Season 1, Episode 12: Should I pay off my debt early?

How to tell the difference between good and bad debt, and tips for how to pay which off when

Some debt is "good" and some debt is "bad", right? But how can we tell the difference?

Sara walks us through how to think about debt, and how to decide if paying it off early fits into our financial planning strategy. (Spoiler alert: Not as often as you'd think.)

Caitlin realizes (again) that banks don't always have our best interests in mind when it comes to lending us money and finally masters some financial concepts Sara has explained to her one billion times.

This week, the one thing Women on the Verge of a Financial Breakthrough can do TODAY to take the first, or next, step towards building a strong financial future is figuring out her "debt inventory".

Ask us your dumb investing and finance questions on our Ask Us page.

Music by Bad Bad Hats and Devmo.

Transcripts for Episode 12: Should I pay off my debt early?

Music intro by Bad Bad Hats

Caitlin Welcome to Women on the Verge of a Financial Breakthrough. Where we're going to figure out finance one dumb question at a time. I'm Caitlin Meredith, a mediator and coach based in the Bay Area, and

Sara I'm Sara Glakas. I'm an investor, advisor and founder of Black Barn Financial and the Austin Women's Investing Group, which can be found on Meetup.

Caitlin So I met Sara when she was my investing for beginners class teacher, and when I started that, that idea of any debt was like bad. That is a bad financial plan. That is a bad situation to be in, except like student loans and mortgages. And after the class, I got even more confused. So this is the episode where I figure out debt. Welcome.

 Music transition by Bad Bad Hats

Caitlin OK, so Sara, when during the pandemic, there's a lot of ups and downs, and we had a conversation, I think it was like building business or something, and you said something that was very shocking to me, seemed very cavalier and it felt off brand and I didn't know what to do about it. And it kind of sent chills down my spine. You said like, Oh, I don't care about debt, or leverage, like, Oh yeah, I can be leveraged, whatever. Alert, alert. Something bad is happening. She said leverage. That's bad. And you were like, everyone I know is like, Oh my God, we had to borrow so much money to do that. Like, it's this a weight on my back and you were just like, leverage, don't have a care in the world, and I'm still coming down from that shock. So I need to find out more about what, like, clearly there was some context. You're not like a credit card debt junky. But what's happening? Why would that even come out of your mouth?

Sara Oh, my gosh. I'm trying to figure out what this conversation was, where I was so cavalier about this. I mean, I think it goes back to. The question of good debt and bad debt. Right? Like in my mind, where you draw that line is it's OK to borrow money if you expect that the thing you're buying with the money is going to increase in value over time. Right?

Caitlin Right, so then you can pay the debt back like you borrow to make more money than you're borrowing and enough to not just pay it back, but to make more money.

Sara Right. I mean, I think one of the things I hear all the time, you've probably heard this too, is people will say, I want to pay off this debt because do you know how much interest I'm paying the banks?

Caitlin Yeah.

Sara They do that one of those amortization schedules, and it shows you how much you borrowed and how much interest you're paying to the bank.

Caitlin Oh right. And at the end, like the amount you're paying them in interest is like a significant chunk of money. And that feels awful,.

Sara Right. And so that's fine, that's like one piece of information. But the way that I think about it is, well, OK, after you pay the bank the interest from them lending you this money. Do you end up with more than you otherwise would have, had you not borrowed the money?

Caitlin OK.

Sara And so that. You know, doesn't necessarily make debt bad. It gives you, it gives you something to compare it to. If the debt has an interest rate that's higher than the expected rate of return from the asset you're investing in, then you're going the wrong way.

Caitlin OK, so an obvious example that the bad debt that we all hear about is credit card debt, really high interest rates, very unlikely that what you're buying with the credit card is going to increase in value to the extent that you can pay off the credit card and the interest and be better than you were before. Is that a good example of bad debt?

Sara That's perfect, and it's even worse because the thing that you bought might not even exist anymore, maybe you ate it or maybe you experienced it, but you don't have it anymore. You have the memory, right? But there is no empty

Caitlin Lovely fajitas on the cruise to the Caribbean.

