How To Manage Your Debt - Tips From Financial Pros | NerdWallet

In today's video, I chatted with three personal finance and investing experts to get their take on debt. Okay, so sorry for the corny intro. So I know debt can be a topic that stirs up strong emotions, but after hearing these experts dive deeper into this topic, there is much to learn from this video. In this video, you'll learn how debt can be a tool to actually help you reach your goals faster, how to think about debt from a psychological standpoint, and also understand why so many people fall into the consumer debt trap and how to get out of it. Stay tuned. Let's talk about the elephant in the room for some people. Let's talk about debt. Okay, so there's different types of debt. What are your thoughts on debt in general? Debt is a financial tool that is a pretty powerful tool. And so if you use it well, it can grow your wealth. That's the first and foremost, the way I see it. Use the tool, but then just like any good tool in a toolbox, at some point, I think there's a time to put it back in the toolbox. It's a great tool to have. That's my honest opinion. But if you use it incorrectly, it could bite you in the butt real fast. That's my simple definition of debt. If you're not careful, it can screw you up pretty good. For me, debt has always felt like one of those things that is something on my shoulder that I wanted to get rid of. And that's just a personal preference. So people have different feelings about debt. For me, it became a driving force when I became a parent to say, how can I eliminate this debt, give myself less stress, give myself more time with my family and my daughter who's coming into this world? And it almost became, how can I just get rid of this stuff to help us have a better life? Are you completely debt averse or do you feel like there's times to use debt? Personally, I do like being debt free. I would just say I know myself and I know that I would get stressed. And I know that it would be something that would just weigh on my shoulders and on my mind. And it's just not something that is important to me. That's also the same reason I like investing in simple things like simple low cost index funds versus day trading. That's just not something that I want to do in my life right now. The only debt that I do take out is mortgage. So right now on my balance sheet, it's only the mortgage is the only debt that I have. Now, I do use credit cards. So when I use my credit cards, I pay it off every single month on the last day of the month. And I know what I'm using it for. I don't blindly use it. I use it because of the rewards and benefits they come with. If it ever comes down to it and say, I can't pay off my credit cards anymore. That is the day that I stop using credit cards altogether and figure out what's going on. So how can individuals differentiate between quote unquote, good debt and bad debt? How do you classify that in your mind? It might've been Kiyosaki or somebody who said this, like bad debt takes money from your pocket. Good debt puts money into your pocket. Good debt is something that you're taking out that is going to appreciate in time. So if you're, for example, you're taking out a mortgage, let's say a 30 year mortgage that, you know, your house is going to appreciate over time. So your debt becomes cheaper with inflation. I believe that is good debt. The other good debt I believe is maybe a business loan because you know that you have a solid business plan to start a, uh, some kind of small business and that you, that let's say that $10,000, $20,000 business loan is going to help your business move up in the world. Then I believe that's a good debt. Bad debt, in my opinion, number one, carrying a credit card debt month over month that immediately becomes a bad debt because now you're paying 25, 30% in interest month over month. And number two, in my opinion, would be a car loan. I think car loans are, are by far the work, like the second worst debt behind credit cards because vehicles depreciate so fast. You're taking out a loan, let's say 8% car loan for something that depreciates 15 to 20% annually. Yeah. It's a double compounding effect. It's the depreciation and the interest on the loan. Have you ever used debt to make money? I, uh, went and took some student loans for my master's degree that helped me make a six figure salary close to, uh, you know, $200,000 at one point in my career. Uh, so I guess I would say that that was a worthwhile investment. When I first started in real estate investing, I had these big 150,000, $200,000 houses at the time. Those houses would now be worth three or 400,000, but we were buying them at really good prices. Like we found foreclosure properties, fixer uppers, and I had a thousand bucks in the bank. Like I literally couldn't buy, like I couldn't buy a car. I couldn't buy, you know, I was, I was, I was living in the spare bedroom of my friend's house. Like you have to take a risk in anything. You have to take a chance. And, and, but the debt on that property, the risk was what made it made the money in that, in that, that catapulted or that compounded into the next deal on the next deal, on the next deal. So it was really, it started the engine for the whole thing. Why do you think so many people fall into a debt trap to begin with? It's not keeping track of their expenses. Something unexpected happens and they have no rainy day fund, no emergency fund. And then they end up taking out more debt, credit cards, or loan to pay for those expenses. I think life happens. I think we're, it's easy to think in the short term and not the long-term maybe. I think long-term thinking is the remedy for debt because debt is, it's