Episode 8 - Borrow Smart: Strategies for Financial Growth
Discover essential strategies for wise debt management and enhance your financial well-being in this solo-hosted episode. We’ll explore how to use borrowing to your advantage, from smart home-buying through understanding interest rates to leveraging student loans for career growth. Learn how to navigate away from auto loans and credit card traps, optimize your credit score, and protect yourself from fraud. This journey into financial freedom is packed with personal insights and actionable tips for savvy spending and investing in your family’s future.
Episode Highlights:
(00:47 - 01:50) Understanding Healthy and Unhealthy Debt
(02:53 - 04:44) Understanding Interest Rates and Healthy Debt
(12:38 - 14:23) Free Starter Guide
(18:07 - 19:19) Car Ownership and Auto Loan Debt
(24:22 - 25:33) Credit Card Rules and Credit Scoring
Full transcript
Let's talk about debt, baby. Let's talk about you and me. Let's talk about all the good things and the bad things that may be. Let's talk about debt. Let's talk about debt. All right. In all seriousness, I know I just did the 1990s salt ‘n peppa song, changed a little word in there. But that is the focus of Beyond Budgets®, episode 8.
I want you to understand debt is a tricky topic. I know a lot of people have strong feelings about it and think it's always bad or unhealthy. There are some healthy types of debt, though, and I want to break the myth that all debt is evil. So we're going to jump into some of the healthy types of debt to start off with, and then we'll talk about the unhealthy types after our break.
Okay, so healthy debt. Mortgage debt can actually be a good thing, especially if interest rates are low.
Obviously, we're recording this in early 2024, so the interest rates increased pretty significantly in 2023 and really prevented a lot of people from buying homes because mortgage rates were so high and the prices of the homes were high. But now we're starting to see at least a pause on the Fed rate. There might be some rate cuts this year, which would impact the mortgage interest rates in a good way.
The mortgage interest rates will come down once the Fed starts doing rate cuts. For many people that either own a home now or are looking to buy their first home, mortgage debt can be a healthy type of debt. You just have to be really cognizant of the interest rates when you're considering whether to purchase or move if you already have an existing property and really weigh the pros and cons there.
Just as a practical example, my own home, we moved here to Florida right before the pandemic hit, and we locked in a great, competitive interest rate. So for us to move out of our current home would be a significant cost, even if we get a similar amount of mortgage to what we had before. Now, the other hardship is that prices have increased significantly since we moved.
Deb Meyer (02:23.662)
In our situation, 308,000 was the purchase price. Now it's probably worth closer to 475 or 500,000. And so if we wanted to find a comparable house in another location, we would have to essentially pay at that higher price and then take out a larger mortgage and pay a higher monthly rate just to have the same exact house.
Again, it’s important to think through the financial repercussions of any move if you already own a home.
If you're renting right now and looking at buying a home, just be cognizant of those interest rates as they change and maybe wait a little bit if you can be patient. Wait a little bit until the rates come down closer to what we encountered over the last several years.
Now, I will say most of my time as an adult, I've been in a low interest rate environment. Mortgage rates were never exceptionally high.
But I’ve been talking to other adults that are a little bit more established in life. They were buying homes in the early and mid 1980s where interest rates were getting 12, 13% for a mortgage. So it really just depends on the perspective you have and what kind of life events you've lived through already that you can kind of decipher what's of reasonable interest rate or not.
just understand with mortgage debt, the bigger, more expensive house you buy, the more potential mortgage debt you're gonna have and the harder it's gonna be to come up with a large down payment. So going back to some of the core values that we talked about in episode two, really figuring out is your core value simplicity? Could you do with a smaller house and something more modest or?
You know, is the home that you live in a really important aspect for you and your family? And if so, what kind of mortgage rate are you giving up to go and pursue that larger home or more expensive home? The other thing that I want to talk about as healthy types of debt would be for college or career retooling. So if you've been in one career for a long time and you're looking to switch into a different
Deb Meyer (04:45.59)
Obviously, you have some transferable skills, but sometimes those transferable skills are not enough and you need different kinds of credentialing or schooling to advance your career in the next field. So for those that are facing college, we have a great episode with Joe Messinger, episode five, where he talks about the college financial aid process in detail.
