Ep 261 - The Debt to Savings Scale - To Better Understand Your Freedom Number

Hey, everybody. Flip and Danny and our guest star, Ben is here. Welcome to another episode of our podcast.

And our podcast is called Freedom through Passive Income.

That's right. And I've got my Bob Barker microphone. This is what I call this for those that I just dated myself. So for those of you out there that remember that, thank you very much. Spin that wheel. There we go. Welcome to another episode. This episode is entitled the Debt to.

Savings scale to better understand your freedom number. And we have Ben here. Take it away, Ben. You love these episodes.

In one of the first podcasts in the series, we talked about the freedom number and how to do that. And so I want to talk, we'll talk today a little bit about this relationship between debt and savings and how it works on this. So let me ask you this, just quick. How would you define debt? How would you define savings?

Okay, well, it says right here, he.

Always looks at my notes and he's.

Totally looking at yours.

Well, I mean, to me, what, what's that? Debt is when we owe people, you know, or things or whatever. And savings is when we put money in an account that makes absolutely zero interest. That's what, that's what my savings does.

That nails it. Okay, well, the way, the definition here that you can also look at in addition to that is the debt is future debt is future earnings that you've already spent. So you're going to, whatever you earn in the future, a portion of that's going to have to come back and pay for what you've already spent. Whereas savings is past earnings or current earnings that you get to spend in the future. And that is. So the interesting thing that happens is that it's interesting for many people, many of us to look at debt and savings is two separate entities, two separate silos of money. And the way you hear it expressed is, well, when I pay off these debts, then I'll start saving. Can you have both debt and savings at the same time? Yes, absolutely. So many of you are working, you have a 401k and yet you still have debt on your house, debt on your car, etc. So it can be simultaneous on this. So one of the best ways to see this relationship between debt and savings is to think about the water, your people. Financially, financially, I'm underwater. That means you're down here, underneath the water level, surface level, that represents debt. So if you take all of the assets that you have, savings, maybe 401k or savings account, checking account, you take all of your debt. And this is part of the freedom number calculation that you had, then that's how you can come up and see where you are in relation to are you below water or at your surface level or you above water. So when you're below water, that means that you owe. You've already spent money that you'll have to earn in the future to get back up to surface level. If you're at surface level, which is very rare for anybody dynamically to stay there for a long time means you don't have any debt. Your current bills are paid zero in savings. That's pretty tough. Pretty tough to have. But anyway, that's the demarcation line. But I tell you, for a lot of people, reaching the surface level after being for years underwater.

Yes.

Is so freeing.

It is. It's an accomplishment that should be celebrated, quite frankly.

Absolutely, absolutely. And then when you have the savings, then again you're starting to. That savings above water means that you've earned money that you can spend in the future that's there in reserve for you to earn. So that's very helpful to be able to keep track of that. Now let me ask you, this is all debt bad? You did a podcast on this?

No.

What would be examples of debt that's not bad?

For me, it's any low interest debt, specifically my house. My house is going to be a good debt. Anytime that I'm investing in something, if I can earn, this is my personal picture. If I can earn more with my money than what I'm paying on a debt, then I'm going to view that as good debt in some way, shape or form. It might not be classified perfectly as the right good debt, but if I can borrow $200,000 at 5% interest and I can take that that money and earn 10 or 12 or 15, I'm fine with that debt. And so I view it in my personal financial world as good debt. Even though the house is something totally different.

Okay. And the house is different because how?

Because it's a tangible asset that is going to appreciate. And especially if I have it earning income in any way, then I'm still earning on top of the tangible asset that is appreciating over time.

Okay, that's a tough question.

Yeah.

HELOC loans on a house. Do you think that, I mean, obviously there's specific circumstances each time. Would you say that that's a wise thing for people to take out a loan on the house that they're living in if it's been paid off to be able to create income? Do you feel that it Is in these uncertain times more wise to have an asset that even though it might cost you potential income, with this uncertainty of what's ahead, you don't have to worry about payments. It's yours as you go. For instance, another situation might be people in their 60s and 70s, they want to make sure that regardless of what their payments are, they still have their house to live in. How would you balance that?

Yeah. So my personal opinion of HELOCs in general, I veer towards a no, that it's not a good idea because if you're not financially responsible, it's easy to not use that money correctly and ultimately be losing your house. And so. But for those who are financially responsible, I have been on the phone with investors going, this is exactly what I'm going to do. And they have left brained it to death. This is what I can borrow, this is how I can use it. This is how I'm going to pay it back. And I'm like, bam. You thought all the way through it, you went through all the challenges, but I just, I don't think it's something that everybody should do. It certainly is something you can do. I think that there's risk to it.

So be careful.

Yes, be careful.

What about credit card debt?

Again, that goes for me. We'll get 0% interest credit card debt. Right. And we'll use it for as much as we can for investment opportunities or a business, you know, something that we're going to invest in for the business to grow something. And then we'll, as soon as the 0% is over, we'll transfer it to another 0% card. So I love playing with credit cards in that way, but high interest credit card debt, again is in my opinion, not a good idea.

Right.

Because you're just you, as you define debt, it's, it's something that you've, you can't even really out invest bad credit card like 17, 21%. Where are you going to put your money?

Exactly. You're going to earn more than that.

I believe that's called credit card surfing.

Do you think for some people that credit cards and credit helocs, credit cards, it's just, they're just really not geared to handle.

Yes. Yeah, yeah, yeah. I think it's free money and people get excited because they have money, but they're just not educated on what it's going to do the time them and they get in trouble. I know a lot of people that have gotten in a lot of trouble. Yeah.

