BiggerPockets Money Podcast - 126: 16 Money Skills They Didn't Teach You In High School with Scott & Mindy

Episode Date: May 25, 2020

Financial Education is so important - but so many people are graduating high school without the basic skills to make informed decisions. Today, Scott & Mindy sit down to share some of the big money moves you should make - as well as some of the big money mistakes you should avoid. These are the tips you didn't learn in high school. From choosing a major wisely (or even deciding if college is truly the right choice for you) to paying for college, to truly understanding just how much it will cost you to pay back your student loans, the decisions you're making now, entering college, are going to affect your financial future for years to come. They also discuss relationships, and how those can also have a huge impact on your finances. Other big decisions you need to consider include how and when to get a first credit card - and how to use it properly to improve and increase your credit score. Scott & Mindy also dive into just exactly what a credit score is - and how its far-reaching influence can affect your job and housing. Scott also shares his unique views on wants and needs - and how to minimize the costs of the needs so you can afford a few wants. This episode is a great intro to financial education for young adults who are eager to make excellent financial decisions and put themselves on the path to freedom. In This Episode We Cover: Decision-making process after highschool The difference between subsidized and unsubsidized student loans The importance of calculating total student loans Everything you need to know about credit scores The difference between good and bad debt How relationships impact money and the importance of prenup Wants vs. needs Roth IRAs, traditional IRAs, and 401(k)s How to set up automatic investments And SO much more! Links from the Show BiggerPockets Money Facebook Group Mindy's Post on BiggerPockets Money Facebook Group BiggerPockets Money Podcast 44 with Tinian Crawford BiggerPockets Money Podcast 22 with Travis Hornsby Which to Borrow: Subsidized vs. Unsubsidized Student Loans Student Loan Calculator BiggerPockets Money Podcast 64 with Zach Gautier BiggerPockets Money Podcast 35 with Craig Curelop BiggerPockets Money Podcast 81 with Erin Lowry Fidelity Investments Vanguard Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast show number 126, where Scott and I share all the things that you should know about money by the time you graduate high school. Hello, hello, hello. My name is Mindy Jensen, and with me as always is my nice and happy co-host, Scott Trench. And my 10-year-old gave me those descriptions of Scott because she thinks the world of you, Scott. And that description absolutely made by day. Thank you. Scott and I are here to make financial independence less scary, less just for somebody else, and show you that by following the proven steps, you can put yourself on the road to early financial freedom and get money out of the way so you can lead your best life.

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Scott, I recently posted in our Facebook group asking people what you would like to see, explained to people who are of the age where they are just leaving high school and potentially entering college. And the topics that they really wanted to have explained are financial topics and how changes now, the steps that you take now can have a lifelong effect on your financial health. Yeah, this is overwhelmingly, I think the most popular response is that folks wanted to kind of hear a complete overview of what people should be doing. doing to set themselves up financially. And, you know, I kind of have a little smile for that because I feel like I have studied this topic maybe more than most and really have a framework in my mind there.

Let me confirm for you that you have studied this topic more than most. Hey, Scott, why did you study this topic? Because I wrote my book set for life on this. So, you know, I usually don't plug that on the show here too much, but it seems highly relevant today. But, you know, for this concept of our, are the kid who's graduating high school and going into college, you know, the biggest point, and we'll really direct the show to that individual, so pardon our shift in tone here. But if you're graduating high school and going into college, what you have to keep in mind is it's about life outcome, right? And there's a lot of things to keep in mind that are not financial, but the show will stay, focus squarely on the financial here. But there's a very real possibility and a lot

of Americans find themselves as position where they're saddled with debt, you know, at age 25, 30, where they are living paycheck to paycheck. They've got a car lease or a car loan, car payment. They've got the rent. They've got student loan payments, all these different types of things, and they're effectively living paycheck to paycheck. And when you live paycheck to paycheck,

in a lot of ways, if you lose your job, you're screwed. That's the definition of being living paycheck to paycheck, right? And that gives your boss undue power over your life. And this is why I think a lot of young people are very afraid of the real world and graduating high school, college, and going to get a job, is because that is scary. It's a boss now has power over me in a way that really no one has had over them in their entire lives. Maybe parents, but parents are naturally much more nurturing and supportive there.

So it's this concept that I want to drill into everyone's heads today of financial runway that really matters. If you spend $30,000 a year and you have $30,000 in the bank account, all the sudden that power dynamic where your boss has the ability to totally upend your life, that power distribution is much more in your favor. If you could survive for two or three years, it's even more so. And the point of this show is we're helping our listeners move all the way to 100% financial freedom where they could sustain themselves indefinitely without a job for the rest of their lives. But the closer and farther you can get along that spectrum so that you can start your career with that runway in place, without having high fixed expenses like debt payments going out,

with having a cash cushion, that is going to give you a lot of power and a lot of optionality in your life. And I think that's the framework to begin thinking about all of your decisions financially in terms of ending your high school years and going into college. And how do you achieve all the things you want to do outside of the world of finance, but build yourself the strongest just a practical financial position you can get to. Scott, you just used a really amazing word. And I want to make sure everybody heard that you said options. And when you have a job that pays you exactly how much you are spending,

you have one option, continue working. Or find another job that pays at least that much. That is your, I guess that's two options. when you have a giant pile of cash in the bank enough to pay one year's worth of expenses, two years worth of expenses, three years worth of expenses, your options are so open. You can take a job that maybe doesn't pay as much as the one that you have, but you hate. You can take a job that may be a little more risky. Like, hey, Scott, do you know anybody who ever left a job at the world's biggest company

that everybody hates to work at an internet startup? For those of you who have not listened to the show in the past, Scott used to work at a company, this great large conglomerate, and did not care for that job at all, and came to the realization that, oh, I could move and work at this internet startup, which is a little riskier than, you know,

working for this solid company that's been around forever, but I'm going to like it so much more. And are you happier, Scott? Yeah. Of course, my example is extreme where I left the Fortune 500 company in a finance role to come to Bigger Pockets here. And Bigger Pockets, I joined as a third employee at a startup and now find myself the CEO here at age 29. So I don't know if that's a repeatable journey, but along that spectrum are a lot of repeatable options. But one thing's for sure.

