(Ep. 271) Financially Undressing: A Talk About Your Debt

Hey everybody, welcome to another episode of the Student Loan Planner Podcast. I'm Simta Williker and I'm joined today with Megan McGuire. Hello, hello. And today we're going to be talking about how to get debt free in 2024. So debt is obviously not a fun topic. We talk about debt all the time though on the Student Loan Planner Podcast because naturally student loans, right? But let's talk about maybe some other debt that we might see clients have or that might be competing like for our dollars, right? I hear that term a lot with clients like I, you know, I feel like my dollars are competing for different things and I don't know what to prioritize. So I think today we're going to really run down like the different types of debt that could be in the picture, how you should be tackling that type of debt, how to start thinking about prioritizing the debt, quick tips and tricks, you know, as we go along too naturally as we like to nerd out about this stuff, right Sim? Yes, and we're also going to talk about when you should hold on to your debt because sometimes that could make sense too. Cool, well let's jump into I think the showstopper which I've said before on this podcast, but a showstopper type of debt would be credit card debt. Credit card debt is probably the most expensive debt, right, from an interest rate perspective that you could have. I see interest rates between like 20 and 30 percent regularly. So not cheap, not something you want to carry around, right? Well how does this happen in the first place, Megan? How do people end up with so much credit card debt? Yeah, so yeah, let's talk about the, I think the credit card debt is the symptom of a bigger like problem, right? There's a cause to this. So credit card debt I think can happen in a number of ways. I think one way is spending or cash flow where we're spending a lot more than what's actually coming in and it does tend to add up pretty quickly if you're not tracking how much you're spending and you're not tracking how much you're paying back. And so that's one way, cash flow, budgeting. I think another way credit card debt can accumulate would be like an unexpected event happened or like a big purchase happened and you're chipping away at it or you're trying to chip away at it and might be taking some time to chip away. So that's where like emergency savings could have been really helpful. But sometimes, you know, things happen at the most unexpected times and maybe you were working on building up your emergency savings. But I think, you know, we do see clients who have credit card debt in the mix when we're doing a student loan consultation and that's usually like a big priority that we want to maybe shed some light on because it can be so expensive. So for example, oh yeah, go ahead. Well, I was going to say this is a question that comes up a lot too because we work with a lot of folks who do have considerable amounts of credit card debt and maybe don't have even like a $1,000 emergency fund. How do you prioritize that? Like let's say you have somebody who, and we'll get to this too when we talk about student loans, but maybe they were able to lower their student loan payment so now they have some extra cash. Should they be throwing it towards building up something else for an emergency fund or should they just tackle the credit cards? This is always tough because on one hand, like it would be productive to start paying down the debt. On the other hand, if something were to happen and we didn't have emergency funds, then we're not going to have the cash. It's going to go back on a credit card. So I think just like with a lot of things in planning, my take is a lot of times a case-by-case take on this. I think you lean one way though. Isn't that right? You lean more towards like save the cash first. I do tend to be case-by-case as well, but I also kind of have a new expression which is 5,000 is the new 1,000. So there are a lot of like gurus out there that say you need a $1,000 emergency fund. And I'm like, excuse me, grandpa, that's not even going to cover like my car repairs when something happens or maybe it could, but I just, I remember being in my twenties and like I drove, I took the advice, I drank the Kool-Aid, I drove a clunker and it was a money pit. I was not saving money by driving a cheaper vehicle. But yeah, I tend to think it might be a good idea to have some cash buffer because if you start throwing everything towards the debt and then something happens and you don't have cash, it's just going to go right back on your credit card. So I think some, some kind of buffer and you don't have to agree with me. It doesn't have to be 5,000, maybe it's 2,500 or something, whatever makes sense for like your cost of living area. But I don't think it always makes sense to throw everything right at the credit card debt or the debt is right away. There's also, I typically like to, I think what's kind of funny, I think with financial planning is I feel like I ask, like someone will ask me a question and then I'll come back with 10 questions before I answer that question. But it's because I want to see like, what are your feelings about it? How do you see yourself being successful with like this task you're asking me about? So for example, when, when I'm looking at somebody who has credit card debt, but they have the need to also save for, you know, their emergency savings, they're also trying to save up for buying a house, maybe something like that. My question, a lot of times back to them is, well, do you prefer maybe funneling all of our resources, all of our extra savings to one goal first and just kind of checking off each one of those goals as we go along? It might take us longer to get to each one of our goals because you're really funneling everything into one first. Or do you like the strainer approach? So that's what I call it, like a funnel approach where we put all of our resources all to one thing or the strainer approach where maybe we put like 100 bucks extra towards the card. We put $200 towards savings, you know, $500 towards the house savings, you know, whatever the numbers are. But I like to ask that question because I think I always get a different answer. Like, you know, I don't like to assume what people prefer and that could be really telling too, to figure out, okay, well, what's going to help you feel really successful with like trying to do these things that you want to do? Is it going to be like focusing your efforts on this one thing and simplifying, or do you like to kind of spread your money out between goals? But does that make sense how I'm explaining that? It totally makes sense. And my thought, my opinion on that is, it's really you're doing two things, right? When someone says, I want to save for an emergency fund and my house, well, those are two savings goals. And so that's kind of one buck is savings. And then the other one I kind of think of is like debt dollars. And so really, you're kind of just doing two things at the same time, which is you're adding money into savings, and then you're throwing some towards debt. And however you want to think of that savings, well, this portion is for emergency fund and this portion is for house. Well, if you have an emergency, you're going to dip into that fund, regardless of whether or not you were going to use that for a home down payment. So I kind of like to keep it very simple