Reduce Debt Increase Wealth


June 19, 2022 MIsterchuck Season 3 Episode 118
Reduce Debt Increase Wealth
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Show Notes Transcript

What the difference between credit and debt, then how does each affect your financial life. Debt can be good and bad, but all credit must be good to have a healthy financial life. This episode is about good debt vs bad debt and having good credit.

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Charles McDonald:

Hello, I'm your host, Mr. Chuck, I retired accountant turn truck driver, I reduce my debt in a relatively short period of time, debt reduction, to achieve financial freedom takes commitment, confidence, determination. Credit, what's the difference between credit and debt? How much does each affect your financial life, that can be good and bad. But all credit must be good to have a healthy financial life. This episode is about good debt versus bad debt. And having and maintaining good credit. I like to start out with the credit part of it. Because it gets kind of confusing. I used to think as credit and debt as the same thing. And it kind of is, but it's kind of different. So that makes it confusing. You probably heard there is a credit score where they rate your credit. That has a lot to do with having debt, it cannot have a good credit score was out having some debt. If you just graduated from high school or college, you have no loans, you have no debt, you have a job, you go to apply for, say an auto loan for a used car. And they say you have no credit, you have no credit rating. Well, a zero credit rating is much better than a bad credit rating, because you got some place to start. But they might lie you the loan because you haven't improved, you're able to repay what you borrow. That's what credit is all about. Having credit has nothing to do with how much debt you have. Kind of confusing, you cannot have a good credit score without having some debt over time to prove that you are a good person to borrow money to lend money to. So that's how it all gets started. So a lot what most people do is get a credit card. And maybe it has to be a prepaid card, you put $500 on it, you use it, you don't over extend yourself, you don't ever charge more than $500 You pay, put money back on on a regular basis by the due date. And you prove that you're able to manage your credit, you're able to manage your debt. When I was in college, the big thing was credit card companies would give credit cards to college students who had no income, I could never figure out why they were doing it. So they were like $1,000 worth of credit. And most of these students went out and they charge $1,000 with a credit by in up to $1,000. And they were unable to repay it unless their parents gave them the money. Some of the parents got probably mad at them and refused to help them. So they started right out the bat, getting a negative credit rating or a credit score, because they didn't make timely payments. Maybe they never paid it at all, whatever. It was not good for their credit rating. So once you know that you got to treat your credit cards like cash. You only use it if you have enough money to repay it by the time it's due. What I always recommend, and I've done this myself is I would use my credit card during the week to maybe buy one or two items. And then on pay day on Friday, I would then go in because now everything's online, you can go in and pay that credit card every pay day or every week. If you get paid weekly. You pay that credit card off every week. If you get paid bi weekly, you pay it off every two weeks, but you do not let the balance get out of control because that's what the credit card companies want you to do. So they can collect a high rate of interest. But by doing that, your credit score is going to go down. Because you're not making a full payment. If you miss a payment, that's gonna hurt your credit score, if you make a payment late, that's gonna hurt your credit score. If you pay less than the minimum amount that's gonna hurt your credit score. So you're not helping yourself. But if you make timely payments, even if you don't pay it off every month, they pay off every two or three months, your credit score will go up because you're making timely payments. And if you use less than 10% of view credit available, that will help your credit score because you're proving you can manage your credit. If you're interested in know what a good credit score is, or how you fall, as far as your credit score, there's an article in my show notes, what is a good credit score, and it gives you all that information. And I'm not going to go through it. So now we're done talk about in order to get good credit rating, or have good credit, you have to have debt. Ben, there is good debt, and there is bad debt. Originally, when I was thinking about this episode, I was gonna say all bad debt is anything with an interest rate of higher than 10%. So that would be credit cards, personal loans, payday loans, auto title loans, whatever, you can think of Pawn Shop loans. It generally has a high rate of interest. But then if you really think about it, and in my show notes, it kind of helped me come to this conclusion. is good debt versus bad debt, what's the difference? And here it is. Good debt has the potential to increase your net worth, or enhance your life in an important way. So what would that be? Well, that would be a mortgage, because you need a place to live. No matter where you are. You need a place to live. So if you have the ability to buy your own home, what's that gonna do for you? Well, it's gonna improve