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3 Ideas That Perpetuate Debt · Cash Confident with Brie Sodano

• 0:01
  Speaker 1: Welcome to the Cash Confident podcast.
• 0:03
  Speaker 1: I'm Brie Sedano, your fearless host, personal finance expert and the visionary behind the revolutionary Cash Confident community.
• 0:10
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• 0:22
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• 0:32
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• 0:43
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• 1:02
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• 1:10
  Speaker 1: Oh, hello, hello.
• 1:18
  Speaker 1: Today we are talking about debt.
• 1:20
  Speaker 1: That's always a big topic for people, and I'm going to teach you three ideas that really perpetuate a debt cycle, that really keep people in debt so much longer than necessary.
• 1:33
  Speaker 1: So that's what we're going to work on today.
• 1:35
  Speaker 1: We'll just go ahead and get right into it, all right.
• 1:39
  Speaker 1: So the first idea that perpetuates debt in a debt cycle is the idea that interest is a scam and that you're not getting anything for the interest.
• 1:47
  Speaker 1: Now, the reason that I say that this perpetuates a debt cycle is that people get so butt hurt about paying interest that they'll move their debt, run up a credit card and then they'll take out a 0% balance transfer and then they'll run up their credit card again because they don't change their habits.
• 2:04
  Speaker 1: But then they're so mad that they're paying their interest and then they'll take out another one, and this really grows the cycle of debt.
• 2:10
  Speaker 1: It's like the idea that the interest is a scam will have them taking out, essentially buying more and more financial products, and it usually starts with 0% balance transfers, and then we'll go to either a 401k loan or a personal loan and then a home equity loan, and then it goes from there, and so the idea that paying the interest is a scam is one of the ideas is that we'll just make people take a lot of action towards their debt, that's not paying their debt off.
• 2:42
  Speaker 1: So here's a reframe.
• 2:44
  Speaker 1: Here's just a different way to think about it.
• 2:46
  Speaker 1: So when you are paying interest, the reason that you're paying interest is you are having access to something that you can't afford until it's paid off.
• 2:54
  Speaker 1: So let's just say I'm gonna use my house as an example.
• 2:57
  Speaker 1: So when I bought my house, I didn't have the cash to fully pay for the house, and so I went to the bank and I essentially bought the money to pay for the house.
• 3:12
  Speaker 1: Now they gave me the money to give to the house seller all at once, and I'm gonna pay back the money that I borrowed plus the cost of the money.
• 3:25
  Speaker 1: So the cost of the money is the interest.
• 3:29
  Speaker 1: So I'm essentially paying rent on the money, and what I get in exchange for that interest payment is I get to live in a house for 30 years that I didn't have the money to pay for it, right, or I had only some of the money to pay for it.
• 3:47
  Speaker 1: So I get access to this beautiful home that I live in, and if I had to rent while I was doing that, I would have so much I wouldn't really be able to save very much because I'd have to be paying the rent, and so it might take me 20 years or it might take me a really long time to be able to save that money.
• 4:12
  Speaker 1: So I get to build equity, so I get to, you know, some of the money goes to pay down the principal and some of the money goes to pay for the rent on the money and I'm getting something, I'm getting the use of the house before I could actually afford it, and so that's what I'm getting for the interest payment.
• 4:29
  Speaker 1: Now, when it comes to, like you know, financing sweaters and margaritas, that doesn't end up feeling so good in the long run, and that's that's okay.
• 4:37
  Speaker 1: We all, you know, make choices and then we learn, and then, you know, we do things maybe differently.
• 4:42
  Speaker 1: But when I'm paying the interest I'm not but heard about it I'm realizing that I got something for it and it was a.
• 4:52
  Speaker 1: It was a trade that I was happy to make when I send my mortgage paperwork, and I'm still happy to pay for it.
• 4:58
  Speaker 1: I'm still happy that I, that I'm able to, you know, have access to this house when I needed it, you know, rather than having to wait until I had, you know, hundreds of thousands of dollars in cash to be able to buy it all at once.
• 5:16
  Speaker 1: So the idea that interest is a scam is one idea that really will cause a lot of action taking around debt.
• 5:22
  Speaker 1: That generally will increase the size of the debt over time If you're, especially if you do that and you don't adjust your spending habits, all right.
• 5:33
  Speaker 1: The second idea that perpetuates debt cycles is that it is better to pay off debt before you save money.
• 5:45
  Speaker 1: This idea it does two things that I think are are no blame.
• 5:51
  Speaker 1: So, first is it perpetuates.
• 5:53
  Speaker 1: It perpetuates debt, and I'll get into that in a second.
• 5:56
  Speaker 1: And the second thing that it does is oftentimes it really has people put off saving and investing for decades, and so I'm going to talk about both of those things.
