hey case you have student loans car loans and credit cards you're not alone today in this video
i want to explain to you what is debt what's the difference between bad debt and good debt
you'll also learn all the categories of debt and finally you'll know how to pay off debt
by using these strategies let's jump into it let's start from the beginning what is debt
what is debt debt is when you owe anyone money maybe you're still making payments for something
you bought yes my friend that's also dead in simple words debt is money borrowed from another
party for something you can't afford maybe you purchased that nice car before you had the cash
a bad or maybe you borrowed money from your stepsister because no one else would give it
to you debt simply means you're at the mercy of someone else until you pay them back when you have
debt you're no longer working just for yourself or your family you're working for whom you owe money
debt comes in many shapes and sizes no matter what type of debt it is bad or good debt just steals
money from your pockets and your future it's time to take back control of your money certainly no
debt is good however there are two types of debt good debt and bad debt bad debt and good debt
bad debt let's start off here bad debt involves borrowing money to buy things that lose value
rapidly or for the purpose of consumption if it does not generate income or does not increase
in value you definitely should not go into debt to buy the item here are some examples
1. cars do we all agree that borrowing money to buy a car is a bad debt it is first not
a good choice from a financial perspective let me explain to you you may think buying
a car is a big deal but after the purchase the car is worth less than what you bought it for
in case you urgently need to borrow money to buy a car look for a loan with low or no interest
that way even if you pay for an asset that will lose value over time at least you won't be paying
interest on it 2. close and consumables did you know that clothes are worth less than
half of what consumers pay for them we all need clothes food and so on but getting into
debt to buy brand new shoes from gucci is a very bad idea now let's look into good debt
basically good debt has the potential to increase your net worth or more importantly
enhance your life in other words it takes money to make money good debt is the debt that can help you
generate income that can build your net worth a couple examples of good debt are 1. student loans
it makes sense because the more education an individual gets the greater their earning
potential an investment in education can often pay for itself within a few years of entering
the workforce however not all degrees are of equal value so it's worth considering both sides
2. mortgages yup this is considered a good debt mortgage debt historically has been considered
one of the safest forms of good debt since your monthly payments eventually build equity in your
home but pay attention borrowing more than you can afford or using mortgage terms you don't
fully understand such as adjustable rate mortgages also known as arms can pose a significant risk for
example your monthly mortgage payment should be less than 28 of your gross monthly income
three business getting into debt to start your own business is considered a good debt being your
own boss is satisfying not only financially but psychologically as well but it can also be very
hard work also consider the fact that the risk of failure is not zero data from the bls shows
that approximately 20 percent of new businesses failed during the first two years of operation
45 during the first five years and 65 during the first 10 years only 25 of new businesses make
it to 15 years or more so before getting into debt to start a business think about this twice
however your chances of success increases if you choose a field you're passionate about
and knowledgeable about categories of debt secure debt you just walked out of the dealership driving
the car you dreamed of last night you can't wait to show it to your friends and family but there's
a problem actually that car is not yours the bank owns that car you're paying the bank to
drive the car this is a simple example of a secured debt now let's look into unsecured debt
unsecured debt refers to money that you've borrowed and where there's no collateral in
case you don't make your payments for example a credit card is an example of unsecured debt
if you go out and you charge dinner at a restaurant or you buy something at a store
and you don't make your payment the credit card company is not going to come collect on that
there's nothing for them to seize in the event you don't make your payment student loans are another
example of unsecured debt if you have a student loan and you don't make your payment there's no
collateral there for the loan it's money you've borrowed but it's not directly tied to an item
this makes it harder for the lender to get their money when you don't pay up thus unsecured debt
usually has a higher interest rate revolving debt revolving debt basically is your credit card
you can borrow up to a certain amount and as long as you make the minimum payment by a specific date
each month you can keep spending non-revolving debt non-revolving credit doesn't change your