kind of a short-term satisfaction or short-term gains, but you're, you're kind of making yourself weaker over the long run. You know, not make any sacrifice now, kind of get what I want now in order to not have to make those tough decisions now. And I know that life happens and like, I don't want to judge people's decisions because there's health issues. There's things that happen. There's real things that happen. But over the long, if you consistently make those decisions, then it's going to be tough to ever, you're going to get buried by just the financial world kind of coming in around you. It's just, you know, the idea of what you think life should look like versus how much you're actually earning. And I know that was me personally. I can humbly say that I totally messed that up in my twenties for sure. But outside of that, life gets expensive. So people take on debt because life is getting very expensive. Food and groceries has gone up astronomically over the past few years. So if you're in a family, I got to get around. I got to get to my job. Give yourself some grace at this moment in life because this is a tough time for a lot of people. What is currently the highest interest rate debt that you would keep or pay off? I guess. I'll just give you real numbers in our portfolio. We have mainly private debt. So we just have individuals who've worked with us for a long time. We pay a couple of them, 6% interest. So that's the highest interest that we have on our portfolio right now. We've borrowed money at 10%, 12% before in the past. 10%. 10% is the max we paid. But that was very, very short-term debt. And we quickly paid it off. It was like a fix and flip. We would buy a property that was a major fixer-upper and we needed a couple of hundred thousand bucks to buy a property that we could flip for 300,000. 10% interest on $200,000 would be $20,000 for 12 months. And we flipped the house in six months. So it cost us an extra 10,000 bucks of somebody else's money. But then when we flipped it, we might make 50 or 60,000 bucks once we sold it. Does debt affect you psychologically? I had a long debt-free journey from 2014 to 2016 when I had over $110,000 in consumer debt. And I'm talking about five maxed out credit cards. I still have a printout here that I look at it just as a reminder. I know that sounds crazy to say, but it is a reminder that I would never get myself back into that situation again. It drove me nuts just knowing that my minimum payments, they were not going to be enough because of my income at the time. And I felt like I was a good performer at work, but when I came home, I was a completely different person. So now I know what not to do, and I have different options to make sure that I never go on that route again. I've become comfortable with it over time, especially the good debt. When we're talking about good debt versus bad debt, that helps me sleep at night. And that's one of the reasons I've tried to reduce my debt over time is just to not only cover the optimistic scenarios, but what's going to happen in a really bad scenario where things go bust? I want to survive. I want to be resilient, anti-fragile through those kinds of times. And so I think there's a healthy fear. I think it's okay to fear debt. And that fear leads you to make decisions that are not just rose colored glasses. So say you do go down that debt trap or that debt rabbit hole, what strategies can individuals use to manage or reduce their debt effectively? Do you have any that you use or was it just nose to the grindstone? Let's just pay this off. We ended up living on about half of what we brought in. Now that's not everybody's situation. So what can you do to increase your income to make the situation a lot easier? Because yeah, you can lower your expenses, but you can only do that so much before you start feeling that nasty pinch of life. So whether that is side hustling, which my wife and I both did during that time, or, you know, taking advantage of things like overtime, sometimes in order to get ourselves out of a tough situation, we would just simply look around our house and say, what has value here that we don't actually use or need? And then we just sell it on Facebook marketplace or eBay, and you can turn your trash into cash, which is a great way for people to get some extra quick money during a tough time. When I was on my debt-free journey, I used my zero-based budget strategy. So what that means is that if I make $5,000 a month and my expenses and debt are 5,000, then that's going to be zeroed out by making extra towards the payments. What people end up doing is they carry over too much money in their checking account because they're afraid to pay more towards their debt. Know what you're prioritizing, which debt you're going to prioritize first and put everything on that debt and then move on to the next one. So if I take this to like the final degree, say you're someone who's tried everything, right? You're almost facing overwhelming debt or you feel like you can never dig yourself out. Do you have any perspective or any tips on just, you know, debt consolidation, people considering bankruptcy, anything along those lines? Get some extra help. If you reach out to credit counselors or a financial coach that can walk you through your situation. Sometimes it's as easy as laying out where you got your money coming in and where it's going. If you're facing some overwhelming debt, it might take some time to get through that. So realizing it as a journey and finding ways to celebrate the milestones along the way, because again, this might seem all financial, but a lot of it is emotional, psychological as well. Awesome. Thank you so much for joining us.