If I live paycheck to paycheck and I was totally dependent on my first job, I would not have had the option. to ditch that ship and move and join bigger pockets. Correct. So I want you to realize as you're going into this podcast episode, this is about options. This is about all the options that you could have if you make small changes now. One of the biggest changes that I want to talk about to kids who are graduating from high school in the next year or so, it's okay to not go to college if that isn't your path. College is not for everybody.

And a man named Freskim suggested that it's okay to go to trade school or join the military because the benefits are awesome. And I think this is really important to share because when I was graduating high school, you went to college. That was your one option. And college just is not for everybody. Do you remember we interviewed Tinian Crawford on episode number 44, Captain DIY? It took him six years to get a two-year degree because college.

is not his path. It was his path. He just didn't really want that to be his path. Now he's an electrician, and he's living his best life. Yeah, you know, when I think of college as a model and kind of going back to that financial runway concept, you know, if you go to college and you graduate in four years with $100,000 in debt and a liberal arts degree and in history, right, you're not in a very strong position. And the fellow who goes to trade school is likely much farther along and likely to achieve financial independence much sooner than you. If you go to college and you graduate with very little debt with a degree in computer science or engineering or mathematics, you are likely to be much farther along than the person who goes to trade school in the military within a couple of years.

You're going to likely have much greater income opportunities in the years following college. And where the right answer lies is somewhere along a spectrum in that decision-making process. And so, no, college isn't for everyone, but everyone listening should know that I went to college. I went to a private university and my parents paid for college and I got a degree in economics and history, two majors, and then I minored in corporate strategy and finance. And so understand my position with a green and salt there, but I believe that mental model will be helpful in helping you make those decisions. If you can reduce debt, if you can choose a major that's likely to help you lead to great income opportunities downstream. I think that's the way to think about this major, major decision with maybe

a little bit more utility. You know, Scott, I posted this question in our Facebook group, and that is where all of these answers are coming from. I wanted to know what is it that you know now, that you wish you knew when you were in high school, or what is it that you want people coming out of high school to know. Melissa said some advice that was just mind-blowing to me. She said, my high school economic teacher had seniors reviewed data on the Bureau of Labor Statistics to see how much they would likely make post-college in the career path they were considering, then compare it to their expected student loans to evaluate if their career path would be able to help them pay for those loans. And she said this was a huge factor in why I am not a preschool teacher.

I love that example because it's not about whether you should do that job or do another job, right? Or follow this career or follow that other career in a vacuum, right? But you have to understand the cost benefit analysis. It is totally fine to do that cost benefit analysis, understand that that role is not going to pay very well relative to the cost. amount of student loans you're going to assume, and then still choose knowing the economic tradeoff. But what's unacceptable, I think, and what can really hurt you for a long period of time and really put you in a bad position in your late 20s, early 30s in particular, is making that choice without the understanding, which is why I love that example from Melissa.

Yes. You know, Scott, we interviewed Travis Hornsby from Student Loan Planner back on episode 22, and he shared with us a specific major veterinary school. That is a major that has an extremely high cost of student tuition, but not such a high cost or not such a high salary when you come out. So you're putting in medical school debt, but you're not making doctor salary when you're done. And he said, unless this is the only thing that's going to make you happy, maybe you want to reconsider that particular major. And I think that a lot of people just, you know, you're 17, 18 years old when you're graduating high school. What do you want to be when you grow up?

I want to be some pie in the sky thing. Great. You should follow your dreams. Following your dreams isn't always the best choice for your finances. Yeah. I just think it's all comes back to understanding the choice you're making at the highest level. And if you're making six-figure decisions right now and you don't, you haven't put in basic 15, 30 minutes to, doing that exercise, looking at the Bureau of Labor Statistics, understanding the income,

understanding your debt and your payments, you're conducting four years of education to study your major, but not the 30 minutes to understand the economics of your choice. That's a lopsided distribution of time. Put in the time to understand that the cost benefit and nowhere that's going to get you. 100%. Tika added some very sage advice. If you're going to college and you're going to spend a lot of money on college, pick a major that will lead to a career that pays. I don't believe college is for delving into an interest. It's an investment in your future earning potential. And that just reiterates this point. You can go to college and study basket weaving. You can take one class in basket weaving and hey, this is great. Let's do it more. Or you can decide that that's

not the thing that you want to be, but an art school, a private art school studying art, unless that's like the only thing you're ever going to do, that might not be the best choice. And I come from that, going to a private art school and studying art because I thought it was fun. Yeah, you know, I think there's this concept around pursue your passion, right? And, you know, my favorite subject was history. I like history, right? But when you say passion, right, the people who become noted historians, right, are passionate to the point where they'll read the same person's biography from 10 different

vantage points, right, before constructing their own. Or they'll become an expert in a very narrow. window of history, like European economic history or, you know, the civil war, you know, those types of periods, right? You know, I like history. I read a book. You got to talk into the Mike, Scott. Grant. One of these recent ones is grants, you know, that is a great one. But I'm not passionate about it to the point where I can spend all day doing that every day. If that's you, and you know that that's your passion, then you're probably going to have more success following that, the thing that you do all day long every day

