Good Debt vs Bad Debt - What's The Difference?

What's up, guys? In this video, we're going to talk about good debt versus bad debt. We're going to talk about auto loans, mortgages, credit cards, student loans. Basic principle of debt. It's good unless you're either stupid or irresponsible, right? It can definitely act in your best interest and it can definitely act against you. I want you to look at this graph. This represents the total debt balance currently in the US. So we've got mortgages, HELOC loans, auto loans, credit cards, student loan, and other. So let's just break these down one by one. So first of all, mortgages. So obviously interest rates are extremely low right now, mid-2021, and people are refinancing like crazy, right? So the reason why is because they recently locked in an interest rate a couple years ago at maybe 4%, 5%, 6%. And now when rates are at 2 or 3 or 4%, most people will actually do elect for a cash-out refi, meaning they take the equity out and basically start their loan all the way over. There's pros and cons to this. Obviously, you can put cash to use. It's in your best interest to actually hold debt. So if rates are low and interest rates go up, then that debt actually becomes an asset for you. The other way around, if you lock in a rate at like You know, 3%, and then rates drop, it kind of becomes more of a liability. I don't think the current mortgage balances are out of whack. You know, they're slightly higher than they were in 2008, but it's also 11 years later. So let's actually skip HELOC loans. Those are great. You should know what those are. It's just like a loan, a revolving loan on your house. So that's why it's called a home equity line of credit. But I really want to talk about auto loans. You see a lot of people getting these 6, 7, 8-year loans on their car, and I just am baffled by it. I am not a strong believer in Dave Ramsey principles, so this is kind of a, you know, anti-Dave Ramsey spiel. Don't get me wrong, Dave Ramsey is really good for those that are, you know, just be frank, financially uneducated, right? I mean, he talks about, you know, very risk-mitigated strategies. He'll tell you, you know, pay off your house as quick as you can, but I mean, I don't think so. And he'll say pay cash for cars. Now look, I don't think you should buy a car if you don't have the money because it's a depreciating asset. I think you should put your money into cash-flowing assets and then let the cash flow on those assets purchase your toys, like your cars, your motorcycles, things of that nature. But the thing with auto loans is there's kind of something that you can utilize to your benefit, and that's a 0% APR. You'll see that it's generally on new cars, but anytime you have money that's at 0% lended to you, you can use that as, you know, You're just utilizing leverage to your advantage. Paint me a picture here. Let's say you wanted to buy a new truck, $50K. You know, yeah, you could go buy that truck for cash, you know, $50K gone. Or if you utilize, let's call it a 5-year, 0% APR loan, you could take that $50K and make payments on it. First of all, there's a couple of hacks. You know, one of them, like you put your payments on a credit card. So then you get 2% off of that $50K. You know, there's There's a grand right there. But what you really should do is you should take that money and invest it, right? So you take out the loan, you invest that money over the next 5 years, and then you can pay off that loan. The reason being, I kind of have a rule of thumb. You never want to have a car loan that's like over 5 years, and you never want a used car, you know, you don't want to finance it over 3 years. That's, it's just, you know, good practice. Again, this isn't financial advice though. Totally. You do whatever you want. So if you were to invest those dollars, you would actually make like an additional $5,000 or $6,000 over those 5 years just by investing that cash and then paying off that, you know, car year 5. So debt just acted in your best interest. I think it's absolutely egregious of people that go out and take out these— anything more than a 5-year loan on your car. It just doesn't make sense whatsoever. Okay, let's move forward to the next one. Credit cards. So auto loan debt has been growing, mortgages as well. Credit card debt is actually shows that it you know paid down a little bit in 2021. A lot of reports have been coming out showing that people use stimulus, the stimulus checks to pay down their credit. That could be one reason why. The reason because it has usually the highest APR, right? It has the highest interest rates on that debt if people are behind on those credit card payments. You should definitely have a credit card, 100%. Even if you're 18, if you're 16. As soon as you're old enough to get one, you know, cosign on one with your parents, but use it like you would a debit card, meaning don't spend money you don't have, right? For one, it's— you guys should know this. Hopefully this isn't too rudimentary for you, but credit card companies take the liability. Like if you make an online purchase and it's fraudulent, you know, credit cards will usually reimburse you. Debit card? Usually not. You're kind of out of luck. Another thing is you earn that interest, right? Maybe it's only 1% or 2%. As long as you're responsible, And you're not stupid, you're prudent about paying off your credit card, it becomes an asset, you know, for you. Now let's move on to student loan debt. Student loan debt has been growing egregiously over the past, you know, 10 years. Now I just want you to take a step back. Like, let's say you want to go to Cambridge or Stanford, you know, those— you're looking at especially out-of-state tuition, $100,000, $200,000 in debt. I can maybe get behind that. if you're gonna go have a, you know, 6-figure salary and you can pay that off in the next couple years. But there are, there are so many students that will go out to these Ivy League schools if their parents didn't help them out. They're thinking, yeah, I'm gonna go to the best school I can, but then they only land a job that's like $30,000 to $60,000. Like, do you know how long that's gonna take you to pay off that debt only making less than, you know, You know, $100,000. It's just ridiculous. I think that's a large reason is people just really aren't thinking that through, you know, of like, okay, what's my expected salary going to be? And what, what is the debt obligation that I'm taking on for that? So that's been growing like crazy. And of course tuition costs are just growing. And I assume that they're only going to continue to rise. Okay. That's enough about student loan debt. Let's move to other debt. Honestly, I don't think there's anything else really worth Financing doesn't really make sense. I think you should pay for everything else in cash. You can take on other loans, like again, if it's zero percent APR, I think it makes sense. Now, don't spend money you don't have. But like let's say you go buy the new iPhone, right? And they're going to give you a zero percent APR loan on your phone and pay it off over 24 months. You know, with time value of money, you know, it's in your best interest to take that loan. Now. You got to ask yourself a question. Are you actually going to take that $900 and invest it, or are you going to go spend it on something else? If you think you're going to go spend it, you should probably just pay for the iPhone in cash. But if you think that you're going to put that into your brokerage account, then certainly, you know, always take advantage of 0% APRs. In life, you got to, you got to calculate your runway. You know, Family Finance One-on-One. Just take an inventory of your income streams and your debts. The one thing I do like about Dave Ramsey is, you know, he preaches about these emergency accounts. I think it's like 3 or 6 months is what he'll preach. However, I think you should have 2 years runway easily, you know, invested according to your lifestyle. I mean, just so many things can happen in life, right, where you lose your job or You know, medical expenses go through the roof. There's just too many things. So I think it's in your best interest to, you know, definitely save up a couple years runway before you start, you know, buying things you— that you want and don't need. So that's everything today, guys. Let me know your thoughts on this and what you guys think about, you know, our debt ceilings and, you know, how much debt the world has taken on, if it's good or bad. Again, just to reiterate, I think debt can be really good if you're smart about it and you use it as an asset.