Sara You splurged for the shrimp fajitas, and now you don't even have those and you're still paying for them.

Caitlin I mean, it's easy to joke, but a lot of people have credit card debt for like real things like medical bills and paying food and their kid's clothes. Like, really, they don't have the money they need to meet their expenses. And so that's how it happens.

Sara Yes, that is true, that does happen to some people, and some people just don't match up their income with their expenses. And it's more like they don't know how much more they're spending or they don't know how dangerous it is

Caitlin Right, to get caught in that trap. OK, so credit cards we can think of as like bad debt and one that under your sort of definition of what good debt would be is it's not going to make you more money in the long run, even though you're paying a high interest rate or interest at all, it's not going to make you more money in the long run. So bye bye, that one it isn't good. What is another example of good debt? I mean, all I can think of is borrowing to build a business or something where you need some initial money to invest in equipment or rent an office or whatever, and that later the idea as you'll be making money with that business so you can pay off that debt.

Sara Yeah, I mean, I think that's the third one. And you already mentioned the first two that most people think of. It's relatively easy to borrow money to buy a house or a piece of property. It's relatively easy to borrow money for education expenses to get a degree of some type, right? And then the third one is borrowing money to start a business, or expand your business, and, you know, by the time you own a business or are starting a business, you should be able to project how much money you could be making in the future and figure out whether it makes sense to borrow that money today, whether you would come ahead in that calculation.

Caitlin OK. But I'm even wondering under like what I'm going to call normal debt or the good debt like mortgage, student loans, etc. I'm part of a couple of these Facebook groups that are for like families or women that are interested in money and a significant percentage of people, who at least comment, seem to be very focused on paying off all of their debt, like paying off their mortgage early as part of like a very aggressive financial plan. And I get the appeal psychologically. I totally get like, I own this now, this is mine or I don't have to pay my student loan bill every month, which I will be paying for the rest of my life. I get that, just like that thing off my back. But when I do, with my very rudimentary percentage comparing skills, it's like, OK, my mortgage is, I don't even know, let's say, 4.5. And so paying extra means that money, in my case, that would mean money I can't pay into my retirement account and making a choice between paying off my mortgage early, which has an interest rate of 4.5 percent versus putting money in a retirement account with a potential expected return over a long horizon. Did you see I said expected?

Sara Oh my gosh. Like, this is just keep going. I love it. Keep going.

Caitlin She's in rapture. Expected. I have to say that because financial professionals can never say you will get this return. Expected return, based on past performance of, let's say, 10%, 9%, 10%. So that's a difference of several interest points that I could gain. So why would I put the extra money towards a lower interest thing? Am I even asking this in the right way?

Sara Yeah, that's that's exactly right. And I think the way that you laid it out is a really sophisticated way of looking at it. I know. I mean, I love this because I think a lot of the debt paydown and the zero debt communities there is like an emotional aspect to it, right? That if we were just looking at the numbers, the way that you laid it out totally makes sense. Like if you can get a higher rate of return, you only have a certain number of dollars left over at the end of the month.

Caitlin Right.

Sara What are your choices? You could put them in a high yield savings account. Right?

Caitlin I mean, I've heard, yeah.

Sara And get 1%. You could prepay your mortgage and basically get 4.5%. Or you could put those dollars in a long term investment account and try to get 8, 9 or 10 percent compounding over time. And so I think that for a lot of it, the the guaranteed rate of return from prepaying debt is very appealing.

Caitlin OK.

Sara You're

Caitlin Because you know, it's definitely that you're paying early and so it will be over earlier and you will definitely be paying less interest than if you prepay your mortgage or student loans.

Sara Yes. I mean, do you think in these groups that you're a part of that there is shame around debt or or or negative feelings about. Borrowing money from someone or owing money to someone?

Caitlin There seems to be a callback to like older times, like when our parents or their parents bought a house, you like, bought a house because you could pay for it and that. The economy has gone crazy. And so like owning your house now should still mean the same thing owning your house and not giving the bank any more for it. That's what I can assume, and I have to assume some of those people have the income level where they can max out their retirement contributions every year and pay ahead on their debt. So like whatever. That's how that's psychologically how that feels safe to them. Great. But for those of us who don't have all this excess cash, like figuring out if that should be a priority or not seems a little confusing because I said, like, psychologically, I get it. I'm not in debt. In debt feels bad, but the math never seems to add up for me.

