How Debt Holds You Back

Nearly everybody has debt of some sort, whether it’s student loans, credit cards, car payments, or a mortgage, it’s debt and it needs to be dealt with in one way or another. While debt can be a useful tool in the short term, it can be quite crippling to your long term prospects for retiring.  While different debts can be classified by how they are used, the better way is to classify them based on their interest rates, and classify the interest rates into several categories:

  • Toxic Debt – Any debt over 10% should be in this category.  This generally will include some car loans, private student loans, and credit cards.
  • Borderline Debt – Debt between 5 and 10%. You can expect to see federal student loans,  car loans, a few credit cards, some mortgages and personal loans here.
  • Constructive Debt – debt under 5% will fall in this category. Primarily you’ll see mortgages and car loans here.
  • Zero-interest debt – Self Explanatory. These usually are only temporary rates, however.

So, what do we make of each of these categories? Given the list, it’s pretty easy to take a top-down approach and just pay things according to the category they fall in.  The trick to these is to manage the zero-interest accounts by making the minimum payments, and budgeting for them to be paid off with a lump sum a couple weeks before their interest period ends (to account for any potential problems in processing).

By taking a look at all the statements and interest rates, you can usually also find a second important item: interest paid. Take a good look at the amount of interest you’ve paid each year, and add it all up.  This is the amount of money that can potentially be saved for retirement, once the debt is eliminated. For a more aggressive approach, add up all the monthly payments made in a year, and this can be used as a potential retirement savings. With these two numbers, you can compare them to your take-home pay, and see how quickly you could retire and maintain your current lifestyle by getting out of debt.

Savings Percent

Years to retire after debt elimination














This table provides a very interesting look at the way debt is preventing you from retiring.  By taking a more aggressive approach, and modifying your lifestyle to spend less, you could get out of debt, and then retire seven years later. Even better, that would put you in the driver’s seat with the rest of your life. It would no longer be about working a job you hate, as you’d be free to leave any time. You could decide to start your own business doing what you love, without worrying about whether or not you could pay the bills on your current salary.  You would be free, and that’s something very few people have the ability to say.

Until next time, feast on some debt!