment on a $5,000 balance, set at an interest rate of $19.99%
Paying Only Minimum Payment
Your Balance: $5,000
Annual Interest rate: 19.99% (Some credit cards are even higher. Department store cards are often 25% or greater).
Your Minimum Payment: 3% of balance (3% is a common amount usually set by credit card company. Your credit card may vary).
Total Time to Eliminate Your Balance: 21 years
Total Interest Paid on Top of Original Amount Owed: $5,983
Now, lets look at what happens if you were to pay the minimum plus an extra $100 a month
Your Balance: $5,000
Annual Interest Rate: 19.99% (Some credit cards are even higher. Department store cards are often 25% or greater).
Your Minimum Payment: 3% of balance + $100
Total Time To Eliminate Your Balance: 3 years and 2 months
Total Interest Paid on Top of Original Amount Owed: $1,491
By law, in Canada, credit card companies are now required to include a similar chart on each statement. This can be a great tool to determine how much your debt is really costing you, and how putting a bit more down each month can make a significant difference in the how much you owe and how long you will be paying.
Sometimes, to break the Groundhog Day debt cycle, it can be matter of financial planning, which includes creating a budget, and finding where you can decrease expenditures and perhaps have money left over to save. The better you are able to budget, the more you will have to decrease your debt owing and get back on the path to saving money and building a stronger financial future. There are plenty of budgeting tools available online to give you a hand.
But what happens if even with budgeting, you simply cannot get out of the endless debt cycle? More money is going out than is coming in, or you are at a point where you are stagnant, where you are on the interest treadmill, unable to save any money for your future?
In these situations, you could benefit from the assistance of a professional debt restructuring service like the Licensed Insolvency Trustees at Bromwich+Smith. Our team of debt relief specialists will go over all details of your financial situation with you and find the best solution for your specific situation, breaking you free from your debt Groundhog Day.
No matter how difficult or complicated your financial situation may seem, you can rest assured there are options available to get you out of the perpetual cycle of debt. Contact Bromwich+Smith today for your free consultation. Our Debt Relief Specialists are available by phone at 1-855-884-9243 or you can request a call back via our contact us page.