and think of it as maybe you're saving for two things and no more than two things. Yeah. I think in like my mentality, I definitely lean more towards the funnel approach. I think that's how I was when like I was saving for our house purchase, for like funding retirement. Like I had a funnel approach where first I tackled like saving for taxes for that quarter, and then I would tackle throwing money into my Roth IRA, and then I'd throw money into savings for the house. So like that's what that was my like triage. It was like, it made me feel good to like check off each thing as I went along. But other folks like to see each of those goals grow at the same time. That's how I've heard clients describe it before too. Like it might be nice to see, you know, savings grow while the credit card's going down. Like I like to see it all at once, and that's okay too. I think the best approach is the one you do. Yeah, exactly. Whatever gets you in the habit of doing it, that is ultimately what I'm in favor of. So that's why it does tend to be case by case, even though we may have like different ways to approach it. Yeah, exactly. Yeah, that's what I was going to say. All that to say, like it's up to you. It's up to what's going to make you successful. And I think that's what we're, you know, what we enjoy trying to figure out, right? Putting that puzzle piece together for you. Oh yeah, go ahead. Let me talk about how crazy the car market has been the last few years with the pandemic. So I've recently become one of those moms who will like talk about her kids at any chance she can get. So I'll do that now too. So we had our twin boys almost always, maybe one day they're going to be, you know, guests on the show. But yeah, they were born about eight months ago. And so we needed a bigger vehicle and I decided we're going to be a minivan family. And so of course, what did I do? I started shopping the used car market and I was comparing prices and I settled on a Toyota Sienna. So all the moms in the audience are like, yay, of course. And so I looked at the price for a new Toyota Sienna and it was only like four or 5,000 more for new. And with the, you know, comes with all the bells and whistles, like you get a warranty and it's prettier and all this other, all this, you know. And so that's pretty crazy. And so what we've seen happen, though, is that a lot of people who ended up purchasing vehicles during the pandemic are pretty much underwater on their loan, right? So they bought it for one price and they would never be able to sell it for that. And I mean, cars already a depreciating asset as it is, but the prices were so inflated. And so a lot of people have this car loan that they're kind of stuck in. Yeah, stuck in or it's impacting your credit because I've had someone reach out to me to ask, hey, what does this mean on my credit report? And I think the term that they were using was high LTV, loan to value, auto loan, auto loan payment or something like that. It showed up something like that on the credit report and it was negatively affecting their credit score, which was a little unexpected because, you know, credit, there's so many little things that go into credit and one thing can affect other things. And so, for example, he was thinking, well, my payment history is perfect. Like I've never missed a payment. I don't have any credit card debt. Like I don't carry balances. How did my credit score go down? And it was because of that loan to value issue that we're talking about here where that did have an impact on the, interestingly, on how lenders would be looking at this person, this person as a borrower. And thankfully it wasn't anything that they're like looking to use credit right now. That's the other thing I like to say about credit is like, don't get too caught up in your credit score unless you're like trying to make a big purchase where credit is really important. Like if you're monitoring it like daily or monthly and you're not really purchasing anything big in the near future, save yourself the stress. Like maybe just monitor the fact that like nothing new is showing up on your credit report, but credit itself is really just a signal to the lender that you are a good borrower and you pay payments on time. You're responsible with the debt that you have. But yeah, very interesting thing, I guess, that's coming about from that really high used car market environment. And don't forget landlords too, like to look at your credit report sometimes, especially if you're younger and like right out of school. Landlords, jobs even could. Yeah, jobs could. It can affect like the cost of future debt, so like the interest rate on anything that you purchase. Refinancing, if you're going to refinance your student loans. So yeah, credit, credit is important. Don't get me wrong. I just feel like if you're not needing it soon, don't panic too much if there's some, a little bit of variation, because there will be. There's a little bit of variation each month as they happen. It's so that we talk so much about like, you know, being house for not buying too much house, but I feel like cars are the new thing now, like being car before. David, so David's one of our SLP consultants on the team. He is a former mortgage broker. So he came from being a mortgage broker for years and now he's crushing it with the student loan planner game. But he had some interesting things to say about like cars and how car payments are like kind of the death to your loan to value or your available credit when it comes to purchasing a home, which I can understand because if car payments on average are increasing, like if the cost of a car payment or like the amount that you're paying per month is getting higher and higher, I can see that really impacting like your debt to income ratio when it comes into a home purchase. So small little plug, we are having a webinar coming up about purchasing a home. That's going to be, I think, in the end of February. So look out for that in the newsletter if you're interested in that topic. So Megan, let's talk about HELOCs because I think we get so many questions about HELOCs, like should I take one out to pay XYZ debt? What do you think about those? Yeah, since we're on the topic of homes and mortgages, HELOCs. So a HELOC is an option. I think HELOCs used to be used a lot more because the interest was deductible for just about like for anything if you took out a HELOC, which is a home equity line of credit. So it is a line of credit against your home, like an asset that you have and that you live in, literally. But you take a loan or a line of credit out from the home and you can use that money for or you can use that line of credit for whatever. But now there's some tax changes where the deductibility of that interest is only relevant if you use it to improve your home or to build something with your home, renovations, that type of thing. That's the only time it's deductible. The interest cost, I mean, is deductible. Outside of that, it's just a debt. It's just a debt that you're going to be paying back if you use it because you have to pay an interest rate associated with it. So it's an option. Now, it can come up a lot when folks are trying to restructure debt, right? Because I think that's where you see it a lot as well with some of your clients too. HELOCs make me nervous because it's tied to your home. And so depending on your circumstances, whether it's just being diligent or