and are going to become one of the absolute best in the world at and can do that uninterrupted for years and years and years. If that's not, you'd be honest and until you discover that passion, make a smart economical choice with something that you'll be satisfied with. There's a feedback loop around,

what am I good at and what am I passionate about? And the things that you start getting better at, you end up liking more. And so it's something to consider as you're making these choices. It's not your favorite subject. It's what's the economic cost-benefit or am I truly so passionate about this that I'm going to become one of the best people in the world at it

over the course of the next 10, 20 years? There's a huge difference between, hey, that sounds cool, and I can't live without it. And I studied a major that I could definitely live without. So that was not money well spent here. Another thing to consider is Tony shared this, know what the difference is between subsidized loans and unsubsidized student loans. and the importance of calculating total student loans and total payback. So many kids graduate college without any idea how much they owe, how much it's going to cost them to pay back. I found a cool online calculator for calculating your student loans.

And if you borrow $25,000, which is not an unreasonable sum for a year of college, at a 5% interest for five years, that has you repaying the original $25,000 plus $2,600,000. $4 in interest. So a grand total of paying back $27,624. And that doesn't seem so bad, but the monthly payment was kind of shocking to me. It was $461 a month every month for five years. And I know I'm going to be dating myself, but that's $50 more than the rent on my first apartment. That's a devastating and demoralizing monthly payment. For millions and millions of adults. And that's what you're setting yourself. up for. And it just, you know, that's multiple dates out. That's the flights to and from a vacation.

I mean, it's just absolutely, there's so many better things you can be doing with that money in a lot of cases. So really understand. Again, maybe that is the best use of that money. Maybe studying that major is at that school is the appropriate thing. But do that math and understand that concept and know the pain that $460 a month represents against the lifestyle that. that you want to be living a few years down the road and the power dynamic that you want to have with your future employer. Yep.

And back to Tony's first part, the difference between subsidized and unsubsidized college loans. This is huge. Not all loans are the same. And I didn't realize this because my parents also paid for my college. But a subsidized loan, the interest doesn't start accruing until after you graduate college. The unsubsidized loan, interest starts accruing as soon as you

get the money. So that's a huge difference. You get the money, your freshman year of college, you go through four years of college, you have four years worth of interest payments that you haven't even started paying yet. Whereas with the subsidized loan, you're not accruing interest in those four years.

So that's a very important distinction to make. And if you have the opportunity to get subsidized loans, take those first. Yeah. And again, if you don't understand these concepts and you're thinking about borrowing large amounts of money, you've got to think twice.

you don't understand what's going on, you are about to get screwed. That's just a rule of life in general, right? So you have to make that assumption, especially when amounts of money this large are at stake, right? This is the equivalent of a house for a lot of people. Another type of subsidy that I like to talk about is if parents are contributing impart or in whole to the decision, which obviously impacts the math of this to a certain degree and gives you a luxury of choice, and that's a good privilege there. If your parents are contributing to that decision, then that might make the push for college

versus not going to college a little bit more clear. It might push the balance in favor of going to college, right? But there's the math around the income potential of the measure you choose does not change. Right? So just because your parents are paying, you know, Mindy, your parents paid for college. They did.

What was your major? My major was fashion design. And anybody who knows me knows that I don't give a frog's fat butt about fashion. I wear clothes that are clean and fit. And that's the end of what I think about when I put on clothes. And I thought fashion design would be an interesting thing to study. And it was. I learned a lot.

I know I can make anything, but I don't. That's the reality of it. It isn't my passion. And it was just something interesting. I would have been much better served to study business or economics. or a more, I don't want to say generic subject, but definitely a more generic major that has the opportunity across a large number of jobs

as opposed, I mean, when you graduate with a degree in fashion design, what jobs can you get? Well, secretary, I did a lot of those jobs. And yeah, I worked as a graphic designer for a while, and now I work as the community manager of Bigger Pockets. There you go. Oh, I was a buyer for quilting supplies. I mean, these were all interesting jobs, but they weren't passionate and they certainly didn't pay well.

Yeah, and I certainly didn't get the maximum economic path with my undergraduate degree. I studied economics and history. My two majors, and then I minored in corporate strategy and finance, right? And that got me a job in a finance role at a Fortune 500 company upon graduation, which was not totally inefficient, but could have been optimized more. But again, I think it's a good contrast between the two of us with those examples of the majors and the starting jobs we were able to get upon graduation. A couple more things I want to say really quickly is pay off your student loans.

This came from somebody who I didn't actually copy her name down. I have worked in a nonprofit for 30 plus years, and I have never met anyone who qualified for the public. service forgiveness program. Just make a plan and pay them off yourself. The public service forgiveness program is supposed to be for people who work in like low income schools, teachers, or, you know, different areas where you are in public service, but you're not making a lot of money. And the program is going to pay off your loans for you, except she's worked in a nonprofit for 30 plus years and has never met anyone who qualified. I know a lot of people who have applied and not gotten any payment

off of this, any forgiveness off of their loans because of this. And I think that's kind of scary because it seems like a bait and switch, but also just know that that's how it works and don't make that as your plan to pay off. Yeah, I think that there's a sentiment, a lot of college campuses, and I'm not going to get too far into this, I don't want to, to go anywhere on this. But a lot of college campuses tend to skew a little more to the left politically. And so there's a lot of sentiment around some of these, socialist or more liberal policies, like, hey, the government will pay off these loans or begin

