America, we have a problem–a spending problem. With borrowed cash readily accessible with no more than a flick of the wrist, Americans are saddling themselves with debt requiring a lifetime of indentured servitude to pay back. And worse yet, most of us don’t know we’re doing it.
A Lack of Financial Literacy
Part of the problem is a lack of financial literacy. In school, we aren’t taught the math that really counts–how to critically evaluate one’s own finances. Important questions like, “How much do I make?,” and “How much do I spend?” aren’t being asked. We aren’t being taught to track our spending or our net worth to make sure we are making the right financial decisions. It’s no wonder we’re in this mess given the basic lessons needed for financial wellbeing were completely omitted from the curriculum.
Furthermore, we don’t understand our debt. The majority of us don’t understand the complicated financial contracts we sign, how amortization works, or the meaning of APR (Annual Percentage Rate), let alone its implications from an interest accrual perspective.
How Much Interest do we Pay?
For those individuals with debt, it’s important to understand how much of your payment goes toward your principal balance, aka paying down the amount you actually borrowed, vs how much goes toward the interest of the loan, aka the cost of borrowing the money.
Typically the borrower is charged interest each month for the money that was borrowed. Before money is applied to the principal balance, the interest must be paid in full. Remember, the interest isn’t buying you anything, it’s simply the cost of the money you borrowed and goes straight into someone else’s pocket. Poof. Gone forever.
So, how much are we spending on interest alone? Let’s take a look at typical American borrowing habits and it’s financial implications from an interest accrual standpoint.
Common Debt in America & Average Interest Payments:
1) Home Mortgages– $448/yr
According to the consumer reporting agency, Experian, the average American in 2019 owed $202,284 on their home. Taking into account an average 30-year fixed interest rate of 4.37%, an individual will spend $161,235 on interest ALONE over the course of this loan. Breaking things down a bit further, this means that roughly $448 each month is spent on interest! 
2) Car Loans– $73
According to an article by Lending Tree, in 2020 the average American spent $32,480 on a new vehicle and $20,446 for a used vehicle. With an average APR of 8.06% and loan term of 35 months, the average American will spend an extra $2,565 on interest when buying a used car.  That means an additional $73 per month on interest. Imagine if we had calculated the cost of a new car!
3) Student Loans– $103
According to Investopedia, the average borrower in 2018 took out a total of $35,359 for college.  A 2014 study from One Wisconsin Institute showed it takes most people 21 years to pay off their student loan debt in full. [6,7] Given an average interest loan rate of 5.8%, a typical American will spend $25,876 in interest over the duration of this loan.  These means $103 per month on interest!
$35,359 X 21 years * .058 = $103 per month
4) Credit Card Debt– $97
As per a 2019 survey conducted by NerdWallet The average American owes $6849 on their credit card.  Those carrying debt from month to month will spend $1,162 on interest per year.  That’s an additional $97 per month of interest payments.
Interest Drains our Monthly Cash Flow
Now, let’s revisit the math they should have been teaching us to better understand debt and what it’s doing to our monthly cash flow.
What am I Missing out on?
That’s $721 each month and $8,650 a year in interest alone! Let’s think about all the other things we can do with this money if we’re not giving it to creditors.
Funding your kid’s 529 savings plan for college
Maxing out your 401k or traditional IRA
Maxing out your roth IRA or backdoor roth IRA
Contributing to a Health Savings Account
Saving for a much needed family vacation since you’ve been working so hard.
16% of our Salary Goes Toward Interest
According to the U.S. Census Bureau, the median household income for 2018 was $63,179 before taxes. Let’s assume that a family lives in MA and is fortunate enough to contribute $18,500 in retirement contributions. With a standard deduction for a married couple filing jointly of $24,000, this means they are paying a total of $8,828 in state and federal taxes.
With a bit more math we can calculate their take-home-pay to be $54,351 per year before taking into account retirement contributions. Now, when you factor in an annual interest payment of $8,650, we can now see that almost 16% of their take-home-pay is going toward interest alone!
6.5 Hours of Life Energy for your Creditors
Let’s see what this means from a work perspective. If you work 40 hrs per week, this means that 6.5 hours, nearly one full day per week, is needed just to pay the interest! This doesn’t account for $1 dollar toward your principal balance. That’s almost one full day of what author, Vicky Robbins, in her book Your Money or Your Life refers to as “Life Energy.” 
Your time and energy are the most precious assets you have in this world. As a person who battled out of $400,000 in student loan debt, I know how draining it can be to pay back creditors. Although it’s not easy to do and takes more time than you’d like, it is certainly possible. You are capable of radically transforming your life. Take action today by cutting down on your spending and putting this toward your debt. Trust me, your financial freedom will be the best purchase you ever make.
How about you? What are your thoughts on debt? Are there any “good” forms of debt that can help accelerate financial well-being and at what cost?
 Dominguez, J. R., & Robin, V. (2002). Your money or your life. Xin zi ran.