if you're like someone who's prone to that, maybe just because you're not aware, you know, where your spending is going, HELOCs can be very dangerous because it's tied to your home. And so I tend to be very skittish of them and not really recommend them except for like a limited number of circumstances. Yeah. We do get the question sometimes when it comes to like student loans, like should I pay my student loans off with my parents HELOC or a HELOC from this property that I have? And our answer is usually no, because it's trading a non-asset backed debt, which is your student loans, right? They can't, you know, if you're not able to pay on your student loans, there are repercussions, but they can't hijack your brain, right? Like, but a house is different. Give us back your education. Right. Erase, what is that little pen that like men in black have? So, but you know, a mortgage is different or like a HELOC is different. It's tied to a property. And that's like a really aggressive, maybe worst case scenario type of comment about the downside of a HELOC. But if you're not able to pay it back or something really goes awry, like there is an asset that's on the line. So generally it's not good to, you know, mix and mingle those types of debts. So usually our answer is no, but a lot of times we're also, we talked to a lot of people who are going to be going towards loan forgiveness versus paying student loans off. So we don't run into it a whole lot. And I also think too, because you mentioned parents are offering this to their kids, like taking out HELOCs to pay off the debt. But then that makes me think about the parent's financial plan too, because it means they don't have assets to throw towards the student loans because they're leveraging their house too. So if mom and dad are offering that, you know, I would kind of start to be thinking about what's their retirement plan. Another thought too, this actually makes me think of a client I had more recently who, they are a parent plus borrowers, so older generation going into retirement. They had been toying with the idea of doing a HELOC versus the backdoor or sorry, not backdoor, but the double consolidation. They were like, well, instead of doing all this like double consolidation stuff, shouldn't it, wouldn't it just be easier for us to pay it off with our home, like our home equity. And we walked through the numbers. I feel like I'm always, I always like to show numbers and data before really answering a question because I mean, there's no like cookie cutter answer for people either. It's like, it's always, it depends. So let's get down to it. So for them, we just, we walked through it and really, I also asked a lot of questions about like what the concern was, like what, because the numbers did shift towards double consolidation, making more sense. Mathematically, it was cheaper, even if the HELOC had a really low interest rate and they were to pay it back pretty aggressively, like the double consolidation still made sense because she was PSLF eligible and was going to be, she planned on working for a lot, you know, for a long time. So I tried to drill down a little bit more into like the reason for why they were worried about maybe going that, that forgiveness route instead. And it came down to them thinking like, well, what happens if the program goes away? Like what if PSLF goes away? And we get that question a lot, right? What is your party line for that these days? My party line is that the language of PSLF is baked into your promissory note. And so if they just totally, you know, got rid of it, there would be massive lawsuits because they would be in breach of contract. Now the tax-free part of PSLF is not written into your promissory note. So could they try to tax PSLF? Maybe, I haven't heard of that being on the chopping block yet, but PSLF, all they can really try to do is scroll over future borrowers. Yeah, that's exactly what I told them too. I was like that, you know, and historically, if there's ever been changes in the student loan system, there's been some kind of grandfathering effect, right? And historically, we also haven't seen things necessarily get worse, except for maybe most recently, the pay plan being taken away. So pay, P-A-Y-E, that plan closes down in July, but there was a grandfathering effect, right? Like if you're eligible for the plan today, you can still apply for pay and you'll be locked into it. New people just can't enroll in it after that July deadline. So that was a good example that I ran with. I told them, you know, hey, this, things could change. Things did change recently. This was something that was an example of changing for the worse, kind of. And they grandfathered folks in. And I agree with you. I think like there would be like mass hysteria if they were to just rip the carpet out from underneath people for PSLF or for some of these like specific terms that people are banking on. Like they're banking on income-driven repayment, having a forgiveness timeline, and that's written into the promissory note. So if they were to just, you know, throw that out the window, I'd like to joke too that the White House might be on fire if that were the case. I feel like people would be throwing tomatoes and it wouldn't be the White House anymore. So Megan, you said something interesting though. So you were trying to walk this family through the math answer. And I think that's what we tend to do. That's our job. But sometimes the math answer isn't always the right one for folks. And we get this question, you know, people have heard about like debt avalanche versus debt snowball. I feel like for things like student loans, we're talking about massive, massive savings. I do tend always to kind of just lean towards the math answer. But for things like credit cards, when we're thinking about debt payoff, I actually don't think it matters between the math answer or the non-math answer, which they say is the debt snowball. Because oftentimes that really just ends up being a matter of months. That one strategy versus the other ends up being. But what do you think about that? Do you kind of prefer one, you know, avalanche versus snowball? So I, it always depends. It always depends. I know. Punch me for every time I say that. I'm just kidding. But I feel like for folks that have. So I work with a range of people. Folks who are, you know, they've got their debt under control or it's completely paid off. They're really working on accumulating and saving for retirement. And then I work with a lot of people who are at the very beginning of state of the stage of like building their financial plan. And there is debt and there have been maybe past mistakes or life situations that have gotten them into a lot of debt. And so for the folks that have lots of different debt vehicles. So for example, let's say this person has four different credit cards that have a balance that they're working down and they have maybe a care credit card that they're paying down too. And maybe they have a small car loan or a really small private loan. So they have all these like little debts everywhere and they've got monthly payments for each one of these things everywhere. So for those folks, I do tend to, you know, if consolidation is not really an option, which we could talk about here next, but if consolidation of debt is not really an option. I like to try to simplify and get debts knocked out of the way as soon as possible. So