Debt Deep Dive

Hello, I'm your host, Mr. Chuck, I retired accountant turned truck driver, I reduce my debt in a relatively short period of time, debt reduction, to achieve financial freedom takes commitment, confidence, determination. Deep Dive that some debt is needed while others debt to avoid, determine how much debt can afford. So you don't put a strain on the budget, I have a link in my show notes, two articles from investopedia.com good bet versus bad debt and then debt to income ratio, how to calculate it. I'm going to go over that briefly. Cuz you got to know your percentages. But there is good debt and there's bad debt. But before I get started there, I want to finish up one more thing on your control center, or your budget I talked about at the top you have your income, then you leave space for each week, or each pay period for you and your significant other, and he have a total income that I talked about putting in your expenses, your needs first, then your wants, you also have to total those up. He totaled up each category, then you go at the bottom do a total of all the categories for a grand total, then you take your total income less your total expenses. And What number is that, if that's a negative number, that means you're spending more than what you make. And how is that coming up in your budget. Because when we're doing a report by category, if you put in your credit cards, and you have two or three credit cards you use on a regular basis, and you're carrying a balance you may be you're definitely spending more than what you make. That's why you can't afford to pay down your credit card. So all those spending that you're doing on your credit card is included in that first 30 days or first 45 days, then in your tracking app, because you hadn't make any adjustments yet. So that's one way you're gonna find out real quick. You're spending more than what you make. Because when the budget we're owning, including the income that you make are not included in any credit card, because it's not income, it's an expense. So when you pay a credit card, when you're using an app, most of the apps I ever use when you're paying a credit card from a checking account, and you have the app and their credit card. In that app, it's treated as a transfer. So you would treat it as a transfer, and as your transfer money from your checking account. So as taken out of the checking account, and you're paying down the credit card or is showing up as a payment in that category. But if you don't treat it as a deposit, or withdraw, you don't go into the credit card account and then enter it go from your checking account treated as a transfer, and everything works good. There's a note there for people who don't use these app or new to it, or maybe don't quite understand that particular feature. So it's important when you're setting up that budget for the first time, look at that total number at the bottom, the net amount, your total income less your total expense. If it's positive, that's good, you meaning you're not spending more than what you make. So you got part of the battle already beat. But if that's a negative number, that means you're spending more, you're using your credit cards more than the way you should be. So in the debt reduction plan, which is part of what I'm talking about the deep dive is the first thing you have to do is quit using credit, then you got to make the minimum payment on all your credit cards, then you build up your emergency fund your savings account, and then have at least a minimum of 1000. There. You keep building it up until you have three or 4000 That's up to you, then you take the over the minimum, apply it to one and it's and then repeat the process. That's a debt reduction plan. That's your guideline of what you're going to do to try to pay off your debt. That's what you're doing in your Creighton emergency fund the savings account, so that if something bad would happen, an unforeseen event that's not planned for you have some money available so you don't have to use credit or you won't have to use as much credit. That's our goal here is go back a step. There is good debt. and there's bad debt. So what is the difference that can be centered good if A has the potential to increase your net worth, or significantly enhance your life, so a mortgage on the home, because over time the value of the house is gonna go up, as you pay down the mortgage that's gonna go down, that would be considered something good debt, who has the money in cash to buy a home and pay cash, not very many people's put it that way. So you're going to be borrowing money to buy your home, you're going to be borrowing money to buy an automobile, at least if you're just getting started out or younger. In life. If you make a lot of money and you save up your money, and you pay cash for a car, that's even better, but a car loan is even though you need the car to go back and forth to work is something we need here. In America, at least, it's still not considered good debt, because the value of the car decreases. As soon as you drive it off the life you buy a new one, and then it's gonna decrease but your loan is gonna decrease slower than what the value of the car is gonna go. So it's a bad investment, it's a bad loan, it's a bad it's considered bad debt, I student loan, maybe consider good debt have helped you get your career on track. That's debatable. Nowadays, maybe if you're going to be a doctor Yes, or something where it's a field that it's in need, and you gotta make some pretty good money. Bad debt is money borrowed to purchase rapidly depreciation assets or assets for consumption. So an asset for consumption would be you borrow money to go to the grocery store to buy groceries, that would be a bad bad loan, a car, a boat, motorhome travel trailer, all those type of items. Now you may argue that it doesn't go down in value as fast and he can make an investment. If you buy an old vintage motorcycle is going to go up in value or classic car could go up in value. That's true. But we're not talking about borrowing money to make an investment. We're talking about everyday life, things that you do, that you buy, that doesn't enhance or go up in value, or help you in your life. Now a car helps you in your life, I get it, but it goes down by you so fast, it