0:12 foreign good afternoon and welcome to people making money one of the way to wow shows I'm your host Kevin bemel and we're here every Wednesday afternoon 12 30 um Pacific Time 3 30 Eastern time and an hour in for uh mountain and central time and we talk about all things professional and financial so sometimes I'll have a guest as I did I believe it was as recently as last week and other times we'll talk about various Financial
0:47 issues financial planning wealth building which is what we're going to do today so we're going to talk about debt and uh how it uh what what kind of tool it is how to use it wisely and how to eliminate debt or at least eliminate the kind of debt that is detrimental to our financial well-being so I'm going to jump right into the things today and and um I don't always do a PowerPoint um for this show but I am going to
1:23 um uh today um because there's uh a sort of a number of details that uh are important to uh to to deal to cover here there we go okay and here we are dealing with debt so um like all things on all of the way to wow shows we we work within What's called the three pillars of attainment and today we're going to be down here in the Pursuits pillar dealing with
1:58 finances okay and um collateral issues oftentimes come up in terms of relationships and and self our identity and our mindset okay that that and that certainly will be the case when we talk about as we talk about debt so we're going to be talking today specifically about Consumer Debt okay so for those of you who are business owners or or um your you have Investments you're maybe you're buying some real estate or something like that not dealing with those types of debts the issues are
2:34 considerably different than um the issues we're going to be dealing with today so this is just personal indebtedness okay and there's really um five types of five major types of consumer indebtedness and you see them here on the screen there's credit cards there's student loans Auto Loans mortgage loans and payday loans okay all of these have their purposes and oftentimes you will hear
3:09 um various financial advisors saying well this one is bad or this one is good or this is this is predatory I mean those are all you know judgments of of debt but the reality is at different times in our lives um all of these could be good and and most if not all of them could be bad okay so it really depends on your individual circumstances okay so I'm gonna go through each of these five types of debt uh Consumer Debt in in
3:45 more detail now and you'll you'll see what I mean so I I think probably the most common type of Consumer Debt that people have is credit cards okay it could be a Visa or Mastercard or it could be an American Express I mean there are other credit cards out there um yeah there used to be something called Diners Club carte blanche which you don't see so much I don't even know if they exist anymore actually there's JCB which comes from the from Japan um there used to be the Discover card
4:21 I'm not sure if that's around anymore either now while they're all called credit cards in reality there is a difference between an American Express card and a Visa Mastercard okay in a with an American Express card the assumption is that the balance is going to be paid off each month okay now American Express does have a feature whereby some of your charges can be spread out over time it's called pay
4:56 over time okay but those are those have to be above a certain amount so for the most part American and with an American Express card you're paying off your balance each month that's why it used to be called a charge card as opposed to a credit card because a charge call although was it was giving you credit you were really charging instead of paying cash with the understanding that it was going to be paid off at the end of the month okay a credit card no matter what the amount is it does not have to be paid off each
5:32 month so a credit card will have a minimum payment um that has to be paid and we'll we'll talk about how that's calculated a little bit later on in the show but uh but no no specific charge on the credit card has to be paid off at the end of the period at the end of the month or whatever the period is okay so it's credit cards are a type of revolving debt meaning you pay it off you charge it back up you pay it off you charge it back up now most credit cards come with a credit
6:10 limit it may be a thousand dollars maybe five thousand dollars maybe ten thousand dollars okay one of the differences between an American Express card and a Visa Mastercard is people perceive that the American Express cards have no credit limit and in fact they used to be advertised that way that's not really true they do have a limit it's just the limit is based on your spending your income your spending habits and all of that okay and from from time to time you
6:49 could hit your limit on an American Express card you just wouldn't necessarily know it because they don't give you a stated limit but having said that if you were to go and try and charge the price of a Rolls-Royce on your American Express card that you've had for a few months unless you had already demonstrated that you have you know the kind of income that would allow you to pay that that charge off at the end of the month they're not gonna um that that charge is going to get rejected okay so um that is that's another difference between American Express and uh and and
7:28 other types of credit cards now in general credit cards have a high interest rate okay 18 19.2 percent these are not unusual now you can find credit cards with lower interest rate maybe as low as 12 and you will sometimes find where they have a low initial rate like a teaser rate of maybe you know five six percent okay but generally speaking those teaser rates are only for limited period of time there to get you to you know switch over
8:03 to that credit card company or whatever I I don't see those nearly as much now as I used to um but but overall credit cards have a very high cost to them in terms of the interest rate they may also have an annual fee for maintaining so American Express most of their cards have an annual fee whether it's a green Card Gold Card Platinum those all have fees now there is something called a blue card which was it which is a no fee American Express card um and it's act that's actually really more like a credit card than it is a
8:39 traditional American Express card which is I think why they offer it at no fee all right so um in general credit card now more and more businesses are not accepting cash they're only accepting credit cards and there's so many different ways now with with Apple pay and Google pay and and venmo and um what's the other one uh uh [Music] shoot I can't think of the other one