And he gives a really good rule of thumb about the amount of student loan debt that's reasonable. The current statistics are saying something like one point seven trillion dollars in student loan debt. That includes both federal government student loan debt and private loans. And that's as of I think September 30th of 2023. One point seven trillion is a lot. And while there are some things the government is doing currently to
you know, do some of the debt forgiveness. That's not going to impact all the borrowers. There's still going to be a substantial amount of outstanding student loan debt. So really making sure before you take on student loan debt that you're being strategic about how much to take out and your ability to repay it in the chosen career once you graduate. So if you think about it from a broad rule of thumb, let's say you are
18 years old looking at going to college and you want to be a teacher for your career. Well, teachers typically don't make that much money when they are at least when they're first starting out. So let's just say an average of $35,000 a year is the typical salary of a new starting teacher. That $35,000 should really be the max that you'd be willing to take in total student loan debt over the four years of undergrad. So
If you think about it in that context, it's going to be, if you're graduating with $200,000 in student loan debt as a teacher, it's going to be extremely hard to pay that off over time just on your salary alone, unless you have gifts or other family sources of income, things like that. That's not to discourage you from going into teaching. It's just being smart and strategic about which colleges you pursue or which...
Deb Meyer (07:05.558)
degrees you might be willing to go down if you want to get into a different career that's maybe more lucrative and then kind of switch into your passion career as your adult life forms. That's totally cool too. I've found many people that do switch careers and some need to go back to school and others do find a way to use those transferable skills. So it just depends on each specific career that you're choosing and where you want to take it.
that can be a good type of debt, even if some people have the means to pay for it or have set aside money to do it, there might be a better use of that fund to just let it grow for retirement or other long-term goals and then use the debt to fund some of those expenses. All right, so here's a good example of one of the clients I used to work with. I'm going to give them fake names just so I'm not...
revealing any of their identity, but Eli and Christina, back in 2017 when I first started working with them, they were newlyweds at the time. They wanted to start a family, start having kids. So what the big issue was for them is they were spending quite a bit just on personal training and some of these other expenses. And even though they both had combined a very healthy income.
Christina in this particular instance had a lot of student loan debt. She had very little support from parents or relatives. So for her, a lot of student loan debt felt very burdened by it, even though she was making a great salary as a nurse anesthetist. And when we started working together, I went through the budget. We cut some of the discretionary expenses. So I think they were spending like $15,000 a year on personal training expenses. And I said, hey, maybe you could just...
go to a gym and do just a normal gym membership for a while and see how that fits. And that's what they ended up doing. They saved like thousands of dollars just by making that one change. Not to say anything against personal trainers, but in their case, they were still motivated to go to the gym and do different exercises. They didn't need that extra level of training and accountability for the longterm. And then in their case, we also refinanced
Deb Meyer (09:29.09)
Eli had already owned a home, so they decided they were going to be staying in that home, make that their family home long term. And he had a relatively low mortgage at the time, so we refinanced in 2017, got a good low interest rate on the refinance, and were able to take all of that money from the home refinance and put it towards the student loan debt. So there are ways, even though we're talking about mortgage and student loans and how those both can be good.
was definitely a cost savings by being able to take the, I think she was paying 6.8% on her student loans at the time, and then the mortgage rate we got was something like 3%. I don't remember the exact specifics, but it was something along those lines. So just the interest rate savings was significant. And having just that single mortgage debt change their perspective immensely, really helped them see that, okay, there is a brighter future here.