Sara I think another drawback to the financial ones that you laid out is by really aggressively paying off your debt, you're taking these liquid dollars and you're turning them into something illiquid. So have we talked about liquidity?

Caitlin No. Let's talk about that, I was just going to interrupt you. Liquid.

Sara Liquid is the idea that you can relatively easily turn an asset into into cash.

Caitlin OK.

Sara Right.

Caitlin A high yield savings account.

Sara That's right. So your high yield savings account is almost perfectly liquid. If you need to take out $10,000, you just take out $10,000, right? It's your money. With stocks, if you have an account worth a million dollars and you need to take out $10,000. It's relatively easy to do that. You just sell $10,000 worth of stock and you make a withdrawal.

Caitlin You don't have to pay a penalty? Oh, that's a retirement account, not just a plain old investment account.

Sara Yeah, I'm talking about just a plain old investment account if you have all of your wealth in the equity in your house. And you need $10,000. How do you get it?

Caitlin Like a cash out refi, but if you're having financial trouble because you lost a job or something, that might not be possible.

Sara Exactly. So you have to really be more proactive. I mean, you could sell your house. That doesn't really seem ideal, right, to have to sell your house to get money. You could in advance open something like a home equity line of credit while you still do have that job. But if you haven't thought through this, you can end up with all of your wealth tied up in like one big illiquid asset, that's actually really difficult to then maneuver with. The benefit that you get, it's like, Well, I don't have a mortgage. It's like, OK, well, you're getting the benefit of that investment in little drips and drabs every month where you don't have that mortgage payment.

Caitlin OK, wait, so you mean if I pay off my house, I get the benefit by not paying the bank any more. And so whatever was going to the bank for my mortgage payment every month,

has been freed up for me to do something else with it. That's the benefit you're referring to?

Sara Yes. Yes.

Caitlin OK.

Sara That if you worked really, really hard and you paid off a $300,000 mortgage and your $800 a month payment goes away, which is often what is cited as the benefit.

Caitlin Right.

Sara That's true. But then you're only getting like $300,000 investment in paying off the mortgage. You only get the benefit a little bit at a time through your cash flow, right, through having lower expenses forever.

Caitlin Right. And the ultimate benefit will be home ownership, because then one day you can sell that home. But until that happens, all your eggs are literally in that basket. I mean, you may also have retirement accounts or investment accounts, but like a lot of cash dollars are in that basket that are not doing anything else. Whereas if you had a mortgage for half of the amount of the house, so $150,000 and that extra money you were putting in an investment account you could be making over that same period of time a lot more money than your house value would increase.

Sara Right, right. I mean, and I see not infrequently, I see situations where there's a retired woman whose only asset is a paid off house.

Caitlin Yeah.

Sara Right? And so if you are 75 and you don't have a lot of liquid savings and you don't have retirement accounts and all you have is a paid off house. You don't have a ton of options.

Caitlin Yeah.

Sara Right, you have way fewer options than you thought you were going to have. You probably until that moment had some security in knowing that the house was paid off and that the bank could never come take it, but once you get to that point where that's the only asset that you have left, you've actually decreased the number of options that you have going forward because you can't pay for a car with a paid off house. You can't pay for a vacation with a paid off house or having someone come in and help take care of you if you need part time or full time care. So then what do you do?

Caitlin Reverse mortgage, is that what those are?

Sara Right? And so that's where the reverse mortgage industry came in, and most people don't like reverse mortgages. It used to be a super sketchy part of the market. They have really improved since the financial crisis, and they're way less predatory than they were back then. But OK, well, now you have the paid off house. How do you undo that after you're done working?

Sara Yeah.

Sara Right. So I do think there is like this. It's not always a false sense of security, but maybe it's over attributing how useful that giant paid off house is as an asset if you don't have anything else kind of working around it.