subsidizing them. Or of course, this is the natural trend of the electorate towards this thing that will benefit me. Not a good thing to plan for. If you're planning your financial position around a future change in government policy or legislation, and that is your plan to pay off your student loan debt, there's a really high probability that you're going to have a very sad financial outcome or in the event that that does come that there are unexpected caveats that come with that assistance. When someone is giving you handouts, they get to dictate the rules, right? You may have noticed this with your relationship with your parents. And that's just a fact of life and why we believe, you know, Bigger Pockets Money podcast, that's better to be financially independent than

financially dependent on anybody, right? Workplace, government, parents, whatever it is. Absolutely. Could not say that better. Have nothing to add to that. I do have one last thing to add about college, and that is choosing a college to go to. One woman said, I've never had a single job care that I got a business degree from a private university versus a much cheaper public one. Your public universities are going to be some of your lowest cost universities. And like she said, it doesn't matter. There is a little bit of, you can attest to this, sky. the whole Vandy brotherhood, sisterhood. Yeah, you know, there's, look, there's great people, I'm sure, at a lot of universities. I obviously went to a very expensive private university that my parents paid for, right? And who am I to sit here and say that that degree didn't help me get my first job or wasn't influential in moving me into my career track to bigger pockets? I think there's a lot of good reasons why I could or couldn't be.

But I'm grateful for that degree. I'm grateful for my parents' assistance. And I enjoyed my college experience and learned a lot of. lot. You know, so it worked out for me. So there's a lot of nuance to all this kind of stuff. One last thing I want to share is we interviewed Zach Gautier, who is a counselor for high school students on episode 64 of the Bigger Pockets Money podcast. And he gave us a whole plethora of ways to pay for college that you may not have heard of yet, including a few websites to go to to find student loans and find grants and see different ways to pay for college.

So that's definitely worth a listen if you have not listened to that episode yet. Absolutely. You know, Scott, one of the first things that happens when you do get to college, when you're on the college campus at your orientation, is, hey, welcome to college. Here's a credit card. You're walking through the orientation. You're stopping at the different tables. And there's the one, hey, would you like a free t-shirt?

All you have to do is sign up for a credit card. How many free t-shirts is worth all that credit card? debt. Zero. Yeah. This is a good investment by the credit card company, I'm sure. Oh, yeah, great investment. They're not even good t-shirts. Okay. Well, why shouldn't, why shouldn't you sign up for, why should or you shouldn't you sign up for a credit card? What should you know before you get that first credit card? You should know that that first credit card is not free. And the credit card companies, it is not in their best interest to tell you all the ways that this can completely ruin your financial life. However, I am not paid by credit card.

company, so I can tell you all the ways that this will completely ruin your financial life. You have... You have something called a credit score, and everybody has one. Even if you don't have one, your credit score would be zero. The most common credit score is the FICO credit score. And that is calculated by many different ways. It starts at 350 and runs to 850. Now, let's be clear here.

You absolutely are going to want... to sign up for a credit card at some point. At some point in your life. At some point in your life. And credit, your credit score is going to have an impact on your future flexibility, right, and your financial options. So when you graduate from college or enter the workforce, you're going to want to do things like rent an apartment or buy a car.

These are items that, you know, what we would encourage you to try to avoid as much car debt as you possibly can, you're probably going to need to get some of the of that in most cases, right? And a credit score in the upper 700s or even approaching 700 can give you a lot more optionality and not have you rely on things like having your parents co-sign a lease with you or cosign a car loan with you, those types of things and be able to help you be, again, more financially independent and direct your own life. That credit score is built up by a number of different factors. One of the worst things to have, however, is to get a credit card in your early years of college, run up a balance and then fall behind and miss some payments on that.

That's a quick way to put yourself into a really big financial hole. That's going to be difficult for you to climb out of and limit your options in terms of where you live, what you drive, and even some jobs look at credit scores. Yeah, and it follows you around. Your bad credit score will follow you around for the rest of your life. So your credit score is the most common credit score is called the FICO score. FICO stands for the Fair Isaac Corporation. I don't know, they just invented this or whatever, but that's not that important.

But the FICO score runs from 350 to 850. And that's 500 points. It seems like, oh, right in the middle would be fine. But no, like Scott said, starting around 700 is where you finally start getting decent credit. A 650, 700 credit score is so much better than a 600 credit score. And like Scott said, employers look at this, your landlord is going to look at this, your other credit opportunities are going to look at this because your credit score is a snapshot of your ability to pay the bills that you say you're going to pay. Yeah, and it is an amazingly effective indicator.

You know, I know this is not popular around a lot of places in the internet, but frankly, the credit score is the number one thing that I look at as a landlord. when I am considering prospective tenant applicants. There are people that with bad credit scores who will make great tenants who are very responsible in those types of things. But there are very, very few bad tenant stories that I've ever heard that come from tenants

with great credit scores, right? So it's an amazing indicator for a lot of different types of things in terms of talking about a wide range of responsible behaviors. And I personally use it in my business and life when I'm interviewing people for jobs or to rent my rental properties. Yeah, it's me saying, I said I was going to pay this bill

and I did. Or I said I was going to pay this bill and I didn't. I as a landlord, don't want your excuses. I want your rent check. Now, as a adult, I have multiple things that are influencing my credit. But I've got mortgages. I've got a few credit cards. I had a car loan that I paid off a year or two ago. So I have a long credit history and multiple types of credit that I'm building or have built over time. That is not something that is a reasonable expectation for most people to graduate from college with. But one of the easy steps that I think is an easy one is, is go ahead and look at a credit card. Sign up for one that has a low fee. Ask them if they charge an annual fee. You're looking for low or no annual fee and put a little bit of money on it every month. Maybe you go out to

