ABC's of Money with Alan Akina - Lesson 3: Good Debt vs Bad Debt

I'm having fun with this, so thank

you, DJ. Let's get started. We are welcoming you to the ABCs of Money Lesson 3. Thanks for joining us, kids from all over the country. We, we're having a great time. We appreciate your feedback, all the messages. The tagging, the text. I love seeing all of you kids get involved and you're starting to use your brains. You're very blessed. Your generation is much better than my generation. You guys are going to take our world and our country and our families to another level. So this is good stuff. Now, before we get into lesson 3, good debt versus bad debt, I want to review last week's Excuse me, last lesson, which was Tuesday, which was the 3 S's of money. Do you guys remember what that was? Go ahead and type that in. Remember the 3 S's. The first S is money that we save. Okay, money that we save. We're bringing that money in, so we're using it not to save for wealth. We're using it, the savings, to be direct into an investment or into starting a business. Second S of money is money that we spend, right? Money that we spend is the B word. What's the golden rule? Remember the golden rule? Never spend more than we make each month. And again, we are with this second S like— remember the example I used last time? We're like the air traffic controller, right? The air traffic controller at the airport tells all the different airplanes flying in from all over the world When to come in, when to land, what landing strip they should go to. And they're coordinating. And if they don't coordinate well, if they're not exact, then people can get hurt or die. And so you're going to be the air traffic controller for your money. And that's why money that we spend is crucial. And then the third money, which is also just as important as the other two, is money that we share. How do we give back? Whether we're tithing to our church, we're helping the homeless, our communities, Maybe giving some fresh bread to our neighbors or the elderly, cleaning the yard. We can help in so many ways. So those are the 3 S's of money, and I put out a financial project for you. Okay, so the financial project was to come up with your own 3 S's of money system. Here's a very simple one that— this is probably like 9 years old. My kids did this many years ago. So I put that out to you and I had you do something creative and fun. And today we have a winner. So my assistant and I helped pick the winner that is gonna get a $25 gift card, not to buy stuff, but to buy stocks, okay? And let me see who the winner is today. And congratulations, this is Andrew, everybody. Andrew— Andrew! Von St. George, okay? So give a big hand to Andrew. He has a really cool system. That's like mechanical. I think it's in should be on my Facebook if you look at it. He'll he has this machine that you you you put coins in and it kind of directs it to the the different pots, the three different S's. So congratulations, Andrew. That was awesome. We'll be sending you a gift card for stock. Okay. So with that being said, if you are here for the first time, folks. Kids, lessons one and two are here right on my Facebook. So you just gotta look back on Tuesday and then last week Thursday. There's a bunch of people that tag me, so you can watch those again. They're about thirty to forty minutes long. Now I want to talk about good debt versus bad debt, and I'm going to try to differentiate the two. But we first need to talk about what is debt? What is debt? So I want you to write these down, kids. Get your notepads out. I went to dictionary.com to look at to see what their definition was. So I'm going to read that to you. Okay, so I did my own research. Dictionary.com says that a debt is something that is owed or that one is bound to pay to or to or perform for another. It's a liability or an obligation to pay. Okay, so I know that's kind of complicated. So I'm going to put it in my own words. So here's here's my definition. I wrote. In plain English, debt is when you borrow money from a bank or people to buy something, and you will owe them until it is fully paid off. For letting them use their money, most banks or most people will charge you interest. So this is going to be their profit. Okay, it's it's what they get for letting them letting you use their money. So. I have an example. Okay, so let's see what kids— who do we have on today? I'm going to say let's pick our winner, Andrew. Okay, so Andrew, let's say Andrew needed $100. Okay, so he was going to— Andrew wants to buy— let me show you this. Andrew wants to buy a remote control car. All right. So he doesn't have the money necessary. So Andrew, he says, okay, the remote control car is going to be $100. Okay, so if the remote control car is $100 and Andrew doesn't have it, he says, well, how can I get it? Well, I'm gonna borrow the $100 from my older brother Tom. Now Tom says, and I wrote this down for you, okay, Tom says, sure, you can have the $100, but you're gonna have to pay me back the $100. I'm gonna give you 10 months to do that, and in exchange for letting you use my $100, you're gonna have to pay me $10 On top of that. So for 10 months, if you think about this, $100 spread out over 10 months, so you're gonna have to pay $10 a month plus $1 a month in interest. That's gonna be Tom's profit. So that's really like 10% interest on that loan. Now here's the kicker. Tom says, And by the way, Andrew, if you are late, we're gonna set a date. So On the 5th of every month, I want my $10. If