And we don't have to be burdened by these student loan debts forever. And then the other type of healthy debt that I want to touch on would be business debt. If you are looking to start a business and you really have those entrepreneurial aspirations, it depends on what type of business you're looking to start, but some businesses are more capital intensive and it's really hard to come up with the funding on your own. You might be wanting to take on some debt to make that.
capital-intensive business a reality. If you have a service-based business, it's typically a lot easier to get it started and off the ground, make it cashflow positive pretty quickly because there's very few investments you're making in infrastructure. A lot of the people I know that start a service-based business might start it kind of small where they're doing, playing all the roles. That's at least what I did in my business. I was everything, right? I was doing the work. I was...
doing the bookkeeping, managing the tax notices, anything that came in related to the business, I was handling it directly. And then as my firm grew, I was able to start bringing on other team members who could help in certain areas. But again, it was having a knowledge of how to do it myself and then being able to transition some of those roles and responsibilities over time to other people that helped
Deb Meyer (11:55.65)
continue with the growth of the firm. So again, my encouragement, if you're having this entrepreneurial dream, if you wanna go down that path, just know that the capital intensive businesses, they do have some opportunities. If you need to take on debt, you can but be extremely responsible with that debt and don't get so overloaded with debt that you're not running a cashflow positive business for years on end. I've...
worked with a lot of different business owners over the years and I've seen quite a bit of service-based businesses do really well financially because most small businesses fail because of cash flow issues and the ones that are able to take on healthy levels of debt are fine or no debt at all. Those are usually the best in terms of long-term sustainability.
But having said that, I don't want to shy people away from doing a capital intensive business. There are avenues that you can pursue financing. You just have to also think about your credit score individually because a lot of new startups, the banks are going to be basing those credit decisions off of your individual credit score because since they don't really have business financials or other data to go off of.
as your business is more established, they'll be looking more to the business financials, but hopefully that will tell a good story and it will allow you to have competitive interest rates and other favorable terms, but there aren't going to be any guarantees in that regard. So the quicker you guys can get cashflow positive as a business, the better you're gonna be, not only in terms of growing the business long-term, but also just being able to
be competitive from a financing perspective if you do need to take on debt. All right. Let's take a brief break. I just want to encourage you as we're going into this podcast, and I know you love listening to some of the episodes, gaining some insights here, but I also have a lot of stuff that I deliver electronically through an email newsletter.
Deb Meyer (14:13.038)
And more specifically, I have a great starter guide called the 10 Family Finance Miss. So I'd encourage you to go to our website and download the starter guide. It's free. And then once you're on, once you register for that, you'll not only get the starter guide, but then you'll also get my emails delivered once a month where I really curate content specifically for parents. And I...
include a wide variety of resources. So I just sent a newsletter the other day and I described a couple of different things. I had some links to the tax season, preparing for tax season, not only the podcast episode but also a related article. And then I also shared some articles I found online, one about maximizing happiness, another about how the people that you're spending
influence your financial trajectory. And yeah, it's a wide variety of articles and resources that I point to. Sometimes they're my resources, other times they're other people's. And I just encourage you to download that starter guide to get on the email list. So if you're interested, please go to www.worthynest.com slash WN dash starter dash guide.
and I'll also link to it in the show notes. Or if you're already receiving my emails, please just encourage you to share this episode with a friend or a family member that you think could find value from it. Okay, enough for the break. Let's talk about unhealthy types of debt. And when I say unhealthy, it's not like you can never have this kind of debt. It just means you have to be careful as you're accumulating this type of debt. So the first one would be auto debt.
And if you think about a car, it's a depreciating asset. If you buy it for $30,000, it's not worth $30,000 a year later, it might be worth $25,000. It's not going to increase in value. And that's just a given with autos. I'm not here to tell you whether you have to do new or used. I've personally been more on the new camp because of warranties and things like that, but I'm a pretty risk averse person.
Deb Meyer (16:36.69)
But I've also known plenty of people that have done great things with buying only used cars. A lot of it for me just depends on the time that you need to be buying the vehicle and how long you're holding on to it. I mean, when you think about just the frequency of buying a new vehicle, if someone's buying something new every two to three years, it gets extremely costly. These are always depreciating assets. And I know the...
car companies are catering to that where they're like, oh, just you'll have the same monthly payment and you'll have a newer car. But wouldn't it be amazing if you could have no monthly payment? Like if you could own a car, pay it off in full over time and then just own it free and clear. That's honestly how my husband and I have worked over the years. We've been very fortunate and blessed to save for the cars before we purchase them.
And then even if we do have to take out a loan, when we purchase them, we're able to pay off that loan fairly quickly. And again, depending on the time that we're buying it, we might be able to get favorable financing terms. So when we bought his Mazda a few years back, I guess it was in fall of 2018.