And so one of the bewares that I have for everybody. This is a credit card in general, is just don't make sure you don't confuse credit card availability of credit with earned money in your checking account. And I think it's easy to say, hey, I've got this credit card, I've got $2,000 of limit spending limits still available. So therefore I'm okay as long as I don't get to the limit. Whereas when you think about the water situation, anything that you use on your credit card, you're still below water. And unless you have a specific reason and you're good with investing to do that, if it's spent on, especially if it's spent on depreciating assets, clothes, entertainment, et cetera, then that's gonna be. It's just taking you underneath the water on that. What about. That's a tricky one. What about car debt? Is car debt good or bad?

That is a tricky one. That's a very tricky one. I think it could be both. What are you using the vehicle for? Right? Is it for work? Is it for to be able to go earn your income, in which case you need the vehicle and it's that mix of good and bad. And maybe there's some strategy there of how fast you can pay that off. It is, like you said, a depreciable asset. And so. But sometimes you need it to actually earn your money and therefore it's a necessity, right?

Yeah, it is tricky on that. What I would suggest everybody is to consider when you have something like the car, when you have discretionary spending, do you really need to have the best? Yeah, you need to have the best on this. Have a friend of ours been teaching out in the west coast for years and years, and as a junior high teacher, his kids would come up to him, his students, and say, wow, why? How do you be able to travel around the world like you do? He says, you know, one thing is, I don't drive a brand new car. I have a good dependable car. But he says, you know, the car payment that I'm not making, he says, that's a week for two in Paris every year.

Nice.

So there is a trade off. And if you have to have a car, you have several kids, a minivan is the best reason for it. You need to have a, or you need to have a dependable car to get to and from work. Then do you have to have the very best, most expensive car or a late model car that's going to depreciate one third to two thirds of the value in the next five years. So it's a choice that you do have to be able to make. So next point here about this debt to savings scale. There's a thing if you have debt and you're underwater. One of the strategies that's become very popular in the past few years put out by Dave Ramsey is called the debt snowball. And it's an amazing strategy for a lot of reasons. The Heath brothers, very successful writers about economics and with academic point of view, have talked about this. So if you're not familiar with that, the basic idea is there's an emotional momentum if you're able to start off with the small bills first and pay off the small debts and then work your way up so you can look online and find out what Dave Ramsey teaches on that. Something that's less well known is an idea of saving snowball. This is kind of what I had in mind as we talked about the hundred thousand dollar lazy money where you start with something and we may have products in the future that we offer where people can actually get started for lesser amounts of money. But the idea is that if you start saving slow and you keep adding small amounts of savings right away that that will, over the months and years ahead that that will build like a snowball and build momentum. And the more momentum that you have, the easier it is to continue to add on that. Have you found that to be true?

Yes, 100%. I also think it builds your habit muscle, right? So I think that's really, really super important because I know you have a spreadsheet, you can talk about this more, where you lay out all the things that we do. And it is a habit to do X every single month as the money comes in. You know, here's all the places and this is where I place $1,000 every month or, or $500 every single month. And it just becomes something you always do. You don't question it anymore. So I like the savings. Did you call it savings ball?

The snowball?

I like that. Yeah, I like thinking of it that way. But yeah, it's a habit muscle, right?

Yeah, it's because what you're talking about is so the sheet that I've got, I go every month, I go through, you know, all of our accounts or whatever account it is. And then at the end of, at the end, once I get done with it all, I review it and then I say okay, I'm going to put another maybe 500 in stocks and then I'm burn another $500 in Bitcoin. And then, you know, which I've stopped doing that, by the way. But. But yeah, so you're right. It's. It's now. It's just. It's habit.

Yes.

You know, one of the former podcasts you talked about actually attacking this from two different ways. One is you're. You're finding money that you're maybe using on discretionary spending that you put over, but it's also reducing your expenses. So you reduce your expenses, which gives you more money.

Yes.

Plus you have the habit of taking money, other monies that you have been earning and going ahead and, and together that can create that momentum on that. So I think the point here is that of this podcast we're trying to make is that it isn't two separate journeys of going from debt. I have to eliminate debt, and then I'll start savings. It's all on the same continuum. And so the illustration of water might help you out if you're underwater a little bit. First get to surface level and celebrate. I mean, it is something to rejoice about in the feeling of being debt free is just amazing. Yes, it's just amazing. So we encourage you to continue to fight for that. My wife and I, we have reached the point where we hate debt. We hate it, and sometimes it's necessary and we'll do it if there's a good reason, like we talked about. But otherwise, the other last thought I'll leave with you this is that if you have unused or unearning sections of money, as I have a chance to talk to many of you on the phone, you'll say, oh, you know, I've got $10,000 over in this account. I've got $15,000 over here. What's it doing? Is it reaching your objectives? No, it's just sitting there. Start to take action today, and this can build that savings snowball. Take action today. We can help you out with this about being able to convert it into our debt fund or other vehicles that we have, allow that power of 10% that we've been talking about to be able to work for you and to allow that savings snowball to continue to accelerate and grow.

Love it.

It's funny when you're talking about the water line, right. And when you're below the water, you have debt. And because we keep talking about cruise ships, this brought back a comedian that I would see all the time on cruise ships, and he always had a line. He would say, you know, people always want to get wealthy, they want to get rich. He goes, me, I just want to be broke. I just want to be right there. I don't want to owe anyone. And I want to. I just want to be broke. Well, we hope that you enjoyed this episode. Make sure you're heading on over to our website, freedomcapitalinvestments.com to join the investor club. And then also make sure you're checking us out on all the social media, whatever those things. Those.

Those things, too.

But we looked at all of our episodes with Invest Smart, Live Happy. Bye, everybody. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice. Opinions and information on the show are not guaranteed. All investment strategies have the potential for profit and loss.

Sam.