9:14 um but anyway there's a number PayPal um there's a number of different services that allow you to use your credit cards very conveniently which is good because as I mentioned a minute ago a num more and more businesses seem to not be uh taking cash they're going cashless so I know I'm on like on my Apple watch if I click the right buttons I have Apple pay right on my watch I don't even have to carry my credit cards with me if I don't want to now Apple pay is not universally accepted and so I do carry my credit cards with me but in
9:50 many cases I don't have to take them out of my pocket I can just use my Watch to pay the bill by the way I could do the same thing with uh my phone because my phone has Apple pay and for those of you who are on Android um I I'm not an Android User but I assume Google pay works pretty much this this the same way so um they're very very convenient okay now the key thing about credit cards is whether it's an American Express card where you need to pay off the balance at the end of each month or a Visa Mastercard which is a traditional credit card they're perfectly fine to use them
10:27 as long as you pay them off each month when if you pay them off or at the end of the payment period if you pay them off at the end of the period you don't pay any interest and so that's perfectly fine okay and I know for me um I have with American Experience they have a really good points program and so it's to my benefit to charge everything on my American Express card pay it off at the end of the month because then I get all those fees and I can buy you know books and other stuff on Amazon and and this that and the other thing okay so um credit cards people think of credit
11:03 cards are bad credit cards are not bad as long as you don't carry large balances okay and and I would add that now sometimes if you have an emergency and you just don't have a big enough emergency fund to cover it or worse you don't have an emergency fund at all then it's going to be very credit cards are going to be your Saving Grace you'll be able to pay for that emergency and then the idea is you'll want to pay that that balance off as quickly as possible and we'll talk about how to do that later on
11:38 in the show Okay so unlike other people I don't I don't look at credit cards as being you know bad or evil or whatever credit cards are a tool they can be a very useful tool they have to be used intelligently and responsibly okay so that's credit cards all right next is a student loan so a student loan is exactly what it says and there's been a lot of in the Press about student loans over the last few years okay student loan is a loan you get to go to college or university okay now
12:13 it's actually a secure debt in the sense that the the well now it's it's the government basically that makes student loans in my day it was Private lenders who made them now the federal government has taken over that program and I think there are some State programs as well but in essence that loan is secured by your future earnings in other words the reason that the government is willing to lend you that money to go to college is because they're assuming your earnings are going to be higher with a college degree than they would have been without
12:48 it okay and the fact that you're going to have higher future earnings makes you a good credit risk okay now I'm not going to get into all the political turmoil over student loans um the reality is that um these days I think the average student loan balance is around 40 or 50 000 and in some cases you know there are multiple hundreds of thousands of dollars for people who use student loans to get a law degree or a medical degree things like that so people can pile up a
13:25 lot of student debt now if you're going to college well I'm going to take a step back and talk about college for just a moment it used to be people went to college in order to expand their knowledge right that's why the humanities uh the liberal arts what are called the liberal arts were so popular you studied literature you might study philosophy these kind of things you know the the things have really changed in the last I don't know 20 or 30 years or so in that a lot of people
14:01 going to college now are doing so for job related reasons so um for a long time it it was becoming ever more necessary to have a college degree to get a good job now that trend has been reversing itself over the last I'd say 10 years or so and a lot of big companies no longer require college degrees in order to work for them um and and it can vary of course with the particular type of job as well
14:38 um the other thing too is um jobs that heretofore did not pay nearly as well have started paying a lot more money and jobs that you don't need to go to college for didn't used to not pay as well and nowadays they pay a lot more money so for example you don't need a college degree to be an auto mechanic and yet if you were to go to say the Mercedes-Benz auto mechanic program it wouldn't be unusual after you got out of that program to be to start making between 80 and 100
15:15 000 a year depending on where you're located so you can see that that um what's used to be called a trade programmer and now they're called more vocational programs um they they can put you in a much stronger um financial position work wise okay plumbers electricians many of them make very substantial salaries nowadays um and part of it is because I think the sophistication of of what these these uh
15:52 used to be called Tradesmen more technicians now do that's part of it and the other is there's just not enough of them to go around and so when when Supply is low um and and demand is high which as long as there's houses and you know other buildings we're going to need plumbers and electricians and such so the the the pay for those positions will increase Okay so I think again student loan is neither a student loan is neither good nor bad it depends on why you're going to school
16:30 and why you're borrowing the money and by the way I um I think it's perfectly fine if you want to go to college to expand your your knowledge and and and and the depth your depth of understanding that's a perfectly legitimate reason to go to college just to understand that a degree in a field like um literature or philosophy may not necessarily translate into higher earnings than you would have been able to obtain if you didn't go to college
