EPISODE 04: How to Pay Off Debt

August 24, 2020 / Jackie Rockwell

hello. Welcome back. Today, we’re going to talk about debt, all things debt. So this is kind of like, Everything we. Everything about debt. Um, probably most of you have some day. I bet if you’re listening to this and you’re an adult, you have some kind of debt or you have had some kind of debt in the past.

Um, and that’s just because that’s the way that the world is that we live in. Um, so we’re going to talk about the different kinds of debt that we have, um, how people feel about debt and then some of the things that you can do about your debt. So let’s dive in. Um, The first thing you want to talk about is just kind of the basics of debt. Um, so in case you’re an aware, there are essentially two kinds of debt they’re secure to debt and there’s unsecured debt.

So secure debt is something like your house or your car. Um, it’s backed by something. So there’s collateral. So the bank loans you money. But holds the title of your car or the deed of your mortgage, or they have the power to take something away from you. Easily. Like if you default on your loan, Uh, there’s a lot more that goes into all of that, but, um, that’s essentially.

How that works and then. The other end. Well, and what else I should say about that is that because there is something that they could. Of value that they could take from you. Um, if you defaulted on the debt, then. The interest rate on those kinds of loans tends to be lower interest rate. Okay. So we’re talking like between, I mean, I don’t even know what home mortgages are at today, but they’re, you know, they’re roughly around like three, four.

Percent. And then. Um, car loans are a little higher than that, you know, around like seven. I’m actually not sure where they’re at today, but it’s been a few years since we bought a carpet. Somewhere around there. And then, um,

The riskier the debt is for the bank, the higher the interest rates. So, um, the other kinds of debt that there is, is unsecured debt, and that is. Things like. The credit card, if you have. You know, medical bills or. Student loans. Like they can’t really come take anything from you that is specifically for that debt except.

Uh, all your stuff. If the, you know, like anyway, so, um, what I’m trying to say is there’s no, like item that is the collateral for that. So if they wanted to. You know, if you stopped paying on a credit card or on some kind of loan and they wanted to, um, Regain that money from you, then they would have to go through a litigation and, and suit you basically. Um, and honestly I’m not actually sure how all of that works, but just because I haven’t, that’s not like my wheel house, but, um, that’s my understanding.

And yes, so that usually has a higher interest rate because it’s riskier, right. If someone gets a credit card and goes and buys a bunch of food, You know, like goes out to fancy dinners. And like ate all of their stuff that they bought. There’s nothing left for the bank to like, come and take, right. Or with the student loan, you have all this.

Uh, information in your brain. They can’t like come and take that from you. That would be weird, um, or is, you know, same with medical bills. So. Um, so that’s why those interest rates are higher. Um, I’ve heard of interest rates like. I don’t. I’m not even sure how high interest rates can go on that kind of debt, but they can be a lot higher.

Um, I would say if you’re paying anything over 20%, like you want to really get out of that debt. Cause that’s a lot of interest that you’re paying on that. Um, okay. So. That leads me to my next topic. Why. People hate debts. So people, not everybody hates that, but a lot of people are really against debt and.

I can understand why it’s.

When you, when you buy something. Um, on credit, on debt with debt. Ew. Are essentially saying I’m going to pay for this, but I don’t have the money right now. And I’m going to pay for it over the next. So many years and with a. With a secured debt. You’re you are saying I’m going to pay for this over the next, you know, five years. If it’s a car or 30 years of it’s a house, maybe 15, but it’s a set period of time.

Whereas if it’s unsecured debt, especially like our credit card. You’re buying, you know, you go and you buy yourself. New living room furniture. And then. You don’t have a plan to pay it off. And so what happens is you think like, yeah, I’m going to pay this off, you know, over the next blah, blah, blah.

A lot of times people don’t have like a set goal for that. And so, um, because they might already have credit card debt. And so it’s just like getting added on to that. Um, if. Or if they don’t already have credit card debt. They will, Matt. They now have this balance on their credit card and it feels a little easier to add to that balance. So, you know, you already have $3,000 in debt on your capital one card, and then you.