dinner once or twice a month and you put that on the credit card, right? And pay it off in full every month. And that will be the beginnings, a very effective way to begin establishing credit over the period of four years while you, three or however long you want to be in college, six, six in the case of that one fellow. So, you know, it'll help you come out of college with a little bit more credit history and a history of payments on time payments. Oh, I'm glad you said a history of payments because that is the number one most important factor in your credit score. 35% of your entire score is made up of your payment history. So when you pay your payments on time, you pay your bills on time every single month,

your credit score goes up. When you miss a payment, that can tank your score. You miss a payment, one payment by 30 days, and you can have a 50-point. drop on your credit score, which can be devastating when you're just barely in the good credit range or in the decent credit range. That's 100% a factor that can help you make you be ineligible for that apartment you want to rent or double the interest rate on your car payment, right? And it's 100% under your control.

Absolutely, right? So getting a point is get a credit card, but do not put an amount on that credit card ever that you cannot reasonably pay off with the next payment. do. Do not rack up. Do not make minimum payments and rack up charges in college. That's just, it's just completely unnecessary, right? You're going to assume a very high interest rate if you don't make the payments, if you don't pay after credit card in full each month. It's just a lifelong habit. Mindy, I have never carried a credit card balance in my life. And I don't think I ever will. Something will have to go very, very horribly wrong at this point for that to happen. Yep.

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Let's say you have a $10,000 credit limit. If you have charged $9,000 and you're not paying that off all the time, you're using 90% of your available credit. And to creditors, that looks like you don't have a handle on your finances. looks like you are grasping at all the money you can get and not handling your finances in the proper way. So they're not anxious to give you more credit when they see that. Your score will go down when they see that you are using almost all of the credit available

to you. A good rule of thumb is 20% or less. So on that $10,000 limit, you only have up to $2,000. And again, if you can't pay that off, unless that's a super emergency, see, you should not have that on your card to begin with. Yeah, I mean, the biggest factors here in the credit score, do you make your payments on time and do you have a responsible amount of debt? If you have too much debt, it's unlikely that you're going to be able to,

your likelihood of being able to make on-time payments are going to decrease so lenders don't want to lend to you. If you have missed payments in the past, that is a very good indicator that you're likely to miss payments to begin in the future. So lenders don't want to lend to you. Lenders like the car load people, the landlord, right? And so those are the two biggest things and they make perfect sense. Yeah. And this is like a super boring topic, but it's so important to your financial future.

When you have a bad credit score, maybe you can't get another job. When you have a bad credit score, maybe you can't go out and get a different apartment. You are beholden to these people that hold your future in their hand because of bad decisions that you've made. And it's really easy to not rack up huge credit card bills. And it's important for certain types of jobs, right? I mean, this is something that if you're going to work in finance, absolutely, your employee is probably going to pull your credit in the job application process, right? How can you handle money for a corporation responsibly if you can't handle it for yourself responsibly? It's a perfectly reasonable question for employers and landlords and

car dealerships to ask. Absolutely. Now, this also kind of brings up a different point, though, Scott, not all debt is bad. There is a difference between debt as a burden, such as credit card debt or card debt, and debt as a tool, like a mortgage. The debt as a tool allows you to buy a property so you're no longer renting without having to save up that entire amount. What's a house in Denver? $350,000, $450,000? I don't have that just sitting in cash that I can throw down on a house. So I need to use a mortgage. And I can put down 5% of the purchase price on a mortgage, and now I'm building equity in a home that I own rather than renting out. We can get into house hacking where I have a property that has more space than I need.

And I rent out bedrooms to my friends or to other tenants. And they help me pay my mortgage. So now my cost of living is lower. But I can't get that if I have crappy credit. That's right. And when you say good and bad debt, right, there's a lot of definitions of this out there. right and I've made up my own which I think is right because I beat it up but but here's the deal when you're looking at good or bad debt a very simple question to ask or a very practical tool is is am I

investing or is this am I going into debt to support my lifestyle right so a car loan is often classified as a good debt I think that's false I think a car loan is a bad debt right because it's costing you money every month your car is losing value you're paying this out and it's some a debt more income you have to or create to cover that payment. But if you're using a debt to purchase a rental property, right, or a business, right, now all of a sudden that debt, maybe it costs you $2,000 a month, but you're able to bring in $4,000 a month in rent. Now you're covering that expense.

You're using that debt in a good way to create an asset. And that is a very, very powerful thing. That can give you the ability to achieve financial freedom or generate passive income alternative to your job much sooner in life. So it's how do I purchase assets? and can my credit score become an effective tool in helping me do that? And it has to, for me, to this point, I've been able to get loans on multiple rental properties and build my wealth that way, but I have basically no personal debt that is not backed by assets. I have no, you know,

I have a credit card balance. I pay off in full every single month. I paid off my car loan, and I probably will never get another car loan, right? So it's those types of things I use it as minimally as I can to get started and then phase it out completely except for that, which is backed by assets. You know, an excellent episode that covers this very topic is our episode 35 where we interview Craig Curlop. Craig had, what, $80,000 in student loan debts? And instead of attacking the student loan debts, he started investing in real estate using his good credit to house hack. And he now is cash flowing so much. He was able to pay off his student loans. in three years, in four years, something like that. It's an excellent episode and actually changed

my mind from, no, you should always pay off your debt first and then invest to, hey, maybe investing is a good way to help you pay off your debt. Yeah, but if you're listening to this, you're probably not going to graduate with $80,000 in student loan debt anyways. So there you go. Yeah, too bad. Craig didn't listen to this before he graduated college. Okay, let's talk about something that's related to money but isn't money at all. Your relationships. I am in a women's personal finance group and a woman asked the question. I thought this was just brilliant that she shared this being so young. She said to the women in your 30s and older, what is some advice you wish you knew in your 20s?