17:05 now it doesn't just say you shouldn't get those kind of degrees perfectly legitimate but just I think people need to understand what they're getting themselves into okay on the other hand to go to you know college to get a a law degree or to go into accounting or or to go into the Sciences or mathematics Okay so historically um especially over the last 20 plus 30 30 years or whatever these kinds of fields when you have a degree in them do
17:40 mean higher earnings usually from the get-go and and certainly over the long run things like computer science okay I just saw in um I think was the Wall Street Journal yesterday there is a scarcity of um petroleum engineers and so these positions are paying a lot more and there's various reasons young people don't want to go into what they see as being a field that's bad for the environment that kind of thing setting those issues aside for a moment you know engineering
18:16 um still is is a field where a degree is probably going to lead you to a higher higher income than than you would have had without the degree and by the way there are people who are self-taught in these fields I have a close friend who's a self-taught data scientist and he does very he's done very well over the years that he's been doing that he has no college degree at all so it's not to say that you can't be self-taught um and and get these bigger paychecks um it's just you know do you have the self-discipline to teach yourself that's
18:53 that's the question so all of these are reasons or issues to consider before taking on a student loan hey now the fact of the matter is student loans overall have a low pretty low interest rate and they have pretty favorable repayment terms in fact um if you've been you know following the news for the last several years since covid um there was a moratorium on student loan payments I think it ends I think it ended last month if I'm not mistaken or it ends this month but it but in any event it's been about three
19:30 years since uh people with student loans had to make payments okay um and as well there are certain programs where if you work in um Community for work for a non-profit or work in community service for a certain period of time then at the end of that period of time if you have any loan balance left that it can be it can be forgiven there's so there's and there's there's discussions all kinds of different discussions about what's going to happen with student loan uh repayments okay so whether any of those if you're if you're considering getting a student loan today
20:06 whether any of those repeat repayment plans are still going to be available you know in four years when you get out of school I don't know um these these things do change it's and and this is one of those sort of um volatile topics um in in in American society today so I recommend you look carefully at why am I getting the degree what is going to be the benefit to me you know if I do have to pay off all the money myself is that really something that I want to do even
20:41 if it doesn't give me any higher earnings um and and in the end just make make an informed decision okay so that you're not regretting having this you know pile of student debts okay let's look let's look at the next one auto loans okay most people when they buy a car they do not pay cash for it unless maybe they're buying a very low cost used car if there is such a thing um anymore I'm I'm not sure there is because the price of used cars has gone
21:16 up so much okay but in any event auto loans are a very uh um I try to do these pretty much in the order of I think how um how frequently people have these I'm not sure if people have if more people have school loans than auto loans Maybe not maybe an auto loan is is you know next most common after credit card something like that but in any event an auto loan is a very common form of Consumer Debt now it's a secured loan meaning that the car that you buy is
21:51 going to be security for the lender and there's going to be a lien against the car so if you don't make your payments the lender is going to repossess the car that's that's how it works right notice how different that is from a credit card if you buy let's say um you know a living room set on your credit card and you don't pay your credit card bill that living room set is not security for the credit card debt Okay so the credit card company cannot send
22:27 someone to repossess your living room furniture credit cards are an unsecured debt most of the time now there are forms of secured credit cards that's that's kind of a special case I'm not going to deal with that um today um but an auto loan is a secure debt okay and it will on the title to your car the lender's name is going to appear as having a lien on the car and that's that lien is what gives the lender the ability to repossess the car if you don't comply with the loan terms okay it's what's called an installment debt
23:03 because from the beginning of the loan you know how many payments it's going to take in order to pay off that car loan what the size of those payments are going to have to be okay we're going to talk numbers later on in the show but you'll see what I mean by an installment debt okay and the interest that you'll pay on it is going to really vary by your credit score now it can also it's also going to vary by whether you're buying a new or a used car it's going to vary based on what the term of the loan is is it a 36
23:38 month loan 48 60 month there's even 72 month loans now okay um but the main variable is going to be your credit score okay the higher your credit score is the better the interest rate you're going to get okay now I've I've mentioned this in in a previous show the idea of leasing a car now a an auto an automobile lease is really just a different way of borrowing money to essentially own a car okay what
24:13 you're doing in a lease is you're only financing some of the price of the car okay and at the end of the lease you have to give the car back or pay off whatever the balance is on the car whatever what's called the residual value is okay and and from that standpoint an auto lease is very similar to an auto loan um people think of them as being different but fundamentally they're not it's really just uh now Auto lease is really just an auto loan with a balloon payment and it keeps the size of the
24:49 payment down okay and you're gonna see when we look at numbers um even a moderately priced car today the payment can be pretty big okay which is one of the reasons why a lot of times people lease cars is it lowers their payment or they can get a much nicer car at a lower payment okay and at the end of the at the end of the lease they give the car back and they start all over again now that's fine um it and and there are reasons why you may not care if you have a Perpetual car payment um but otherwise um you know you may not want to always