your net worth because real estate, generally speaking, goes up in value over time. So if you buy a home for $250,000, you put 5% down, you make payments, maybe not even apply extra you just make the timely payments, while the timely payments is gonna help your credit score. And 10 years down the road at$250,000 home might be worth 300,000. And you might only owe 150,000. I didn't figure out the numbers on this saying that gives you a lot more equity, you need a place to live. So unless you live in a place where housing is very expensive, and renting is a whole lot cheaper. There are some places like San Francisco, California, maybe New York City, maybe large cities Chicago, Atlanta, I don't know. I'm just saying there are some places we're renting is a better option. But most places in the country own in your own home, where it goes up in value it appreciates is gonna help you with your net worth. Bad Debt involves borrowing money to purchase rapidly depreciating assets, or for the purchase of consumption for the purpose of consumption consumption. That would be you're using credit cards to buy your groceries to go to restaurants to buy clothes, and you're unable to pay for what you charge. And a by the end of the month when the payment becomes due on the credit card. Some credit cards give you 20 days to pay it before charging interest. Some gives you 30 days some gives you know days. So you got to be important on what credit card you carry. That's also important on determining whether debt is good or bad sometimes depends on one's financial situation, including how much they can afford to lose. So what is good debt? Good debt is often X That's Expensify. And the old adage, it takes money to make money. If the debt you take on helps you generate income and build your net worth, then that can be considered possible, positive. So can debt that improve you, your and your family life and other significant ways, among things that are often worth going into death for housing, a place to live, to own your own business, education. They don't have listed in that order, but that's my order, he got to have a place to live. So owning your own home is always a good investment. Starting your own business, once you have enough money saved up to invest in your own business, then yes, that's a good thing. Because the lender will not lend you 100% of the money, you may need to start your business education and that is the bailable. If you're going to be a doctor, and you have the grade point average to get into med school and become a doctor, yes, then that education will generally be good at investment. If you're gonna become a history teacher, I'm not cracking on history teacher. But if you if you got a major in, let's say Russian literature, there's no jobs out there for Russian literature, unless you're a professor, PhD, and teaching at a college level. So that may not be such a good investment in education. It may be something you like and enjoy, but it may not be something that will help you earn more income. So not all education is equal. Sometimes, a technical education like electrician, plumber, mechanic, whatever, can be much better education than a useless degree from college. And what's bad debt, it's generally considered to be bad debt. If you're borrowing to purchase a depreciating assets, which could be automobiles, clothes and consumables. Important credit card reward program gives card holders an extra incentive to spend. But bear in mind that unless you pay your balance in full every month, the interest charges may be more than offset the value of your rewards. I never want for rewards, I don't believe in them. I'm not going to charge something just so I can get a 1% reward and then have to pay at 17% and interest. Borrowing to pay off debt for consumers who are already in debt taken out of debt consolidation loan from a bank or at a reputable lender can be beneficial. Debt consolidation loans simply have lower interest rates than most credit cards. So they allow you to pay off existing debt and save money on future interest payments. The key however, is making sure that you use the cash to pay off debts enough for other spending. Borrowing to invest, don't do it online. gonna read it. stockbrokers have margins account where you can borrow money and make investments but he can win big and you can lose bigger, don't. And that's money you don't have is a good rule of thumb. So what kind of loans should you I mean, we all need loans. So mortgage is a good debt. If you need an automobile to get back and forth to work, that is a good debt. But you want to try to get that down and paid off as soon as possible. Because auto loans, even new auto loans have higher rates of interest. So that could be a good debt. Education could be a good debt, student loans. That's what we're referring to here. But don't go so deep into debt that takes you your whole working career to pay off your student loan. And don't rely on some government official saying, we're going to pardon all student loans, you'll never have to pay it back. Has that happened yet? Not for everybody only under special circumstances. And if you don't make timely payments on your student loans, you may not be able to get the student loan debt forgiveness, just a note there. So I guess that's confusing enough that credit is a form of that because you need that to have credit. Credit is just a rating of your ability to repay based on your particular history. When you start getting your debt under control, you got a significant amount of money saved up for retire Are men and that would be a number up to you borrowing money to