The Truth About Debt: How to Use It (And Beat It)

Tyler Gardner (0:00)

Hello, friends, this is Tyler Gardner welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. In this episode, we are going to tackle the universally applicable topic of debt. Rich, poor, old, young, we will all face it. Or we have already faced moments in which we are either in debt, or are thinking about going into debt, or struggling daily trying to climb out of debt, and wondering how the heck anybody manages to do so, while still being able to put food on the table. So let me start here as a lifelong reminder. If you are experiencing debt or have experienced it in the past, you are not a bum, and you're not somehow less than someone sitting next to you who has not experienced debt or who has less debt. More frequently than not, those of us who experience debt early in our lives experience it because of the good old birth lottery. You know, that thing over which we had no control, no choice, that random chaos that created me at birth to parents who were unchosen by me, to a place that was unknown by me, and to a money situation and environment that certainly had nothing to do with me or my vain attempt to sell lemonade at 10 years old to the neighbors. Early debt particularly is often a product of our environment, just as early privilege is often a part of our environment. But that does not give us an excuse to not learn more about debt, to think critically about debt, and to do everything we can to understand our own personal and optimal relationships with debt. Because to spoil one punchline early, all debt is not created equal. And all those in debt are not experiencing the same response to debt. I know people who have zero assets and are wildly in debt. And I know multi-millionaires who take on immense amounts of debt every year, depending on their specific venture at the time and whether or not it's a good opportunity. And yes, I did just call debt an opportunity. As we will see quickly in this episode, debt is also more than just numbers on a spreadsheet. It's one of the single most emotionally challenging topics in personal finance. Although we'd love to believe we're all automatons who crunch numbers in life rationally and can respond easily to different interest rates and monthly payments, that's simply not who or what we are, nor is it how we operate, particularly as it pertains to our money. What interests me is that even the word debt makes everyone feel slightly differently. Some people think about opportunity, as I said. Some think that it is the grand inhibitor of opportunity. And some people feel that it is really something worth being ashamed of. Regardless, it must always be something of which we are highly aware, and we would all be well served to know how we respond to debt, just as we would be well served to know how we respond when we get angry at the world or sad with someone. Some people carry debt like it's just another financial tool, something to be managed and optimized. Others feel crushed under its weight, constantly looking for an escape. Still others, unfortunately, have never learned much about it, and feel almost as if they're victim to this unjust script that is designed to keep them in debt. Then there are those who obsess over the interest rates, strategizing over every fraction of a percentage point to see where they can get the best edge in business or investing. But at the end of the day, paying down debt is about more than just math. It's about what gives you the best shot at building long-term wealth, while also providing you with the distinct possibility of being able to sleep soundly each and every night. And I don't know about you, but I do like my sleep. So today, we're going to break down when and how someone might choose to pay down debt. But we're going to do it a little differently than some of the personal finance advice you've already heard. We'll go beyond the oversimplified, oh, just pay off all your debt as soon as possible type of mindset. And instead, take a strategic approach that balances logic, opportunity, and psychology. Because to me, personal finance is not only personal, but it is also an art form that necessitates our balancing all of those elements in order to give us a genuine foundation that is both sustainable and realistic. So first, we'll talk about the concept of a risk-free return versus the opportunity cost of keeping debt and investing that money instead. Then we'll establish a clear debt emergency scale, a ranking system that helps you figure out what should be paid off first and what might be able to wait. Finally, we will explore the psychology of debt and why sometimes the mathematically optimal move isn't the best choice for you, your family, or your financial well-being. So, the first step in making an informed decision about whether you should or should not pay down your debt is understanding the concept of opportunity cost. Every single dollar you put toward paying off debt is a dollar that's not being invested elsewhere. On the surface, this may seem incredibly obvious, but it is perhaps the single most important factor that drives my own financial and life decisions on a daily basis. The study of economics, and I would extend that to the study of personal finance, is largely the study of scarce resources. We have X amount of resources, that amount being, of course, finite, and we're looking to do Y amount of things with Z amount of time. Well, unfortunately, we can't do it all. So if I want to go out with my friends tonight, which luckily I rarely do, because I'm over 40 and prefer being in bed by 8pm after watching a little bit of Love is Blind, don't knock it till you try it, well, then I can't stay in and watch Love is Blind. That's the opportunity cost or the true cost of going out. We have to always be thinking that way. What are we forfeiting by doing something? As it pertains to our money, if I pay down $1 of debt, I can no longer do anything else with that dollar. I cannot spend it at the dollar store. I cannot save it in a piggy bank. And I certainly can't invest it elsewhere as it's been allocated permanently. That's why it's crucial to begin by comparing your current debt's interest rate to what you could be earning on that money if you did something else with it. And let me pause here to say that when people say, should I pay down debt or invest the money, what most traditional financial advice does not tackle is how drastically different your options are as it pertains to investing that money and as it pertains to opportunity costs. There are countless ways that you can invest the money, and each of those would probably provide you with a different answer of whether it's a good idea for you or not. Let's start by looking at what I might consider to be the safest way to think about the tradeoff.