25:26 have to make a car payment and so then a lease may not be the best um um via vehicle like I'd say that you know sort of pun in cheek as they say a lease may not be the best vehicle for purchasing a car okay um again you need to look at your individual circumstances this is all General guidance on on the the topic of in this case auto loans but just debt in general okay so that's an auto loan and we're doing okay on time good all right
26:01 next is a mortgage loan okay or a home loan they go by you know different names okay mortgage is kind of a um an old term it's been around for several hundred years as far as I know um many mortgage loans today that you don't actually have a mortgage here in California when you borrow money to buy a home you don't they call the mortgage but you don't have a document called a mortgage which you have is a document called a trust deed okay so in the case
26:38 of a loan to buy a home generally speaking there's going to be at least two documents to that loan one is a note and that note is the actual loan itself okay it's the evidence that the lender has lent money to you in order to buy your home and then there's going to be some kind of security device okay that's what a mortgage is a mortgage is actually the document that gives the lender a lien on your home so
27:14 that if you don't make the payments the lender can foreclose on you and take the home and sell it in order to pay off the loan okay now in California we have a different kind of security device called a trust deed the trust deed makes it much easier for a lender to foreclose okay let me explain the difference briefly excuse me if a lender has a mortgage an actual mortgage type lien on your home
27:52 in order to foreclose they have to um they have to file a type of legal action called a foreclosure action it's a court action and they foreclose on they use the mortgage to foreclose on you and because it's a court action it's it takes time there's a lot of costs associated with it okay and they can there can be appeals and all the things that come up with uh any kind of court hearing or Court procedure okay so a mortgage loan
28:29 is more is diff can be difficult to a mortgage secured loan can be difficult for the lender to foreclose okay on a trust deed unlike the mortgage you do not have to go to court to foreclose on a trust deed I mean you can but there's no reason to okay so in a trust deed you have the trust store that's the lender you have the beneficiary which is the borrower because they're getting the money and then you have a trustee that trustee is supposed to be a neutral
29:05 third party really what they are is is there a different party than the lender and if you don't make your payments on a trust deed secured home loan the lender will contact the trustee they will give evidence that you haven't made your payments and they will ask the trustee to foreclose in what's called a non-judicial foreclosure okay what's going to happen is the trustee will initially file what's called um file with the County recorder and
29:42 serve on you a notice of defaults that means that you have not complied with certain terms of the loan okay and you have three months to secure that default that may need to not secure the default to make up the default so let's say you're behind a month or two in your payments uh let's say it's two months because generally lenders won't file a a a won't have trustees file a default after a month but let's say you're two months behind and and the lender has
30:18 tried to call you you haven't responded or you have but you just you don't have the money so the lender decides to foreclose in order to cure the default you're going to have to pay those two months back payments plus any costs the the lender has had in dealing with um having the trustee file that notice of default okay now by the way the cost of that is much lower than filing a Judicial foreclosure that you would with a mortgage okay but nonetheless you're
30:53 gonna have to make up those costs there may be late fees some other things associated with it if you cure the default the loan is put back in good standing and off you go and as long as you don't miss any more payments you're fine if within three months you do not cure the default now the lender is going to contact the trustee and say hey it's been three months haven't gotten the the default has not been cured um foreclosed okay and so then the trustee will file a notice of sale and
31:29 that notice of sale will be posted on the property itself okay and that notice of sale generally speaking gives well it gives not generally it gives three weeks it could give more but it gives a minimum of three weeks at which time if the loan hasn't been essentially paid off okay including costs and expenses that the lender has borne the property can be sold at a public auction okay now when I say hasn't generally speaking hasn't
32:05 been paid off it may be that you can make a deal with the lender to get the loan back in good standing without paying it off you can always try negotiating some lenders will negotiate others won't okay and there's other ways to get out of a foreclosure as well you might end up doing what's called a short sale for example if the home is not worth the amount of the of the loan there's different other ways to deal with it but in any event if at the end of the three weeks of the notice of sale the you know the if the loan hasn't been dealt with then the trustee can hold an
32:43 auction and can sell your home okay at the end of the sale assuming there's been a buyers that's been accepted that's it you no longer own the home now with a mortgage at the point where the court orders the property sold and the sale is held the buyer I'm sorry not the buyer the homeowner has a one-year period of redemption in in in most jurisdictions so even though the home has already been sold the the the homeowner who lost the home
33:19 could come back within a year pay off all the money and still end up owning the home they have this Redemption period you have no Redemption period under a trusteed secured type home loan okay right so that's when we call it a secure debt that's how it works and that's the types now um a mortgage generally speaking is a long-term debt 30-year mortgages are very common you also see 15-year mortgages for people who want to pay their loans off more quickly and I've heard about 40-year mortgages
33:57 um I I've never seen one candidly but I've heard they're out there I I suppose for very high priced homes a 40-year mortgage it will lower the payment um even more than a 30-year mortgage and so that you know that that may be out there okay now the interest that you pay on a home loan is going to vary by credit score the loan to value ratio meaning how much of a down payment you make it's also going to vary by programs so an FHA loan or a VA guaranteed loan generally speaking we'll have a little
