The Hidden Cost of Spending While In Debt

Courtney and I are big fans of what we call “mental filters”. These are simple little tips and tricks that we can use to increase our financial awareness. (J.D. likes to call these tips and tricks money hacks.)

For example, I’ve talked before about how we taped a picture of our daughter to our credit cards while we were paying down our debt. Many people I know use some sort of 30-day rule to curb their impulse desires, especially those which contribute to clutter.

Both of these techniques are examples of deliberately installing a barrier between yourself and a routine action. Many of us do this in various aspects of our lives to help raise consciousness, but this technique can be particularly powerful in our finances.

Today, I want to share a mental filter (or money hack, if you prefer) that Courtney and I used while passionately attacking our debt. But first, let me share a quick story:

The $6.25 foot-long
Once upon a time, I was approached by a close friend with a question about his credit card statement. He knew one of his rates was out of control, but didn’t know how to go about asking for a reduction (or even where to find the details on his statement).

Always the good friend, I offered to look over the statement for him. As my eyes drifted down the page I saw a frightening sight: 24.99% APR!

Yikes! The amazing thing was that he’d been paying consistently and timely for well over 18 months at this rate! He’d been paying the minimum payment, and occasionally making a small charge here and there. Because the interest was 90% of his minimum payment, his balance was simply treading water and at this rate he was never going to get out of debt.

Trying to help him brainstorm options (and trying to light a little fire under his butt), I turned to him and asked, “Do you realize that, until we get this fixed, every purchase you make is actually costing you 25% more?

My friend thought for a second and replied, “I guess you mean because I could use the money to pay down the card. I never really thought of it that way.”

To be completely honest, neither had I before that very moment. I pondered the concept for a second and then shoved it into the back of my brain as we piled in the car to search out something to eat. As we drove through town we came upon the very difficult choice every person has to make at some point in their life: Subway or Taco Bell?

My friend paused and then said, “I’m definitely going to Subway. You just can’t beat the $5 dollar foot-longs!”

I tried to fight the urge, but I couldn’t resist: “More like a $6.25 Foot-loooooooooong!”

Realizing I’d just sucker-punched him, my friend snapped back, “You know, maybe you should change the name of your blog to Man vs. Fun!” Ouch!

The hidden cost of being in debt…
While my friend ended up getting the best of me in the story, I did revisit my side of the conversation a couple of days later. At the time, our highest interest rate on a debt was about 14.5%.

I realized that mentally tacking on an additional 15% (or so) to my purchases might help ensure that I only spent on items that were specifically budgeted for or that were absolutely essential.

Note: I realized then and as now that the math is a little bit fuzzy. Only in the case where the extra spending took exactly a year to pay off would neglecting to pay down a 15% interest rate yield exactly a 15% premium. Nevertheless, it’s a rough and convenient rule of thumb.


From that moment on, I tried to think of any non-essential expense as if it was marked up by a 15% premium.

You know what? It worked. It didn’t really affect the small purchases as much — I wasn’t fazed by an additional $0.25 or $0.50 tacked on — but when it came to purchases of $50, $100, or $150, I started to feel the effects.

Psychologically, nobody likes to pay a premium. Even if it’s still a fantastic deal, none of us enjoy paying what we think is a 15% premium.

The only downside I can see to this mental filter is if it were taken to an extreme. There’s no need (and certainly no benefit) in examining every single purchase through a tiny microscope. For us, we never felt pressured on expenses that were truly needs. I didn’t feel pinched to buy a loaf of bread because I had 15% credit-card debt.

This wasn’t necessarily a life-changing tactic that we employed, but a combination of these small mental filters did play a huge role in our financial turnaround. Each one helped raise our overall awareness!

J.D.’s note: I remain a huge fan of money hacks. Money hacks are identical to what Baker is calling a money filter; they’re little tricks you can use to make yourself spend less and save more. There are tons of money hacks in the GRS archives.

