Debt
You will accumulate debt at some point in your life. There is really no way around it. Especially when you consider the two
greatest costs you will face – buying a home and funding your education. Debt if used wisely, can be a great asset.
Positive debt
As mentioned earlier using debt to purchase a home (a mortgage) and fund your education is always recommended. The
reason it is recommended is because both of these expenditures are actually investments.
Negative debt
Negative debt is any debt used to buy short-term consumer goods such as clothing, entertainment, electronics, etc. All of
these items have a very short life span and usually have no value when we decide to sell them. Therefore the money we spend
on them is really money that we can never get back. However, many people end up financing purchases for televisions, stereos
and computers. It would be best to make these purchases in cash.
One important side of debt: Record keeping.
You should have a file created in which you keep careful track of all debt you accumulate along with an idealized payoff plan. If
you do this you will have more control over your debt than the average consumer.
To keep good records you will need to understand simple interest.
Whenever you borrow money, you pay a usage fee. That fee is called interest. The amount of interest you pay is based on three
elements: the amount you borrow, the interest rate, and the length of time the money is borrowed for. The terminology for
these elements is as follows:
Principle: the amount borrowed
Interest Rate: annual percentage of the principle that is charged as a fee
Term: length of time the money is borrowed
When it is time to pay back the money, you are required to pay the principle plus the amount of interest that has accumulated.
This is called simple interest and it is typically used for very short-term borrowing or investments.
The formula is as follows:
Interest = Principle * rate * time (I=Prt)
Example: If you borrow $1000 for five years at an interest rate of 10%, the amount of interest you pay is:
I = Prt
I= $1000*0.10*5
I= $500
The cost of borrowing $1000 for five years at 10% interest is $500.
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Debt Worksheet
Using the Debt article see if you can answer the following questions.
1. The amount charged for the use of borrowed money is called:
a. Principle
b. Term
c. Interest
d. Rate
2. The amount of an original investment is called:
a. Principle
b. Term
c. Interest
d. Rate
3. The formula for Simple Interest is:
a. P=itr
b. I=Prt
c. r=I/Pt
d. Both b and c
4. The three elements used to calculate simple interest are ______________ ,
_________________, ____________________.
5. How much interest does a $10,000 investment earn at 5.6% over 18 years?
6. Susan borrows $8650 to buy a used car and is charged 4.5% interest. If the term of
her borrowing is 5 years, how much interest does she pay in total?
7. What is positive debt?
8. What is negative debt?
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Answers
1. The amount charged for the use of borrowed money is called:
c. Interest
2. The amount of an original investment is called:
a. Principle
3. The formula for Simple Interest is:
d. Both b and c
4. The three elements used to calculate simple interest are Principle
Rate
,
Time
.
,
5. How much interest does a $10,000 investment earn at 5.6% over 18 years? $10,080
6. Susan borrows $8650 to buy a used car and is charged 4.5% interest. If the term of
her borrowing is 5 years, how much interest does she pay in total? $1946.25
7. What is positive debt?
student loans, car, mortgage
8. What is negative debt?
clothes, entertainment, electronics
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