34:33 bit lower interest rate than um a conventional loan a loan that falls under the conforming limit meaning it's a loan of a size that will be bought by Fannie Mae I'm not going to get into all that secondary Market mechanism for loans today but but there's something called a conforming loan and it means that it's in an amount where Fannie Mae will buy it um they generally have a lower interest rate than a jumbo loan a jumbo loan exceeds the conforming loan limit okay
35:08 so all of these are factors in determining the interest rate that you'll you'll pay on a mortgage loan so are mortgage loans good or bad well you know again it depends on your circumstances if you can't afford to pay a mortgage loan and you've got one I guess it's bad right but in general mortgage loans are considered to be good if we were to go back to the 1930s and earlier before there was an active Marketplace for for mortgages most people if they wanted to buy a house you
35:43 had to just pay cash for the house okay and and the vast majority of people couldn't afford to do that so the rate of home ownership was pretty low in this country okay and then with the Advent of federal Home Loan Bank and the the creation of a standard way of making mortgage loans okay the ability of a middle-class American to buy a house was greatly increased now I think home ownership in the country I'm not exactly sure what the percentage is but it's in I think it's in the 60
36:18 it's 62 65 maybe I think it's somewhere around in there okay much much higher than it was a hundred years ago okay um and and the reality is um to own a home so well let me be careful how I word this Mo most people seem to think that to to own a home is the best thing or is better than renting now that may be the case
36:53 but not necessarily okay A lot has to do with interest rate levels rent levels where tax laws are at what part of the country you're in okay How likely it is that the value of the home will go up so from a strictly numerical standpoint although it seems like it's best to own a home you're a home that is not necessarily the case it may be better to rent okay so that's another that's a and
37:28 it can be a somewhat sophisticated calculation to figure that out um again beyond what we're going to be covering today um however for many people owning a home gives them a sense of security they they you know that they own the home they can decide what needs what's going to be done with it how it's going to be fixed up they don't have to answer to anybody so it's what I would call a lifestyle decision and indeed I would recommend that you look at home ownership as a lifestyle
38:04 decision in the sense of do you want the security that generally comes from owning your own home concurrent with that do you want the responsibility that comes from owning a home having to deal with the maintenance issues having to pay the taxes and the insurance having to um um you know have that make the make the mortgage payments having the responsibility for the mortgage papers was what I was trying to think of saying if you don't want all that responsibility then maybe the security of owning a home doesn't really mean that much to you and you're better off
38:40 renting from lifestyle perspective okay so those are some of the questions to think about as you make a decision about whether to own a home or not okay and that can be something you think about as a young person getting started but can also be something you think about as you're you know making your way through life you may get to the point where you just don't want to deal with the headaches of home ownership okay and so that's why I call Home Ownership a lifestyle decision it's not an investment decision necessarily okay
39:15 um the other thing is um although we've seen rapid increases in home prices generally speaking the last few years there is no you know 11th commandment thy home shalt increase in value which especially here in Southern California people seem to think that that there is that 11th commandment no even here in you know how low to Southern California home prices do drop sometimes okay especially Homes at the higher end of of the market so there isn't any guarantee
39:51 that if you buy a house today it will necessarily be worth more money you know five years from now 10 years from now okay it really depends on the marketplace okay um and and with with population shifting so much now it's I think it's much more difficult to predict today where there will be a home price increases and where there may be you know flat home prices for the long term or even decreases it's hard to say there's been a lot of out migration from areas that historically
40:27 have have had very high home prices places like New York and California and I think one of the reasons people are leaving is because of the cost of of of homes and so and there's been a big influx into other areas that historically have had low and fairly stable home prices places like Indiana Ohio think places like that okay so what is that boat for the future it's hard to say what I would recommend is you get professional advice about a particular
41:03 Market in which you're interested before you make a decision either that well that that and and do you do your homework okay so that that's mortgage loans uh all said and done I I you know mortgage loans are are I think generally speaking a type of debt that is you know perhaps most likely to be good we'll put it that way okay all right next uh payday loans okay so if if you were to do like a Google search on payday loans you would see these are predatory they're this they're that uh look
41:39 payday loans have their purpose um and if if they were truly a hundred and twenty percent bad then you know nobody would borrow the money but the fact of the matter is especially for lower income people who don't have an emergency fund available sometimes a payday loan is is what they're going to need in order to be able to pay for some kind of health care or pay for food maybe they've had a temporary setback in work or something like that and and they
42:14 they need this sort of stop Gap Loan in in order to survive so look all things being equal this would be the last type of loan I think you know you would want to take out but but just because it's the last type doesn't mean that it's necessarily bad okay if you've got no other choice if it's you know be on the street or get a payday loan then you know payday loan may be a perfectly valid Choice okay so I wouldn't listen to the people who would tell you that payday loans are are