Caitlin So the way that that priority, it's like overrated as that being the one thing instead of like, look, 75% paid off with 25% of your assets in a retirement account would make your life a lot easier at that point, like making the decisions now about allocating that will give you the options later.

Sara Right. I mean, I would definitely fall into like that latter camp where if I see people or if I myself have a 50% loan to value ratio, right, then

Caitlin 50% loan to value ratio, what does that mean?

Sara Yeah. So if the the balance on your mortgage is only 50%, of what the house is worth. OK, so you start out with 80%, if if you put 20% down, you start out with an 80% loan to value ratio. And you know, ideally, if you're paying this off over time, then the mortgage balance goes down and the value of the home hopefully goes up. So your loan to value ratio is going down steadily over time.

Caitlin Right.

Sara I mean, I think that's where, you know, in talking to like the zero debt community, I would be interested to hear like. Why isn't like 25% loan on your house, OK, for safety purposes, right? Or 40% right where you're past that threshold, where the market's going to tank in the bank is going to come take your house, right? You have so much equity in it that you're just not in that type of danger anymore. And so what is the continuing incentive to put some or all of your monthly savings into a low, low risk, low return, low liquidity investment, like paying off your debt.

Caitlin So we're talking about something like a mortgage that we've, you know, is the good debt. Mortgage rates are historically low right now, and so hopefully people can get them low enough, if not the lowest rates right now, but what about, you know, private student loan debt? I guess I'm curious from your perspective, at what point is there like a certain interest rate where you say, Oh, no, pay off that debt first and then worry about retirement? Or is it always hand-in-hand? Like what where is that threshold between like, give the minimum payment to carry that loan as long as it'll go versus like, Oh no, you need to be a little bit more aggressive there.

Sara Oh yes, Sara's personal rating of interest rates. Yeah, pay out priorities. Yeah, yeah. OK, so this is I've had this in my mind for a long time, so anything over 10 percent is a priority to pay off.

Caitlin OK. Sara won't get out of bed for anything less than 10 percent interest rate. OK.

Sara Well, you know, let me back up here. Let me say anything over 15% is a no brainer, don't save money anywhere else, except maybe like one month of living expenses in your emergency fund, but almost all of your extra dollars go to paying off debt that's 15% or higher. OK? Because there aren't many investments you can make that have a reasonable chance of consistently hitting a 15% annual rate of return.

Caitlin So that that the over time drag on your whole financial flexibility is so great when you're paying, when you're in debt for something over 15%, that you need to really attack that first. Such aggressive language, go after it, attack it. Pay it off early as much as you can so that doesn't swallow any of the benefits that you could get from putting your money other places?

Sara Yes. Yes. So 15%, I'd say 10 to 15%. If you're if the next batch of your debt is somewhere between 10 and 15%, then the majority of your savings should go to paying off the debt, but you can probably start setting some aside in a retirement account, let's say. So for that piece of your debt next that falls in that 10 to 15 percent interest rate threshold, I would say a majority of your savings should probably go to paying that off. But now you can start setting money aside in your retirement accounts. So if you get a 401K match, then you have enough of your savings going to get some or all of that 401K match and then the rest of it goes to continuing to pay down the debt. The next chunk, like under 10 percent, get a little bit, I don't know, like a little bit trickier. I would say like, OK, for debt, that's between seven and 10 percent interest rate, you continue to pay that down in advance, so pay it down early. But start setting aside more of your savings in a retirement account versus the debt pay down. And then for me, like, any interest rates less than five percent are not interesting to pay down.

Caitlin It's like free money. I mean, clearly like you pay your monthly whatever,

Sara Right.

Caitlin But you don't see any benefit of using any dollars to pay that off early.

Sara Right. So that just gets paid as agreed. Whenever the as agreed amount is, they send on the statement like you would need to. You owe us $371.23. Yeah, like you don't pay a cent more, you just let that 5% and under. Just like, let that baby ride forever if you have to or for a really long time. Again, this is like, you know, people will have different thresholds for themselves as to what that number is. For me, it's 5% where I probably won't prepay anything that's under 5%,

Caitlin OK,

Sara that I can get from anywhere.