payment is usually fixed and the amount that you borrow starts off at a certain amount and
then it decreases it never goes back up there are different types of non-revolving credit to go into
but it's essentially credit that doesn't go up so it's a fixed dollar amount that you're borrowing
and you're reducing every month it's a debt that can't be used more than once
it's a car loan a business loan a student loan or a mortgage you borrow a specific amount of
money and pay it back in installments before a certain date and your minimum payment each month
usually depends on how much you originally took out once you've paid the loan off it's
gone and you don't get any more funds to spend sneaky dad ah these sneaky debts pay attention
here computers cars motorcycles you've probably seen the flashing neon signs zero percent apr
annual percentage rate or 90 days the same as cash sales people know most people can't pay it
off within 90 days and the moment your time is up crazy interest rates kick in with full force
good advice would be don't fall for these debts disguised as deals they're not worth it so
now how do you pay off debt if you have any well one make a budget it's fundamental to track your
expenses and income you need to understand where your money is going you can manage your money by
using the 50 30 20 rule let me explain to you what it is 50 of your money is for your needs need is
something you cannot live without which is food mortgage insurance for health utilities and so on
thirty percent of your money is for your wants want is something that you don't necessarily need
but it improves the quality of your life which may be dining out shopping hobbies and so on
twenty percent of your money is savings or paying off debt which may be student loans credit cards
etc two debt snowball so essentially with the debt snowball it's basically listing all your
debts in order from smallest to largest by dollar amount here's how it works your goal is to pay
your smallest debt first regardless of interest rate then roll the amount you'd been paying on
it into payments on the next largest step 1 only the minimum payment on all your accounts
step 2 put as much extra money as possible toward the account with the smallest balance step 3 once
you finish paying the smallest debt take the money you were putting toward it and funnel it towards
your next smallest debt instead repeat all three steps until all your debts are paid this method
is very efficient because it includes a series of small successes at the beginning which will give
you the determination to pay off the rest of your debt there is also the potential to improve your
credit scores more quickly with the debt snowball method as you lower your credit utilization on
individual credit cards sooner and reduce your number of accounts with outstanding balances
3. avalanche method what the debt avalanche talks about is that you want to pay off your highest
interest debts first so the reason for this is because mathematically that's actually the most
efficient way to do this by using this strategy you'll pay off your accounts in order from the
highest interest rate to the lowest here's how it works step one again only the minimum payment on
all your accounts step 2 firstly pay as much as you can on the account with the highest interest
rate step 3 once the debt with the highest interest is paid off start paying as much as
you can on the account with the next highest interest rate repeat and continue the process
until all your debts are paid that way you'll get out of debt quicker because you're paying firstly
the debts with the highest interest rate 4. halt your credit card spending are you a compulsive
shopper and can't control yourself next time when you leave the house leave your credit card at home
stop spending with your credit cards until you have your finances under control
five change your habits stop for a moment and think about all those unnecessary things you buy
all those things are part of the wants list maybe you smoke or pay netflix every month
these are all unnecessary expenses that are taking money out of your pocket do you really
need your daily cappuccino for example you can prepare your lunch for work at home instead of
buying it every day ask yourself what can i change without sacrificing my quality of life too much
6. never use debt again before borrowing for a new house a new car or student loan stop breathe
and ask yourself a question will this debt pay me back more than what i put into it the question may
seem simple to you but you need to think very carefully about it it's definitely worth asking
instead of drowning yourself in unpaid debt i suggest you write down a list of pros and cons
if the result doesn't satisfy you then it's not worth it to go into debt
conclusion most of us spend a bunch of dollars without actually thinking about what we're buying
log all your monthly spendings cut back on things you don't need and start saving the surplus or
put it towards reducing your debt thank you for watching this video i hope i've helped you to
understand better what debt is and how to get rid of it i'm really curious to know what you think i
have a question for you what method would you use avalanche or snowball let me know in the comments
thanks for watching and i'll see you guys in the next one