You know, the next month you’re like, Oh, I really like, you know, this new, like, I don’t know rug for the, for the bedroom. Like I, I’m going to put that on, on here too. And, um, I know no one is like consciously, like I’m going to go put something on my credit card today. But it’s, it’s kind of like you see things and then you decide that you want it. And so you go and you put it on your credit card. Cause that’s like,

The answer, right. Except it’s not because. It’s because. Unsecured debt. Is a very dangerous place to. Be, Hey, you know, hanging out in. It’s a big commitment. Right. So you get. I think the reason back to what I was saying, I think the reason that people don’t like debt, especially unsecure debt. Is because.

It’s such a big commitment. You, you get this opportunity to pay for something for a long period of time, but especially with unsecured debt, you don’t know how long that’s going to be necessarily. And if you decide that you want to back out. It’s very difficult. Right? You can’t just like. Return the item.

And, and get all this money back. Like it’s not, it’s not like you can change your mind and decide not to buy it. You already bought it. And. Um, so you’re kind of stuck with it. And whereas. Instead, if you were saving up for something. You could always decide, I don’t actually want that. Right. So.

That’s the difference between like, Waiting before you buy something and then buying something and paying for it over time. Okay. So. I think of another reason people hate debt is because. We’re. Americans are drowning in it, right? The average household has. Eight over $8,000 in just credit card debt. And this actually has kind of plateaued this amount. Um, and that’s thanks to the Frank Dodd. What is it called?

The Dodd-Frank wall street reform act act, which was. I wanna say like 2005 when like the housing bubble burst and all that happened, they had been giving out credit cards to basically anyone who could, you know, was over 18 and could sign their name on the. On a dotted line. So, um, we got into this place where people just had way too much debt and so they made it a lot harder for, um, for people to.

Get a credit card and which is good because it shouldn’t be. Um, they shouldn’t just get one just cause you know, you’re alive. Um, Because it’s a. It’s easy to make mistakes when you have. Credit cards.

But like I was saying, if you have this debt and then you go, you know, go, you’re going through your month and you have to pay for something that maybe you don’t even want anymore, or maybe you don’t have anymore. And it’s not like it’s itemized out on your, on your credit card, bill. Like it’s like, I don’t even remember what I bought with all of this $8,000 in debt that I have.

Right. So that is, I think why, why people are like, so my debt is such a, it’s a four letter word. That’s why it’s has such negative connotations with it is what I believe.

So that’s kind of like, I don’t know the negative side of Ted. Right. But I, I honestly do think that there are some huge benefits from debt. And, um, so I’m going to tell you, you’re actually a little bit of our family story. Um, a couple of years ago, how we took on some debt and it actually was quite beneficial for us.

So. We live in a really small town. Well, it’s not really small. It’s a small town and, um, it’s a college town and the housing here is quite expensive and it’s just been going up like it has everywhere. Um, we, we haven’t been able to purchase a home. And, you know, we hadn’t been able to purchase a home for, we had tried in the past, but I was like newly self-employed and we just kept running into obstacles.

Um, and then we looked at how much housing was around here and we were like, Oh my goodness, we we’re never going to be able to afford a house around here. Um, but then, uh, we, so we were renting doing this house and our landlord said that he was thinking of selling and like the next. While, you know, he was like in the next year and we, this was like a, maybe a month.

I want to say it was less than that. It was probably a couple of weeks after we had had our third child. And so I’m not really working, you know, and we were like, what we were living in this house that. You know, we’re, we’re getting a good deal on our rent, which was nice. But if we were, have had to do and move there’s no, it’s very unlikely.

Right. We would have found another place that would have fit our three kids, our family of five. For the amount of rent we were paying. And we really, at this point, we’re like, we want to, you know, we had some money in the bank. Uh, we were like, we want to buy a house, but we didn’t really have enough to be competitive.

And that is the problem. When you think with buying a house is there’s just like this market where you have to be competitive against other bitters, it’s such a sellers market. So, um, W my husband and I, we talked, I talked for a while and we decided this was, we were like quite ready to buy a house. Or at least we hadn’t like really been serious about it yet.

It’s just something that we knew that we had wanted to do. And so, um, we, we talked and we decided we wanted to go ahead and buy this house. And ideally we would have had a much bigger down payment and. You know, we would have, there’s a lot of things that could have been different, but the, the reason we bought the house is because if we would have tried to buy any other house in this town where we want to live, you know, our kids go to school here.

