by Timothy Cummuta

Created on: August 10, 2009

"Where is all my money going?" In order to build a plan for our future, we must find the many leaks in our financial ship and patch them all. As one of my very successful clients put it for me, she was 85 and owned several businesses and pieces of real estate, "I don't know any other way to make money then by saving money." That is a very true and profound statement.

The first step in making money and keeping it is to stop losing what you already have.

The debt to wealth equation is a simple math tool I developed for use that states how much your debt is worth in accumulated dollars if it were invested instead of paying credit down. This is usually called the opportunity cost. Whenever you choose one place to use your money, there is an opportunity cost associated with using it in an alternative minimum savings or investment plan. If we consider using a 3-month Treasury bill currently returning 3% as a possible opportunity alternative, and our interest rate for the credit is 8%, then our opportunity cost using the debt-to-wealth equations is 3 + 8 or 11%. We are sacrificing gaining 3% while also paying out an additional 8% in interest.

Let's look at an example of the debt-to-wealth equation in action. There can be many variables to consider so we will just utilize one scenario to put the point across. We will start with a $1,000 debt for simplicity. We will use an average debt interest rate of 10%, even though this is probably low in most cases. We want to be conservative here so as not to be over-the-top with our example. Let's further assume we can get a modest interest rate of 5% on the money instead if it were saved or invested.

In this case if we were to invest the money at just 5% for five years instead of having to pay credit, we would have roughly $1,275. At 10% interest on the debt we would pay approximately $1,275 to pay the $1,000 off in five years. If we saved the money we would have $1,275 instead of losing $1,275 that gives me a swing of $2,550. Although my opportunity cost seems low at 5 + 10 or 15%, the amount of cash I would gain is significant. Dividing $2,550 by my original $1,000 gives me a debt to wealth swing of 255%. I would have 255% more money if I did not spend the $1,000 on debt and could invest that money instead at only 5%. That is the debt to wealth equation. Now multiply these numbers by the amount of real debt you may have. Do not exclude anything, including your home if you own one or any automobiles. These are all

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