I just turned 21 and I want to do it right. People were giving some really excellent advice, but there was a lot of the same thread. Learn to recognize red flags in relationships. Don't stay with him or her if it's not right and they don't bring you joy. don't loan money to your boyfriend or your girlfriend. If you have to wonder if they want you, they don't. Move on. Don't settle for somebody who, what did you say, Scott?

Don't settle for a cash flow negative spouse. Don't settle for somebody who isn't on the same page as you are. Don't chase somebody who doesn't want to be with you and know when it's time to leave. Yeah, I think it's just a good idea, particularly maybe in college or even really any relationship prior to, marriage to keep your assets separate, keep your finances separate. Don't make big loans, those types of things. Yeah. In episode 81, we talked to Aaron Lowry and she said, get a pre-up. I was so anti-pre-up. My husband brought it up before we got married. I'm like, oh, you think we're going to get a divorce? He's like, oh, never mind. I was really, really angry that

he brought it up. But Aaron had some pretty practical advice. She said, you know what? You already have a pre-up. It's the laws in your state. the divorce laws in your state. So if you don't want to go by whatever they say, you need to make a pre-up that directs your assets the way that you want them to be directed and protected. And I'm going to bring up the kid question or the kid comment. Bob commented in our Facebook group.

He said, my nugget of advice to the young ins is, unless you're paying tens of thousands of dollars to a doctor, never believe someone when they say they can't get pregnant or can't get you pregnant. Kids are expensive. I have two kids and I love them dearly and my life would not be complete without them. But I also waited until I was a lot older to have kids. And I know a lot of girls who got pregnant in high school and college and they didn't finish

college. And I don't want to say that kids that young will ruin your life. But they will definitely alter your financial state considerably. So if you don't want to be pregnant, don't get pregnant. If you don't want to be getting her pregnant, don't get her pregnant. If you're in a sexual relationship, be in charge of the birth control. That comes from a position. That comes from a position of experience, I guess.

I mean, I planned to have my kids when I had them. And I know, you know, I don't want to say, I don't think a child is a mistake. There are, you know, accidents or not accidents. What is it? Surprises. There are surprises sometimes. but you can have one surprise. You don't need to keep having more surprises.

After a while, it doesn't, it's not a surprise anymore. Let's talk about life choices. What is a want and what is a need, Scott? A want is something that you don't need. A need is something that you must have. But on the needs piece, I actually like a different way of phrasing this, right? There's fixed and variable expenses. your life. What do I mean by that? A fixed expense is the rent. You got to pay that every month. It does

not change. It's a large amount. A variable expense might be the food budget, right, or the beer budget for those who are over 21 in college. And so those are changing every month. You might buy more or less one month or whatever. And it's understanding how do you make your fixed expenses as low as possible? Because people say housing, rent, the rent is a need, right? But a $500 a month, one bedroom or a bedroom in a five-bedroom house with four other roommates, right, satisfies that need just the same as a $2,000 monthly house all to yourself rental bill, right? And so making those fixed overhead expenses, I think,

and keeping them very low, in particular during and after the college years, can really give you a massive jumpstart. And then just budgeting and basic self-discipline to control the variable costs in a reasonable way after that, I think is the other major piece to this. That is a very good way to describe it. I was going to go with Maslow's hierarchy of needs.

You need food. You need shelter. You need clothing. But you don't need expensive shelter. You don't need brand name clothing. You can buy secondhand, buy third hand. Get it for free. Yeah, that's really good. I like the way you said it better.

Well, absolutely. I just think that that's the way to think about, you know, once in needs, it's too easy, I think, for a lot of people to justify a big rent bill or a car payment as a need. But if you go into it thinking, how do I keep my fixed expenses, particularly transportation, housing, and my food budget? Well, I guess food budget, I just described as a variable. But those are the three big ones for most people. How do you keep those as small as you possibly can while being very happy? And then the way you can kind of justify that mentally is say, hey, I'm going to spend very little on my housing, transportation, and food budget.

But I'm going to up my budget relative to my friends or relative to the folks in my peer group for the fun stuff, the entertainment, the trips, whatever it is. Because you'll end up saving so much more that way and I think getting a lot more fun in. I love it. Here's a little bit of advice that I'm going to share with you that may not be so popular, but do not get an Amazon Prime account. If you have access to one, stop using it. And if you don't have one, don't get one.

And Scott said, oh, they're free for college students. Don't get it even if it's free. It makes it so much easier to just click one thing and buy something online. I hate paying for shipping. I can go shopping right here and it's free to ship. I just walk to the store and get it. when I have to pay for shipping, that is a mental block for me to make sure that I really want that item. So Amazon has kind of creeped up into my life.

And I'm trying really hard to stay away from Amazon just because it's so easy to click once. And it's at my door like the next day. Mark Twain said, a man who carries a cat by the tail learns something he can learn in no other way. And that's kind of mean. Like, why would you pick up a cat by the tail? But boy, that cat's going to let you know they don't like that. If you give a loan to somebody that you know, you will never see that money again. That should be your mindset whenever you loan money, even family.

If you choose to loan, view it as a gift. And then if you get any money back, it's just a nice surprise. But lending money to people has ruined more relationships, I think, than anything else. Absolutely. Yeah, this is particularly true with high school and college friends who are wonderful. but you're unlikely to get that 50 bucks back, I think, anytime soon. Or ever. Or that $5.