going for the lowest balance first, that's not the avalanche approach. It's just the snowball approach, I guess, technically. So that's where we're not really paying attention to the interest rate necessarily, which is not the math answer per se, but we're focusing on just getting the lowest hanging fruit out of the way because we're going to close out that payment, roll that payment into something else. But there are times where I lean more towards the math answer because when I run the numbers on like the avalanche approach compared to the snowball approach, and let's say there's not a lot of debt, it's maybe between a couple cards or a couple pieces of debt with different interest rates, there can be a pretty big difference between the interest cost and maybe the time cost too. So if there's a pretty wide difference there where it could save like a thousand dollars to prioritize the highest interest rate debt first, then I'd say go that way. But this is also all up to the client. So I like to show the numbers, talk through it, get a feel for like their behavior as well, like what's going to help them feel successful about it and then go from there, see what they think. Ultimately, and you kind of said this earlier, but the best approach is the one that you do and the one that gets you to where you need to be. And so sometimes that means knocking them out as fast as you can from from smallest to largest and sometimes it means just prioritize the highest interest rate ones first. Yeah, it really does come down to just like what's going to get it done, like what is going to make you feel successful and keep motivated to stick with it. So we have a question. Yeah. Is debt consolidation a scam? Can I just ask that? I kind of feel like it is. What is your thought there? I have only seen it be helpful if it doesn't raise someone's interest rates and they just have like one bill that they feel like is more manageable for them. Because I know for some folks, they don't even know all the debt that they have, which is bad because if you don't know the debt you have and you're not paying on it, then you know it ends up on your credit report because you missed some payments. So the debt consolidation is what's going to get you to where you need to be, then so be it. But a lot of them kind of position themselves as like, well, we're going to help you get out of debt sooner. And they're not really doing anything. And sometimes you're paying fees for absolutely nothing. Yeah. So there's there's a couple of things here. There's debt consolidation as a like act, like going and and there are like, I guess, products for this where you can get a debt consolidation loan, which is really just essentially a personal loan that you use to pay off all the debts that you have in the mix. As long as you get up to that, like how much you you have in debt, because it depends on what you get approved for, too. Right. So let's say you have $12,000 of debt between different instruments. You apply for a debt consolidation loan, but you only get approved for $10,000. You can only really consolidate that $10,000 and the $2,000 that's left. You have to decide like what you're not paying off and what you still have to pay separately. So there's that. But you are totally right with those types of loans. There's usually like some type of origination fee or and we really only want to do this. I could see an argument for simple simplification, but ideally you only want to do this if you can get a lower interest rate than what your other debt is. So that's the key. Debt consolidation is not super helpful if you can't get the debt cheaper. We definitely don't want to increase our cost for simplification. That's not, I think, a good move in my mind. But then the other thing that hit my mind first when you asked that question was debt consolidation companies. Are you familiar with those and what their tactic is? I don't know what their tactic is, but I feel like they're probably a big driver as far as why I've almost never, I don't think I've ever recommended a debt consolidation to anyone. So debt consolidation companies are typically, they're actually typically law firms that deal with consumer debt. And what they do is not, so they're not a bank, right? They're not going to lend you anything. But what they do is they take, I'm going to explain this in non-legal terms, so attorneys don't get mad at me. But the way we see it from a financial perspective is they take somewhat, not ownership isn't the right word, but something like a power of attorney over the instruments that you include in the program. So you have a contract with them. You say, I want you to work on X, Y, Z cards, credit cards, or debts. And you sign a contract which says you'll pay them X amount per month, every month. So it's like a fixed amount that you pay the law firm, not the debt. You pay the law firm and they take over the responsibility of those debts. And what they do is they go and try to negotiate on your behalf, trying to get a lower balance, basically. Does this sound familiar? Have you heard of this before with any clients that you've worked with? Yeah. I have told clients before in the past to negotiate their own debts. If it's a really dire situation, they're like, Sim, should I go bankrupt? It's like, there are things you can do before considering bankruptcy. And at the end of the day, you just have to remember that these companies just want their money. And if they feel like you're just not going to pay it, they will be more willing to negotiate with you because they still want something out of it. Yeah. And that's essentially, in essence, that's what these firms do is they really drag it out as long as they can. They stop paying. So this is the bad part about it is they stop paying those monthly payments. So you have your required monthly payment for each of these debts. They stop paying them. And that means you're going to go into a default status, some type of delinquency. It's going to be sent to a collections company, but they're your attorney, right? You retain them. They're going to be communicating with those entities on your behalf. And that's where they get themselves into that negotiating range where they, you know, the debt is outstanding. It's in collections. Collections companies or debt collectors really have a limited window on when they can collect debt from you legally where they can sue you to pay them. There's a statute of limitations in every state. It's a little different, but usually it's between like two and six years. Things last on your credit report for seven years. So there's a window of time where they know that they can get the money from you legally if they don't decide to sue and it's past the statute of limitations. You do still owe that debt, but they can't legally make you pay anymore. So we're getting kind of into the weeds of like collections and like being in bad status. We don't want to be in this range. This means your credit is taking a nosedive. And so this is what sometimes people don't realize though when they go with these debt collections companies and they sign these agreements is they don't realize that that's what they're doing. That they're intentionally trying to make you look worse and worse from like a financial perspective so they can continue to argue on your behalf to lower the debt balance that you have to pay back. So in their eyes from like a purely like factual perspective, are