Caitlin OK, so one of my student loans is under that one is over. So the one that's under, I just pay the bare minimum every month. Don't think about it, which is good because I'll be doing it for the next 30 years. And then the other one, though that's over it. I really pay attention to adding a little bit extra

not at the expense of also contributing to my retirement, but like it should be a parallel priority to get that a little ahead of schedule.

Sara And, you know, you can do a calculation to see. You know, if you set money aside in something where you expect a higher return. So let's say you start a brokerage account and you start investing in there and you get a relatively good rate of return like, you know, eight, nine, 10, 11 percent per year. It might be the case that your brokerage account grows so fast that you can then use that money, you grew in the brokerage account to pay off the rest of your student loan. Right? If you prepay the student loan, you're only getting ahead by the interest rate right by the 4.5 percent per year or whenever. But what if you took like a little bit of a risk because there's no guarantee. And instead of prepaying at four and a half percent, you put the money in a brokerage account that just like you didn't do anything special. But because the market cooperated for some period of time, you were able to grow that money at eight or nine or 10 or 11 percent and then use your investments to pay off your loan.

Caitlin Some of that to pay it off. Brilliant, Sara. This is, is this like insider stock tip? Like only here. This like as insider stock tip as it gets for me.

Sara No, it's it's not not a stock tip.

Caitlin So we won't go to prison for implementing this.

Sara I think it's just a way to train yourself to think differently about how you're investing your money.

Caitlin And growing it, I mean, if your only experience with getting more money is because you worked more hours or got a Christmas bonus. It doesn't make sense that you think you will get money because it grew somewhere else and then all of a sudden you have more money from the money you put it like it has. It's such a crazy idea. I mean, it's like the rich get richer. It's like it doesn't seem to apply to a normal person. And here you're saying, like, if we put our money in the brokerage, it will make money. It's I mean, I know that's the whole point of all of this but it still seems like a new.

Sara What episode is this? Caitlin has a breakthrough.

Caitlin I had no idea.

Caitlin Investing will make you money? Wait, hold on. Let's unpack that.

Sara Let's start a podcast about that.

Caitlin  Here we are, though, talking about how debt, you know, under 4%, but this is something that always confused me. It's like you go to the bank and you know, now during pandemic, whatever property values in Austin and everywhere going insane, people are qualifying for mortgages that are really big. And mortgage rates are really low. So it's like, why not take it? Oh my God, a 3% mortgage rate. How do we, like, I just thought the bank would know what I could handle and would like only offer me the amount of money that was like completely, fiscally responsible for me to borrow. It turns out that the bank seems, the bank, seems to lend people a lot of money at low interest rates, and it's still kind of up to you to decide what you could responsibly bear. So I'm just wondering how that piece connects to this like is it like no matter the amount of money, as long as the interest rate's low, like, go for it? Or like, what else are we supposed to be paying attention to here?

Sara Yeah. So the piece that was glossed over is the the debt payment versus your income. Yeah. Right, so this comes back into your budget, your short term cash flow. Because in order to get to the long term on a long term investment, you have to make sure that you can pay the debt on any money you've borrowed or otherwise like, in this case, the bank is going to make you sell your house when you don't want to and pay them back. Right? So the the part where that connects is, you know, you get qualified from a lender and they send you that, you know, that piece of paper that says, OK, now your monthly payment is going to be $3,500 per month. Yeah, that's what they've calculated. They will give to you, right, the amount that they would give to you. But you have to look at that and be like, Oh my gosh, is that $3,500 payment reasonable, and or, advisable, right? Like,

how easy is it for me to cover this $3,500 payment? If it's a stretch, and it kind of depends on best case scenarios, right? But yeah, people stay in their jobs. Nobody has to go part time and nobody gets sick. Nobody has to take unpaid leave to have children. You know, nobody like, right, like if it relies on a bunch of best case scenarios. Then it's risky, right? Like if your calculation is like, I just need everything to go great and then I can afford this payment that is a giant red flag.

Caitlin And for a long period of time.