you are late, then I'm going to charge you $2 as a late payment fee. And if you do that, if you're late every day, I'm going to add on another dollar. And oh, by the way, Mr. Andrew, if you miss 3 payments in a row, then I'm going to take that RC car back and I'm going to keep all the money That you had already paid me. This is a typical loan or transaction when you buy something with debt. That is why we say most debt is, is bad. Okay, and I'm gonna have to clarify that because it's needed, but it can be bad if it's used wrong or if you're not like the air traffic controller and you're directing it. and understand it and in control of it, then it could get really, really bad. Okay, so let me talk to you about the different types of debt that we have. So I'm going to have you write down this, this list. Okay, so different types of debt come to mind. Go ahead and type some into the comments. I want to see what debt do you know of? What's considered a debt in your mind? Okay, so go ahead and write those down. I'm going to list The different types of debt. Okay, so here's our list. Number 1, the most popular, is gonna be credit cards. Okay, that's probably the most popular. Second on that list is gonna be an auto or car loan. Car loan. Third, so write this down, kids, in your notebooks, is a mortgage. Mortgage is a loan on a home to buy a house. Okay, then there's going to be— this is going to— this is very, very popular but dangerous now— student loans. Student loans is used to pay for college. College and further education. Then there's other loans like personal loans. There's payday loans, which are really bad. These are temporary loans that people use. Then there's like home equity. And there's probably loans that you have to your parents. You probably will never pay back, but that's okay. That's a whole nother thing. So these are some of the most common types of loans. I want to go through the top 3 and give you an example of that. Okay. What is going to take place? So let's start with the credit cards. I ran some numbers for you and let's assume on your credit card. Okay. You guys all know what a credit card is. You see your parents using it, credit cards. They're swiping at the store or wherever you buy stuff on Amazon, you put your credit card in. I think you should have an idea of what a credit card is. Now, just to be clear, the money that's on a credit card is not really your money. A credit card is a tool from a bank, so it's really a bank product, okay? Like a checking account, like a savings or CD, but it's a bank debt product that's really easy for people to carry in their pocket. They can use it to purchase all types of things, and the bank says Look, we'll let you use this credit card and you can buy things and you just have to pay us back within the next 30 days. Otherwise, we're going to charge you interest. And typically that interest is going to be like 16 to 18%. So it is one of the, the higher interest that you'll pay on any loan. That is why it becomes very dangerous because it's so easy to use. It's small, it's convenient. You can use it anywhere. And and the money's available. Now again, just know that it's not your money. You're borrowing money like from your brother Tom, and you're going to say I'm going to pay that back over time. But if most banks give you like thirty days or so to to pay that back without paying any interest, okay? But most people don't do it in that time. They get lazy and they they get overexcited and they start buying more than they need. So remember yesterday. What I talked about, the golden rule: never spend more than you make each month. This is how people get in trouble. They use credit to spend more than they have. Now here's an example. So write this example down: credit card. Okay, so you write down credit card. If you had $500, let's say you bought five RC cars. Okay, typical interest rate, like I said, is going to be about 18%. So write down 18%. Now, if you were to make the payments on it, the minimum payment, which they schedule for you, which most people do, it's going to take about 4 years to pay off. So they're going to get that $500 back, and in interest, it's going to be roughly about $200. So for that $500 purchase, it ended up being $700 because we're using credit and paying interest. And that's one form of debt. Okay. The second example I have for you is an auto loan. So I looked up a car, like a simple car, like a 2014 Toyota Corolla LE, just a very simple car. Now this car was on sale for $9,998, so just, it's roughly $10,000, okay? And the interest rate on that car loan is gonna be about 4%. Okay. Now, car loans typically are scheduled to be paid off in 5 years. Okay, so here's the deal on the car loan. If you made the payments on that car loan over the 5-year period, you would have paid back the $10,000 plus another $1,000, another over $1,000 just in interest. So that car didn't cost $10,000, it cost over $11,000. And then the last example I have for you, I got 2 of them. Is a mortgage. Now, to buy a house, it's pretty darn expensive, kids. So most people have to borrow money, and they call it a mortgage. Now, I want you to write down the definition of a mortgage. Okay? So this is kind of funny. I don't want it to freak you out, but here's the the breakdown of mortgage. Okay? So mort, you know what that means? Mort means dead. You know what word do we use mort in? Mortuary or mortician. So mort means dead. And then the last part of mortgage is gage or gage, and that's a pledge. So we're going to