they going to save you money on the debt? Probably. They'll probably be able to negotiate it down for you, but they're going to trash your credit on the way down to do it. Like that's not their concern at all. They're just concerned with trying to get the debt balance lowered or canceled to some extent, which is interesting. And you're paying them to do that. So I would not suggest doing this guys. This is last resort. But like Sim said, you can negotiate these things on your own. There's lots of articles online through like annualcreditreport.com. There's a lot of information there on like your rights as a borrower. Well, I kind of want to add to that that rabbit hole we just went down, which is debt verification, like knowing your rights. If someone sends you like a bill or something and you're like, I don't know what this is from, like you get a letter from collections. I think this is the right act, correct me if I'm wrong. I think it's the Fair Debt Collections Act. You have the right to request verification of that debt that you actually owe it. Request in writing, always do it in writing and have them prove that this is a debt that you owe. This is a great tip too around like credit management, like good credit management, which is like making sure that everything on your credit report is legitimately yours. You can get a free credit report from annualcreditreport.com, like legitimately free from each of the credit reporting companies. I tell folks to kind of space out when you pull a report because you can pull one from TransUnion right now for free, check the credit report or the guts of your credit. And then, you know, six months later you could use one of the other companies. So that's how you can maybe monitor credit on an ongoing basis from like the source of what's, you know, making up your credit. Won't give you your credit score, but it does give you the guts of what's on your credit overall. So another question we get from people is, you know, hey I have an elderly parent and there seems like they might pass soon. Am I liable legally for their debts? What do you say to that? That's a great question. The answer is no, as long as you didn't co-sign anything. So if mom or dad passed and they had debt, so the way it works is if mom or dad passed and they had debts, then the executor of the estate has to put out a notice and I forgot the period of time. There's some kind of legal period of time. I don't know if it's like 60 days or something, but the notice is out there and anyone who wants to collect on the debt can make a claim against the estate. So potentially it could impact what you get from the estate. Like if mom or dad had, you know, some assets to pay the debt, that might decrease the number of assets that are passed to you and your siblings or whatever, but you do not owe money on the debt. So if someone is calling you and saying, hey so-and-so owed this much money, either don't answer the phone or tell them to kick rocks because they're preying on you while you're grieving. So it's pretty scammy. Yeah, it's really just the co-signing relationship, right? Because that's where you like signed on the dotted line that you would be equally responsible for that debt. Now good news, kind of, is that federal student loans are completely dischargeable if you die. So that's the fastest way to pay off student loan debt. But I do not recommend that route, guys. Let's just laugh at it. It's so silly, yes. If you or anyone you know is struggling, you know, there are resources. We do talk about this, like on a serious note, we do talk about like the mental health impact of student loans. And so if you are thinking about hurting yourself, please reach out to a friend, reach out to us. We are here for you. Yeah, absolutely. Yeah, and private student loans, so they're a private student loans too when it came to debt pay down. Private student loans, they, from a responsibility perspective, a lot of times there is a co-signer because you initially borrow a private student loan probably for undergrad. And you're young, they probably require a co-signer at the time from, you know, for you to borrow that loan. So a lot of times there is a co-signer situation for private student loans. How you can get a co-signer off of your loan is you can refinance it again as long as you can refinance it in your own name. So that's taking it to a different company and then it's completely under your name. Or if you're trying to take, this is also depends on what your plan is, but if you're trying to take a Parent PLUS loan out of your parent's name and put it into yours, the only way you could do that is, only way you could do that is by refinancing, taking it and putting it into your own name. Again, as long as your credit is going to allow this. So that's some ways that you can remove a co-signer. A lot of companies too have a co-signer release clause. After like two or three years of on-time payments, you could apply to release a co-signer. So that's an option too if you initially have to have one, but you'd like to ideally not have one later. Or you'd ideally not like to be one if you're the person who is the co-signer and it's not your debt. You have to be really careful with the co-signers because some of them have really sneaky language. Like upon the death of a co-signer, you might owe the whole loan balance in full. It's not as common anymore, but it still exists. What's interesting about refinancing is that even though for a lot of people, it's not the right path, it's actually great for a lot of people who were in that co-signer situation in the first place because your interest rate that you probably got on it was terrible. And a lot of people that I've met with who had these loans, like, Hey, I was young. I didn't have good credit. They get variable rates. And so maybe it like sneakily starts low. And then I meet with them and it's like, I've seen, and I'm making this up, like around 13% variable. And it started off at like three or four. And so even though today's interest rates are not the best, like maybe it's like seven or 8%, that's a fixed rate. So you're still better off in a lot of situations, refinancing that debt to get a lower interest rate and to make sure it's a fixed, not variable rate. And you can get mom and dad off the loan. Yep. And, you know, when it comes to student loans in general, interest rates, you know, again, interest rates right now aren't awesome, but if you do have private student loans or your plan is to pay your student loans off, like you're not going towards loan forgiveness, generally the interest rates are lower than maybe other debt you might have. So like credit cards, those still take the priority, like still focus on those first before accelerating your, your private student loans, because you want to look at the interest rate. What is each of these debts costing you and ideally prioritize from there, unless you're doing more of a snowball approach where you're going for like the lowest balances first. So yeah, but there's a ton of different ways we can go about debt pay down. But I think those are some of the things to keep in mind is like the prioritization of like how much interest you're being charged on the debt too, and the type of debt it is. So what happens if you don't pay federal student loans? That's probably not a good thing to do, right? That is like bad news bears, because the federal government has a lot of power, if