can get really behind on that and get upside down on my loan course are saying if it helps you make income education, a business your home, okay? That's education is depending a business pending, if you go in business, and you spend a lot of money and you borrow money. First of all, who's gonna lend it to you, if there's some type of business that doesn't have a proven track record, you'd have to be friendly or friend, somebody you personally now, as no bank or financial institution is going to land a new business, any money, at least not very much is put it that way. Because it's would be considered a risky venture. So consumables or clothes, food, something that you buy and use up and have to buy again, boats, vacations, cars, so don't borrow money to go on vacation don't and boats are expensive. So I don't know, if you have a lot of cash, and you save up for it. And you only need a small part of the percentage of the value of the boat for the loan. Okay, but I'm not thinking they're not really talking about yachts, anything that would be more than a couple million dollars. Because those are be the people that actually would have the money to pay for it, whether they use a loan or not other types of debts is borrowing to pay off debt, which be a debt consolidation loan. I'm not saying do it, that's just rearranging your loan, you're not really getting out of debt, you're just rearranging it. Maybe you're getting a lower rate of interest, maybe a longer time course credit cards forever. There is no time period, as long as you make a monthly payment. There are high rate of interest, borrowing money to invest. Don't ever do that. Because it's risky. If you borrow money and you invest it and you lose money in investment, you still got to pay that loan back. So you don't want to do that you invest only with the money that you have. That's going to be long term for your retirement. And we're not talking here about day trading where you go in, you buy something in the morning, you sell in the afternoon, you hope you make money. The other part about debt, it's somewhat important that a lot of people don't understand or know is your would be your debt to income ratio. If you put debt to end income ratio and Google, you'll find a bunch of calculators. I'm not going to calculate anything. But these are percentages that you need to know and understand. Your debt to income ratio plays a large role in whether you're able to qualify for a mortgage, known in the mortgage industry as a DTI, it reflects the percentage of your monthly income that goes towards debt payment. And both you and your lenders determine how much house you can afford to lenders is this as important as your credit score, and your job. Lenders calc ear, calculate your debt to income ratio, but divide your monthly debt obligation by your pre tax or gross income that be monthly. Most Leonard looked for ratios of 36% or less, although there are exceptions when the ratio can be higher cudos. Let's talk about that this article was talking about, I'm assuming you're looking to buy a home and you don't have one, maybe you're a renter, they're saying that if your income, the debt ratio is less than 36%, that you could qualify for a mortgage, how much is a mortgage gonna be compared to the income the debt, if you already have 36% debt without a mortgage payment, I think the first thing you need to do is pay off some of that debt. If you got credit card debt, and you got to try to buy a house, it needs to be zero, he can't be carrying a balance on your credit cards, but the only loan that you're gonna be able to get by on would be you at least a car loan, if you're married, and you're both working maybe two car loans. That's not overly expensive. That's maybe around 15 to 20% of your income to debt ratio, with no other debt, maybe some student loan debt. But it's got to be a small percentage. And I'm saying that because what can you afford? As far as a mortgage, if you don't have any debt at all, as what I'm referring to your mortgage should not be more than 35% of your gross income, they won't lend you a more than 43% of your gross income. There's some loans that will some federal loans, whatever. But if you borrowed too much money to buy it, well, what's referred to as buying too much house and your mortgage is too high compared to your income, you then the struggle trying to pay for other things, you're gonna be living paycheck to paycheck, because time, this ratio is based on your gross income. So if you buy a house, and it's 40%, then you take out taxes, and you take out your health insurance. And your 401k 40% is now could be 60 70% of your take home pay, that gives you 30% The pay for your car loan, insurance, food, everything else. So you don't want to over buy a house especially the first time because it's gonna be a strain on your budget, your total mortgage to gross income should be around 35% plus or minus four or 5%. Your car loan should be around 15%. These percentages are only calculated on money you borrow, your credit card should be zero. Your student loans may be less than 5% 10%. If you want to buy a home, move in and live a comfortable life and not struggle. These are the percentages you need to try to achieve. If you're already in home, already have car payments, already paying down your student loans you know all that's happened already. Then you understand what's going on. Look at what's your mortgage to income ratio, what's your car loan still income, the total car loan staying calm. If you got more one, your student loan interest or mortgage payments, loan payments to your income, get those numbers, put them down in front of you and that will help explain why you're having problems. If you're struggling living paycheck to paycheck, maybe your mortgage is at 39% Maybe your car payments are at 28% Maybe your student loans of 15% most of your income was gone. This making those payments That doesn't give you much left over to put money in your 401 K, to pay for health insurance, to buy groceries, put gas in the car, and pay for other things. So it's important, you know, these percentages, understand how debt is gonna help you for your mortgage and you buying a car education, school loans maybe, and saving money, how important it is to save money to pay for your children's