be pledging to be in debt till we die when we buy that house. And for most people, that's That's actually kind of true. They have their mortgage for 30 to 50 years or more. 30 to 50 years of paying every single month for the house. And then over that time, it breaks down and it wears out. You got to put a new roof and new appliances and paint and all the stuff that goes into it. So it is very, very costly. When you buy a house and have a mortgage. Now, I'm not trying to—I'm not trying to scare you away from buying a house, but we're going to talk about that in lesson five. I believe it is five or six about how to buy a house properly and then pay that off. So there are some really good things about that. But that's what a mortgage is. So I have two examples for you. I'm gonna start with my my friends in Hawaii. Okay, kids, if you live in Hawaii, the average price, so they call it the median. Median price. It's about the average for a home on Oahu. It's actually, I took a lower price. It's over $800,000, but I did one at $700,000. Okay? So I said, let's say you found this house on the island of Oahu and it costs $700,000. Now the mortgage is going to be anywhere between 3.5% to 4% currently. Currently in the interest rate environment that we're in. So let's say we did 4%. Now write this down. Okay. A mortgage at 4% would cost us about $3,800 a month in payments. Okay. That's how much you would have to pay every single month for, for the house. And you would do that for a minimum of 30 years. Now, if this was a perfect world, okay, what would happen is that in 30 years we would have paid back the $700,000 for the house. Okay, so that's for the house, plus the bank wants their profit. It's called what? Write it down. Interest. The interest on this house is going to be a minimum, like low, low end, $500,000 or half a million. So the house really costs $1.2 million after 30 years. That's, that's what interest does. It, it really sucks up a lot of money out of our pockets. Okay, so, so write those numbers down for you in Hawaii. $700,000 a house. We pay $3,800 a month in monthly payments, and the interest is going to be about half a million dollars. Now, for those of you that don't live in Hawaii, you might be somewhere cheaper. I ran some numbers last night for houses in Utah. So let's say we bought this house here in Utah. About $350,000 is the median price. Okay, so we're— We're going to buy a house for $350,000. Okay. The payment on that house is going to be roughly $2,000 a month. That's at the 4% interest rate. Okay. So you'll have to pay— your parents are going to pay $2,000 a month to have that house. Now, here's the thing about a mortgage. Okay. We live in the house while we're paying it, but we don't really own the house. Who owns the house, kids? Yeah, the bank. The bank here that gave you the $700,000 or the $350,000, they actually own the house, just like your bigger brother Tom. Tom actually owned that RC car. He gave you the $100, you played with it for that— those 10 months. But during those 10 months, Tom was the owner, the true owner of that RC car. RC car, just like the bank is the true owner of the house until we pay them back all their money plus the interest. Now, the interest on a $350,000 house over the 30 years is going to be about $250,000. So if you add this up, we're going to pay $600,000. For that $350,000 house in Utah. Your house in Hawaii, it's $1.2 million for that $700,000 house. So, so kids, if you can see what's happening, right, when you start adding up, if we just imagine if you have a credit card and a car loan and a mortgage, imagine how much we're paying every month in debt, right? In debt. And the biggest problem with the debt is the Interest. The interest on the debt is what's going to the banks. Okay, so I hope this makes sense to you. I, I have a golden rule. Okay, so write down this golden rule. And the golden rule is to try never, ever, okay, to get into much debt. Try to minimize your debt. And you want to pay it off as quickly as you can. Okay, so golden rule, remember, write this down: try to stay in as little debt as possible and pay it off as fast as you can. You don't have to wait even though the bank says, "Oh, it'll take 30 years to pay off your mortgage." You don't have to do that. Uncle Alan, Uncle Alan doesn't like to pay mortgages for 30 years. In fact, my my first house that I bought. I'm going to pay it off in 2 years and 3 months. And my other houses that I have, I pay them all off quick. I try to pay them all off in under 5 or 6 years. And I just don't like keeping that mortgage for 30 years because of all the interest. Okay. The interest is really a major, major killer. So in closing, okay, I want to talk about when debt becomes good. Okay, so when does it shift over to good debt? And there's, there's sort of— and I hope I explain this to you right, kids— is debt is kind of good and kind of bad. So for example, we need for the most part to get a mortgage to buy a house. So it's good because we need a house and we'd much rather pay the mortgage than pay rent. So you look at the alternative. We're either going to rent a place or we're going to buy a place. Majority of the people, it's better to buy it and, and then try to pay it off quick. Okay. So it's good because you can get into the house, but it's bad if you follow how they want you to pay it off and keep it for 30 years or more. That's when it starts to get bad and we don't pay it back properly and we, we aren't responsible. Okay. Another form of good debt, kind