Question Answered about Interest- updated

A few days back I asked this question:

If you take the total gross income for an average city in the US (adding up the gross income of all the residents), what percent of that goes towards interest? Any guesses?

I suppose the question could stand for a single household and be just as meaningful.

I got one response:

By "going towards interest" did you mean making payments on interest-laden things (credit cards, loans, etc...)? If so, I would guess 35%. With a house and cars, my parents pay 22% of their income towards interest but they don't have particularly expensive cars and they don't keep credit cards so the figure is probably under the average.

This sounds about right to me. I'd say somewhere in the 20-40% range.

As a side note: if you have a comment for the blog you need to email me directly at The anonymous comments left through Blogger were getting a little strange for my taste.

Now, if I may make a related comment.

Banks engage in a (legal) practice called fractional reserve banking. This means that when you put $100 on deposit, the bank can loan out something like $1000 and collect interest on it.

Let me put it another way. If you get a loan for your home (which we are told you must get because there is no other way to obtain shelter) for $150,000 you will probably pay back something like $100,000 worth of interest on top of paying for your home for a grand total of $250,000.

You will pay this interest because a customer of the bank had $15,000 on deposit. Possibly even you yourself.

Let's dig a little deeper. How long will it take you to produce the $100,000 worth of interest? I'd say two or three years. Doing nothing except working to pay interest.

I am openly inviting any reader to refine my view on this matter. Do I have my facts straight?

Another Comment from a Reader
I just read your blog on the interest payments... I was stuck in that trap years ago and it was not fun. It felt like half of the money I spent was only covering interest... We now no longer use credit cards, take out loans or worry about interest. We pay for things as we go... We are currently building a house and estimate it is going to take 4-5 years to complete, but when it is done we will have no payments to make on it, we could have taken a loan an had it build in under a year, but that loan would take us 20+ years to pay of, but when doing it up front and in full, it is only going to take a quarter of that time (or less).
Something sad I noticed, I went to open house at my son's school... he is 5 years old, and was showing me the toys he plays with in school. They had a pretend store front, with a register and veggies and cans of food, they are encouraged to "role play" the rolls of the buyer and the cashier, etc... except unlike when I was a kid in school, they no longer use play money. The kids all have pretend credit cards, and everything they purchase is charged to credit. They are teaching the kids about borrowing money and using credit cards to make purchases.

It now explains why several months back, I had my son in Wal-Mart, and he wanted to get a lego set. I usually allow him to pick out something each time we go, since we only take the trip into town once a month or so... he picked out a $129 lego set, and I told him he had to get something smaller because I didn't have that much money on me, that would have to be a Birthday or Christmas gift... his reply was "it's ok Daddy, just use your credit card so you don't have to spend any money"...

You think things are bad now, wait until our kids are in their 30's...



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