We have friends here. We love it here. If we, if we would have tried to buy a different house in this town, it’s very unlikely that we would have. Been able to do that without, you know, we would have had to like settle for something that was not what we want. And we, you know, there were certain things that we would, I really love about this house, especially the location.

And there’s really no way we would have found anything in this area. Um, so anyway, what I’m trying to say is taking on the debt for this house. Was a blessing for me. Yes. That we were able to do that, you know, and we w I’m not going to get into like the necessarily our personal finances, but, um, we were able to come up with down payment.

We were able to like, um, Just figure out how to make it work. And we were able to buy directly from our landlord. And so no one else was like bidding against us. There wasn’t any pressure. Sure. We were just able to like, have a conversation with him, go back and forth a couple of times, um, a couple of things and, and like just.

Be done with it. And it was very, very nice. Um, and so we’re very grateful for this debt that we were able to take on. And then the beauty of buying a house, especially for secure debt, is that your, your value of your house oftentimes. You know is going up. And so, so as our debt on the house goes down, the value of the house is going up, but so that’s a very nice benefit of buying a house versus buying a car necessarily.

However, I will say, like being able to buy a car, if you need to take out a loan for a car, the interest rate is low. And if you know, if you do it right, I think that you can be, why is about getting a loan on a car are as well. So I don’t think that all debt is necessarily bad. I have a problem with, uh, mostly unsecured debt and.

The amount of unsecured debt that, that Americans have in our country. And I’m not sure about worldwide, but I would assume probably around the world as well. Um, so yeah, let’s see, what else did I want to say? Okay. So, um, I kind of gave you like an example of how debt works as far as like. When you pay for something, you know, you get something in return, but there’s another piece to this, which is like a down payment.

So I want to talk about at that. So, um, when you are going to buy something large, like a house or a car, I’m just going to keep using those examples. You have an opportunity to, um, pay for some of it. With cash. Right? So say you want to buy a car for a $30,000, please? Don’t if you do. Um, that’s so much money.

Oh, anyway, um, I just can’t believe how much cars cost these days. Um, so, so you want to buy a car and it’s $30,000 and you have. $5,000 in the bank. And you know, maybe you don’t need the car right now. Like your other car is not like dead or something, but you’re like, okay, this is something we want to do or ready to upgrade.

We obviously don’t have the $30,000, but we really do want to buy a car. So this is what happened with our family. We needed to buy a minivan or something that would hold five. People because we were before we were driving a Honda fit and it was really tiny. And, um, we had two kids like kind of jammed into it in the backseat.

We were like, well, there’s no way we’re gonna get it. And the other car seat back here. And so we, um, decided to upgrade. We didn’t have all of the money that we needed for a van. And we did look at used vans, but there’s this weird thing about vans where, um, they’re either like. A thousand dollars and. Stop working while you’re driving them, which literally happened to one of the ones we were testing.

I was driving it. Um, I’m just going to put a pin in that and tell you the side story. So we were driving, um, my husband and I were test driving this van. Um, and I like go around the corner and I’m accelerating and the everything just stopped, like stopped in the middle of the road. We were like, Nope. So there’s those cars.

Or, you know, with minivans, there’s like brand new minivans, but it’s kind of hard to find a gently used minivan. That’s kind of the middle of the road range. And so, um, at least with the kind that we were looking at, that’s what we ran into in this area. Maybe not everywhere. Um, and so we had to buy, deciding that, okay, we should just buy a newer one, but when that’s like slightly used and we found one that was.

I don’t want to say like three years old. And, um, so it had lost its like initial, like car lot value, but it was still new enough that it was so luxurious for us. Um, but the price wasn’t brand new car price, so, Oh, that was nice. Anyway. So what we did is we didn’t have the entire. 20,000 or whatever it was that we needed for the van.

And so, but we had a big chunk of money. And so we put down, like, I want to say like 7,000 or something. And so, um, that. Bye bye. And we had to like save up for that, right? So by like being intentional and like putting as much down as you can in the long run, you are going to save yourself so much because your monthly payments are going to be lower.