you didn't know this, and they have like a wide ability to get what they're owed. They can garnish your wages, for example, and we do have currently operate, not operation, I keep wanting to call it operation fresh start. I'm like this isn't the military, it's just, just a fresh start. So we do have an opportunity to, you know, I don't want to call it rehabilitation, but that is an option. You have rehabilitation, there's consolidation, there's ways to get out of default. But yeah, the federal government can garnish your wages and get what they're owed. And your tax return, and your social security, if you're out on social security. It's either social security, or I think it is that. I think it is that. So pretty serious. And you don't really want a tax, you know, tax refund. I know a lot of people think that's great, it's tax season, I'm getting this refund. It just means that you gave Uncle Sam free money for the year, and you didn't get to keep it for yourself in your high yield savings account. Yep, yep. Speaking of high yield savings accounts, so there is an argument for not always paying off your debt. So high yield savings accounts, or like equivalent, like, you know, the Vanguard money market funds, they're yielding quite a bit, like around 5% or so, or upwards. So in a lot of cases, you're getting paid not to pay your debt. If your interest rate on your, on your debt is less than 5%, sometimes it makes sense to just keep it there. Call it like cheap debt. Now, it's not for everyone. Some people psychologically can't handle that. And that is totally fair, because it's like, oh, well, I'm beholden to someone I owe money. So the question is, can you make more money elsewhere? And so, you know, one argument that a lot of planners make is, what do you think your return can be if you were to invest it instead? And of course, no one knows the answer to that question, because no one can guarantee any returns with investing or anything. But if you kind of look at historical data, well diversified portfolio, and you think maybe, you know, you can get like 8 to 10% annualized, and your debt is less than that, maybe it makes sense to just stick with minimum payments and use the difference to invest. Yeah, a small example of that, well, not small, I mean, probably a lot of people took advantage of this during COVID was when we had 0% interest on student loans, and folks were putting their money in a high yield savings account instead of paying towards the student loans, even if they were trying to pay the loans off in the future, because they were literally earning money on, you know, savings that could have gone towards the debt, but the debt wasn't costing them anything. So this, this would be called leveraging your debt, right, leveraging what's available to you. Behaviorally, though, like you said, that could have, like, some folks didn't want to do that, because they just, they didn't want to even think about the, you know, the fact that there was a debt outstanding. But that's a good example. I literally have a client right now who has about, I think the interest rate on the student loan that's left, it's like a really small private student loan, it's like 3% or something, and they're getting close to 5% in their high yield savings. So we talked about that, we were like, should we pay off this small private student loan? Or do you want to keep money in savings for now? And the decision was, no, I want to, I'll just keep paying it down slowly, and I'll make more money in my high yield savings. I was like, okay, that's, that's good. So it's up to you. So okay, I think we talked about a lot of different pieces of debt, anything we didn't get to IRS debt, tax debt, tax liens. Yeah, the IRS, that is not an entity you want to mess with either, because again, extension of the federal government, they will get what they are owed. And so you can work out a payment plan with them. I have a client who's doing that right now, interest rates are not great, they're paying like 8% in this arrangement that they have with the IRS. And so the issue is that, you know, there's, there's other debt involved, there is some money in emergency funds, you kind of have to think through, okay, this interest rate is bad, I'm not getting 8% in my high yield savings account. But if I drain my high yield savings account to throw out this IRS debt, it's not going to pay it off in full. But if I have another emergency, and I already have credit card debt, so it starts to get complicated too, because it's not just the interest rate question anymore. It's the planning question of, am I prepared for, you know, what's the alternative here, if I do this? Not that all planning, I don't want to give the impression that financial planning is just like, worst case scenario, what if? I am like the queen of that. I am so good at, what's the phrase they call it? Catastrophizing. Yeah. Like thinking about what is the absolute worst thing that can happen. But I think that that's useful, because you do want to be prepared for some of those if it's a realistic thing that could happen. So we talk about tax debt, actually, not debt necessarily, but like tax obligations, actually quite a bit with our student loan consultations, because of the fact that forgiven student loans, in the future, forgiven debt in general, if it's canceled or forgiven, it can be taxable to you as income. So we do actually talk about this when it comes to a plan for folks who are going towards loan forgiveness, because part of the plan is, of course, paying down the loan or paying the required payment, but also saving for this potential tax implication. So if we anticipate some kind of future forgiven debt, we should also be anticipating some kind of future tax implication. And worst case scenario is if we're not prepared for that tax implication, we can go into a debt arrangement or a payback arrangement with the IRS, like Sim, you were saying. But better case is we prepare for it. We save for it on a month-to-month basis and prepare. So we, you know, hopefully that's not the case in the future. Hopefully this tax implication is gone for the future. But this is also relevant for kind of going back to those debt consolidation companies. If they do get debt canceled or lowered for you, you're responsible for the tax implications of that. So if they forgive or they're able to get your balance reduced from, you know, $15,000 to $10,000, you're going to have a tax implication for that $5,000 difference because the IRS sees that as a benefit to you. So they're going to tax you on it as if it was income. So that's just a little quick note. Fun fact, it is reported on the 1099-C that will be issued to you when you file your taxes, so they will know about it. Yeah. Right. Well, cool. Okay. So we talked about debt. We talked about things to look out for, little tips and things that we think about when we're talking to folks about their debt. Let's start talking about how to implement a game plan to pay off debt this year in 2024. What are some simple steps to start with? So let's do that. And one word I don't like to use that I will probably end up using anyway is budget. And I hate the word budget. It's like new B word because to me, it connotes the sense of rigidity of like, okay, I can only spend this much on groceries. I overspend on groceries. I guess I'm just messed up for the rest of the month. I blew my budget. That's not helpful for anyone. It's