[Music] All right, let's talk about another one because a lot of these kids that we just talked about. They come into the world, and then they find themselves in a situation where there is a very real tug of war that exists just because of the nature of the world in which we live. And here's what they have to decide: Do I build an emergency fund? I know I should do that. I know it's important. But I've got debt and fill in the blank. We'll talk about the different types of debt. But I've got this debt. What should I do? Should I make sure I cover emergencies, or should I start knocking out this debt? And how do I figure out what makes the most sense? This is where I think life is somewhat cruel, especially with these interest rates that we have right now, is because we are setting, and I and I made in the content meeting. I said it was a Hansel and Gretel situation. We have told young people that debt is their friend. We're way too comfortable.

with debt in our American society right now because we're pushing consumption, pushing consumption, guys. It is a trash. So that's why we've got to help you prioritize. How do you focus on having reserves so you don't make those desperate decisions, but also how do you avoid and pay down some of those debt traps that you might have fallen into. So let's start at kind of the beginning again. We have a framework that hopefully helps you make financial decisions BR. You hold the thing up. We have the financial order of operations. Well, Step One is deductibles cover. Now, this is different than your emergency fund, but we do advocate that like for a young person, this may be a couple thousand dollars. It may be your health insurance deductible or if you are a family and you have a higher deductible, maybe this is 5 to $7,000. This is not what we're talking about because we think that that is foundational. You have to have that in place. Now, when we start moving along in

the financial order of operations. And when we think about our debt, we have to think about how do we categorize our debt. Is our debt a step three high-interest type debt, or is it a step nine low-interest type debt? Because the answer to that question will then inform how do you prioritize what you should be doing with your next St. Well, and this question's gotten harder. It's gotten a lot harder. I mean, it's now look, it's easy. Let's talk about some of the easy ones out there. Is when I think about like consumer debt, credit card debt. I was shocked when you see the data that's out there. The typical credit card interest rate now is close to 21%. It's gross. You know, we get excited. We run illustrations at 88 and a half % to show you how many millions of dollars you're going to have by just saving a few hundred a month, depending on how early and often you start saving and investing. Imagine if you could run your rate of return at

21% below every that'd be a dream plan all it is just it it's not even realistic but yet somehow in our society it's gotten to be very comfortable for people to be running up credit card debt and then paying back the banks at 21%. How are you ever going to own your financial life if you're falling in this trap? Yeah, Bri you have this cute little saying you say credit card use okay credit card debt no way no way right so you just cannot do that. We don't even like this is a hot take I'm going to give it to you we don't even like like 0% APR credit cards because in our opinion it's even just kind of like playing with fire so if you have credit card debt we want you to knock that out that firmly would be in step three now let's talk about another one that's gotten a little bit more difficult actually was um this was a lot of conversation we had in our content meeting too what about car loans I mean

gone are the days of 0.919 car loans. Have even gotten a little bit higher so how do we think about that. Do I build an emergency fund or do I knock out the debt on my automobile. Well look we we are known for our rule of 238 and if you just need a a kind of review of this 238 is putting down 20% on your vehicle purchase cuz this way we can get out ahead of that just horrible appreciation cuz Vehicles Drop Like a Rock and then we like you to pay these cars off within 3 years once again this is to keep you ahead of that depreciation because most cars lose 50% of their value in the first five years of ownership we got to get out ahead of that and we also want to keep you from expanding your eyes of what you can afford with these huge amorz rates that you see people taking their loans out six and seven years in the future and then the 8% that that 238 is making sure

your car payment doesn't exceed 8% of your gross income. This is also to keep you restricted. And then this is for affordable transportation, not luxury vehicles. If it's luxury vehicles, you got to pay it same as cash and pay it off within the first year. And this is another rule that we always say. And this is going to help shape this bow because we really put a lot of discussion. I never want your car payment exceeding what you're already investing in your Roth IRA, your 401k, 'cause you need to be saving and investing more than your car payment. Well, now we have this unique moment in time. Interest rates are up. I'm hearing about people who have car loans that are around 15%. So you're like, well, guys, what do you do? Do you do 238 or do I just throw every dollar at this car debt because it's 15%? We kind of came to the conclusion if you're paying more than what you can even make on your money, that's not a joint effort anymore.

