The Rachel Cruze Show - How to Avoid These Popular Debt Trends

Episode Date: May 6, 2024

💵 Sign up for EveryDollar today. Create a free budget!    This episode is one huge PSA! I’ll go over some of the worst debt trends and traps that steal your paycheck—and what you can do to steer clear of them so you can use your money to create a life you love.   In This Episode: ·      Financial Goals That Are Impossible With Debt  ·     The Sad Reality of Credit Card Rewards  ·     The Financial Trend That Is Robbing You Blind    Next Steps: ·      📈 Check out the Investment Calculator: https://www.ramseysolutions.com/retirement/investment-calculator ·      🏡 Work with Churchill Mortgage to buy a home without a credit score: https://www.ramseysolutions.com/real-estate/mortgage-loans ·      💸 Take Financial Peace University: https://www.ramseysolutions.com/ramseyplus/financial-peace ·      🎥 Watch “How Financially Smart Are You?" here: https://www.youtube.com/watch?v=MOU0tPd_8RE   Offers From Today's Sponsors 🏥 Learn more about Christian Healthcare Ministries.   Listen to More From Ramsey Network 🎙️ The Ramsey Show   🧠 The Dr. John Delony Show 🍸 Smart Money Happy Hour 💡 The Rachel Cruze Show 💸 The Ramsey Show Highlights 💰 George Kamel 💼 The Ken Coleman Show 📈 EntreLeadership   Ramsey Solutions Privacy Policy Learn more about your ad choices. Visit megaphone.fm/adchoices

There are all kinds of reasons that people are convinced to make a risky financial move. They fall into this trap because they haven't set themselves up well for smarter, better options. It's not a bad thing to have to wait for something that you want. Hey, you guys, welcome to this episode of the Rachel Cruise Show podcast. I'm so glad that you're here. So in this episode, we'll unpack the truth about credit card rewards. Then we'll discuss the trends that is robbing you blind. But first, I want to talk to you about what you could do if you didn't have any debts.

Take a listen. So when it comes to money, it's always best to keep things practical. But that doesn't mean that a little imagination isn't an important part of building wealth too. So today, it's going to be all for you daydreamers out there because I want to talk to you about what you could do if you didn't have any debts. So it is time to look at the real opportunity cost and get in terms. intentional about what your life could look like. We're going to be doing some calculating and estimating and imagining. So by the end of this episode, you should feel really confident and

equipped to reach your goals and to start building the life that you want without debt and payments weighing you down. And stick around because at the end, I'm revealing one of the biggest obstacles in people's way when it comes to building wealth and how to fix it. All right. First and foremost, what is opportunity costs and how does it affect your money? Well, opportunity costs is the loss of potential gain from other alternatives. So, for example, the choice to store large amounts of cash in a regular savings account creates an opportunity cost in terms of earning interest if that money was invested elsewhere. And in my opinion, debt is the ultimate opportunity cost.

Even if savings aren't on your radar yet, any debt that you carry around is robbing you from wealth that you could be building, and said you're just throwing it away on minimum payments. And it's never fun to be throwing away money on interest for food that you've already eaten or a concert you've already attended. Speaking of, next, let's talk about what opportunity costs might look like in your budget specifically. So brace yourself, because I'm going to do a little Rachel Splaining here. And again, trust the process and stay with me because this is so interesting. So this question might sound like a no-brainer at first,

But have you ever really thought about how swiping and payments work? So the opportunity cost is literally a part of every single purchase that we make. Every dollar that you spend is one less dollar that you could have for something else. So if you're debt-free, then this goes for different line items in your budget. So for example, if you choose to splurge on three Uber Eats meals every week, that could be $50 less that you have to spend on vacation shopping, or back to school supplies for your kids. And then when looking at debt specifically,

the stakes are immediately higher. So every payment that you make towards your car, a couple of hundred dollars, that's less a couple of hundred dollars that you might have to spend on a date night at your favorite restaurant or a bougie spa day. And if you add up the average level of debt for the three most common debts that people carry,

we're talking about thousands of dollars that you're missing out on in your monthly budget. the average monthly student loan payment is $393. The average monthly car payment is $499. And the average credit card minimum payment is $30 plus fees and interest. So say somebody has five credit cards, that's at least $150 per month going toward high interest rates on things that they've already enjoyed. And according to these numbers, the average American is tossing about $1,042 out the window every single month in payments. which brings me to my next point.

Let's do a little calculating. So let's say you've freed up that margin in your budget. Not only would you have significantly more money to spend, but think about how much money you're losing without money not being invested. So, for example, let's take the total of all of those average payments. And according to Ramsey's investment calculator, if you invested that $1,042 every month,

starting at age 35, by the time you're 65, and you're ready to retire, that would be over $1.2 million with a really conservative 7% return rate, okay? So it's probably way more than that. And again, that's not even including a company match of 401K if you're investing in that, too. That is literally millions of dollars, you guys, that you're throwing away at payments. That could be yours. And for those of you that might still feel like a little skeptical, let's just take a portion of that total and let's see what we find.

