﻿Hook: When I was in business school, I was told that there are two types of debt.
Good Debt and Bad Debt. Just like there is good food and bad food,
I thought debt must be the same. Right? Actually,
No. There is no such thing as a “Good Debt.” And if we aren’t careful, even a “Good Debt” can get
us into a whole lot of trouble very quickly. Branding: Hi, if you are new to the channel,
my name is Tae from Financial Tortoise - a channel dedicated to helping the Sandwich Generation reach
Financial Security. Introduction: In this video, I want to talk to you about “Good” Debt. What it
is and why we should be very careful when we are dealing with them. Home Mortgage Loan Number One.
The most popular “good debt” is our good friend - the home mortgage loan. If you own a home, there
is a good chance you purchased it using a home mortgage. I mean with the crazy low interest rate
right now, it’s a bargain, right? However, what we don’t realize beyond the numbers and the interest
rates, is how it affects our buying behavior. The easy availability of home mortgage loans,
tempt too many buyers into buying homes they don’t need or that are way more expensive than they
need. And the whole mortgage industry encourages it. When have you ever worked with a real estate
agent or a mortgage lender that told you to spend less on a home? The agent makes more money,
the more expensive the house you buy. The mortgage lender makes more money, the more loans you take
on. Almost every mortgage lender that I worked with always started with: “Hey Mr. Kim, great
news, you’ve been approved for a Billion dollar mortgage - now go out and find a home that allows
you to borrow that much!” Now, I’m not bagging on mortgage lenders, because I’ve worked with
some great ones who allowed me to take advantage of some amazing interest rates. But we need to
understand what everyone’s primary incentives are. As the Sandwich Generation, our goals
are financial security and ultimately financial independence. This means we want to hold as little
debt as possible. We should seek the least house to meet our needs, rather than the most house we
can afford as told by our mortgage lender. When we purchase more house, greater the ongoing cost. And
this is not just in higher mortgage payments. But also in higher interest, property taxes,
insurance, maintenance and utilities. And let’s not forget, when you have a big house,
you need to furnish it as well. Let me tell you an interesting story about this. In the 16th Century,
there was a famous French philosopher named Denis Diderot who had co-founded the Encyclopedie,
one of the most comprehensive encyclopedias of the time. Ironically despite his fame, he was quite
poor. And to make matters worse, his daughter was about to be married, but he could not even afford
the dowry. When Catherine the Great, the Empress of Russia, heard of his financial troubles,
she offered to buy his library from him for today’s equivalent of approximately $50,000
US Dollars. Suddenly, Diderot went from being in poverty to having money to spare. To celebrate
his good fortune, Diderot purchased a new scarlet robe. And that's when everything went downhill.
Diderot’s robe was very beautiful. In fact it was so beautiful that he immediately noticed how
out of place it seemed when around his regular possessions. In his words, there was “no more
coordination, no more unity, no more beauty” between his robe and the rest of the items in
his house. And this is when he went on a spending spree. He decorated his home with beautiful new
furniture - a new kitchen table, a new mirror to place adobe the mantle, and a new leather chair.
The list went on. Today, these reactive purchases are now known as the Diderot Effect. We obtain
a new possession and that leads to a spiral of consumption of other new things. We have a brand
new home. And now that old IKEA table doesn’t look too good at the massive dining area. Time to buy a
new one. The old minivan doesn’t look that great in this upscale neighborhood. Time to check out
the Porsche dealership. Take advantage of the low interest rates and the secure 15-year mortgage.