where you're saying save you know just as much in your investment account as you are with your car payment if you're paying 15%, we got to get that taken care of. Yeah, even inside the context of 238. High interest does exist. I said, Okay, well let's put some numbers to this. Based on that, if I need my dollars working for it, maybe Steo got me rolling and my interest rate is through the roof. How do I think about paying this off? And here's the metric that we came up with. If you're someone in your 20s and your auto loan is above 10%, you're going to have a really hard time out there investing your dollars making more than 10%, so we think you should prioritize paying off that auto loan. If you're in your 30s and your auto loan is higher than 9%, we think you should probably prioritize paying off that auto loan. And by the time you get in your 40s, if it's above 8%, we really think you

should prioritize paying off that auto loan because as your wealth multiplier decreases, your dollars are going to work less and less hard for you. Well, you don't want your dollars working against you, and at these high interest rates, that is exactly what debt will do. It will force your dollars to again work against you. It is worth repeating. 238 is for people who come into this whole wealth-building journey with zero assets and zero ability to pay cash for a car. Paying cash for a car is the ideal always. I just know in my own journey I graduated college had zero to my name, really. Um, so I bought my first car, financed it for three years so I could get to my J.O. consistently and reliably and start that wealth-building journey. But I'd love if you can pay cash for your cars, let's rock and roll and do it. But we want to make sure you give you the guidance so you don't fall into a debt trap. Now one thing that you have to keep in mind is that not all debt is

created equal, and not all debt secures the same type of assets. So we've talked about, you know, credit cards. No, we've talked about auto loans, which, you know, there's some nuance there. Let's talk about another one that gets even a little more nuanced. It's even more prevalent in common today: student loans. And we know that this is a real issue. And if you've listened for any amount of time, we even have some guidance around student loans. And this is similar to the guidance around auto, based on the equity risk premium. But here's what we would encourage you: If you're in your 20s and your student loans are above 6%, then perhaps you should begin thinking about prioritizing paying off your student loans. If you're in your 30s and your student loans are above 5%, perhaps you should prioritize. And by the time you get in your 40s, if your student loans are above 4%, we think that you should begin to think about prioritizing paying these off, because you want to

make sure again that this debt is not working against your future financial building potential. Yeah, and if you have children that are in high school and you're trying to help them shape them on what they're going to their college years go look like, remind them about return on investment. That's why we're trying to keep your student loan debt below that first-year salary out of school because you do want to have the ability to pay this debt off. And it really frustrates me. We had a lot of conversations about student loan debt in our content team 'cause I feel like we've got this huge disconnect where it's just not fair to what's going on young people. And I did want to give one clarifier 'cause, you know, I feel like I don't know if the colleges are doing everything they can but at least like the government is out there trying to create some plans where you didn't hear these horror stories that were happening for the last decade or so where people were making payments on their student loans for 10

15 years and owed more insane than than when they came out of college. So there are programs that you might want to consider and look into like if you're you're part of that that save payment plan that at least lowers based upon your income your effective interest rate to where you won't have that issue where the the loans are growing upon themselves where the interest exceeds your principal payments. So take that into account. This is a very complex multifaceted issue but we at least want to give you some facts to consider. All right BR let's talk about one other type of debt that you people have to think about how I prioritize paying this off it's mortgages. Now here's what I think like when people think about mortgages that they think about present day they think about the 6 and a half 7% mortgages that exist today but in reality 59% of Americans have mortgages below 4%. Well if you happen to be one of those Americans and your mortgage rate is below 4% and your cash in your

savings account is making 5%. We would have to argue that that counts as low-interest debt, but we look right now, the average mortgage rate today is something like 7%, so very different than the below four. I still don't know, Brian. I'm curious if you agree with this. I still don't know if I'd be in a huge hurry to pay off 7% mortgages because I think that realistically at some point in the future, whether it's next year, year after year after that, there's probably going to be an opportunity to refinance that Mortgage Debt down into a lower rate from 7%, and I think it's going to be okay to not prioritize a 7% mortgage, continue building your army of dollar bills because I think there's going to be some future opportunity to leave. Well, I don't mind sharing my own experience. Share is that my first mortgage was 6 and 3/4, and I was still focusing on trying to fund my retirement accounts and other things, so I've walked in this.