Oh, I once lent a lot of money to a boyfriend. But everything was going so well. I never saw it again. I mean, it was a lot of money back then. It's actually still a lot of money. Okay, Scott, you want to talk about investing? Yeah, let's do it. Okay.

So in terms of an investing framework, I imagine if you're listening to this show, you've heard the concept of compound interest before. If you haven't, it's the concept that your money will grow, and then the newly grown money will continue to compound and grow again at that same rate. So 100 bucks might turn into 110 bucks after a year. The next year, it will grow by another 10% to 121 bucks and so on and so forth. I'll be become very, very wealthy over time. It's why people are able to become millionaires or multi-multimillionaires over the decades, even though that seems like an unfathomable amount of money to you right now relative to that. So the way you get started doing that is by investing.

And while we occasionally get some high schoolers or college students who are interested in real estate, in a practical sense, it's pretty difficult unless you're very gung-ho about it to get going on that. There are ways you could talk to your parents and ask them to help you co-sign a house hack, for example, in college where you buy a house with a couple extra bedrooms, rent a few to your friends and are able to, you know, cash flow college for your housing cost, at least in college. We know a couple people who have done that, but that's pretty rare. A more approachable way, potentially for a lot of folks, would be to contribute to a Roth IRA or just open a brokerage account after tax, like in an app like Robin Hood or something like

that, and begin putting a little bit away into some sort of long-term investment. So let's unpack some of those terms, Scott. said open up a Roth IRA and then you said after tax. Can you explain what those mean? Well, I guess they're both in some ways after tax. But basically a Roth IRA is a retirement account that allows you to put money into it, which will then grow tax free. So for example, if I put $1,000 into a Roth IRA and that generates a dividend income, I'm not going to have to pay tax on that dividend income because it's in my retirement account. When I'm older, I believe when I'm 59 and a half, I can withdraw that $1,000 plus any gains, including that dividend income.

And I do not have to pay tax on that. Now, that's a very long time away. That's 40 years away if you're listening to this. So I get it. I know that that can be daunting. But there's a couple of good things about the Roth IRA. First, I believe you can withdraw your contributions, not the gains, not the dividend income prior to age 59.5, tax and penalty free. So if you need it, you can always just pull it back out at some future date. Now, the second thing is right now, you're probably not earning much income. So what that means is that you're not paying any income taxes. And if you can contribute to a Roth IRA while you're in a zero percent tax bracket and you're listening to this podcast, you're going to become a multi, multi, multi millionaire by the time you're 50,

I mean, that's just, you know, just keep listening to bigger pockets money and you'll get there. At that point, you'll be in a high tax bracket and you'll have all this money left over in an account that you can withdraw from at a very low rate. That's my sales pitch for the Roth IRA. I like that. I want to clarify a couple of things. So a Roth IRA means that all the money that you are putting into that plan, you have already paid income tax on with a traditional IRA or a traditional 401k, the money that you contribute goes in there before you pay taxes, income taxes, on that money. So you've already paid your tax in the Roth IRA. It then grows, especially if you're 18, it grows for 40 years.

When you have it in 40 years, you're going to have, you put $1,000 and you're going to have, let's say, $500,000 in 40 years. That's not an unreasonable amount. I would rather pay taxes on the $1,000 that I put in than on the $500,000 that I'm taking out. Many times when you're 18, you're not working at a job that has a 401k or a traditional IRA as an retirement option anyway. So the Roth IRA is a really great option that you set up yourself. You go to fidelity.com or vanguard.com or any other number of places will help you set up a Roth IRA. And then you contribute. You contribute regularly and consistently. The contribution limit in the year

2020 is $6,000. So if you divide that by the 52 weeks that are in the year, that's $115 a week. That's not a huge amount when you're making money as an adult. But as a kid, if you're 18, you're working part-time, maybe $150 is your entire paycheck. So maybe that's not really what you want to be doing with that money. maybe that's not what you can afford to put in. Put in what you can. Make a goal. I'm going to put in $20 a week. I'm going to put in $50 a week.

I'm going to put in $20 a month. Invest, invest consistently, contribute consistently, and you will be astonished at how fast that grows. If you can contribute $6,000 a year throughout college by working part-time, whatever it is, and you're graduating college with $24,000 in a Roth IRA, you're in a pretty good position. But I will caution that going

back to the very original point I made around financial runway, right? This is a controversial statement, and a lot of people beat me up for it, but I would rather be the college graduate with $25,000 in my checking or savings account and complete independence and that more balanced power dynamic between me and my first employer than a college grad with all that money in an IRA that I don't feel comfortable withdrawing even though, you know, because it's I mentally put it away for retirement. I just feel like for me, I would have been more able to take that next job,

that job at that startup, that buy that first house hack, buy that, you know, start that next, that first business, whatever it is. That opportunity to me, I was going to use it. But that might just be the way I'm wired.