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There are 51 comments to "The Hidden Cost of Spending While In Debt".

  1. Mrs. Money says 10 March 2010 at 05:33

    It’s funny how your way of thinking shifts after you’ve seen what debt costs you. A $6.25 footlong does not sound like a good thing to me!

  2. Sam says 10 March 2010 at 05:38

    We increased our mental awareness by ditching the credit cards for day to day spending and using only debit and limiting the amount of money, via our allowance system, in our checking accounts tied to debit.

    When you have $500 for a two week period, you HAVE to think about each debit transaction or you are going to run out of money way before the two weeks is up.

    Best thing we did was switch to debit and limit available funds to spend via debit. It was painful at first but it really helped us first pay off all our non-mortgage debt in 2007 and save $50,000 in 2008 and 2009.

  3. Brian says 10 March 2010 at 05:44

    Pedantic nitpick:

    “I wasn’t *phased* by an additional $0.25 or $0.50 tacked on”
    should be
    “I wasn’t *fazed* by an additional $0.25 or $0.50 tacked on”

    Phased is a word in other contexts, so spell-checker won’t catch it.

  4. Adam says 10 March 2010 at 05:51

    I wrote the phrase “think about it idiot” on my credit card and it worked like a charm. Our credit card debt is gone!

  5. Joseph | kickdebtoff says 10 March 2010 at 05:53

    The ablility to seperate the needs and wants is one major requrement for any ‘get out of debt’ plan; and the mental filters come very handy.

  6. Justin says 10 March 2010 at 06:05

    I like the mental 15% premium idea. I mean, there are times when 10% off an item at a store makes it a pretty good deal. Similarly, as a general rule, I avoid stores where I know I’ll pay an extra 5%-10%(except for some locally-owned specialty shops where I feel the 10% premium is worth it). With credit cards, EVERY purchase costs a little more ultimately if you don’t pay the balance in full.

  7. Asa says 10 March 2010 at 06:52

    Funny, I read a lot of political blogs and saw the headline and assumed the article was about the government. The US government could definitely use this very timely (and good) advice.

  8. Kevin says 10 March 2010 at 06:55

    After I read “Your Money or Your Life,” I started doing the same thing, but with taxes. A $500 Blu-Ray player became a $885 Blu-Ray player, thusly:

    $500 plus PST (8%) plus GST (7% at the time) meant that the $500 Blu-Ray would actually cost me $575. However, since my marginal tax rate (federal + provincial) was 35%, I’d have to earn $885 in order to be left with enough to buy that $500 Blu-Ray player.

    Applying this thinking to a new car purchase just blew my mind. A car advertised for $18,000 is really $20,000 after you add enough options to make it driveable. Then they tack on all the extra fees and taxes, like the dealer admin fee, delivery fee, non-standard paint colour fee, rustproofing, Scotchguarding, fuel surcharge, air conditioning tax, and whatever else. Then you apply the taxes. Then, if you finance it, you apply loan interest. It’s incredible how an $18,000 car can actually easily cost you $30,000. That’s an extra $12,000! Now that’s a “hidden cost.”

  9. Adrian says 10 March 2010 at 06:55

    I think another excellent method to use is projecting the cost of items in “paid hours of work (net)” as well as “after-tax costs.”

    Here in Ontario, Canada, our tax rate is 13% on virtually ALL items, therefore, before making almost any purchase, I think about how much this item is costing me in “net work dollars” as well as how much the item will completely cost — taxes and interest taken into account.

    That system pretty much turns me off from most unecessary purchases, as well as helps me in proritizing when it comes to my “fun money” what I REALLY want in life.

  10. Adrian says 10 March 2010 at 06:56

    @ #7 Kevin << Great Minds Think Alike 😉

  11. josh says 10 March 2010 at 07:05

    I think it would be more interesting to see the true costs. Most people will not pay off their balances in one year. Look to do the calculation stating how much the sandwich costs after 1, 2, 3 ,5, 10, or the 20 year time period the minimum payments have you paying the card off. Take some depreciation for the the small amount of minimum monthly payment that will go toward that sandwich if you have say a $5000 balance and I would be surprised if the sandwich was less than $25.