• 6:07
  Speaker 1: So when people are putting all of their free cash flow toward debt and they're not saving and they don't have money set aside for the things that are definitely coming in the year.
• 6:18
  Speaker 1: So, like, if you follow my work, you know if you're in the invisible system, things like working capital, which is just a way to like look at all of your annual expenses that come up that are not monthly budget line items, things like heating oil, snow tires, back to school, shopping, you know gifts, you know holidays, things like that.
• 6:38
  Speaker 1: So a lot of times when people are so busy paying off their credit card, they don't build savings habits, and then life will throw them a little curveball come.
• 6:48
  Speaker 1: Give them a little smack in the smack on the cheeks and they're right back to using the credit cards.
• 6:53
  Speaker 1: And so this cycle of not being able to get out of credit card debt is extended when you don't learn how to have money.
• 7:01
  Speaker 1: So debt is always the result of needing money, and the antidote to needing money is having money.
• 7:09
  Speaker 1: Now, when you have debt and your and if you're, you know back to secret one when she was like really but her about paying the interest on it, you know, the temptation to hurry up and pay it all off is really there.
• 7:24
  Speaker 1: It's really valid and it's loud.
• 7:26
  Speaker 1: The thing that I find is when we do that, we expose ourselves to so much risk to falling right back into that debt cycle, even if the debt gets paid off fast, like if you're.
• 7:37
  Speaker 1: If you finish paying off your credit card but you don't have any money in the bank and then next week something happens and you need a few thousand dollars, you're right back to those credit cards, and that's a cycle that I see happen all the time.
• 7:51
  Speaker 1: So what I suggest doing is building your savings habits, really first and foremost, and then you would obviously make the payments, at least the minimum payments, on your debt.
• 8:04
  Speaker 1: And then, as your debt gets paid off, as your savings grows and your debt starts to get paid off, you'll start to see a little bit more wiggle room and then you can really, you know, maybe even increase your income or increase those payments or do whatever makes sense to you.
• 8:19
  Speaker 1: Now the second reason that I said that I just want to mention here this doesn't really perpetuate the debt cycle, but I do think it is damaging to people's financial lives is when people believe that they have to be debt free before they start saving and investing and they're maybe in a debt cycle or maybe they're used to having some debt or debt as part of their financial comfort zone.
• 8:40
  Speaker 1: They will put off saving money for literal decades, and I'm not exaggerating.
• 8:45
  Speaker 1: When I was a, when I was an investment advisor, sometimes people would come see me like, at 55 years old, like Bree, I'm ready to get started saving for retirement.
• 8:55
  Speaker 1: I paid off all my debt and now I'm ready and I'm like, oh, my goodness, we, you, you don't have really enough time to get there in the market, like, so the thing about investing in things like your 401k, investing in the market, is that money needs time to grow.
• 9:11
  Speaker 1: So when we stop putting that money in, when we're in our 20s or in our 30s, and at the time it will make sense because people will be like all right, well, I'm going to make 8%, maybe in the market and I'll pay 21% on the interest of my cards, let me hurry up and not do that.
• 9:32
  Speaker 1: But the thing that they don't factor in, where that decision becomes unsound, is that the money that they were saving and investing for retirement, let's say, is going to double every seven years.
• 9:42
  Speaker 1: Well, let's just say 10 years to make it.
• 9:45
  Speaker 1: To make it nice and easy math so let's say the $10,000 that you didn't save in your 20s because you stopped doing that, you know to to pay off your credit cards, that $10,000 would have been worth $20,000 in your 30s and that $20,000 would have been worth $40,000 in your 40s, and that $40,000 would be worth $20,000 in your 30s, 80,000 in your 50s and 160,000.
• 10:16
  Speaker 1: And listen, these are super rough numbers.
• 10:19
  Speaker 1: You can run your calculator.
• 10:20
  Speaker 1: So it probably sounds like I'm exaggerating a bit, but the power of compounding interest in time is really really vast.
• 10:28
  Speaker 1: So the money that you set aside in your 20s or in your 30s, when it has 30 or 40 years to grow, it ends up being really really big.
• 10:37
  Speaker 1: So the $10,000 that you don't save because you're paying off the 21% interest credit card can end up really taking a massive bite out of your retirement savings.
• 10:51
  Speaker 1: And you cannot borrow money for retirement.
• 10:53
  Speaker 1: You have to have the assets.
• 10:55
  Speaker 1: You have to have the market portfolio or the cash on hand or the real estate or the business or whatever else.
• 11:02
  Speaker 1: So that's the second thing.
• 11:06
  Speaker 1: And the third thing is the idea that we're going to pay off our debt really really fast.
• 11:12
  Speaker 1: Now listen, if you have like $2,000 worth of credit card debt, sure, carry on, go ahead, rush.
