How to Decide What’s Good Debt, Bad Debt, and Right For You

0:06Welcome to the Wealthy After 40 podcast, the show for Gen X women and couples who are ready to ditch financial stress and feel confident about retirement. I'm your host, Dailene Higgins, money coach and retirement strategist to help you gain clarity and confidence with your money by creating a spending plan that aligns with your financial goals and dreams so you can spend intentionally, save consistently, and feel at peace about your future. Join me every week to understand your money, simplify your decisions, and take intentional steps toward the life you want.

0:51Welcome to today's episode. This is a real release of episode 43. I think it's a great time to revisit this one. If you remember last episode, we talked about a relationship with debt. and how as young adults in our 20s and 30s, it served us differently. And we need to be planning now and realigning that relationship. This episode will walk you through some of those things to think about. How to create that new relationship, because that's all debt is, is having a good relationship. How do you manage it? So listen to this episode and And hopefully you can define that for yourself. Today we're diving into very explanatory of what is debt and ways that you can manage debt.

1:43What is debt? It is not a way of life, but it is a part of our life. So basically debt is a delay of payment of an expense with a future cost. okay so in a sense we have asked another person i'm just going to say person but it's a company they're making money this is what they do we're asking them to pay the people we're buying the thing from we're going to have them pay them we're delaying our payment and so we're going to pay this person on an agreed upon future cost, hence the interest. So essentially that is what we are doing. We're getting the item today, but we're delaying payment with a future cost.

2:37An agreed upon amount and agreed upon future cost, we know both of those going into it for a specific amount of time. That is what debt is. When we go into a debt contract with a lender, with a financier, with the banker, with whoever it may be, that is essentially what we are doing. We are delaying payment of our expense with an additional cost. So I think that's really important to think about. What does it mean when you charge something on your credit card and you don't pay it off by the payment date and it's going to accrue interest? You're just delaying payment for the future for a cost. Your credit card company is going to charge you.

3:24You can pay the minimum, but I'm going to charge you this amount. They're going to make their money. Believe me you, they are going to make lots of money. So understanding that specific definition and that flow is very important. Yes, we have to play a part in it. Yes, we have to do that. But understanding those three elements of debt can help us be a better user of debt. Like we discussed in the last episode, that we need to participate in debt to create credit, a credit history. Once we have a credit history, more people will be able to let us borrow, especially for those bigger purchases, such as a home.

4:08That's important. And understanding how to segue that is so important, but still understanding those elements of debt, that it's not just the initial price. It's not just a$20 mil that I'm putting on a credit card and not paying off. It becomes my future expense at a, it becomes a bigger expense. It's this today's price with a future cost. And that is going to eat away essentially at your future money. That is another way for you to think about it. Every time you commit to five years, 10 years, 20 years, whatever it may be, you're committing your salary in that duration, in that time. Now, I don't want to sound gloom and doom.

4:55I think it's just really good to have a really understanding of debt and what it means so that you can also explain it to your children and help them get off on a better step. Your children or your grandchildren, whoever it may be. if you started your money journey and you didn't know you were like oh people just go use a credit card for this and that works and it's easy that's what that is what having an understanding helps you better go hmm yeah it's not quite that easy and it's going to cost me and am i willing to give up something for that extra cost because that's ultimately what it's going to boil down to.

5:35Our salary, our income can only go so far. And if we want certain things, we've got to structure that so that we benefit ourselves. We look out for us, we be selfish for us, and we take care of ourselves. Some tips to manage your debt. So to start this off, the first tip is to you choose the payment that will work. The payment of your income you're willing to commit to for X number of years, months, however they phrase it to you. So I want to share a little story that will explain this better. And hopefully you can help those who are on their initial way to that. My husband and I, when we went to purchase our first home, early 90s, so way back when numbers were way different than they are now, interest rate was worse than it is now.