  12. Craig/FFB says 10 March 2010 at 07:15

    A great place to apply this is at retail stores that offer say, 20% off if you open a credit card then charge you 29% in interest if you don’t pay it off.

  13. Adam Baker says 10 March 2010 at 07:18

    Fantastic idea Kevin and Adrian.

    I’ve calculated our real hourly wage in several situations, but I never broke it all the way down to the point of sale like that.

    That one may lend itself even more to being extreme (with such a large premium), but it would be *awesome* a nipping larger purchases in the butt!

  14. J.D. says 10 March 2010 at 07:25

    Thanks, Brian (#3). I should have caught that in editing…

  15. Full Disclosure says 10 March 2010 at 07:34

    ‘Money Hacks’ great term JD!

    My own personal Money Hack is that I think about how much i cost a company to make a particular product and than figure in the retail mark-up on the product, most of the times we’re already paying 15-20% over costs, factor in a credit card interest rate on top of that in in some cases we are paying 50% over costs!

    At that cost I don’t need the product that bad. I’ll just wait and shop for a better deal and save up the cash.

    Buy discount and save the difference!

    Great blog post, thanks for sharing.

  16. Adam says 10 March 2010 at 07:50

    Agreed with (11). Your assumption of a $6.25 sandwich is only applicable if he pays off debt in a year. Otherwise, that interest is accumulating for more than a year and could easily be a $8-12 sandwich.

    Then again, inflation…

  17. Lakita says 10 March 2010 at 07:53

    I put about 100 rubber bands around my credit card in all directions. I was bored….but you know what….I stopped carrying it and have not used it.

    Also, since I’ve successfully established savings and emergency funds….I keep them at a separate bank so the money is not easily accessible.

    Another hack I employ is not saving purchasing information online…not only for security but Amazon and Jimmy John’s make it too easy for me to buy something on a whim. If I want the item I have to manually type in my information each time instead of the random impulse buy.

  18. Dustin | Engaged Marriage says 10 March 2010 at 08:02

    I really like to think of large or sustained purchases in terms of opportunity costs. For example, I realized a few weeks back just how overboard I had gotten with my habit of eating out over lunch.

    I wrote a post describing my “oh crap” moment. When I looked at the average of $55 per week I was spending at restaurants (over *lunch*), I realized that could easily represent $350,000 of Roth IRA retirement savings in 30 years. Expensive cheeseburgers!

  19. Suzanne says 10 March 2010 at 08:37

    I look at those little amounts spent on food in a slightly different way. I have eliminated my takeout lunches – and most takeout dinners – by instituting the rule: Never pay to eat alone. If I’m going to pay for a meal from a restaurant then it must be a social occasion. I still get to eat good food, and have special occasions with friends, but those aren’t more than a couple of meals a week, so I’m saving a lot of money!

  20. Adam says 10 March 2010 at 08:50

    With my 2% cash back and the fact that I have zero debt, does that mean I can start discounting the prices of things too? 😉 Also the time value of money for the interest free grace period. This could go both ways!

    I think its a bit obnoxious to point out to your friend that a $5 lunch (cheap) is something he should be worried about because of his credit card debt. Its the “Latte Factor” school of thought and I hate that. If he decides to go on some all inclusive vacation while carrying the debt, then YES by all means point out that the money would be much better spent on credit card debt. Eating at home isn’t going to cost much less than $5/meal (especially not here in Canada, where grocery store prices have gone up much faster than fast food prices), so its really the difference in price between $5 and what he could make at home for lunch ($3).

    Hardly worth being a dink over.

