Not All Debt Is Dumb- How To Make the Most Out Of It

As someone who has long been an avid Dave Ramsey follower, I was shocked to learn that most successful, financially savvy business people are, in fact, in some kind of debt.

Let me back up and make one clarification–there are many, MANY kinds of debt that are BAD.

Just about every credit card debt, especially store credit cards, are very, very bad debt. I am not saying this to make you feel like crap if you happen to have it. I just wanted to clarify in case you misread my title and think, for example, maxing out your card at the #NSale (if you know, you know) is a good idea. It’s not.

Basically what people who have strong job security are able to do is maximize what’s happening in the markets while remaining in some low interest debt. So, for example, it makes more sense to invest more in a stock that has a 5% return than it does to put that same amount of money toward a car that’s only on a 2% interest loan. Make sense?

Obviously this only goes for people who have very, very strong job security. The last thing you want is to get fired and be stuck with all kinds of monthly expenses that you can’t pay.

While I don’t claim to be an expert on this, I thought it might be fun to tell you what my debt is and how I manage it.

The debt I avoid like the plague:

As I mentioned before, if I use credit cards, I make SURE to pay them 100% in full every single month. That goes even more for store credit cards. I only have a Nordstrom card and I usually submit payment immediately after using it so I don’t forget. The interest rate on that puppy is HIGH.

I also (thankfully) don’t have student loans and never have.

Under no circumstance do I touch payday loans with a ten foot pole and you shouldn’t either. This is a predatory financial practice that targets low income individuals. The interest rate on these is often around 36% which is nothing short of criminal. Don’t use these losers under ANY circumstance. Never ever.

Debt I have

Currently I have a primary home mortgage, secondary home mortgage, car payment, and Peloton payment. I don’t feel comfortable sharing the exact numbers, but I will say that the grand total for all this roughly 1/3 of my monthly take home pay, without commission (if you’re new here, I work in sales).

I have really good rates on my mortgages and Peloton (that one is 0%) so I make minimum payments on those.

My car interest rate, however, isn’t great (4.5%), so I’m on track to pay that one off by early 2021. I have a 2019 Acura ILX that I bought used this past December. One thing I wholeheartedly agree with Dave Ramsey on is that buying new cars is a TERRIBLE idea and you tend to only get really low interest rates on new cars. There are all kinds of 0% incentives floating out there right now but if you’re able to get a used car for much less and pay it off quicker, you’ll almost always end up saving more in the long run. Dismount soapbox.

What I do with the rest

Aside from the obvious expenses (cell phone, internet, groceries, electric, etc.), I am aggressive about investing and saving for retirement. I max our my Roth IRA every year (wish I had started this sooner!) and invest the rest in a mutual fund.

How I think you should pay off debt.

Some debt is OK to have. While you shouldn’t make late payments, it is OK to make minimum payments on them.

Dave Ramsey utilizes the “debt snowball” which I think makes a lot of sense when it comes to getting started with paying off debt. Psychologically, when you get a sense of accomplishment (in paying off that remaining $1,500 of your student loan, for example), you gain traction and are more likely to pay off more. I get that.

In my humble opinion, any unsecured debt with a high interest needs to go like, now. Unsecured debt is any debt that, no matter what you do, will NOT go away. Student loans are a great example of this. Even if you declare bankruptcy, you’re still on the hook and have to pay it back. Secured debt, on the other hand, has some kind of collateral behind it. For example, a car loan is secured because, if you don’t pay it, you car gets taken away (and your credit is shot).

Generally, people (who are not Dave Ramsey) say to pay off the highest interest debt first and go from there but every case is different. In the case of secured versus unsecured, it’s really a case by case basis. For me, I don’t have any unsecured debt but since my car payment is the highest interest (while the Peloton is the lowest amount of money), that one is going to go first.

What to Do With The Rest

You’ve heard me talk about Roth IRAs on here a lot and I’m going to mention it again. As long as you don’t have any insanely high interest debt, I think maxing out a Roth IRA should be your #1 priority.

In addition to that, talk to a trusted financial advisor about perhaps opening up a mutual fund or buying some stocks. It all depends on your level of comfort but with the economic downturn happening right now, it’s especially helpful to buy stock “on sale.”

Why it’s important to keep things in perspective

Most Americans are financially illiterate so the fact that you’re even bothering to read this post puts you a step ahead of all of them. Finances are a tricky world and it’s important to ALWAYS be learning more. Bad debt is a standard for most Americans. In fact, the average American has $6,200 in credit card debt. While that’s not a great situation to be in, it’s STANDARD and most people don’t even know to care. It takes a long time to learn financial literacy and bettering yourself by reading personal finance blogs, for example, is a great first step.

Tackle your debt in the way that works best for you. You got this. I believe in you.