How to Pay Off Debt (Good and Bad debt) - How to be good with money

How to Pay Off Debt (Good and Bad debt) - How to be good with money

hey case you have student loans car loans and 
credit cards you're not alone today in this video   i want to explain to you what is debt what's 
the difference between bad debt and good debt   you'll also learn all the categories of debt 
and finally you'll know how to pay off debt   by using these strategies let's jump into it 
let's start from the beginning what is debt   what is debt debt is when you owe anyone money 
maybe you're still making payments for something   you bought yes my friend that's also dead in 
simple words debt is money borrowed from another   party for something you can't afford maybe you 
purchased that nice car before you had the cash   a bad or maybe you borrowed money from your 
stepsister because no one else would give it   to you debt simply means you're at the mercy of 
someone else until you pay them back when you have   debt you're no longer working just for yourself or 
your family you're working for whom you owe money   debt comes in many shapes and sizes no matter what 
type of debt it is bad or good debt just steals   money from your pockets and your future it's time 
to take back control of your money certainly no   debt is good however there are two types of debt 
good debt and bad debt bad debt and good debt   bad debt let's start off here bad debt involves 
borrowing money to buy things that lose value   rapidly or for the purpose of consumption if it 
does not generate income or does not increase   in value you definitely should not go into 
debt to buy the item here are some examples   1.

Cars do we all agree that borrowing money 
to buy a car is a bad debt it is first not   a good choice from a financial perspective 
let me explain to you you may think buying   a car is a big deal but after the purchase the 
car is worth less than what you bought it for   in case you urgently need to borrow money to buy 
a car look for a loan with low or no interest   that way even if you pay for an asset that will 
lose value over time at least you won't be paying   interest on it 2.

Close and consumables did 
you know that clothes are worth less than   half of what consumers pay for them we all 
need clothes food and so on but getting into   debt to buy brand new shoes from gucci is a 
very bad idea now let's look into good debt   basically good debt has the potential to 
increase your net worth or more importantly   enhance your life in other words it takes money to 
make money good debt is the debt that can help you   generate income that can build your net worth a 
couple examples of good debt are 1. student loans   it makes sense because the more education 
an individual gets the greater their earning   potential an investment in education can often 
pay for itself within a few years of entering   the workforce however not all degrees are of 
equal value so it's worth considering both sides   2.