6:27But really looking the environment other than the inflation of home prices were very similar. So we had low inventory, you paid asking price or more, and interest rate was 10%. So that is what we were dealing with. But still, we went into the lender. She is still our lender today. I will talk about that hopefully in a future episode about building your financial team and why you want to do that? So this was our first introduction to her. She was a referral from a friend. And so we walked in and we said, we want to buy a home that will not cost more than this much a month. And honestly, I don't remember what that number was.

7:08So we're like, we don't want to pay more than this a month. That's what we knew with the income we were making at the time that we could commit to for 30 years. Mortgages are a long time. So with that amount, she then told us what we qualified for. So I believe it was like less than$100 ,000 that we were looking at, that we were in that realm. So yes, a long time ago, less than$100 ,000 for a home, for a starter home. We did purchase a starter home with this first house. As we were working with our realtor, it was our first time with her as well. We kept her for many years until she retired. But she says, as we're looking, because we limited ourselves in other ways as well, that we had this limitation of it had to be less than$100 ,000.

7:51With the market the way it was, the inventory was low. We were limiting to certain areas of one city. It's just what we had laid out for us. And she says, can't you just get somebody to co-sign with you to qualify for more? And we said, that's not the problem. We don't want to pay more. We had set our debt level for our home purchase at that amount. That was our choosing. It was not industry choosing. It was not social choosing. It was not family choosing. It was ours. And I want you to remember that your debt payment, your debt level is your choosing. Nobody forces you to. It's not a way of life.

8:31I want to say that again. You get to choose the payment you want to work with. So another way to look at managing your debt is how much debt do you want to take on? So there's kind of some industry standards out there. You'll hear people say not more than 30%. That has a little more clarification. That's with non-mortgage debt. With non-mortgage debt, it can be anywhere between 35%, 45%, and 45%. And it depends on who you go to. But really, do you want somebody else deciding what your level is? What do you feel comfortable with? Now, I know with today's prices, with inflation, with home prices that are, oh my gosh, people have got to quit asking for it and people have got to quit paying for it for that to change and that to come down.

9:21But I think interest rates will continue to rise to deter that and hopefully force that back down. That's the only change, the only way it's going to happen. But anyways, be sure that you are being very clear on how much money you want, how much debt you want to take on. If you're a person that's comfortable with 50 % or more of your income going towards debt, that's okay if you are okay with that. Defining that for yourself is so important, but understanding, and again, it goes back to the very first thing I covered on this episode about what is debt. What is debt? You are committing future income, future payments, future cost.

10:06so if you are in a job that is not secure but you're going to commit to 30 years or you're going to commit to 60 70 percent of your income is that wise that's my only question i'm going to ask you because it's for you to decide but it's so important to come back to thinking about it for yourself and what the true cost is. We are basing it off of today. That's okay. But we also need to think about the future. Things can happen. What are we willing to commit to? How long are you willing to commit to somebody? Do you want to commit to a$2 ,000 a month mortgage for 40 years? And maybe you can. Situationally, if you're making money that covers that, great.

10:54So that's why you need to go off a percentage, stick with that because that's more relative to how much money you're making. And not everybody is going to be the same. And again, we don't make blanket statements like we talked about last episode. So make sure you define your rule, your why, your personal, so that if somebody asks you, you can explain further. That just educates them. Then they can create their own. That is very important. So another way to manage your debt is thinking about types of debt. Not only types of debt, but as you're going to go on your money journey, what other things may pop up.

11:33As Gen Xers, we are aging. We're getting older. Some weird things are going on here. So there's a lot of normal things that age takes on, that healthcare comes on. Is that something that you're going to have to put and take out debt for? Or are you going to have health insurance that's going to cover that? Just thinking about those different types of debt, meaning what situations are going to present themselves and what types of debt are you willing to take on. So when I talk about types of debt, there's credit card debt, there's unsecured, and that's unsecured, meaning you don't have an asset tied to that.

12:11So a vehicle loan is a secured debt, meaning that you have that asset tied to it. If you don't make a payment, they can take that. So in a sense, that's still not good, but they have something they can get money out of, which could reduce your payment back to them. So like bankruptcy, you're going down all that roads. Thinking about what types of debt, are you somebody that's hoping to have a credit card? And if you are, define what it can be used for. I think that is so important. Now, I want to go back to when credit cards were not as, they're not as, they weren't used a lot. We didn't have debit cards.

