#23 - Debt!

This week’s episode is all about debt!

Learn the difference between reasonable debt and slippery slope debt:

Reasonable Debt:

  1. Things that make you money - like actually make you more income, not potentially make you more income or make someone else more income. So student loans that actually make you income is a good idea. Business loans when you’ve calculated a nice IRR is a good idea

  2. Mortgage, as long as it’s not over 30% of pre-tax income, but preferably under 20% AND you plan on staying in that home for a while. If you’re looking to move or upgrade it may not make sense to buy (or do a 30 year fixed mortgage)

  3. Car - takes you to work, but really shouldn’t be more than 7% of pre-tax income

Here’s that nice student loan calculator from the Washington Post. It tells you whether or not you’ll make money with your degree. If you wont - then the thing you want to do is a hobby. Sorry to say.

Update regarding the episode - I mentioned the Public Student Loan Forgiveness program, and said that if you work for the government that you can get full forgiveness without the IRS considering the loan forgiveness to be a gift. That is true - it’s also true if you work for a qualifying non-profit.

The other student loan forgiveness programs - they do in fact forgive your debt, but the balance forgiven is considered a gift to you and you have to pay taxes on the gift. In light of me throwing out this information without delving deeper - I think we will do a student loan episode for #24!

Slippery Slope Debt:

  1. Pretty much anything else

  2. Things that are “shoulds” but really don’t make you money - like a bunch of student loan debt without good career prospects or business loans that really wont pan out

  3. Credit card debt

  4. Personal loans for weddings or regular expenses

  5. IRS debt

  6. Mortgages over 30% of pretax income

  7. Car loans over 10% of pretax income

What do I do if I’m in debt?

  1. Budget! I know - I’m so repetitive. But seriously, budget

  2. Align your values with your spending

  3. Pay down debt with the Debt Snowball Method (pay off the lowest balance first, quickest way to see progress) or the Debt Avalanche Method (pay off the higher interest rate first, cheapest and fastest way out of debt)

  4. Make extra payments

  5. Get more income

  6. Use consolidation as a last resort

  7. Stay focused throughout the process!

Other things we mentioned:

50/30/20 budget - this is AFTER-TAX income. So you spend 50% of your after-tax income on needs, 30% on wants and 20% either saving or paying down debt. Here’s a nice graphic about it:

50_30_20 rule.png