pursue an activity. That gives you passive income is good debt. Passive income is income you earn without having to do anything other than owning that particular item. It could be in the stock market investments, it could be own in a business word takes very little work, which would be rental property. Real Estate rental property is a good investment, because you get passive income from it. The renters pay the debt for you, you just gotta come up with a down payment, you have the income, and the property generally goes up over time, the longer you hold it, the more the property is worth more your net worth will grow. Other passive type of businesses would be vending machine routes, on and then laundry mat. But those are types of business that takes quite a bit upfront money to get started, and a little bit of time. While you might consider it passive, he might still have to spend an hour or two a week going around collecting your coins, going to the bank, making sure everything is stocked, making sure everything's working and not broken and vandalized. So that would be something that would be up to you, I'm just giving you ideas. Because in order to become financially shucker your investments is need to provide you with income. And the more income that you have, the more wealth you can generate. The more wealth you can generate, the better off you can be. So I'll be back in one moment with my final thoughts. If you want to contact me to request my spreadsheet for the budget, or leave a comment or ask a question, you can send it using my email, reduce debt, increase reduce debt increase wealth is all together no spaces. If you'd like to ask your question, quick question in the subject. If you'd like to request my monthly budget, put Brett spreadsheet in the subject matter if you want to leave a response of any kind comment in the subject matter. I will get back to you as soon as possible. Having a good credit score will help you save money on your insurance, on borrowing other money for whatever it may be for. So that's important to keep a good credit score, you can do that simply by paying all your bills on time by the due date in full over a long period of time. So if you have a bad credit score, you need to start right away, making timely payments and do what you can. That's why when you are paying off your debt, if you're a debt reduction person, and you have three or four credit cards, when you pay off a credit cards, you don't want to close it, because that will lower your debt or your credit amount, which will hurt your credit score. So pay off the credit card and keep it open but don't use it. Maybe use it every couple months, one small charge just to keep it active, the longer you have the same credit, in this case, credit cards, that's gonna help your credit score. So keep all that stuff in mind. I talked about passive activities you can do to help build your wealth that you spend very little time and done and I mentioned laundry match and a vending machine route as examples. For the definition of passive income for the Internal Revenue Service for your federal income taxes. Those don't apply. Those are businesses that you need to file a Schedule C for if you're self employed, and pay self employment taxes. But if you have rental property, real estate, we're talking about real estate rental property. It's a Schedule II and that's considered a passive activity by the IRS and self employment taxes do not apply. I know you're thinking well Maybe your rent, personal property may be machinery or equipment, that is still a Schedule C item. And it doesn't apply to passive income. Just a note there to warn you, if you're in the process of getting here becoming debt free, yes, you need to pay off all your high interest debt, your credit card debt, all the bad debt. And you need to do that as soon as possible. But rather than might you pay off your home, maybe you pay off your line of credit. So you'd have a higher rate of interest, that paying off your first mortgage, for example, is not necessary for you to do because it is good debt. And over time the house is going up in value. And when you sell the house, you'll have more money to pay off your debt, you still have money left to put in your own pocket. But if there's a reason you want to be 100%, debt free thing, go for it. My reason was, I was coming up on retirement, I didn't want to have a whole lot of debt in retirement because my income was gonna be reduced drastically by 50%. So the less debt I have, the more money I have to live off of, and to live a more comfortable life when I'm retired. That was my reason. Maybe you're looking to retire early. So the less debt you have for the longer term of thanks, the better off you're gonna be. If you're gonna be selling the house in the next few years, maybe even 10 years, you may not consider paying off that debt because if it's a low rate of interest, three or 4% or lower, it's cheap money, and you can pay it back with your cheaper money that you earn in the future because of interest, as long as you can afford it. And as long as it doesn't hurt your budget, and your percentages are good 36% of your gross income or less, you're doing good. There's no reason for you to pay off that debt. It shouldn't be causing you a problem for that home that you are living in. Remember rental property real estate. Even though you have that debt in your name, you technically are not paying for it your renters are paying for it. So that would be a good thing. That's why that is also considered good debt. I hope you found this episode interesting and useful and and I'll be back in one week.