42:49 predatory and they're evil first of all it depends on the payday lender number one and number two it depends on why you're getting a loan certainly outside of an emergency circumstance a payday loan doesn't make sense because of what we're going to talk about now first first of all well I mean it's an unsecured debt generally speaking okay well that's fine it's a short-term debt meaning it's got to be paid off in a very short period of time two weeks maybe a little bit more than that okay
43:25 and that can make it very difficult so unless you know the money is coming in to pay the loan off borrowing the money just to have one more debt probably doesn't make any sense especially because the interest rates tend to be very high Okay so that's why I say this is kind of a loan of Last Resort okay for an emergency and and when and and when you know you're going to have the money coming in to repay it right this isn't people say well it's legal loan sharking well
44:00 they're probably not gonna you know break your arm if you don't pay the payday loan I I don't I've never heard of that not not if you're going to a reputable payday lender okay but the reality is the interest rates are high and and if you have to renew a payday loan that interest can build up pretty quickly so you don't want to be in a situation where you're having to renew a payday loan you want if if you're going to take out a payday loan you want to be as certain as you can possibly be that when it comes due you are going to have the money to pay it off okay now if look
44:36 if it's a choice between getting health care for you or your child or something like that or not well then you know that may be what you decide to do um and it's it's probably I would think it would be better than watching your child suffer okay so this is why I refrain from condemning outright payday loans sometimes we know we get ourselves into difficult circumstances we wish we hadn't we learn a lesson and and and then we you know hopefully improve our financial situation so we don't have to
45:12 use something like a payday loan in the future but in the meantime it may have been this our Saving Grace so um I wouldn't reject them just out of hand okay so those are the five types five most common types of consumer debts there are other types out there I don't I don't want to get into you know every single permutation it's too much these are the the most common ones okay so I want to talk about one other concept before I get into the numbers and that is something called financial leverage okay now assuming you're not borrowing because you have to like we
45:48 were just talking about you know you had an emergency you got to pay for health care or you need money to pay your rent otherwise you're going to get evicted setting aside those emergency circumstances okay financial leverage is is typically why um it can be worthwhile to borrow money okay now in general financial leverage is used we're using debt to increase potential return now this I said this is really on Consumer Debt so I'm I'm not
46:26 going to talk about Investments so much although financial leverage has much more applicability to Investments than it does to up to just regular consumer transactions okay um but what I want to talk about where I want to talk about financial leverage is in buying a house Okay so so the reality is as I was saying about home loans a little while ago most of us can't afford to buy a house and pay cash okay the median price of a home in the country now is I think
47:01 or around four hundred thousand dollars right how many of us can just like oh okay I'm gonna write a check for here you go buyer our seller here's you know four hundred thousand dollars plus fees you know to buy your home most of us can't do that okay so the advantage of financial leverage is we can buy an asset that we otherwise couldn't afford okay now generally speaking and this this applies to Investments we have something called positive financial leverage when the rate of return on our investment is higher than
47:38 the interest rate on the loan now since with a home we're not getting a rate of return so we don't really talk about financial I mean positive or negative financial leverage with respect to a home but here's the thing remember when I was talking about owning versus renting so this is where the concept of financial leverage comes in in really figuring out on a numerical basis whether it's better from a financial standpoint to own or
48:13 rent your home part of that is going to have to do with financial leverage okay I'm gonna I'm gonna talk in a future show in much more depth about financial leverage because I'm going to I'll deal with it in the context of Investments but you'll also see then how it works in terms of a home as well now there are risks to using financial leverage and one of them is that you're more vulnerable the market changes so let's say you bought a house uh for four hundred thousand dollars and then one of the major Employers in the area
48:50 closes down okay that's likely to cause a recession in that area if there is there doesn't have to be a nationwide recession for a particular region or area to suffer from a session and suffering from recession you may see home values draw so let's say that home values dropped from four hundred thousand dollars to 360 thousand dollars okay now let's say by the way you put 20 percent down so on a four hundred thousand
49:25 dollar house um you lost you lost you put down eighty thousand dollars if the value of the house drops to 360 you've lost half your down payment okay half your down payment all right so it increases it increases your loss on a percentage basis now if you had paid cash for the house 400 000 and it dropped by forty thousand dollars to three hundred and sixty thousand dollars you've lost ten percent of your investment okay you've still lost forty thousand dollars but it only represents ten percent of your investment instead
50:02 of fifty percent of your eighty thousand dollar down payment okay so leverage can be good it can be it has benefits it has risks okay and and and I I just wanted to touch on this concept because it relates specifically to buying a home now it could relate to other things as well although generally generally speaking other consumer purchases that we make um the rate of the rate of interest we're going to pay on those loans whether it's a credit card or even an auto loan is not good is going to be higher than any return we could make you know renting