punitive in a way. So what I like to think of, and you can call it whatever you want. Some people call it like a spending plan or spending awareness. That's really what we're trying to do is bring awareness to where is your money going? And you can be as detailed or not as you like. The important thing is that it's helpful for you. So you can like track to the dollar if you want to. There's a lot of apps out there that will let you do that. Or you can just look at like general categories of spending, whatever your like big offenders are. I can tell you what your biggest offender is. I look at, you know, spending plans all the time and I am also a spender. So it's housing, but also most people food in some form, whether you're eating out or you like to buy like expensive groceries. That's what it is for most people. Oh, and honorable mention, of course, childcare. I'm feeling the pains of that too. That's just, it is what it is. So you need a spending plan. You need to gain awareness of where is your money going and then make a decision. Is this where I'm, where I want my money to be going? And sometimes the answer is yes. Sometimes you're okay with what you're spending on food. Maybe that's how your family does entertainment. Or maybe you're like, you know what, this is too much. I don't need to go to Chipotle three times a week. And I can take, you know, two of those trips and throw it at my credit cards. Yep. Oh, you know, I'm, I love cash flow planning. That's like all I do with, well, that's all I used to do with my, my planning clients. And now we're incorporating in with SLP wealth. But I really enjoy cash flow planning. And I do totally, totally, totally agree that budget is like a cringeworthy word. Like, it's almost like, ah, like your stomach is like, oh, but I, I love like the spending parameter thought process of like, it's not nitpicking every single category. It's more so like giving yourself a parameter to stay within which you have free reign within and maybe like budgeting or limiting like a couple categories that you know are problem categories or avoiding things. Like if you know, target is an issue for you, don't go into target. So it's like that lame, like dad joke, like, you know, dad, my arm hurts when I do this. Don't, don't do that. Yes. Do you know that dad joke I'm talking about? Oh my God. I totally know. I've heard it was like, you go to the doctor and doctor's like, don't do that. Yeah. Something like that. Yeah. So but yeah, I think that, that is probably a good starting place is if we have debt, we know it is a result of something, right? It's a result of not having a good spending plan put together previously. Maybe biting off a little more than we can chew on like travel or your living situation or whatever it is. So identifying like where some of that bleed is coming from would be helpful. Or if it was from like an emergency situation, it's, you know, that could be more reason to think about building up your emergency savings fund. So that could be maybe the next thing to be thinking about is I think first budget. Well, actually I think, I think savings account could come next. I think so. Hey Megan, here's an idea that I share with some of my clients too, is when we think about what we spend money on, something a lot of us forget about is non-recurring, but annual expenses like holidays, birthdays, travel. These are things that happen every year, but I think we tend to not plan for them. So, you know, it's, we're in January now. I met with a lot of people for their spending plans in December and they're like, oh, well December was an off month. We had the holidays and I'm like, is this your first December? And I mean that like as a joke, I'm like, you know that the holidays happen every year, right? So let's figure out what did you spend? And then I said, what do you spend on birthdays? What do you spend on like anniversaries, right? And because you're going to spend something. So let's try to figure out roughly what that is. And then we build it into a monthly plan. So for example, if you know, you tend to spend like $5,000 a year on travel, you need to start every month, you know, setting aside 416 bucks into a savings account. So, right. So when that expense comes, you already have the funds for it. It's not like a, oh, well I decided to do this and you've already prepared for it. That's a great point. I love that. I think sometimes folks will call it like slush fund or like, you know, annual savings fund. People like buckets and I think Ally, a couple other banks have like savings buckets you can use where you can like shovel like money. I love buckets. I'm not going to tell you how many I have. Capital One lets you have up to 25. I don't have 25. You have 24. I've been closing them down, but I love having like a category for each thing and it's a little excessive. So like I said, but you know, you can have like your travel fund. You can have like your home down payment funds, emergency funds, birthday fund. You kind of go big for your birthdays and plan for it. Don't necessarily have to change it. Yeah. Yeah. No, I think this is a good organized way to start like being more proactive about your money too. I think budgeting really, I think what we're talking about, like parameters, like having a parameter for spending, that's a more proactive way to think about budgeting versus reactive where I think a lot of times like budgeting software is pretty reactive because it's pulling through what you already spent and it's like, thanks. Yeah. I overspent last month, but that's not going to help me now. So having some parameters could be proactive. The reactive is useful in the idea of what you're spending. It's like, well, let's just look at what happened in the last three months. Yep. Okay. So that's kind of laying the framework, right? So getting, getting organized with our spending, maybe where we should be spending, identifying some like bleeds that we have in our plan or in our spending plan overall. I think next we need to really just get organized with what debt we do have and start prioritizing. So however you need to do this, list it out on a note of paper in Excel, you know, however you need to do it, just list out what you do have. Let's start to financially undress a little bit and get a feel for where we're at. List out the balance, you know, what, what the debt is first, but then the balance, the interest rate and your required monthly payment. Those are the important pieces that, that you would need to start to identify how to prioritize and sort what we want to focus on. And just to reiterate your point earlier too, if you're not sure all of what you owe, check your credit report. And you can report things if something looks off or something is not yours on your credit report, you can submit a, not a complaint, but a dispute. That's the right word. You could just submit a dispute to make sure that that's taken off just in case. So, okay. So now we're getting organized. Next is prioritize, right? So how do we want to think about prioritization? I think pick a couple, pick one or two. So I like to be a little bit more targeted and that's what we're going to focus on. These are the debts we're currently focused on. When that's out of the way, pick the next two. That would probably just mean then paying the minimum amount, minimum payment on all the other debts that you're not prioritizing, right? To really maximize the ones that