• 11:18
  Speaker 1: But if you have student loans that you're paying on or any substantial credit card debt or loans for business or for other things, a lot of times the idea that we're going to pay it off all at once doesn't happen.
• 11:31
  Speaker 1: So I see this with entrepreneurs quite a bit.
• 11:36
  Speaker 1: People take out a business loan and be like all right, well, when I start making more money, I'll just pay it off in like one month and I'm like all right, and it can happen.
• 11:44
  Speaker 1: People have done it.
• 11:46
  Speaker 1: But oftentimes the idea that you're going to pay it all off at once is unhelpful, mostly because it's hard to do and it's not to say that it's impossible but it has you kind of like in this mindset of really hoping and needing for something really, really big to come in and then maybe not focusing on the areas that could be focused on, like building savings habits and doing debt, you know, taking down the debt reasonably and slowly.
• 12:19
  Speaker 1: One other thing about rushing to pay off debt that makes it ineffective is a lot is for most of us we have a comfort zone around debt and we're used to having a certain amount of savings and a certain amount of credit card debt and a certain amount of income and expenses and a certain amount of free cash flow.
• 12:35
  Speaker 1: And so if we can pay off all of our debt all at once but we don't address the habits and we don't address our financial comfort zone, that is going to come back.
• 12:44
  Speaker 1: It's not because, just because that's the way that comfort zones work.
• 12:50
  Speaker 1: So if you're used to having debt and you pay it off slowly, you give your brain time to address to new comfort zones, but if you pay it off all at once and you leave those habits unaddressed and you leave, yeah, I guess, just the habits unaddressed and the comfort zone unaddressed.
• 13:07
  Speaker 1: Very likely that problem is going to come back and I've seen that many, many times, like many clients have hired me to work with them on credit card debt and they said, all right, well, I paid this off a few years ago and it came right back.
• 13:20
  Speaker 1: And it's the third time I've paid off on my credit card debt and it's come back.
• 13:23
  Speaker 1: And most of the a lot of times they're paying it off, like with a tax refund or a windfall or an inheritance, or with business owners.
• 13:32
  Speaker 1: With business owners it's extra funding because they're always hoping for like a really big business month.
• 13:37
  Speaker 1: The only trouble with that is, if you do a lot of sales, you still have the cost of fulfillment.
• 13:42
  Speaker 1: So a lot of times with business owners they'll want to pay off their credit, their business debt, but when they sell all the stuff they put the money toward the debt, but then they're right back on the debt because they didn't factor in the cost of the fulfillment of those goods or services.
• 13:56
  Speaker 1: So oftentimes it's a little bit kinder and a little bit gentler with yourself to put together a plan that you can do over a period of time, that you know we don't need to dilly-dally, we don't need to be doing this for years or extended long periods of time, but the idea that we're going to get all of our debt paid off super, super fast can be a cause of perpetuating this debt cycle of just using and it kind of goes back to what we just talked about in secret two, which is just like the perpetuation of like not having any money.
• 14:30
  Speaker 1: So to really shift out of that, we do want to really spend some time working on our mindsets, working on our habits, working on maximizing our income, working on our cash flow and making sure that we're a good money manager, because then we can use that debt to like be a catalyst for change and to clean things up and to really make good financial progress that puts us in a good direction, is long lasting, rather than like having like this weird situation where we like yo yo diet but with our debt, where we like pay off our debt but it comes right back when we pay off our debt.
• 15:07
  Speaker 1: But it comes right back because these these issues, they erode a sense of self trust when it comes to our money and the more you trust yourself with your money, the better your money management will feel, the better it will will behave like.
• 15:22
  Speaker 1: When you trust yourself with money, you are so much more powerful and so a lot of times those are the sort of things that really erodes people self trust With their finances and causes, I don't know, just heartache, trouble.
• 15:38
  Speaker 1: You know bigger, longer, longer term problems, more interest payments, etc.
• 15:44
  Speaker 1: So I hope that you learn something.
• 15:49
  Speaker 1: I hope that you taking away some ideas around, just understanding what it really takes to get out of debt, not just Like what get out of debt once and for all, right, unless you're going to use that on purpose, with clear intention to build wealth.
• 16:06
  Speaker 1: I'm talking about the consumer debt that's like Maybe the unintentional purchases or whatever else.
• 16:12
  Speaker 1: So, anyways, please feel free to share this show.
• 16:14
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• 16:18
  Speaker 1: Yeah, that's it.
• 16:19
  Speaker 1: I appreciate you so much.
• 16:20
  Speaker 1: Thank you for listening and I will talk to you next week.
• 16:23
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• 16:31
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• 16:32
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• 16:39
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• 16:43
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• 17:18
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