50:38 that that car out or the furniture out and so your financial leverage in in personal property like that generally speaking doesn't make a whole lot of sense okay so and I think that's what that's the last yeah okay so if you um here's about the questions and such um I'm gonna return to this because what I want to do now is get into some numbers which are right here okay now if you see this you see this Excel spreadsheet
51:13 um this is this is a pretty simple example okay so let's say this particular person has two credit cards an auto loan and a mortgage loan okay and the first credit card has a balance of a little over fifty four hundred dollars at 18 interest okay and the monthly payment is a hundred and ninety dollars now where does that come from well generally speaking the credit card company is going to calculate the monthly payment at whatever the interest is for that month okay so if it's 18 interest per year it's going to be 1.5
51:50 percent interest per month okay so you're gonna pay one and a half percent interest on the balance Plus somewhere between two and four percent of the balance do okay so in this case I think I used two percent of them yeah I used two percent of the balance due okay so the payment for this month for the upcoming month is going to be a hundred and ninety dollars now having paid down the balance uh uh um of the credit card a little bit next month's payment will be a little bit less and then you know a
52:25 little bit less but it's going down just tiny amounts each month okay then you have a second credit card with a balance of about thirty seven hundred dollars in this case the interest rate is nineteen point two percent okay and you can see that um although the balance is about two-thirds um the interest rate is high you're still paying 132 dollars a month and I calculated it the same way okay um uh um in this case the monthly interest rate would be one point six percent and then two percent of the balance that's what makes up 132 dollars
53:01 okay now here's an auto loan and the amount of the auto loan this is including taxes license and all that kind of stuff uh thirty two thousand six hundred dollars the interest rate is six and three quarters percent for a sixty month term okay and and this is why this is an installment uh Loan in that you're gonna pay it's probably going to be 59 payments of 641 dollars uh 641.83 typically the last payment is going to be just a little bit different
53:36 a little bit higher or lower depending on on rounding errors and that kind of thing but basically you're going to pay 60 payments of about 642 dollars okay and then you have your mortgage so you got a mortgage of three hundred thousand dollars um which means let's say if you put 20 down you bought a house for um what about 370 000 thereabout you put about seventy thousand dollars down okay you got a three hundred thousand dollar mortgage for 30 years or 360 months okay
54:11 at six and a half percent okay and that works out to uh this is a fixed mortgage of eighteen hundred and twenty dollars per month okay and you'll make you know 360 payments of 800 of 1820 now again just like with the car in reality that final payment is probably going to be just a little bit different um but for our purposes we're gonna say they're all the same all right so how is what is the most well first of all what debts do you want to get rid of and what debts might you not have to
54:46 worry about getting rid of well for sure you want to get rid of the two credit card debts you're paying very very high interest okay and there's there's no asset behind it that's of any value okay so there's no chance for example that um what you but well I don't want to say no chance there's very little chance that whatever you bought with this money that you borrowed is going to go up in value so fast that it becomes worth you know that it
55:21 appreciates by 20 per year year over year over year okay it's probably it probably dropped in value dramatically after you bought it okay so you really don't want to carry balances on a credit card unless you absolutely have to okay now the same is true generally of an auto loan okay while you paid 32 600 thereabouts for your car the minute you drove it off the lot okay it's value dropped and it's no
55:58 longer worth that kind of money now depending on what kind of car it is um for a car in this price point it's it's gonna almost for sure drop in value now if you bought you know a Rolls-Royce and you drove it off the lot it wouldn't necessarily drop in value below what you paid for it Rolls-Royce values tend to maintain and there are other cards that are worth more now than they were when you know they were first sold okay but those generally speaking we're not buying those kind of cars and so the the
56:33 idea that your car is going to increase in value say seven percent per year year over year and make it worthwhile for you to you know not pay off this loan very unlikely okay so you you want to pay off the auto loan as well now the mortgage loan is different okay while there are our financial advisors out there who tell you you want to pay off your home loan as quickly as possible that's not necessarily true it depends on what else
57:08 you can do with that money okay that's number one number two in California we have something called a homeowner's exemption okay if you get sued and the the value of your home is less than the homeowner's exemption plus the loan on the house your home cannot be taken from you to pay the person who was successful in suing you okay so there may be an incentive in
57:44 that case to really not pay off your home loan and the reality is you got to live somewhere okay so if if this is much less expensive than renting well so then that's fine you're not you're you're you're saving money in terms of your your cost of of um shelter okay and if the interest rate is low enough that you know you couldn't invest the money somewhere else at a at a reliably higher rate of return then it may not make sense to pay off your home loan that's
58:19 going to depend now there are financial advisors I'd say well I can get you 12 year over year over year well they've been able to do that for the last what 10 years that the market has been very very good but just because the market has been on an upswing doesn't mean it can't go on a downswing right and the market can be volatile so um the reality is it may not make sense for you to pay off your mortgage loan that's that's a more complex question okay and and a much more specific question to your specific