Sara Yeah, right? Because that $3,500 payment is in there for a really, really long time. So that's where the connection comes in, it's like back to if you think about your short-term cash flow, will you be able to cover this payment? And this is true for mortgages. It's a little bit more difficult for student loans, but I wish that more kids and or their parents did this calculation based on the amount of debt you're taking out. What is your higher salary? Is there a higher salary for the degree that you're about to get there?

Caitlin In my case, no.

Sara I would say there are lots. Yeah, there's lots and lots of master's degrees that do not lead to substantially higher income levels.

Caitlin Hashtag no regrets, but also hashtag had no idea.

Sara Thank you for saying that. And then with your business? Right, OK. If I borrow $100,000 and now I have this monthly payment to the bank. How sure am I that this $100,000 is going to lead to more business allowing me to repay this debt? So it's that it's that connection between the income and the monthly payments that's really the thing to look at to make sure that in the short term, you are as stable as possible in the short term because that's how you get to the long term, right? By having that short term stability and I do think that is what. I think in some cases that's what causes people to go from borrowing money to wanting to be debt free because something happened and they, they got out of balance, and all of a sudden their income was not covering their debt payments, and they saw the debt was the culprit. Right, like the debt was the problem. And so the debt is the enemy. It must go, and all of it must go because debt is no good. This was a total mistake. And you know, you're taking that. I don't I don't I guess its logical conclusion that if you didn't have the debt, today, right, if we didn't, then

Caitlin Then I could change jobs and not worry about my mortgage payment.

Sara Right, right. So, so I get that, and maybe for some people, that is true. But when I think about especially people pre paying their mortgage and you think about how long and how hard it is to pay off hundreds of thousands of dollars in very short periods of time, and then you think about, well, what else could that $300,000 have done, right? Like if you had kind of considered all of your options or not putting all of your eggs in one basket, I think there are opportunity costs that people don't necessarily think through all the way. Hopefully, they thought through them and just decided that the debt payment was the lowest risk and most emotionally satisfying way to go, but I don't know that people necessarily do that calculation.

Caitlin You know what this is revealing for me this disappointment that, it's like I'm disappointed that the, this sounds so naive and crazy, but like that the banks aren't more paternalistic, you know, like I expected them to like take a sober look at my finances, my all that and offer a number that was very reasonable and whatever. And instead, they have a completely different calculation because they get the house in the end, if it doesn't work out, like their skin in the game is pretty protected, right? And so it's very confusing like you set up in the beginning to be like, Shit, I hope I get approved for a mortgage. And then when you get approved, that seems like the big hurdle. But then the second part is the realization that they might lend you more money than you should responsibly take. And yet they seem like the ones that would be withholding from you. So you're set up to, I don't know how to explain this like they're supposed to be the stop sign. And really, it's all set up as a deception so that you think they're the stop sign, and when they don't give you the stop sign, you think it's a green light. Did I mix enough metaphors or do you see what I'm saying, like,

Sara yeah, I see what you're saying.

Caitlin  I think of them as the adult in the room saying, like, Whoa lady, slow down. You can only responsibly borrow this amount. And instead, they go hog wild. And I'm like, Wow, they really see me as an important financially responsible person. It's like flattery. Well, yes, you're right to recognize me as an upstanding citizen. Ha ha ha, joke's on me. They get the house if anything goes wrong and I'm screwed.

Sara Yeah.

Caitlin So that like speed bump, we have to put in for ourselves to figure out and also just thinking about a woman's lifetime. How many different changes we undergo that directly influence our earning potential, like the idea that we could sign a contract one day in our 20s, in our 30s and 40s that would be able to predict the amount of money that we could pay back every single month for a 20 to 30 year period is pretty insane.

Sara Yeah. You're not wrong on any of those points. You are right right now. I mean, and you are right. And there's. You can put you can put numbers to a story with debt, right, and in a much easier way than you can with. With investing, and so I mean, I think for for every person they have to figure out. I think it's important to think about like, OK, but the emotional reasons that you are doing, whatever you're doing and one of the common narratives for retail investors, right? So this goes back to like regular investors, a common narrative is that debt in and of itself is bad.

Caitlin Yeah, that's that's where I'm coming from.