But, be careful not to be tempted into buying the biggest house you can “afford” just because your
mortgage lenders say you can or your real estate agent tells you, you should. // Subscribe - If
you're enjoying this video and you want to learn more about personal finance and navigating life
as a sandwich generation, I would appreciate it if you subscribe and hit the like button,
because that would really help out the channel. Student Loans The second on our list of “good
debt” is my personal friend - the Student Loan. I have quite an extensive experience with this guy
here - you can learn more about my wife and I’s journey to paying down our $105,000 student loan
here. When I was in college at the University of California, Irvine from 1999 to 2003, the
annual in-state tuition was around $4,000. With my part-time job as a valet and my stipend from
the US Army ROTC program, it was enough to cover the $4,000 needed for the school year. Now fast
forward to today, 20 years later. My nephew is in his 1st year of college and the annual tuition
at the same school - UC Irvine has increased to almost $14,000. A simple Compound Annual Growth
calculator tells you that the annual growth rate is close to 6.5%. Average inflation rate in the
same period from 2003 to 2021 is 2.29% according to an inflation calculator. So essentially,
college tuition has increased by 3x more than the inflation in the same time period. And this is
just looking at a local public state university. When you compare private universities, the problem
here is many times worse. Make no mistake - easily accessible student loans have played a
huge role in this increase. Just think how easy it is for a young 18 year old to get him or herself
a $20,000 student loan. All you need is a college acceptance letter and a pen. I know, because I was
that kid - sadly, I was 28 years old at the time and not any wiser than an 18 year old. And the
real scary part of student loans is that you can never walk away from them. Unlike a home mortgage,
where the bank will just take away your house and you can walk away free - student loans survive
bankruptcy. It can garnish your wages and even your social security. From the bank's perspective,
this is a godsend product. They can continue to collect from you until the day you die. Think hard
about taking student loans - whether for yourself or for your children. Good education doesn’t have
to cost you an arm and a leg. // Comment - Have you battled with student loans like me in the
past? Let me know in the comments below! I’d love to hear more about it! Home Equity Loan Third on
our list is Home Equity Loan or Home Equity Line of Credit, aka HELOC. These are essentially the
close cousin to a home mortgage. If you own a home and have some equity within it, I’m sure
you are bombarded by banks to take some money out. With these loans, you are essentially using the
equity of the home, the value of the home minus the mortgage as collateral. Many people use home
equity loans to make home improvements, such as to replace a leaking roof, fix the broken driveway,
etc. However, most often, people have a tendency to use these home equity loans as another bank
account to pull money from. Thus the popularity of the Home Equity Line of Credit. Instead of taking
a lump sum of money, HELOC allows individuals to pull money as needed - just like an ATM.
But this is another danger of a HELOC - people forget that this is borrowed money.
Not your checking account. I’ve seen people use HELOC to upgrade their perfectly fine kitchen,
remodel their well functioning bathroom and even buy things not related to their home - a new boat,
a new car, etc. My recommendation is this. Don’t use Home Equity Loan or the HELOC. If you need
to upgrade the roof because it is leaking, save for it. When you have access to easily
accessible money like the home equity loan, you may find it hard to resist the urge to get that
new kitchen marble counter you always eyed. Make the decision simple and just not allow yourself
that temptation. Business Loans Number 4 on our list is business loans. This was another lesson
I learned in business school - it’s normal for businesses to borrow money and in many cases it is
necessary. Used wisely, this recommendation makes sense. If an asset can generate steady revenue,
it makes sense to finance the purchase of that asset with low interest debt. However,
I believe many people interpret this statement in a very wrong way. Many hear the statement
that - “you need a business loan in order to start a successful business.” This is far from the
truth. My good friend, Alan Donegan has worked for many years to flip this myth. I have a link in the
description to his business, the “Rebel Business School” where you can see how he and his team is
helping people to start in a business the right way - with no debt. The main lesson here is that
debt is always a dangerous tool and the history of business is filled with thousands of companies
ruined because of the debt they took on. And you don’t have to look far to find them - ever heard
of Blockbusters? Or Lehman brothers? There you go guys. 4 supposedly “good” debt that you should be
wary of. CTA: Thank you guys for watching. If you found value from this video, please hit the
like button, leave a comment and subscribe to the channel so that you don't miss out on any
of my other upcoming videos. I firmly believe that being part of the Sandwich Generation doesn't have
to mean financial stress. With careful planning and preparation, we can thrive during this stage
of life. Help me spread the knowledge. Thank you again and I'll see you in my next video.