  21. ctreit says 10 March 2010 at 09:03

    I’d like to think that almost everybody who controls his or her spending well uses one or more of these “money hacks.” My wife and I use a money hack that could also be called a “spending hack”. We record our expenses and neither one of us wants to get caught by the other one. Who wants to face up to spending frivolously? We also use our credit card quite a bit for the same reason. We see on the credit card statement who spent how much money on what. Yikes. I for one am more careful with my spending knowing that my wife is my watchdog.

  22. Crystal says 10 March 2010 at 09:33

    I employ the same trick Adam uses (picture taped to the card) but of a house since that is our goal. I also like to print my favorite posts from GRS and re-read them right before I walk into a keeps me on track.

    I also read somewhere (maybe here?) that another trick is to change all of your passwords to the goal you are working to. That has had a great effect on me.

    Love the article, as always

  23. Shel says 10 March 2010 at 10:13

    I just don’t buy anything with credit cards- if I don’t have the money in my bank account I won’t buy it. No premiums involved 😉

  24. Ryo says 10 March 2010 at 10:35

    I think something’s wrong in the first place when people are buying stuff just because of money.

    I’ve found that when I am TRULY honest with what I need and what I want money is of little concern. It seems to always come out cheaper in the end because the desires end there and are completely satisfying because it’s not something you “settled” for.

    But I guess you really have to know yourself well to pull it off…

    It sort of goes back to the whole balanced money thing…. I mean, what’s the point in me having money if when I really want a footlong I can’t get one?

    Definitely not comparing it to the OP’s situation though…. debt easily forces people to change their normal behavior and priorities.

  25. Mike Ramsey says 10 March 2010 at 11:00

    I’m a big fan of life hacks and other productivity tips, so these kind of “tricks” really make sense for me.

    It’s amazing how you can trick your brain into doing something based on what you *know* isn’t completely accurate but sounds like it would produce a bad outcome.

    Whatever gets you to the end goal – being debt free – is good, in my opinion.

  26. Sam says 10 March 2010 at 11:09

    And by ditch our credit cards, we cut them up and threw them away.

  27. Budgeting in the Fun Stuff says 10 March 2010 at 11:18

    I like this idea! We don’t have credit card debt, but we have a mortgage (5.375%) and a car loan (4.1%)…I’m going to start thinking that all our luxury expenses actually cost 10% more and see if that helps. Thanks!

  28. Stella says 10 March 2010 at 11:33

    This is exactly why I pay my credit card balance in full each month: why go to all the trouble of bargain hunting only to have the savings obliterated by interest?

  29. K.C. says 10 March 2010 at 12:15

    A long term savings goal helped me refrain from impulse spending. I measured all significant purchases against the goal: Did it help me achieve my goal or was it an obstruction? Of course, I had to be honest about this appraisal.

    Otherwise, I budget for everyday purchases. The budget process is where I prioritize my spending. If there is money in the budget, then I don’t have a problem spending the money. I still want to get a good value, however. And I do not carry debt.

    Paying cash for little things like coffee or soft drinks or a newspaper naturally limits my spending as I don’t like an empty wallet.

  30. ebyt says 10 March 2010 at 12:40

    This is why being in debt is so terrible. Everything you buy is technically going to debt. Even if you buy the new shirt and pay cash, you’re taking that much longer to pay the credit card debt. This is why I am so desperate to finally get out of debt myself. I’m coming close, but it sucks to know that for several years now I have really paid extra on EVERYTHING. Low interest credit card or not, it’s still interest.

    And to add to that… sometimes I am horrified when I wonder if I am still paying for that McDonald’s meal I know I put on my credit card back in college a few years ago. *shudder*

  31. Laura says 10 March 2010 at 12:46

    I don’t think the author was wrong to say what he did. He was truly trying to help. And if you want to think of buying the item as 25% more, then you have to think of ALL items that way. Then when you figure out that the real price is $6.25, you can decide you don’t care and buy it. But that’s the point. You need to “translate” the cost of all items first and re-weigh your decision after the translation. The whole point is to make you more aware of your purchases and to see if you really want the item. It should be second nature.