You can, you will, you’ll be okay. Taking out the five-year loan as opposed to like the six year loan that they now offer with cars. Um, because. Your monthly payment will be still low enough that you’ll be okay taking on this debt. It’s not going to be like $600 a month car loan. Right. So if you can be smart about putting money down down before you, you know, before you take on this loan, not before, but like when you take on this loan, if you can put down a large down payment, you’re gonna.

Save yourself a lot in interest. And you already, at that point, something happened and you needed to like sell the car. You’re not going to be out money, which can sometimes happen if the car loses value faster than your loan goes down, which is not, not fun. So, um, so if you’re going to buy a house or a car or.

About, I don’t know. I’m trying to think of another example. Um, I track, I guess there’s not a car would just automobile or something like that, then take, take as much. Of down payment or, you know, save up as much down payment before to take as much time as you can before purchasing it to like, get a hefty down payment because your interest rate is going to be lower.

Your overall interest interest is going to be lower. Like it’s just going to. Feel so much better. They couldn’t even believe like how much we were putting down at the car lot. They were like, Oh, you have a large down payment. And I was like, yeah, we do. Like, we’re not messing around. So anyway, that is like my hot tip for if you’re taking out debt.

Um, okay. So next steps. So with all of this debt that maybe you have, or that, you know, maybe it’s accumulating, um, For you, what you might be wondering. Wow, Jackie, that’s a lot of information. Like what can I do with all of this debt that I have? Okay. So I have a few tips. The first thing, right, I want to say is, I want you to say stop putting stuff on your credit card.

If you’re pulling out your credit card at all during the month for something that you either need, or you think you need. You have to stop doing that. If you you’re in an emergency mode and we need to get you to where you’re not. So that might look like you need to do a spending freeze that might look like, you know, getting on a good budget.

Um, cause a budget does not include, but putting stuff on a credit card every month. You’re going to have to say no to some things in order to stop putting stuff on a credit card. So I’m not going to dwell on that a whole lot, cause we’re not really talking about spending habits here, but, um, yeah, that’s all I’m going to say about that.

Um, and then the next thing I want you to do is to take a deep breath and I want you to total up your debt. So. Sometimes people don’t really even know how much debt they have. They might know, um, the amount of this loan and the amount of that loan and Oh yeah. There’s this other, you know, student loan that I have and what, what actually is your amount of debt? So I want you to list out your debt. And list out all of the amounts that’s for each debt, so that you have a total. So, you know what you’re working with this mate, I feel very uncomfortable. Um, I just had a class on net worth. And so this is part of, of figuring out your net worth is like looking at your debt and, um, You know, I told them like this, this is hard.

It’s not, um, you might feel like you’ve done something wrong and you might not to do some like forgiveness work with yourself. Um, but you can’t go in the past and change anything. So all you can do is like, make, um, make up your mind to do things differently, going forward and to like, get this debt paid off so that you feel better about it.

Um, Okay, so you’ve totaled up your debt. And so now you, hopefully, you know, you can like group your debt together. So a lot of times I want to talk specifically about student loans here, because a lot of times with student loans, there’s like multiple loans. Um, depending on like how many times you went to college and then like when you are in college, they give you like a loan for a free term, and it’s just such a mess.

But, um, You can consolidate those. So that one it’s easier to like look at and know what your interest rate is, but then also, um, you can consolidate to get a lower interest rate. However, there’s a caveat here when you consolidate federal student loans. With a private lender, there are no longer federal student loans.

So there’s companies like so fine and lend key and Ernest and I’m sure there’s. Many more that will say, consolidate your student loans, save on interest, save, save, you get a lower monthly payment. And it sounds really great. Um, if you’re just looking at the numbers, right? So you can take like, You don’t even, it’s not even consolidating sometimes, sometimes it’s just refinancing, but you’re, you’re taking this debt that has, um, you know, a certain monthly payment, certain interest rate.

And, um, what you’re doing is like, then you’re, they’re selling it to this other lender, but this other lender is not a federal lender. It’s not a federally backed lender. And so it means that. Now your student loans are no longer federal student loans. So the one, the thing that’s really important to understand here is that if you do that, Your loans, aren’t going to be, um, they’re not qualified for like the, like right now where everything is on a freeze and you don’t have to pay, you know, there’s no interest accumulating on student loans and you didn’t have to pay for your, um, your monthly loan payment for six months for all this COVID-19 stuff that doesn’t happen with.