Sara Right, right. And you know, like if you if you can't make your debt payments, it's like the worst thing that could have possibly you could have possibly done because you're a liar and a cheat and you're trying to get out of what you told someone you would do. And there's hubris and just bad decision making, and you're irresponsible, right? So there's all of this, this shameful emotions that go along with it, and it doesn't have to be that way. There can be a healthier relationship with debt if you look at it more from a numbers perspective and less from an emotional perspective. Yeah.

Caitlin Well, and I think about people that I've heard that are in great depth, as I referred to earlier, like a medical thing happened or like things that are truly outside of your control or just we know women get paid less than men. People of color get paid less like there are all sorts of traps in the American economy for working people to get caught in a lot of debt, like payday loans exist for a reason. People do not have enough, are not earning enough money from their jobs to pay for the necessities of their life. So there's a lot of really legitimate ways to get caught in debt. And yet it's held like a personal failing, even if you're plugged into a system that's out to get you.

Sara Yeah, and I think that does also kind of go back to this idea of not putting all your eggs in one basket from a risk mitigation perspective. Right? Like, yes, like those things happen it is not safer to have all of your wealth tied up in the house and then have a medical emergency. Right? Because then if you can't get the money out of your house, you have to go into credit card debt, so what if instead of putting all of your savings into pre-payment, you know, some of it is going into a 401k and some of it is going into that old high yield savings account. And then some of it is going to prepaying the debt so that if a medical emergency happens, you look at your picture and you say, OK, how what's the best way to go about dealing with this? Do we drain the savings? Do we borrow against the 401K? Or do we sell the house right? Like, you at least have three options? So I think that that, you know, for me, I think that's maybe the most undervalued part of thinking through this. The most underweight, you know, that people are is like thinking through how valuable options are when bad things happen.

Caitlin Yeah.

Sara And also not treating it as a personal failure and not being so quick to judge people who run into financial trouble because really like our whole financial system in the U.S. is built that way, right? Like. A lot of people are lent money that they shouldn't be lent in the first place, but that's just the way it is. It's not a personal failing. And you know, I think I mentioned this to you once before, like I actually think the bankruptcy system is underutilized in a lot of ways.

Caitlin We have to do. I have known nothing about bankruptcy. We have got to talk about that.

Sara Yeah, we should have someone come in and talk about it because, you know, occasionally I'll see some sort of picture. And it usually involves, you know, payday loans or some sort of like really super high interest rate loans. Maybe it's credit cards. Where you look at this financial picture and the person's income and their prospects and you're like, this person can't do, the math does not work at all. Yeah, the best thing to do is just start over, right? Start over. And so I think that that in a worst case scenario is an option that people should consider again like. Bad things happen to good people. People make mistakes and that there is like a whole system put in place to help you not get buried by it for the rest of your life, that it doesn't have to be a decision that. You're stuck with or in a circumstance you're stuck with forever.

Caitlin OK. I I'm understanding this more. I think when we talk about leverage what my associations about always been as people buying too much house like that they couldn't afford and being super leveraged in their house and then trying to figure out, Well, I'm super leveraged in my house. Like, How do you tell the difference between like buying a house means you're leveraged versus you're too leveraged? And so I think what you've given is some ways to think about that. Obviously, look at what the money coming in is, what your budget is like. Can you afford that without it being a stretch every month? Can you absorb some transitions and fluctuations in your personal life and

what finances are coming in without putting that loan at risk. Am I thinking along the right lines?

Sara Yes. That's amazing.

Caitlin Nailing it. Just totally nailing it.

Sara Great summary.

Caitlin It's like our sixth conversation on this topic. So refreshing and making some headway. OK, thank you, Sara.

Sara Thanks, Caitlin.

 Music transition by Bad Bad Hats

Caitlin OK, Sara. What's one thing a woman on the verge of a financial breakthrough can do today in this realm to take care of her financial future? Put her financial house in order, if you will.

Sara So I'm going to to piggyback on some ideas we've thrown out in past episodes. And so this one is putting together your debt inventory. This is really helpful when you're trying to figure out what to pay off and in what order, so to do your debt inventory, all you need is make a list of all your debts. No. The balance of each one.