car loan

Mortgages yup this is considered a good debt 
mortgage debt historically has been considered   one of the safest forms of good debt since your 
monthly payments eventually build equity in your   home but pay attention borrowing more than you 
can afford or using mortgage terms you don't   fully understand such as adjustable rate mortgages 
also known as arms can pose a significant risk for   example your monthly mortgage payment should 
be less than 28 of your gross monthly income   three business getting into debt to start your 
own business is considered a good debt being your   own boss is satisfying not only financially but 
psychologically as well but it can also be very   hard work also consider the fact that the risk 
of failure is not zero data from the bls shows   that approximately 20 percent of new businesses 
failed during the first two years of operation   45 during the first five years and 65 during the 
first 10 years only 25 of new businesses make   it to 15 years or more so before getting into 
debt to start a business think about this twice   however your chances of success increases if 
you choose a field you're passionate about   and knowledgeable about categories of debt secure 
debt you just walked out of the dealership driving   the car you dreamed of last night you can't wait 
to show it to your friends and family but there's   a problem actually that car is not yours the 
bank owns that car you're paying the bank to   drive the car this is a simple example of a 
secured debt now let's look into unsecured debt   unsecured debt refers to money that you've 
borrowed and where there's no collateral in   case you don't make your payments for example 
a credit card is an example of unsecured debt   if you go out and you charge dinner at a 
restaurant or you buy something at a store   and you don't make your payment the credit card 
company is not going to come collect on that   there's nothing for them to seize in the event you 
don't make your payment student loans are another   example of unsecured debt if you have a student 
loan and you don't make your payment there's no   collateral there for the loan it's money you've 
borrowed but it's not directly tied to an item   this makes it harder for the lender to get their 
money when you don't pay up thus unsecured debt   usually has a higher interest rate revolving 
debt revolving debt basically is your credit card   you can borrow up to a certain amount and as long 
as you make the minimum payment by a specific date   each month you can keep spending non-revolving 
debt non-revolving credit doesn't change your   payment is usually fixed and the amount that 
you borrow starts off at a certain amount and   then it decreases it never goes back up there are 
different types of non-revolving credit to go into   but it's essentially credit that doesn't go up so 
it's a fixed dollar amount that you're borrowing   and you're reducing every month it's a 
debt that can't be used more than once   it's a car loan a business loan a student loan 
or a mortgage you borrow a specific amount of   money and pay it back in installments before a 
certain date and your minimum payment each month   usually depends on how much you originally 
took out once you've paid the loan off it's   gone and you don't get any more funds to spend 
sneaky dad ah these sneaky debts pay attention   here computers cars motorcycles you've probably 
seen the flashing neon signs zero percent apr   annual percentage rate or 90 days the same as 
cash sales people know most people can't pay it   off within 90 days and the moment your time is 
up crazy interest rates kick in with full force   good advice would be don't fall for these debts 
disguised as deals they're not worth it so   now how do you pay off debt if you have any well 
one make a budget it's fundamental to track your   expenses and income you need to understand where 
your money is going you can manage your money by   using the 50 30 20 rule let me explain to you what 
it is 50 of your money is for your needs need is   something you cannot live without which is food 
mortgage insurance for health utilities and so on   thirty percent of your money is for your wants 
want is something that you don't necessarily need   but it improves the quality of your life which 
may be dining out shopping hobbies and so on   twenty percent of your money is savings or paying 
off debt which may be student loans credit cards   etc two debt snowball so essentially with the 
debt snowball it's basically listing all your   debts in order from smallest to largest by dollar 
amount here's how it works your goal is to pay   your smallest debt first regardless of interest 
rate then roll the amount you'd been paying on   it into payments on the next largest step 1 
only the minimum payment on all your accounts   step 2 put as much extra money as possible toward 
the account with the smallest balance step 3 once   you finish paying the smallest debt take the money 
you were putting toward it and funnel it towards   your next smallest debt instead repeat all three 
steps until all your debts are paid this method   is very efficient because it includes a series of 
small successes at the beginning which will give   you the determination to pay off the rest of your 
debt there is also the potential to improve your   credit scores more quickly with the debt snowball 
method as you lower your credit utilization on   individual credit cards sooner and reduce your 
number of accounts with outstanding balances   3.

Avalanche method what the debt avalanche talks 
about is that you want to pay off your highest   interest debts first so the reason for this is 
because mathematically that's actually the most   efficient way to do this by using this strategy 
you'll pay off your accounts in order from the   highest interest rate to the lowest here's how it 
works step one again only the minimum payment on   all your accounts step 2 firstly pay as much as 
you can on the account with the highest interest   rate step 3 once the debt with the highest 
interest is paid off start paying as much as   you can on the account with the next highest 
interest rate repeat and continue the process   until all your debts are paid that way you'll get 
out of debt quicker because you're paying firstly   the debts with the highest interest rate 4. halt 
your credit card spending are you a compulsive   shopper and can't control yourself next time when 
you leave the house leave your credit card at home   stop spending with your credit cards 
until you have your finances under control   five change your habits stop for a moment and 
think about all those unnecessary things you buy   all those things are part of the wants list 
maybe you smoke or pay netflix every month   these are all unnecessary expenses that are 
taking money out of your pocket do you really   need your daily cappuccino for example you can 
prepare your lunch for work at home instead of   buying it every day ask yourself what can i change 
without sacrificing my quality of life too much   6.

Never use debt again before borrowing for a 
new house a new car or student loan stop breathe   and ask yourself a question will this debt pay me 
back more than what i put into it the question may   seem simple to you but you need to think very 
carefully about it it's definitely worth asking   instead of drowning yourself in unpaid debt i 
suggest you write down a list of pros and cons   if the result doesn't satisfy you 
then it's not worth it to go into debt   conclusion most of us spend a bunch of dollars 
without actually thinking about what we're buying   log all your monthly spendings cut back on things 
you don't need and start saving the surplus or   put it towards reducing your debt thank you for 
watching this video i hope i've helped you to   understand better what debt is and how to get rid 
of it i'm really curious to know what you think i   have a question for you what method would you use 
avalanche or snowball let me know in the comments   thanks for watching and i'll 
see you guys in the next one

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