Um, With these private loans. So that was only for federal loans. So there is a benefit to having federal loans. I just want to say that because sometimes people don’t realize that when you’re, when you do that, that it’s going to a private lender. Um, yeah. Okay. So. Next. Okay. Consolidating your loans. Yeah.

Talked about that. And then, um, well, the other thing that you can do is, um, I mean, if you are like, if you’re a hundred percent, totally up a Creek and like literally don’t have, uh, and a solution, like you’re just like, there’s no way I’m ever gonna be able to. Like make these monthly payments, then you, you can look into like bankruptcy or, or, um, you know, contacting your lenders to like work out a payment plan.

But, um, hopefully that’s not where you’re at. Um, Lastly, I want to tell you about the debt free action plan. So this is like a very, very powerful tool that, is available through my website. You list out your loans in this big workbook and there’s a tab for each loan and it tells you, like you put in your loan information and then it’ll tell you when it’s done going to be paid off, which is like, cool.

You know, you can just do that on the internet, no big deal, but it combines all of this so that, you know, When you’re actually going to be out of debt for all of these debts. And then the most beautiful part is you can add in, you can make a plan so you can add in any extra payments. So I am a huge advocate for the avalanche method or the snowball method, either one of those are debt payoff methods, which I’m not going to get into here, but basically, um, They, you pay us one of your debts off, and then you take that monthly payment and move it to another debt.

So while you have all this debt, your monthly payment is going to stay the same, but you’re like, Plowing over all of this debt. Um, and then the avalanche method and the snowball, the method are just two different ways to, to approach the loans that you have. But basically you’re just paying it all off. Um, But much faster than just making the minimum payments.

What this spreadsheet does is you feel, you take your, you know, say you have a right loan, a car loan, and it’s almost paid off. And that the, um, Monthly payments like $250 you take, when that’s paid off, you take that $250 and then you put it onto your name, next loan that you’ve decided to pay off, which would maybe as a student loan.

And so if your student loan had been a $200 and now you’re adding this $250 payment to it. So now you’re making these $450 monthly payments. And this is it’s just going to, like, it’s gonna like slim down real fast. You’re gonna have that paid off. And then you take. That $450 and like apply it to your next monthly to your next debts, monthly payment.

So overall you’re paying the same amount each month, but you’re, it’s you just sort of like cutting the time that you have all this debt back by so much. So it’s really fun to play around with. Um, I have clients that just love it. And so. You can find that on my website. It’s, um, it’s a very powerful tool and it’s super affordable.

 

 

If you go to https://jackierockwell.com/debtfreeactionplan, you can find it. Or I think if you just kind of poke around on my website, you’ll be able to find it too. Um, So, yeah, that’s everything about debt. And if you want to talk to me more about this, I would love to talk some more. Um, I hope I didn’t like fluff anything up when I was talking about federal loans, but I’m pretty sure all my information is accurate and yeah, I hope you have a lovely day.

If you have debt, I’m going to leave you with one thing. If you currently have debt, don’t beat yourself up about it. Like, let’s just, this is kind of the world that we’ve been living in and it’s not, um, something to like, feel terrible about because it’s, it’s something that you did and that when you make a mistake, the best thing you can do is forgive yourself and show yourself something, compassion, and then move forward.

So. Well, I made that mistake. I, you know, bought that couch, put it on the credit card and now I don’t even like it. Maybe get rid of it, which, you know, like maybe whether some healthy things that you can do to like move forward from these choices that you’ve made with debt. Also, if it’s like student loans, And then you’re not even using your student loan girl.

You are not alone. So many people have gone through this and it’s okay that you, it’s not that you’re not using that. Like, you still learn so much from just going to college and like, and this education that you did get, you know, like. You’re better off having received that education. And also you have probably learned a lot from that experience about making good choices and knowing that, you know, yeah.

Next time too, to think about something a little more to really feel into something before or before you make that choice to. Dive into all of that debt. So anyway, that’s how I want to say about that. Cause I want to leave you with a little bit of like encouragement and feeling good, so, alright. I love you.

Have a good day.