education, so that they won't have to struggle with student loan debt. Like you have to be back in one moment with my final thoughts. If you're interested and learning about an online software that helped myself get out of debt, it does tracking, budgeting, and keeps track of all your assets and all your debt. It even tells you how much and when to transfer money into your savings account, and how much and when to transfer money to your debt, and which debts to pay off in order. First, it's not cheap. It's a one time payment. But it will definitely be an investment, something and yourself and an investment in your personal financial life. If you're interested, send me an email at reduce debt increase wealth@gmail.com. And I'll send you the information about this online software that worked great for me. Now let's go back to a debt reduction plan or debt management plan, whatever you want to call it, I said it earlier, the first thing you want to do is quit using credit, want to make the minimum payments number two, number three is put money into your savings account, build up an emergency fund a minimum $1,000. You keep building it up over time until you have three or 4000 I recommend 4000. Then the next step, once you achieve that your monthly bills are paid things are looking good. Even take the access over 1000 of your minimum to $3,000 and apply it to one of your debt continue on the process, you start saving again, you build up your savings, you get to X amount, you apply it to debt as your debts coming down, the amount in your emergency fund should be going up a little bit by leaving a little bit more in there every time. And if you've listened to my Christmas debt into savings, you do the same thing. If you have a set amount of money that you want for Christmas, every time you do that, you need to figure out how much time you have until Christmas, how much extra you need to leave there. So that you have the money that you can use to buy your Christmas gifts without using credit. And then a little bit more to build up your emergency fund. I'm not saying to use your emergency fund to buy the Christmas gifts, because you should leave a minimum of $1,000 in there no matter what. So now let's get back to your control center. You probably heard me say it might have missed it when I was the you know A is descriptions b is your budget amount based on your previous history. See, Column C is the actual current month what's going on over time, d is the difference between B minus C is the difference that should always be positive. If it goes negative, it's no big deal. Maybe you just don't have the good amount of money set for your budget yet, for that particular category. Or maybe it was a month you just spent too much. That's up to you to figure out. The next column over is percentages, you need to put at the top your gross monthly income. The combined for you in order your significant don't include occasional income unless you do it on a regular basis, such as working a part time job, if you only do it seasonal for Christmas, or certain times a year don't really need to include that. But if you do it throughout the year on a regular basis, then you probably should include it and then down out there by every loan that you have. So you have your mortgage. If you have multiple mortgages, you will probably be might you'll have this same percent a couple of times. So you put in a formula in that column, column me put in a formula where you figure out the percent of income to your debt. So you take your debt payment divided by your income, and that should give you a percentage, if not, the other way around, that I'm pretty sure it's debt divided by income will give you a percentage. Do that for all your loans, that's in your control center or in your budget. Once you get that done, that's going to tell you how much money percentage wise of your gross monthly pay taken out of your budget just to pay loans. Now your credit cards, if you got more than one balance on your credit cards, you can add those up and use that but spaced on the unpaid as paid on your monthly payment. So you'd add up all your minimum payments, and your credit card and other debt. And then do one percentage for that. Then you go through into your total your total housing, your total transportation, total food, total savings total. That other income and other debt, credit cards and other debt, total entertainment, you know your needs and your wants. And just do that too. And then that really gives you a big picture of where your money's going by a percentage, though you gotta remember that your gross income, before it gets deposited in your checking account has taxes taken out, they may have a health insurance take them out in may have alimony or child support taken out in may have 401 K or retirement plan taken out. So even though those percentages, let's say they are they're low, that doesn't mean that you have that much money in order to pay the other things you have to pay, because it's really the amount that you're basing your budget on is the net, or the amount that deposit in your checking account. That will give you a quick and easy way to review your budget to see what's going on. And if you know if you have that in, say you did, June one month is your first month, July, it's your second month, August, September. And you have these percentages in there. And you made some adjustments to your spending, and you're updating your monthly budget amount or column B to reflect more currently, that's gone to help you and your your percentages will change. And you can see the difference in your percentages. And they'll see a better understanding of where your money's going, and why you're living paycheck to paycheck, why you're having trouble meeting some your bills, your obligations, etc. So well. It's something that people don't like to look at. You need to look at your debt, you need to manage your debt, you need to have a complete understanding how the debt is affecting everything else in your life. The more debt you have less other things you can do, because more of your income has gone just to pay your debt. I hope this was helpful. Stay focus. Keep on track and you'll be able to get your debt under control and pay down and pay it off and be able to live a better, happier life.