How to control Debt
Does “good debt vs bad debt” exist?
Bad debt charges an interest on items that depreciate, while good debt has a return on investment.
Using a credit card for a consumable item like buying clothes, going out to eat, or a loan for a car that depreciates in value is bad debt.
Good debt would be used for education, a business, a home that increases or anything that adds future value is good debt.
Good debts can turn into bad debt.
College graduates that have student loan debts that outweigh their earnings are considered bad debt.
Some law students are suing their schools because the debt was much higher than their potential earnings.
During the recession of 2008 older workers went back to school to get a degree, then did not get hired because of age bias. I am one of those older students.
Educational debt should be considered good debt because it would pay itself back with a higher paying job. However, that isn't always the case.
Investing in yourself may not pay off the way you hope it will. Be cautious when taking on debt. Understand debt and how it can hurt or help.
Unsecured vs Secured debt
For unsecured loans, interest rates can be over 30%. For 2020 and 2021, I have seen the average around 15% -30%.
When interest rates for unsecured loans are higher than the average return on a Standard and Poor’s investment averaging around 10% a year, it’s hard to justify the loan unless it is paid off each month before the interest is charged.
Secured loans have lower interest rates because if the loans aren’t paid, the lending institution can repossess the item.
How Interest Rates are Determined
We know if we have a low credit score, we will pay a higher interest rate. If our score is high, we will pay a lower interest rate.
Low credit score doesn’t mean you don’t pay on time. It could be due to other factors.
You can be 100% paid, but if you have a lot of loans outstanding that are maxed out or not a variety of loans between a car, house, or revolving credit, such as a credit card, that can also be a factor on a low credit score.
In the United States initial interest rates are determined by the Federal Reserve bank which is a centralized banking system.
Rates are determined based on the state of the economy.
If the economy is flat or consumers aren’t spending, then the Federal Reserve lowers the interest rates to encourage spending and boost the economy.
If everyone is spending and the Federal Reserve is concerned about out-of-control inflation, it increases the interest rate.
When interest rates are low the dollar is devalued, and imports are more expensive to purchase.
The reverse is true when interest rates are high. When interest rates are high the dollar has more value, foreign products are less expensive to buy, and products leaving the U.S. are more expensive.
The prime rate is the best rate given to the best customers. This is when banks lend to each other overnight.
How Money, Banking, and Credit is Manipulated and Who Benefits
As part of my finance degree, I took a “Money, Banking, and Credit” class.
During class, I raised my hand and asked a question.
“Does anybody here realize we are learning how to manipulate money for our benefit?”
The look from the students’ faces were priceless, as if they were thinking; “Is she an idiot? That’s why we are learning finance, so we can learn how to make the big bucks and get paid to manipulate money, credit, and loans then capitalize on it.”
I do not think it was the intention of the teacher, but I was learning how to manipulate money.
The class moved on and I realized that they didn’t understand my point.
EVERYONE SHOULD KNOW HOW MONEY IS MANIPULATED. EVRYONE SHOULD LEARN HOW TO MANIPULATE MONEY.
This should be taught in high school. It’s not difficult. I was bothered that this knowledge could be used at the expense of others.
How Lending Institutions Manipulate Debt to their Advantage
A simple explanation of a checking account. In the eyes of the bank, you are not only their customer, but you are also their creditor.
The more money you have in your account the more money the bank can lend out.
Depending on what kind of bank account you have, determines whether you earn interest or not and how much.
It is also why there are minimum balances on certain accounts.
If you fall below the minimum, you will get charged.
For most banks the interest you earn is below the inflation rate, which means you are losing money in a savings account.
When opening bank accounts/credit unions/investment banks/brokerage firms, check their fees and interest rates.
See if the institution you are banking with offers “sweep accounts” This is an account that automatically transfers your funds at the end of each business day into a higher earning investment like a money market fund.
It is a way to manipulate money to a more favorable position. It also curbs some inflation loss.
Debt can be used to Create Wealth.
Businesses purchase machinery to decrease time on servicing or producing products.
Financial analysts of large corporations use formulas to determine if the loan or debt would produce a high enough return.
Will the return on that purchase be greater than the cost, when accounting for interest, amortization, and depreciation?
If the financial analysts’ numbers indicate that it would increase the profits, then the item is purchased, and the interest can be written off on taxes.
Investors can make money on debt, but at a higher risk of loss and it should only be done by savvy investors that know what they are doing. I will talk more about that in another blog.
You are Going to use Algebra after High School
Understanding algebra, probability and statistics and some business calculus can be very beneficial when trying to manipulate things in your favor.
Remember in high school asking the teacher, “When will I ever use algebra?”
Students did not understand what “x” meant.
I was one of those students.
I was ecstatic if I got a “C” on a math test. Most of my grades in math were D’s.
When I went to college later in life, I chose finance as my major, (a math heavy major). I had to start in remedial math classes. By the time I got to business calculus I got a 98%.
I didn’t understand why I did so poorly in High School. then in College, I finally got it.
My teacher told me, “When you were in high school, you didn’t see the application for it. Now you see the application for it.”
Every time you buy a car, purchase a home, use a credit card to make purchases and the money is borrowed you are using algebra.
I will give the simplest example of how algebra is used every day.
If I have 4 apples, but I need 9 apples, how many more apples do I need?
4 +? = 9, instead of using a “?” we use an “X”
So, it looks like this:
4 + X = 9,
we know if we subtract 4 from 9, we get
9 – 4 = X,
X = 5,
I need 5 more apples.
If you aren’t good at math, learn to get better.
Take math classes. Learning the basics of algebra and probability and statistics will help you determine whether you should accept the loan or if there would be a way to use debt to your advantage.
If you have a high interest rate credit card, don’t purchase anything you can’t pay off at the end of the month.
If it is a school loan be careful about whether the debt for education will return to a higher paying job.
Be careful about consolidating your school loans with a private company. The interest will no longer be tax deductible.
With government loans you can write off the interest rates when filing your taxes.
Look for ways to have the education pay for itself, through scholarships or paid training.
I had some of my finance education paid for through scholarships.
I have a CDL B license. The cost for training for a CDL B license was a few thousand dollars, but because there was a shortage in the industry, I got paid while training.
When buying a home, consider the market and interest rates. Different strategies for different markets.
Be careful of interest free loans. The minimum monthly payment is often not enough to pay for the loan in its entirety before the interest kicks in, then you are charged interest on the entire amount regardless of how much money you paid on the loan.
AS an example, my mother needed $4500 dollars for dental work, she qualified for a loan but didn’t want to borrow the money.
The loan would be interest free for 12 months. If the loan wasn’t paid off within the 12 months, she would have to pay 20% or more in interest.
Leaving a balance at the end of 12 months is calculated on the initial loan amount of $4500 and not the balance.
If my mom paid $375 a month for 12 months, paying the loan off, it would have been interest free. If she then invested another $4500, the invested money would have earned an interest. Essentially lowering the cost of the dental work by the interest earned and recovering some of the loss.
Be fearful of the guru that is selling you a product or service that encourages you to spend or borrow money to make money. The old saying of “it takes money to make money.”
Their interest is not you or your business. Their interest is making money from you at your expense. They might say things like: “you are investing in you”.
Most of the time what they are selling is overpriced.
Going to college and learning from professors would be cheaper than what some of these guru’s charge.
They make everyone believe that they can be rich and successful just like them. Building up hopes and dreams.
The amount of money these gurus claim you can earn would put you in the top 1% of the population and for some reason with their tactics everyone in America could be 1%. That math doesn't add up because the bar was just raised to get into the 1%.