of bad debt, it's kind of a blend, is auto loans. Now, I do want to say we don't have to buy the newest car and have the best brand new car. My, my car is 7 years old and it has miles on it. I try to take care of it so I can keep it forever, for as long as I can. So, but sometimes we need to borrow money for a car. And that car gets us to work, gets you to school, to hula practice or to soccer practice. So we, we need that stuff. So it is kind of a combination of, of good debt and bad debt. But again, we want to try to pay this off quick, as quick as we can, so we don't carry it on for the term that they give us. Usually it's 60 months or 5 years. You want to try to pay that off in a year or 2. Okay. The other form of good debt versus bad debt is student loans. Now, I think it's a great idea to invest in your education, especially if you don't have that opportunity to have it paid for. But I always suggest looking for scholarships, looking for grants. Uncle Alan, when I went to school, I had 3 different sources of ways to pay for my schooling, my college. I had a Pell Grant, which was from the government. I had a— because I'm part Hawaiian, I had a Native Hawaiian scholarship and I had a basketball scholarship. So if you do it right, you can actually make money like Uncle did. Uncle was making more money than I was paying for college because I went out there and took the time to do that. A lot of people kind of skip over that. Now, lesson number 8, I'm going to talk about college and careers. So I'm going to give you more ideas. of how to take care of that. But in some cases, we need to take out loans to pay for school. I think it's a great idea to pay for— to go to school and to go to the best school that you can. Remember, I talked about this in lesson 1. But student loans can get pretty nasty out there, and it, it can be a difficult thing for people to pay off. So again, be cautious on, on how you manage it and don't take out more than you need for your student loans. Okay. Lastly, where I think good debt is, is really good is when you buy things that are assets. Remember we talked about investments, right? In lesson number 1, we talked about buying investments. So some of the investments that you could buy would be like stocks or real estate. Now, I personally love to invest in real estate. So this is when Debt could be good is when you, when you buy, let's say you buy a house and you use good debt from a bank. So this is a bank and you get money from a bank to help you pay for the house. Okay. Now in this house, you're going to have renters. Okay. And the renters are going to pay rent. So this rent income now goes into your pocket. So this is your pocket, and then you can pay— you can use this rent income to pay the bank back, and you keep what's left over. That's going to be your profit, your rental income profit. Okay, so that's when it's good to leverage. And then once you start to understand good debt, you understand how mortgages work, you understand how real estate works— and it takes time, this is your first entry into real estate— And again, I'm going to go over that in lesson 6. But once you understand it, then you could go to the bank and say, hey, can I borrow more money? Can I get more money? I want to buy this other house. It's— there's 2 houses in one. It's called a duplex. So you can rent out 2 sections of the house and have rent checks coming into your pocket. Okay, so there's, there's multiple ways that you can use Debt, good debt and bad debt. Okay, now for for today's financial assignments, okay, I have I have a few assignments for you today. Okay, the first assignment is I want you to research how much it would cost for a house in your neighborhood. Okay, so if you look around, you know, you go online, there's a lot of websites today that. Will tell you the cost of home. So, for example, like one of the most popular is Zillow, zillow.com, and your parents might know about these. So go online and search properties in your neighborhood and pick one. Pick one house you see, and I want you to get the cost of the home. So is it seven hundred thousand? Is it three hundred thousand? Is it two hundred thousand? Whatever the cost is. Okay. Now you get that cost, and I want you to go and Google mortgage calculator. I want you to put a mortgage calculator. I could pull that up and put the cost of the home in there. I want you to calculate what the monthly payment is going to be and what the total is going to be that you paid for the house after you completely paid the mortgage off in 30 years. Okay. So look up a house, search a house in your neighborhood using online tools and, and websites and calculators to come up with The price of the home, because this is a good exercise for you to know what homes cost in your neighborhood, and the monthly payment, the mortgage payment on it, and the total cost. Okay, this is a good start. Okay, the second assignment I have for you is on researching a car. So take your dream car, like a car that you really like, and go look it up on like how much that car would cost. There's a lot of websites like AutoTrader and Kelly Blue Book. Your parents would know. So research cars for sale. Find your dream car. So let's say you want a BMW or a Tesla or, or a Lexus, or you want a Volkswagen. My, my first car was a Volkswagen Bug in high school. It was $400. So, you know, research the car that you want. Okay, then I want you to go and search for auto loan calculator on Google. Auto loan calculator. And I want you to type in the