you're focusing on, correct? Yeah. So that way, I think that's a really efficient way to prioritize your cashflow. Yep. And that's in a way, that's the funnel approach. I love the funnel approach. Now I do something a little bit different though, rather than focusing on the minimum payment on each one. What I want to make sure is that the minimum payment actually covers the interest that's accruing. So what I tell people is your minimum payment is the amount that will at least keep it frozen. So it's not growing. And usually that is the minimum payment, but not always. And so I'll calculate that and say, these are your minimum payments on everything. And then we're going to pay extra on this one. That's a good point. Another little maybe tip is to do a little bit of an audit on if you're trying to pay down credit cards, for example, there could potentially be reoccurring charges on those credit cards, which could make the balance grow as you're trying to pay it down, right? So if you're trying to really simplify, really get spending off of those cards so you could start paying them down, a good tip would be to audit the last couple statements to see if there's anything that's reoccurring, like an Apple charge or a subscription somewhere. Or if your husband has another second card and uses it for gas every so often, you got to find out what is actually going on that card, shut it off so you could start to work it down. Cool. Okay. So we talked about getting organized, prioritization, and really, I think, you know, motivation is a good thing to throw in here for what's going to make us successful is, you know, get yourself motivated about what this is going to mean. I like to show folks, you know, when we talk about how much we're committing to our debt, when we're looking at it in a cash flow perspective, or like a spending parameter perspective, like, it's probably a lot of cash flow per month. Like, let's say you're committing, you know, let's just throw out a number, like $1,500 a month towards paying down these debts, or $2,000 a month, or $500 a month, whatever the number is. That's a chunk of change that once this debt is done, you don't have to put towards debt anymore. You could put that towards something else, like savings, or your vacation fund, or whatever that is. So really think about, like, what would you put that towards if it wasn't going towards debt? Or how could you, like, reward yourself, like, once this is done? Now, we're not going to reward ourselves crazy to where we get back into the same position, right? But a little bit of a reward would be helpful to keep you motivated. And I think it's important, and I think I talk about this a lot, too, with clients. But when you come up with some kind of, like, cash flow plan, I think it's really important to have some kind of line item for yourself. You're not going to spend $500 a month on yourself, because we're getting out of debt. But you need to have something, because you're going to burn out if all you're doing is, like, okay, I'm working, maybe I'm still going to school, and I'm paying off debt. Like, that's not a life. You will burn out. Your mental health is important, and you need to keep going. So do something for yourself. And not everything that you do for yourself costs money, but if you need a line item, you know, give yourself 50 bucks a month, go do something. I do, I have a couple clients where, a couple reasons, I've put a line item in their cash flow that literally says, treat yourself. Treat yourself. You have to. We're not made to just work. Yeah, and it's funny, because, like, some clients, it's because they have a hard time, like, spending money on themselves, because they're so, like, productive with their other money, which is awesome, but also, like, mental health, right? Treat yourself. And then on the flip side, it's because they need, like, some motivation to work towards, because they're working on some really hard things in their finances. So it's, the spectrum is pretty funny there, but you do. I think everybody deserves that, deserves a little bit of treat yourself money. Anything we're leaving out to help people be successful with paying down debt? There is one thing that we didn't talk about yet, which is balance transfers. What are your thoughts on those? Oh, shoot. Yeah, we didn't even talk about those. Okay, sorry. Man, so circling back to the beginning, and then we'll wrap this up. Balance transfers, that's a really popular topic. Balance transfers are, I guess, more and more common. I think they started to become more common, like, I don't know, I feel like maybe five to ten years ago, like, I started to see more and more opportunities for this. But balance transfer, in its essence, what it is, is taking, like, basically your debt and transferring it to a different lower or zero percent interest debt. Almost always, it's credit cards we're talking about here. We're doing a balance transfer between one credit card to another credit card. We're shifting where the money is and how much interest is being charged on that. So they've been really successful with folks who were trying to get out of debt and pay less interest, because you can take that balance that's accruing interest and move it to a balance that's not accruing interest for a period of time. Usually there's, like, a 12-month window, 18-month window. I've seen as long as, like, 21 months, which is pretty cool. And that just means that we can set out a schedule on how much you need to pay to get it paid off before that interest kicks back in. And it saves you a lot of interest when we calculate the math on it. It saves you interest and time. So those are options. I usually like to suggest looking at NerdWallet. Not sponsored at all. Not necessarily a formal plug, but I love going to that website and just comparing the different card options that are available. But any other little tips you want to add there? Yeah, I think it totally makes sense if you're paying off the debt and you're intentional about it, but we can't use it as a, like, well, I'm just going to keep transferring this thing forever. I'm going to find a new card. Like, you actually have to have a plan to pay the thing down. So you can't do it indefinitely. Intention needs to be there to pay it off. But that is, like, a one, like, good. I think it's good we're probably ending with this, too, because that could be one quick, easy way to maybe reduce your cost of debt payback. If that's something that you haven't looked into and your credit is pretty decent, you want to get, like, a little oomph on, like, your savings here and you want a little extra help, that could be that little extra help here. But if we don't fix the cause of what caused the debt in the first place, then kind of like you said, we're going to always be doing these balance transfers, which is not good. So have a game plan to get out of debt and stay out of debt going forward. And put money towards things that you love and that are productive and work towards your future. Yeah, so I think if anyone listening out there is unsure how to tackle your student loans as part of, like, your overall debt reduction strategy, you can reach out to any of us, studentloanplanner.com slash book, and we can come up with a plan for you. Definitely. Well, yeah, thanks for hanging out with us today. And hopefully this helps give you a couple nuggets to take with you. And we'll catch you on the next one.