    I use money hacks all the time; but for the little exercises I go through (like translating the money to how many hours I have to work in order to get the item), I call these spending barriers because they provide a potential barrier to spending.

    Fabulous article! Wish there were more money hacks articles. thanks!

  32. K at Greenshield says 10 March 2010 at 12:56

    The only problem is that you can do the same thing in reverse …. come up with little games to convince yourself that the money you are spending a safe amount of money. That can be a problem for people in debt.

  33. Paul in cAshburn says 10 March 2010 at 13:35

    I can top your “man vs. fun” story, when I laid this insight on my daughter-in-law:

    While we enjoyed a beer one sunny afternoon in Denver, she opined that $4 for a glass of beer is a lot of money. Without missing a beat, I said “it’s more like $16”. In response to her quizzical look, I explained that if the next time she passed a bar she decided NOT to have the beer, and instead put the $4 towards retirement, over the next 36 years at 4% (based on the rule of 72) that today’s $4 would have doubled twice to around $16. She stared at me for a few moments, and with an enlightened smile said “you are such a fun sponge… you’ve ruined happy hours for me”. I smiled back, but I’ll always wonder how much of an impact teachable moments like that can make in a person’s life. 🙂

  34. Delphine says 10 March 2010 at 14:11

    Or, you can just not put anything on your credit card that you can’t pay in full when it’s due.

    That’s what I do.

    When I put things on my credit card, I see it as a 1% discount.

  35. Meg says 10 March 2010 at 14:42

    DH and I also record our expenses. It’s like a diet journal – when you start realizing “gee, I’m spending a LOT on food/clothing/entertainment,” you start to cut back.

  36. RJ Weiss says 10 March 2010 at 14:59

    I like it.

    I think we all have the friend who is buying things on a credit card w/ a high interest rate and bragging about the deal he just got. Unfortunately, he doesn’t understand the true costs.

    BTW…the $6.25 foot long is pretty generous. That’s if he pays it off in only one year.

  37. Tracy says 10 March 2010 at 15:09

    I really like the idea of taping a picture or some significant text to your credit card. I’ve heard of variations of this before, but they involved simply imagining that the money you are not spending is being “put aside” for a certain future expenditure that is desired. That rarely seemed to come to mind in a heat of the money spending moment. Having something actually on the card is a much more direct reminder that is much harder to overlook.

  38. Brenda says 10 March 2010 at 15:19

    @ #20 – Adam

    That’s the exact sort of mentality that probably got his friend into debt in the first place. “Oh, it’s just a cheap little thing, I’ll put it on the card. It’s not much more than eating at home”.

    Guess what. All those “cheap” things add up! His friend is in debt right now, so the point is that $5.00 meal is actually $6.25. If he’s doing that each day at work, that’s 20 meals a month. If he could eat home for $3.00, that’s $65.00 a month he COULD be putting towards paying down his debt. That’s fairly substantial, and all it takes is preparing your lunch at home. I’d say it’s worth it to get out of debt.

  39. Shahar says 10 March 2010 at 15:47

    Why would anyone pay for something they cannot afford or don’t have the money for? It _might_ make sense for a house or a car, but for everything else, geez, make sure you have money first!
    I would go on a “financial diet” and/or take a loan from the bank to cover any outstanding CC debt at 25(!!!)%. My credit union offers “life-saver” loans at 5.5%. Less convenient? Maybe marginally so. You actually have to fill a form or two. But guess how much you save on $5000 a year… Eliminate that credit card debt (but not necessarily the credit card)!

  40. Dwight Kellams says 10 March 2010 at 15:50

    If the cardholder is only paying the minimum it will take much longer than a year to retire the balance. Therefore, IMHO, 25% actually understates rather than overstates the premium that the credit card balance is costing him.

    It will be interesting to see how consumers react to the new credit card disclosure requirements. When consumers learn how long it does take to retire a credit card balance when only the minimum payment is made, I think that most consumers will change their behavior.