12:52I'm going back to the 80s, watching my parents. We go on a trip. The car, the engine catches fire. So we're out of state. We only have a check to use. There were times that I could see a credit card would be beneficial. But of course, my parents were raised with those beliefs, with those thoughts about credit cards are bad. That is bad. Now, they can be. I'm not going to say they're good. And we already talked about that in last episode about defining that for yourself. But having a credit card, they could have paid for the vehicle. But we have an out-of-state check. So my dad maneuvered. But then the guy was, it was a whole different story.

13:29But if that would be a situation that you would be like, you know what, I'd be okay with that. I'd be okay to use a credit card for that. Some people use it for all of their monthly purchases. And then they pay it off at the end of the month and they get the rewards. But you need to define, I have a credit card, or if you have multiple credit cards, what is their use? What is their purpose? How does this support your money journey? Think about all of those things. Having those things created also help you to be a better manager of your money, of your spending. It just puts things more in line with, okay, I am willing to take on debt to this amount.

14:09I am willing to have a credit card and I will use it in these situations. Just like we define our savings buckets for vacation, for debt payoff, for furniture, home remodel, whatever it may be. The same thing needs to happen with your credit. When can you use credit? What types of credit do you want to use? What things are you willing to put on your credit card? that you can't pay off at the end of the month. Just speaking through all of those situations and really helping yourself better understand what debt is to you, okay? So we did ask, what is debt? But what is debt to you? How does debt fit into your money journey?

14:52How does it help you go from point A to point Z in a positive respect, okay? Debt costs us. Debt puts us at risk. Debt does have a negative connotation, but you can create it as a positive within your money journey by defining all of those things. And I will repeat those. Choose the payment that will work. Don't just walk in and go, you have a really good interest rate. Yep, I'm going to, yeah, I'm going to do that. No, ask. Ask how much of your monthly money is going to be committed to that. How much debt total will you take on? Where do you feel comfortable? When we were able to pay off everything but our mortgage one time on our journey, and then we took on for a recreational piece of property, hoarding toys that went with it, and then we were able to pay that off a second time to just have our mortgage.

15:50That debt can be manageable. Debt should be manageable. But having a plan before you go into it and a full understanding is so important. So again, choose the payment. How much debt will you take on? What types of debt are you okay with? And what things are you okay to put on your credit card or credit cards? Make sure those are defined. Those are your action step from today's episode. Thanks for listening to this episode. It was a great revisit. I hope it helped you understand how you can start formulating that new debt relationship, especially that we talked about in last week's episode. So if you missed that, be sure and go hit that, listen to that.

16:36As you are getting more and more clarity with your money and you need support in understanding all of the financial foundations, debt is one of them, head over to elevatefinances.us backslash clarity and download my free guide that helps you get those clarity moments in six different ways so that you can understand is debt the issue? Is that what you need to resolve? Maybe there's some other areas that need support. But if you're looking for a bigger view into what may be going on with your money, I hope you'll join me in April's workshop. You can find that at elevatefinances.us backslash workshop, where we dive deeper into what is going on with your money.

17:21I help you assess your numbers without looking at every little piece. And we define priority areas, focus areas that will give you the greatest momentum and moving forward and feeling better about your money. So I hope you'll join me. And I'm glad that you this was a good listen for you. Thanks for tuning in. I hope today's episode helped you feel a little clearer and more confident about your money and reminded you that progress doesn't have to feel overwhelming. If this episode was helpful, I'd love it if you followed the show, left a quick review, or shared it with another Gen Xer who could use this kind of support.

17:58And if you're ready to stop guessing and want clarity around what to focus on next, I invite you to book a free financial clarity call at elevatefinances.us backslash clarity. And remember, retirement isn't just a dream, it's a plan. Let's make it possible together.