58:55 circumstances okay so what do you want to do well the reality is although I've got credit card number two here second in the list what you're going to want to do is make it put it first on the list it has the highest interest rate and you want to pay it off as quickly as possible if your budget is really constrained and all you can afford to do is make the minimum payment on all your debts which together work out to be about twenty eight hundred dollars a month well then that's what you'll do any extra money you get should go to
59:30 paying off this debt first okay get that paid off as quickly as possible so let's say you were able to pay say you know two hundred dollars let's say you have an extra seventy five dollars a month okay rather than spreading it out focus it all on paying off this debt okay so pay off two pay two hundred dollars a month in that way okay um you will reduce the balance much more quickly okay so if you pay off two
60:05 hundred dollars a month okay once you've got this paid off instead of it taking whatever it is four years to pay off maybe you can pay it off in two years or 18 months even then whatever amount of money you were using to pay this off of now add it on here and pay three hundred and not thirty two hundred three hundred and ninety dollars a month in that see how now you're basically doubling this payment you'll pay this off much more quickly okay now once you've got this paid off
60:43 once you've got credit card number one paid off take that 390 dollars add it to your car payment and you're going to be paying off about a thousand thirty dollars a month on your car and very quickly you'll pay off the balance of that car loan okay that way you will as you will get rid of the highest interest rate debt first okay and you will be able to retire the lower interest rate debts afterwards now there
61:20 is one exception to this rule or to this plan and that is let's say you had a third credit card oops oh let me just let me just copy this real quickly copy paste okay so we have credit card number three now and let's say you own you owe uh 782 dollars and one cent on it okay and let's say the interest rate is actually 16 okay
61:56 so in reality your payment is only twenty six dollars a month okay still and and the interest rate is lower than these other ones still pay off this one first and the reason you want to do that is by get quickly getting rid of one of your monthly payments first of all it gives you momentum in getting rid of a debt second of all it allows you more flexibility okay so if if in your if in your debt
62:33 elimination plan an emergency comes up and now all of a sudden you're not able to put this extra money to paying this debt off still you're going to be better off having just these two credit cards than having all three so if one of your credit cards has a low balance that you can pay off pretty quickly get that one paid off first even if it's a lower interest rate okay to just get rid of that debt okay now depending on what your level of uh self-discipline is a in general you don't want to close the
63:10 credit cards that you've paid off you want to leave them open and that's because of how credit scores work um I'm I'm not going to get into the details of credit scores but the best thing you can do is to have all three of these balances go down to zero okay and then what's your what what happens is the percentage of available credit that you're actually using that percentage goes down and that increases your credit score that's or it can increase your credit score that's one of the things that can okay so that's the
63:47 goal all right so that this is this is a very simple easy to use way to eliminate your credit card debt okay I'm gonna stop sharing now we're actually a little bit over an hour here but this is such an important topic getting out of debt and it will mean all the difference to your future so once you have that that um car loan paid off you were paying a over a thousand dollars a month right now you can take that thousand dollars a month
64:22 and invest it okay if you if you um have a retirement plan at work maybe you and and there's a matching program maybe you can increase to the maximum what you're putting away in your retirement program at work and get the maximum matching or maybe you can start a separate Ira or a Roth IRA um and and build that up or just start saving money even if it's not in a retirement plan maybe you want to save money so you can have a vacation or of course you want to have an emergency fund that's crucial to have so that you
64:57 don't have to borrow on credit cards if an emergency comes up okay so after you've paid down that debt all of a sudden you have some flexibility and you can more uh you can set up your finances in a much Sounder better way going forward and really start Building Wealth okay so that's what I've got for you today I hope you found that um useful and if you have any questions look down in the show notes there my email address is there you can post a question in any of the social media
65:35 um uh sites for the show um by the way you can feel free to post comments I'm good and bad you know criticisms don't please don't tell me that Dave Ramsey says I'm wrong I know Dave Ramsey says I'm wrong I disagree with what Dave Ramsey says about debt and that's fine I I know a lot of people really like what Dave Ramsey has to say and I respect what he has to say I disagree with him on on some small points um and look that's that's what it is um I've dealt firsthand with a lot of people in the military and their
66:10 finances I know they always found it strange that chaplain was helping with with their finances I would tell them you know until you feel financially solid you probably don't care a whole lot about you know Bible study so that was always my philosophy but in any event um if you have thoughts uh criticism whatever feel free to drop those in our social media as well so just to uh mention um next week we start again on Monday at 10 A.M with trusts and Estates weekly on Tuesday at 11 A.M these are all Pacific
66:45 time is business lessons from the military and then we'll be back here again seven days from today at 12 30 PM Pacific time with the next episode of people making money so I thank you very much for watching just asking you one favor before I go if you're not a subscriber on our to our YouTube Channel please do consider uh subscribing and that way you'll get notified each time there's a a new broadcast coming on and a new episode post you won't miss any and um if there's something here that's useful to one of your friends please
67:20 pass it along to them um that's that's the reason for doing the show is to help you and your friends your family with with your finances with your professional lives so one more time I thank you very much for watching and wishing you a wonderful rest of the day and a great rest of the week take care and see you next week