Caitlin How much you owe.

Sara The payment monthly payment for each one

Caitlin like the minimum that they're requiring, correct?

Sara The interest rate. Yeah. And then if there's some sort of like maturity date, that's important. And so most loans they go from, you owe $10,000 and they slowly drawdown to zero. But if you're in especially something like one of those teaser rates that you get from credit card companies,

Caitlin it's like the first year as one rate and then it goes balloons after that?

Sara Exactly. If there is a rate or if there's a date where that rate changes from zero to 15 percent. Put that in there, too, so make a note of that.

Caitlin I mean, that's just the definition of a trap, right?

Sara Well, unless, some people are really savvy about using introductory rates, credit cards, and so like, I don't want to pooh pooh on all of it, but it's. But you want to know when the rate changes.

Caitlin Yeah.

Sara So put that in there, too. So make a list of all these things. And then as you're figuring out how you're going to tackle this debt, if it's something that needs to kind of be brought back into line, you can start looking at, well, OK, well, this debt has the highest interest so I think I'm going to start there, right?

Caitlin OK.

Sara Pay all of the other debts, just as agreed. And then all of your extra money goes to paying down this one high interest rate debt, but just doing the inventory itself, you'll be able to see, hopefully, like the impact that your decisions on the debt repayment, like what impact those can have on, I mean, overall interest paid to the bank. And how does it impact your cash flow? And by that, I mean, like once this debt is paid off, it'll free up another $400 per month that I could use somewhere else, either to start my retirement account or to put towards another piece of the puzzle.

Caitlin OK. And I know there's a website called undebt.it. u-n-d-e-b-t-dot-i-t. Maybe. And I think I think their overall premise is so that you can pay everything off quicker. And we're suggesting you look at that in a different way, make some priorities based on the interest rate levels. But I think you can plug in all those numbers and it gives you the different scenarios. Like, if I paid this much per month, how much, how quickly, what I pay it off, etc. So that might be worth playing with to sort of get the information you need to look at your what did you call it, debt inventory?

Sara Yeah. Debt inventory.

Caitlin So like, it's so official and objective. Like not like the Hall of Shame.

Sara It's just the numbers.

Caitlin The debt inventory. Yeah. OK, awesome. I it's a scary one because that number. Oh well, you remind everybody that often people owe more than they're worth for a long time in their life. I feel like this is the moment we all need to hear that.

Sara Oh yeah, a lot of people owe more than their, and they owe more than what their assets are worth for a long period of time. So that's that's OK. You want to be moving in the direction towards positive net worth, towards having your assets be worth more than your debts. But not everybody starts there. So it's more like a spectrum where you might be on the spectrum somewhere. OK? of net worth. And you definitely want to be moving towards positive net worth over time.

Caitlin The trend line is important here, not where you are at this moment in time.

Sara Exactly.

Caitlin OK, thank you so much, Sara.

Sara Thanks, Caitlin.

Music transition by Bad Bad Hats

Sara Hey. Do you have any dumb questions about finance or investing? Send them to us at our website womenontheverge.com

Sara Hey, so many thank you's to Kelly West, a woman on the verge in her own right who took the amazing photos for our album, art and website, helped with our website design, music, audio editing, cheerleading, mental health, everything. Emily Kleinsoerge, our stylist that did our hair and makeup for our photos from Lucy Skyrocket. Lauren Gross and Taylor Gross, who helped us with our graphic design

Sara and our music is by Bad Bad Hats and Devmo.

Caitlin If your partner is making you ask for money, giving you an allowance, taking your money or not letting you know about or have access to family income. This could be economic abuse.

Sara Learn more at thehotline.org or call 1 800 799 safe.

Caitlin So Sara because you're a financial professional, when you have to read a disclaimer for this podcast,

Sara I would actually really love it if you could read the disclaimer and your.

Caitlin OK. Doing it. This podcast contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this podcast will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

Music outro by Devmo

Devmo I know the first thing you notice is that I'm covered in gold, the flick of the wrist it could turn a hot bitch cold, to get what you want in life girl you gotta be bold. Now Imma die rich, and I know...