Mazda was offering 0% financing. So it was kind of a no brainer for us to take the financing, even though we had set aside a decent amount of cash, we just took the 0% interest rate. Over time though, because again, we're kind of risk averse people, we ended up paying off that vehicle and he still drives that car, even though it's been paid off for a year or two. Now, if we think about the debt on
buying a new vehicle that every two or three years, you're getting something new, your opinions change, it gets extremely costly and it's always a line item in your budget that you have to think about. But again, if you are able to buy it in cash or put a substantial down payment down and then not have to worry about, if you have a...
Deb Meyer (18:46.282)
term where you're paying it off in five years, for example, but you hold the car for eight years, you're getting that extra three years where essentially the only costs that you're considering are maintenance costs at that point. So it's a much more manageable endeavor. And then when you own it free and clear, when you do go to buy the next vehicle, you can put that towards the new vehicle purchase as another form of down payment. So it does really benefit you to think through.
Okay, what type of car do I really need to be driving? A luxury car or can I get by in a more standard vehicle? And some people, again, if your value is, hey, I really wanna be able to drive a fancy luxury car, by all means, if that's your jam, go for it. Just make sure that you're able to manage those monthly payments over time and pay it off in full after a certain date.
where you could still potentially drive it, even if you're typically a person that wants to get a new car every five to seven years. So I would encourage you to the extent you're able, hold onto those cars longer term, especially if you have low mileage on them, and just be cognizant of it anytime you're going to the auto dealership to see what the financing terms are before you...
decide on what percentage amount to be putting towards a down payment versus finance. And then I also just want to share a statistic there. I know WalletHub shared something with me recently about Americans collectively having 1.6 trillion in auto loan debt. So very close to that student loan number we just talked about earlier.
and they were talking about the states with the biggest auto loan increases from the third quarter of 2023 to the fourth quarter of 2023. Those states are Wyoming, South Dakota, and Texas. And I'm living in Florida now. My state was number eight, unfortunately, for the biggest auto loan increases. So again, if you're in one of those states, be even more careful. A lot of people around you are probably trading up and buying
Deb Meyer (21:04.246)
bigger, fancier cars, just be aware and see if when you're making the decision to purchase, if you really need to be purchasing it today or if you can think about purchasing it at a later time. All right, credit card debt is another thing that can be dangerous if you get into a cycle of only making the minimum payments or paying less than the balance in full each month. So...
I know just from a practical standpoint, some people are more willing and open to take on debt. They're more of the natural risk takers. My sister and I, when I think about how we were growing up, she was a little more open to taking on debt than I was. I was always very like, no, I got to save. Be carefully planning. We just have very different money personalities. And
In her case, when she went away to college, she got in some trouble with the credit card debt and just taking on more and more credit card debt, not having the ability to pay it off in full each month. So I know how hard it was for her to, as an adult, then pay off all of that high interest credit card debt. She did it, but it took a long time and a lot of dedication and willpower. Whereas
I never really took on credit card debt. If I was working, I always made sure I had enough money in the bank to pay the credit card bill in full each month. And I never really struggled with having to pay that debt off over time. So again, you know who you are, you know your personality and what you're willing to do if you are in that cycle of making the minimum payment or paying less than the amount that's the statement balance that's due.
just be willing to go out and seek other resources that are specialized in debt payoff. Dave Ramsey comes to mind for Christian's Financial Peace University, I've heard is a great program. For Catholics more specifically, WalletWin is highly regarded, that's run by Jonathan Amanda Teixeira. And then if you need more one-on-one guidance, typically you don't come to a financial advisor for that, we're more apt to help people.