    We have always paid our credit card on a monthly basis. The phenomena that I noticed was that with each passing month, the monthly charges increased. Before the monthly charges got to a balance that could not be paid off monthly, I would declare a credit card free month. Once the credit card free month was over, we would resume charging at much lower levels. The cycle usually repeated itself every 6 or 8 months for us.

  41. David/Yourfinances101 says 10 March 2010 at 16:25

    Unless you’re living in denial, which I guess most people are that live in debt, these costs aren’t even hidden, are they??

    Its right there on your credit card statement.

    The sooner people realize the costs involved in living in debt, the sooner it will motivate them to do something about it.

    At least, that’s exactly what happened with me.

  42. Frank says 10 March 2010 at 16:28

    Since I started using Mint to track my spending my eyes were opened. Especially when they send you notifications that your credit card just charged you a finance charge + a purchase charge. That $15 dinner all of a sudden got more expensive. I now only do debit and eat out a whole lot less, it’s healthier to eat in and fix your meals anyway. Now that the card companies are forced to disclose how long it will take you to pay off the balance I imagine a lot of paying off of debt will take place.

  43. Samantha says 10 March 2010 at 16:54

    I think that if the friend could have it explained to him that every single purchase is costing him 25% more, and then *immediately after* decide to go charge lunch on his credit card, he still doesn’t quite get it.

  44. Nicole says 10 March 2010 at 17:10

    #43 I dunno… If you’re hungry $6.25 isn’t too bad for lunch.

  45. Sara says 10 March 2010 at 18:01

    This is a great way of thinking about the cost of buying things on credit. I have tried to explain to a few people what a huge waste of money credit card interest is, but I never really though about using such a simple rule of thumb. It’s true that the interest would add more or less to the cost depending on how long it takes to pay off the purchase, but the general idea is right.

  46. The Chinook Guy says 10 March 2010 at 18:09


    I really like this idea. Personally, this is a very effective way of discouraging on buying things, on want alone. Thinking that there is always a premium on top of the display price makes me think twice of buying that item (an exact opposite if you’re looking at item which says at reduced price).

    Thanks for sharing this valuable money hack (as JD Roth calls it).

  47. javier | says 11 March 2010 at 05:03

    In my opinion if you apply the two following rules you’ll never find yourself in debt:

    – never spend more than you have. (No exception made, neither when you like a lot X and will pay next month)

    – save at least 20% of your income.

    Take care!

  48. Mark says 11 March 2010 at 09:10

    I have a filter too. It’s called, “If I don’t have the money, I don’t buy it.”

    Why would you even consider taking out a loan (which is what a credit card purchase is) for a sandwich?

    Use a debit card if you don’t have cash in hand!

  49. Adam says 12 March 2010 at 09:15

    You’re forgetting that the 24.99% is an ANNUAL intrest rate. So you have to divide by 12, since you make MONTHLY payments. That’s comes out to about 2% monthly.

    Even so, 25% APR is still ridiculous. The only reason I still use a credit card is because I get a 7.99% fixed APR from my employer.

  50. Matt says 12 March 2010 at 13:23

    This filter is great. It’s a terrible feeling when you realize you’ve spent even 5% too much on something.

    One trick I’ve used is thinking of the interest we pay each month to the credit cards as if they stole a date night between my wife and I. That never fails to anger me.

  51. Becky Vesey says 17 March 2010 at 21:00

    @Mark (#48)

    It’s pretty simple. I value my time. Finding the time to make it to an ATM during daylight hours so I can carry around cash is more annoying than using a card that is either a) the one I pay off every month, or b) the check card that comes straight out of my checking account.

    But then, I am currently free of debt (other than the remains of my student loan, currently in deferment while I’m taking classes at a local community college – which worked out to be cheaper than paying down the loan, even with paying down the interest), so I may be a very bad data point

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