How to Control Debt

Good Debt vs Bad Debt

It is not only important to know the difference between good debt vs bad debt, but also how to control debt.

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 on time, 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 students looked puzzled, as if they were thinking; "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 realized that they didn’t understand my point. We were learning how to manipulate money at the expense of others which is neither moral nor ethical.

EVERYONE SHOULD KNOW HOW MONEY IS MANIPULATED FOR THEIR BENEFIT BUT NOT AT THE EXPENSE OF OTHERS.

How to control debt is about making debt work for you.

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 spent 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.

Businesses hire financial analysts because they have the skills to know how to control debt.

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 heavy math major). I had to start in remedial math classes. By the time I got to business calculus I got a 98%.

I couldn't understand why I finally understood math in college but not in high school. My teacher told me, “When you were in high school, you didn’t see the use for it. Now you do.”

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,

so: X = 5,

I need 5 more apples.

If you aren’t good at math, learn to get better. You will be that much better by doing so.

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. Understanding math is one way to know how to control debt.

Examples of How to Control Debt.

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.

Most of my financial education was paid for through scholarships.

I also have a CDL B license. The cost for training 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.

Be wary of people 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.”

They might say things like: “you are investing in you”.

Most of the time what they are selling is overpriced.

They make you believe that you can be rich and successful 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.