journey. And the reason is that there are get wealthy behaviors, there stay wealthy behaviors. I do have a feeling that in the coming future, there will be an opportunity to refinance these mortgages down, but you will never get that opportunity to put that $7,000 into that raw IR. So you have to know, are you on the get wealthy journey or are you on the stay wealthy part of your journey? CU, those things do matter when you're making these type of decisions, okay? So we listed out all these different debts you have to think about. Well, maybe you said, Hey guys, I just my bingo card just got filled out. I got all of them. How do I think about attacking these? How do I think about approaching these? Well, there are two common strategies, two common ways that we think you should look at debt, and frankly both of them work just fine. You have to determine what is the best for you. There's a debt snowball, which is incredibly popular, where you want to pay off your balance based on the smallest

to largest. And so, this is a behavioral technique to let you build some momentum. Or maybe you're a financial mutant. Maybe you understand the mathematics. You say, Hey, I'm disciplined. I don't need the behavioral solve for. I can do the debt Avalanche. I can arrange all of my debts by the largest interest rate to the smallest interest rate. And I'm going to pay it off from largest interest rate to smallest. That is fine too. What we want to see you doing though is if you're in the financial order of operations, if you have high interest debt, if you have that step three debt, we want you to employ one of these strategies to begin getting that debt knocked out. Here's the big thing, know thyself. If you're a very, you have trouble, you get distracted, you don't have as much discipline, but you're still good with money, maybe this snow, the debt snowball works for you because you get that momentum. You get to pay off those small

debts first. And it gives you the adab boys. Hey, we're doing this well, but if you're a person, you're a financial mutant. A lot of you guys are out there and you're looking at you like, Hey, I just know interest rates being at this level. They're much higher than they have been historically. I'm a financial mutant, so I'm going to focus on the debt Avalanche so I can pay this off that much faster. Just know thyself so you can make the right decision. So then that knocks out the high interest de. What about low interest debt? Here's some reasons why you might want to pay off low interest debt. Maybe you're at step nine and you're thinking about stay wealthy Behavior. So it's less about optimization and it's more about uh preference, maybe and drisking and drisking. Maybe you're someone who's prepared for retirement. You're entering into retirement. You want to get rid of those fixed costs. Maybe you're someone who just needs a free up cash flow so.

you want to free up that, pay off that low-interest debt so that you have more cash flow coming in. Or maybe you just want peace of mind, maybe you just don't want debt, maybe you just want to simplify, maybe you just want one less thing to think about. All of those are very viable and reasonable reasons to pay off low-interest debt, but that's step nine, not step three. Yeah, I, I, I, one of the things I always tell people, this is the part where I want you, that peace of mind really has a powerful thing Beyond Step n, because we talk about financial Independence, how do you have an unencumbered life, meaning you carry a bunch of debt and consider yourself truly financially independent, take that into account. Now with that said, I'm a, I'm not a hypocrite, but I'm just good with math and you and I fight about this. I have a two and a half percent mortgage and I have enough cash to pay it off, but since I'm making close to 5.3 percent on

I just have not been able to go fully into the peace of mind. I justify this in the fact that I'm still working. I'm nowhere near thinking I'm walking away from the workforce, so it's okay. But everybody's going to have their own calculus or math that they're going to do, you know. So, focus on those key elements and don't play mind tricks with yourself. If you can pay it off and you know all the lines point to the fact that you should because you're in that stay wealthy phase, it's okay being completely debt-free.

Save for an Emergency Fund or Pay Off Debt: Which Should You Prioritize?

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