price of the car and see how much the loan would cost you. What is the monthly payment on the car and what is the car going to cost you in total? Then, then I want you to take either one. You take the house or the car, whatever you want, and I want you to print it or write it on a sheet of paper. And I want you to take a picture with it. Okay, so whether it's the house or your dream car, maybe there's a picture of the car, a picture of the house, and I want the total. Total, um, the price of the house, the monthly payment, and the total paid. You're going to take a picture and you're going to post it and tag me. Tag me and use the hashtags right here: Money ABCs. Okay, Money ABCs and also hashtag 101 Financial so we can find you. Why? Because we're going to pick another winner For a gift card from your post. Okay, so when you start tagging me, so you might be a winner just like Andrew was today with his three S's of money. You can be a winner for posting and tagging me in debt. Now, I don't want you to be afraid of debt. I want you to be knowledgeable. See, knowledge is power. Once you understand that, if you understand it, you start to learn it, and you're not going to get it all from this thirty-minute lesson. But you're going to get an idea. And over time, as you start to get older, I want you to be in charge of your debt. I want you to be in control. You are the boss. You are the CEO of your money. So write that down. I am the CEO of my money and I will dictate where it goes and what we do with it. And that is the power that you will have and you will be able to change your life or improve your life for the better. Moving into your future and your adulthood. So, with that being said, guys, kids, I thank you for coming on. I'm going to have a couple minutes for questions. I'll take two to three minutes if you have any questions. Love to see it. Any comments, and then we'll wrap up and get prepared for lesson number four. Okay, I have another question. I want to go to college, but I don't want to get into debt. Very good. I I think college is for most people, and if you can go to college, go. And try to go to the best school you can. I have lesson number 8. I'm going to teach you about college and careers. I'm going to give you some ideas how to pay for college without taking out any student loans. That's something that I did personally. Okay. What happens? Okay. From MJ, your kids. What happens if you don't pay off your mortgage before you die? Then your kids have to pay it for you. Okay. So tell your mom and dad that pay off the house before you die because I don't want to pay your bill. Okay, it's going to go to your kids. Your family's going to have to pay for it, or the bank is going to take your house back. Just like, remember my example of big brother Tom giving you the $100 to buy the RC car? Let me see the RC car. If, if you don't pay back the $100 to brother Tom, then he's going to take the car back. And here's the thing, if you don't pay the bank back, they're going to take the house and then they kick everybody out. And we don't want that, right? We don't want— we don't want the The big bad banks that take kick take your house and kick you out, and they and these banks they have no heart. They have absolutely no heart. Don't don't get me started on banks. So I will have to go off. How much student debt do you think is okay? Some schools are crazy crazy expensive. You know that's a personal thing. Like you know I try to get my kids to go to. The best schools I have. My older son's going to BYU. Very lucky for us because BYU is a great school here in Utah, but it's also very cheap. My second son, now that's a whole other story. Kavika, he's on a mission right now. He's serving in the Hispanic area of North Carolina speaking Spanish. When he gets home, he's going to go to college at New York University right in Manhattan. Now I got to tell you, we've done our research on it and New York University is like $76,000 a year all in. That's with tuition and room and board. It is unbelievably crazy. Fortunately, he has a scholarship, but it's not covering everything. So it's really how you plan for it and what you do. Okay. Okay. What did I miss here? Good question. What if I buy the bank? You know what? I want to buy a bank too. So let's go on in a deal together and let's go buy a bank and let's start a bank. Very good. Whoever that was, I love that. Kaleo, who's— what's your kid's name? How long does a student loan last? A student loan. So we— my company works with a lot of doctors. And these dudes, these doctors, they make good money, but they— a lot of them are in their 50s and 60s and they still are paying for their student loans. It just— it can go on forever. They just— they keep getting you to defer or refinance and it can stretch on forever. And the crazy thing is the lender for the student loan, they don't have anything they can take back. Like the bank, they give you a mortgage. If you don't pay the mortgage, they take the house. You buy a car, you get a car loan, and if you don't pay the car loan back, they take the car. But if you have a student loan, they can't take the student— they can't take your classes back from you. It's in your brain. So you're the collateral. You're the one that owes them. So they're going to latch on to you and they're going to tag you. If you owe them money, they're going to take part of your income. And there's just some crazy things. And Al will be here next Tuesday, 8 AM Hawaii, 12 noon Mountain. Take care. God bless you.