Slaves to Credit

Proverbs 22:7

Biblically speaking, one should avoid borrowing.  Proverbs 22:7 says the borrower is slave to the lender.  If that isn’t the truth, I’m not sure what is.  According to USA Today the average American carries $6,354 in credit card debt.  CreditCards.com notes the average card interest rate recently hit 17.69%.  

So what does this mean as a Dividend Farmer?  It can mean losing Seed Money and a future crop that may have grown from it. 

If a family carrying the average credit card balance at the mean (pun intended) interest rate plans to pay it off in 5 years, assuming they don’t continue adding to the debt, they’ll pay $160.28 per month.

That payment doesn’t sound too bad.  However, over the course of 60 months they’ll repay the $5,000 credit card loan plus another $3,262 in interest!  That’s $8,262 they gave a card issuer and don’t have for Dividend Farming purposes.

Hypothetically speaking, had that family instead been able to save $5,000 rather than spending it through a credit card, they would be well ahead.  In addition, investing their $160 monthly credit card payment in a dividend stock with a 4% yield, compounding quarterly, improves the position further.  They would have finished with $9,624 at the end of the period – nearly double what they spent on the credit card in the first place.

More importantly, the difference between paying the credit card company $8,262 dollars over 5 years instead of paying themselves $9,624 within the same time frame represents a swing of $17,886.  In other words, spending on the credit card left our family nearly $18,000 behind where they might have been had they instead chosen to save and invest.

When people are behind the savings curve to this extent they truly are slaves to lenders.  It’s challenging to save for an emergency, let alone the future, when the math against a borrower is crystal clear.  

I understand emergencies and unexpected expenses compel folks to accept credit card debt.  However, mocha lattes and similar frills don’t fit the emergency category, helping people dig farther into debt gulch.  This is when they violate the Proverb above and become a slave to the lender.

Dave Ramsey Tip

The greater the debt, the stronger the shackles.  If you’re financially indebted to another, your freedom is compromised.  If so, maybe it’s time to find another path.  Check out Dave Ramsey’s Financial Piece University for thoughts on a new course.  I've taken it and found it valuable.  It can be baby steps from there toward your own Dividend Farm.

Thoughts expressed here are those of the author, who is not a financial professional.  These opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.