Debt: The Darth Vader of Financial Planning Tools, Money-Guy Podcast 7-13-2006

July 13, 2006

Our last show was on your Credit and how powerful of a tool it is. It can make many areas of your financial life easier.

Credit is also a great lead in to the Power of Debt. Debt gets a bad rap by most financial professionals and there is a reason. Unfortunately most individuals do not use debt as a wealth enabler instead they use it to extend their income and life style (an expensive way of faking success).


Examples of faking success:

  • Expensive car that you could not possibly afford without debt
  • Clothes shopping/ Shoe shopping in excess
  • Designer Handbags for the ladies and Expensive Watches for men & women
  • Exotic Vacations
  • Spoiling our friends and family at Christmas & Holidays with lavish gifts

(Now there is nothing wrong with anyone of these items if you can afford them, but many are faking it at the expense of their financial future)

Need proof of our misuse of debt (All according to the March 2005 Reader’s Digest by Max Alexander):

· Americans bought over $2 trillion worth of stuff on credit last year
· Current outstanding debt on credit cards – that’s the part that we don’t pay off every month – totals nearly $700 billion, up from just $50 billion in 1980
· By the mid – 1990s, credit card debt held by Americans living below the poverty level more than doubled.
· The average college student owes almost $2,800 on plastic and that does not include student loans.
· Senior citizens, once noted for their frugality, are sinking deeper into debt: Their average credit card balance increased by 89% between 1992 & 2001.
· And as I have stated in previous podcasts the average consumer debt in the US is over $8,000 & that that does not include mortgages

Now let’s discuss Wealth Building Debt

· Good debt is investment debt that creates value; whether through an appreciating asset (home value going up) or income (buying rental property)
· Notice the big difference between good and bad debt. Everything we discussed earlier under faking success went down in value immediately after you purchased it.
· Examples of Good Debt include:
o Mortgage on your house
o School Loan
o Real estate loan
o Business loan
Examples of Good Debt
o Cars are paid for
o Credits paid off monthly
· Clients that do residential rental property
o Many of my large clients that made their money through real estate made their first purchase through home equity loans on their primary residence.
· Commercial Real Estate Investors (several million dollar loans)

The Power of having a good banker is tremendous:

· Once read a great statement about debt and bankers:
o Borrowing money from a banker is one of the few business examples where you come up with 10% of the money for the venture and yet the bank allows you to have 100% control and 100% of the profit less interest. Not a bad deal.
· Please know that there is risk just like any other investment, but if used wisely it can help you grow your wealth

· So the next question is “How much debt is okay?”
· Dave Ramsey who is another financial personality that know a few of you listen to based upon emails recommends no more than 25%
· I will give you a little more latitude and let that number drift up to 35% as long as you are truly funding 15%-20% of your gross annual income to savings and retirement.
Remember that Debt is extremely powerful but it must be used responsibly.

The Biggest Pyramid Scheme in History – Social Security

· In about 2017 Social Security will begin to spend more for benefits than it takes in from its taxes
· The Social Security trust fund does not contain either cash or saleable assets. All of the extra money that Social Security collects in taxes over what it needs to pay benefits each is spent on other government programs. They are funding Social Security with nothing more than IOUs.
· A 25 year old man is predicted to receive a -.82% rate of return under the current system
· Minorities receive the double whammy with lower life expectancies and the inability to pass on assets to their heirs.

June 26, 2006 Investment News – Bipartisan group unveils plan to save Social Security by Sara Hansard
· Under the plan, guaranteed benefits for typical workers would be reduced by 43%, the retirement age would be raised immediately, and the payroll tax cap would be raised to 90% of earnings. In addition, personal accounts equal to 3% of earnings would be mandated.
· Social Security is truly a growing problem for our country that if not fixed will lead to major financial challenges
· What can you do? www.vote-smart.org



Most Recent Episodes

Dave Ramsey vs. The Money Guy: Which Strategy is The Best?

Dave Ramsey has an incredible legacy of helping folks get out of debt and take control of their financial lives. We agree on a lot of things, but there are a few points of contrast. In this episode, we’ll discuss differences between The Money Guy Show and Dave Ramsey...

Top 4 Financial Mistakes We Saw This Year! (2022)

We saw some wild financial mistakes this year during the bear market. From making extreme changes to portfolio allocation, chasing the hot dot, and using too much leverage, we’ll talk about some of the biggest financial mistakes we saw in 2022 in this episode.   In...

How Millionaires Build Wealth! (With Dave Ramsey)

Join us for a very special episode as we welcome personal finance radio host and influencer Dave Ramsey to The Money Guy Show! There’s so much misinformation out there about building wealth. We had the pleasure of having a great conversation about how millionaires...

Do These 4 Things with Your Finances BEFORE 2023!

There are unique financial opportunities available at the end of the year - especially this year with the market down. In this episode, we’ll talk about what you need to do with your money BEFORE 2023! In this episode, you'll learn: What you need to do with your money...

How to Win When the Financial World is Burning!

Lately it’s felt like the financial world is in chaos, with rising interest rates, a falling stock market, and high inflation. Let’s talk about how to focus on what you can control and how to minimize the time spent worrying about what you can’t control. In this...

Financial Advisors React to RIDICULOUS Money Advice on TikTok!

The most powerful time to get serious about building wealth is when you’re young. So, what is the younger generation learning? Financial Advice (good and bad) is being produced in massive rates across online platforms and TikTok is the new frontier. Is there good...

Loss Harvesting: Why Wealthy People Love It (And You Should Too!)

Tax-loss harvesting: what is it and should you be doing it? In this episode, we’ll cover everything you need to know about tax-loss harvesting, including whether it makes sense for you, how much it could save you in taxes, and how to eliminate the downside of loss...

The Market is Crashing! (Where Should You Put Your Money?)

The stock market has not had a great year so far. You might be asking yourself, “Since the market is crashing, where should I put my money now?” In this episode, we’ll discuss how to invest when the market is dropping and how to make the most of your money. In this...

Will Rising Interest Rates Tank the Economy?!

The Federal Reserve is raising interest rates to combat inflation, and many are concerned about how it will affect the economy. In this episode, we’ll discuss what rising interest rates means for your wallet and how to make the best of it. In this episode, you'll...

How to Be Wealthy By Age! (Can You Catch Up?)

How much does it take for you to meet your retirement goals by age, and what are some common traps your peers fall into? Learn more about how to be wealthy, mistakes to avoid, and exactly what a little extra saving can do for your retirement income. In this episode,...