Deb Meyer (23:27.662)
who have a good history of responsibly managing debt. So a financial coach is looking at more of that accountability and helping you more specifically with cashflow on a frequent basis. I do have a blog post on the website about distinguishing between a financial advisor and coach, so I'll also link to that in the show notes. But just understand that there are people and resources that can help you if you are stuck in that cycle of
Deb Meyer (23:58.142)
All right, one more thing I want to touch on before we wrap up this episode is just credit scores. For a lot of people, I think credit scores are this box and mystery. You don't quite know what factors are most important. So I'll start with the two most important factors. One is payment history, and the other is the ratio of debt to the overall line of credit. So payment history, just think about it as right now I'm a 41-year-old woman. I've been...
paying and using debt responsibly for about 20 years. So my credit score, because of my payment history alone, is going to be higher than someone fresh out of college that's just starting to use a credit card for the first time. So that alone is gonna be a huge difference, just by being older, having a longer history of making payments on time and in full. My credit score is going to be higher as a 41-year-old than a...
22-year-old. Now the other piece is the ratio of debt to overall credit line. So typically speaking when you're thinking about the credit line they're gonna look at your income, the credit card provider will, and they're going to decide okay based on this person's level of income today we feel comfortable extending this type of credit line. So if you want to think about it with this rule of thumb
Deb Meyer (25:27.206)
utilization ratio is good. If you have a $10,000 credit line, you want to keep that monthly credit card spend to $3,000 or less. If you have a $20,000 credit card line, then you want to keep it to $6,000 or less. So let's just say your credit line's only $3,000. In that case, 30%.
you want to keep it to $900 or less of spending on that particular card. So again, be cognizant of what the credit lines are on each of your cards, if you have more than one credit card, and use that to inform your spending in a given month and how much you're putting on certain cards. In my household, we have a couple of different credit cards, and one has a very healthy credit line.
Another has a more moderate credit line, so we just are intentional about not putting as much on that particular credit card, even though the rewards on that credit card can be good if we're using a particular store. I don't wanna say, hey, go shop at Costco or go shop at Amazon or whatever, but some of those, Costco or Amazon, they will give you special incentives for spending on their websites or in their stores, and then they also can...
you know, give nice cash back amounts on the other expenditures like gas or travel. And there's obviously different rules with each credit card. Just understand that those types of credit cards typically are going to have a lower credit line and they, you know, won't be as likely to extend credit, especially if you've had a different credit card you've been using for a longer amount of time that's more broad. So those two components though.
payment history and ratio of debt to overall credit line comprise about 65% of your credit score. The other piece would be the length of the credit history itself. So if you have one credit card and then you do a balance transfer to another credit card after a year and then you do another balance transfer, they don't like that as much from a credit history perspective. So they want you to, they want to see stability on your credit history.
Deb Meyer (27:48.518)
opened a Chase credit card 10 years ago and you still have it open today, that's a good sign. And usually, you know, any financial institution, if you're not paying your bills timely, they're not going to be as open to extending you new credit if you have some marks on your credit score from the past. So it's always important to be thinking about keeping even inactive cards open for a longer period of time than you need them.
I got into a Home Depot card, I think, back in, I don't know, 2014 or 2015. We were doing a lot of home renovations. So it was one of those incentives, hey, if you sign up today, you can save 10% or whatever the amount was on your purchases. And we're like, okay, let's do that. But then once our projects were over, it kind of didn't make sense to have the Home Depot card anymore.
but we just kept it open for a short time. We just left it aside in a locked drawer and we were able to have that longer credit history behind us instead of just immediately closing it as soon as we didn't feel it served its need or purpose anymore. So I hope that helps from a credit score perspective that it gives you a little bit more insight and clarity into.
what is important when you're trying to build a good credit history or increase your credit score if you're not as satisfied with it today. But the credit scores do matter on any of this debt that we were talking about, whether it's healthy debt or unhealthy debt. They do look at your credit scores and history and they want to be able to make informed decisions off of that. So being able to monitor your credit score.
on a regular basis is also great. Free annu I'll link to that in the show notes as well. That's a good monitoring system just to make sure that no one's opening new credit cards in your name. You can also put what's called like a credit freeze on your account just to make sure no one's opening things. But the hardship with the freeze is like, if you do need to apply for credit, you have to go through some extra hoops and certain credentials to make sure that you're.
Deb Meyer (30:08.902)
opening it to the right vendors that need to know. So yeah, I hope that was helpful for you just to hear some of the different types of debt and then also the credit score and how that is shaped. Okay, thanks so much for joining me.