Every drop counts when building residual income. Your finances are like a bucket with water coming in as your income and water leaking out as expenses. This is an exercise in examining the holes in your bucket.

While monthly interest costs is a simple calculation it is nice to know what your debt is costing each month. Lately I’ve been obsessed with automatic monthly income or expenses. Trying to cut back on every monthly expense and trying to increase monthly residual income is a challenge. What if I paid an extra $1,000 on my credit card? How much would that increase my net monthly income?

While $10 a month doesn’t sound like much savings it all adds up quick. If you have $10,000 in credit card debt you’d be paying $100 a month just in interest fees. Fighting to get back $10 a month in residual income is well worth it.

Cost of $1,000 debt every month

5% APR costs $4.17 per month
6% APR costs $5.00 per month
7% APR costs $5.83 per month
8% APR costs $6.67 per month
9% APR costs $7.50 per month
10% APR costs $8.33 per month
11% APR costs $9.17 per month
12% APR costs $10.00 per month
13% APR costs $10.83 per month
14% APR costs $11.67 per month
15% APR costs $12.50 per month
16% APR costs $13.33 per month
17% APR costs $14.17 per month
18% APR costs $15.00 per month
19% APR costs $15.83 per month
20% APR costs $16.67 per month
21% APR costs $17.50 per month
22% APR costs $18.33 per month

Debt = Risk
The economy for the last 20 years has grown almost entirely on debt. Real wages haven’t increased but consumption has double and tippled. We live in bigger homes, drive newer cars, and have more expensive technology than our parents did. The recent boom in housing has dumped billions of dollars of new home equity and home sales money into the economy. This money was created through new loans and new debt. Consumers have maxed out there credit cards, home equity loans, and are struggling to make ends meet as gas and food prices increase.

Debt is marketed vigorously to young, old, and everyone in between. Debt is sold as the end-all solution for any of life’s problems. Sometimes debt is sold as a tool to ‘leverage’ other people’s money to your own ends. This very popular in the get-rich-quick real estate programs. While there is power in leveraging it can work in the opposite direction, and frequently does. Remember the Great Depression? It was made many times worse by the use of borrowing on margin accounts. Margin accounts are used to borrow from a broker to buy stock. When the market went up everybody made money. When the market started to slide downward everyone panicked. The margin accounts left many people over-leveraged and debt quickly turned against them. The longterm results will disprove the theory of leveraging and using excess debt to build wealth.

No matter which way you slice it debt equals risk. Companies and individuals with a lot of debt are not considered financially healthy. Investors and lenders won’t tolerate the high-risk lifestyle and penalize those companies and individuals with very high lending rates. Debt is a guaranteed loser and those that claim debt as a valuable tool can look at the longterm record of all the failed companies and individuals as proof. Longterm prosperity can’t be built out of excessive debt.

Surely, some debt can be good. It wouldn’t be right to say debt is good, but justified. Debt is justified when these criteria are met: It can consistently make more than the cost of debt. The asset doesn’t depreciate or stagnate. The asset appreciates with time.

(positive growth of asset) – (cost of interest on debt) = Asset(+) or a Liability(-)

Most justified debt include education and homes. Debts that are not justified are: consumer debt, automobiles, and vacations. Those things aren’t bad per say but should be bought with cash, not debt.