And if you're someone who is, you know, a little bit more conservative and is going to go after it, like many people, it may be a really good idea to max out these retirement accounts going into it. The best answer, of course, is to do both. If you can max out that retirement account and have money left over to begin building your financial runway after tax and outside of those retirement accounts in addition to that. Okay, Scott, moving on, let's talk about automatically investing. Set up automatic investments as soon as you have your first job. In high school,

summers, college, always put money into your investment account first. Kind of like what we were just talking about with the Roth IRA, figure out what you can afford to put in there and then put that in first. Every paycheck, automatically you get $50 into your Roth IRA or 20 or 10 or whatever it is that you can do. Yeah, absolutely. It's just the easiest way to go about it. It's pay yourself first, put that money into an investment account. And look, people are not going to understand this. A lot of people like your friends, they may not understand the concepts of investing. They won't understand why you live in a apartment that is lower cost than they do. And then they also won't understand it a few years after a few years when you plop 50 or $100,000

down on a rental property. Or in seven or eight years after college graduation, when you are financially independent, able to start your own business or travel the world and not have to worry about money really ever again. So it's understanding those two dynamics and then automating and massively increasing your investment on an ongoing basis. as early in life as you possibly can. You know, Scott, that's a really great point that I didn't even think about when I said that before,

but your friends are most likely not going to be supportive. Why are you so cheap? You're not cheap. You are investing in your future. You are setting your future self up for a very comfortable life. And it doesn't matter what your friends think about what you're doing. They will not understand what you're doing when you're doing it. And then once you do plop down that $50,000 of buy your first house,

Oh, wow, how'd you do that? Really? For all those years, yeah. I lived in that apartment and drove that car. Yes. So if you're having trouble finding fellow frugal weirdos, please come join our Facebook group. We will welcome you with open arms,

and we will help you on your road to financial freedom. And your friends will still be your friends, and you can start renting to them when you buy your first house. There you go. Okay, and along those same lines, when you get a raise, when you get a bonus, add that to your investments. You won't miss it now, especially if you're automating your investments. When you get a bonus you weren't expecting or a bonus that you were expecting, throw that into your retirement account, throw that into your Roth IRA.

You will be so far ahead of things when you do that. And it's not something that you're going to miss right now. Love it. Scott, I think that wraps up all the major points I wanted to talk about. The student loans starting off your adult life with massive student loans. loans is such a downer. It's such a hindrance. It will hold you back for so long in your financial life. Yeah. No, I mean, once you like, look, imagine two scenarios. One person graduates college and they've got $50,000 in debt and a $50,000 a year job, right? They rent a nice apartment,

buy a nice car, and they're living paycheck to paycheck, right? That person over the years and decades is not going to build wealth is going to become dependent on that income source, right? And is going to have a lot of limited options, even though their lifestyle right out of college will be relatively good. They'll have a nice car, they'll have a nice apartment, relatively nice apartment, those types of things. But if you can graduate with no debt, right, with $25,000 or $30,000 in the bank, which is very possible if you play your cards, right, over the next four years, choose a school wisely, work. I started to receive some scholarships, whatever. You know, you're in a, a massive position of power in that thing. If you can then rent that cheap apartment, take the roommate

for an extra couple of years, you could buy a duplex or a rental property and live for free a few years down the road. You could build a hundred thousand or several hundred thousand dollars in net worth over the first two or three years after graduation, right, giving you the option to start a business. Again, travel the world, take off a year, right? Join a startup or other enterprise. Get a sales job. Work for yourself. Whatever. All these different options to arrive after you have built a very strong financial foundation. And that will go on to, I think, make a major impact on how you, how much fun your 20s, 30s, the whole life will be in terms of this stuff. Just understand it, make choices that are conscious about it. And look,

you don't have to make every decision optimized for your long-term financial position. But you've got to understand the cost. And you've got to understand when and the cost of deviation from those different types of choices, just like you would with any other part of your life. Be money conscious, consciously make decisions that are going to affect your long-term future. I think that's fabulous, Scott. Yeah. How many people have we had on this podcast, Mindy, who got started a little later, right?

And how wealthy would they be or how much easier would their journey have been if they had just, been able to get this part right and make very conscious decisions about their college education, their first job, their lifestyle expenses, and their budgeting early on. How many decades would that have accelerated their wealth building journey by? You know, Scott, whenever I talk about this and people this age, I am reminded of this story that I was told when I was 22 and could have done something about it. If you invest $1,000 a year from the time you are 22, I'm sorry, I went, yeah, from the time you're 22 to the time you're 30, and then you never invest again.

You will have more money when you are 60 than if you started at age 30 and invested $2,000 a year from age 30 to age 60. So eight years versus 30 years, you still have more money when you start earlier. And it is just a really powerful example of compound interest and how it just works in your favor. When you're 22, typically you just got out of college or your friends got out of college, people aren't living high on the hog. They are living frugally. They are still eating ramen and they have roommates and start investing then when it doesn't change your lifestyle to invest small amounts of money.

Yeah, and then work to invest large amounts of money. And then work to invest large amounts of money. But have a nice cushion so that you can weather these storms so that you can leave the job that you thought you were going to love. And it decided that you were working for the most hated company in America. Yeah, some of my favorite podcast episodes have been folks like Avery from a few episodes ago. These are folks who graduate college with a reasonable degree. a manageable student loan debt and then go to town with stock and real estate investing over the years. And they make it sound so easy, don't they? A lot of these folks who are going to on track to

retire by 30, they just... It is easy. Yeah. And they're not like sacrificing. They're not changing, they're not not having fun while they're doing it. They're just controlling their budget, living reasonably. They're making smaller choices. They're making small adjustments to their spending that have huge changes in their future. And they're millionaires by 30. And the whole world, the whole, every conceivable set of opportunities is available to these people. It's amazing. It is amazing. And it's not that hard. Okay, Scott, should we get out of here? Let's do it. From episode 126 of the Bigger Pockets Money podcast, I am Indy Jensen and he is Scott Trench. and we are wishing you a very fulfilling financial future.

Love it. Alliteration is fantastic. Alliteration is amazing. I can't believe you missed that, Scott. Alliteration is awesome. Yeah, there you go. You're the one who's so on the ball. I know, I'm a little slow today.

Sorry, guys. The puns next time. Yes, of course, next time. There's always the next time.