So let's say you paid off your student loan debt and you didn't have the minimum payments for your credit cards, but you're still hanging on to that car payment. Well, if you were just to invest that card payment of $499 per month with 7% return rate from age 25 instead of 35, then you would have $1.3 million at retirement. Unbelievable. And that is the power you guys have compound interest. Investing less than half of your original total, just 10 years earlier, you end up with more money at the end. I mean, it's so wild. So not only is the debt itself a huge opportunity cost, but the time that you're spending tied down with payments is equally as detrimental. So at this point, some of you might be thinking, okay, we've talked about a lot of numbers, but when do we get to do a little daydreaming that

you mentioned earlier, Rachel? Okay, well, now's the time. So first, I want you to look at your monthly budgets. If you're not officially in the habit of using a budgeting app, just pull up your bank account and choose a payment that you wish you didn't have to deal with every month. So just pick one. Next, take some time to reflect on what you wish you could be doing with that money. Is it travel? Is it a house? Is it a bougie gym membership that maybe brings you joy? I don't know what it is, but it's amazing of what you could be doing with that money instead of it going out the door. And if you're married, I would say grab your spouse and talk to them and kind of brainstorm. hey, what do we want for our future? Our retirement goals. Do we want to pay for our kids' college? Do we want a home

renovation? Like, what do we want to do? Because here's the power in playing the hypothetical game. When you ask yourself questions about the future, you're going to be so glad that you did because it's actually going to prove out what you really wants. And then you're going to have to see, okay, do we have the ability to achieve all of this? And of course, probably not all at once, but over time, what do we do? Because if you're buried with multiple types of debt, it's going to be really really, tough to hit those goals, so that may actually give you the motivation to start attacking some of your debt. And now it's time to talk about one of the most common obstacles, though, that I hear from people all the time when it comes to trying to build wealth. It's not the government or the housing

market or the student loan debt. Sometimes it's actually the spouse. So as we're talking about daydreaming with your spouse, some of you might be thinking, oh my gosh, Rachel, that all sounds great, but my spouse will never get on board. Well, here's some things to think about. I would say, run some numbers and just say, hey, what if we got out of debt? Here's the timeline it would take to get out of debt. Here's how much extra money we would need every month to get out of debt in this amount of time. Here's the amount of money that if we didn't have debt would be invested. Here's the amount of money that we could save for next year on a family trip. Like, start running actual numbers and sometimes seeing visually what's going on is so helpful for people. And then also talk about

your why. Why do you want to do this? Is it because there's a level of fear for you? Is there a level of If something happens, we're not going to be okay because we are deeply in debt and have no savings. Is it because maybe you grew up a certain way and you want your kids to have a different lifestyle or a different way of life than what you had? Whatever it is, talk to your spouse about that because that's really important. That's part of you. And again, if you're in somewhat of a healthy, functional marriage, there'll be a conversation there.

And hopefully your spouse is actually listening and wants to hear it and actually wants to know what's going on inside of you. And if they don't, then that's usually another. flag that's raised that, hey, maybe this isn't a money issue. Maybe there's other stuff in your marriage that you guys need to talk about first and get that settled before you can move on to the subject. But money is a very revealing topic, especially when it comes to marriage. So listen, out of everything that we've talked about today, I think the easiest step for minimizing the opportunity costs is that no matter where you are financially, you need to get on a budget. I think one of the best things that you can do is be intentional with your paycheck. So many people feel like they got a raise once they

budgeted because they didn't realize how much money was going out on these purchases that they didn't realize they were making. It was just like spontaneous. So do a Google search, type in every dollar and start tracking your spending today. And once you have the exact number on some of the specifics around your money, that's going to give you a much clearer picture on what your next step needs to be. So when in doubt, just think of what you could be doing with your money in the present and the future if you didn't have payments. So picture yourself at your favorite store. You know, you got Target, J-Crew, Old Navy, Ulta, whatever it is, and you're in the checkout line and you're about to spend a lot of money. And then all of a sudden, Kimberly from behind the register,

says, oh, I've got great news. You are pre-approved for our in-store credit card, and you can save 10% on today's purchase if you sign up. Wrong, Kimberly. Come on, Kim. That's not great news. First of all, 10% is just taking away the tax, which you probably weren't even factoring in anyways. And second, you're not pre-approved. That's just a line that Kimberly has to feed every single customer so she can add a tally mark to her monthly goal. And third, credit cards are just another tactic to get you to spend more money or spend the same amount that you are planning on it, but not to have to pay for it until weeks later and they get slammed with interest. So, no thanks. Now listen, if some of you have fallen for that very scheme before, you are not alone.

We all love a good deal, but the truth is that credit cards are never going to be the secret to saving money. So today, I'm going to give us all a little reality check and explain why. Now, I can already hear some of you in the comments, like, well, I pay my balance off every month and I only use credit cards to get airline miles. Trust me, I've heard it all. So let's unpack some of these common excuses one by one. First, we'll start with all faithful. Or until I have to build my credit so I can buy a house. To put it simply, you guys, that's not true. You can actually buy a house without a credit score,

and it might take a little extra paperwork, but it is not impossible. All you need is to find somebody who will do manual underwriting. So manual underwriting is basically an investigation into your ability to repay debt. So you're about to take on a mortgage, so your lender wants to know how you can handle it. And our friends at Churchill Mortgage are the perfect people to get the job done when it comes to buying a house without a credit score. So ultimately, you have to have three things. Number one, proof of payment history. So bring in at least four regular monthly payments that you have to make.

So that could be daycare tuition, utilities, other bills you may have, insurance premium, cell phones, whatever it is. Number two, you have to have a larger down payment. So aim for 20% or more so that it reduces the lender's risk. And number three, choose a 15-year conventional rate mortgage. So no FHA loans, no subprimes, and no 30-year with 5% down. So repeat after me. I do not have to use credit cards to build a credit score to buy a house.

It is not true. All right, another common reason people fall for credit cards in this trap is the rewards game. So first of all, let's just look at the math. You have to spend $1,000 to get $10 cash back, okay? Mm-hmm. So it's a lot, you guys. So the bigger question here is who is actually paying for all those rewards. Credit card companies that make their money in three ways. Number one, fees paid by cardholders. Number two, transaction fees paid by businesses when you swipe. And number three, interest paid by cardholders. So all of these methods come at a cost to you and are more vulnerable populations.

So you have to understand that, man, there's a level that you have to have this income to be. be able to juggle all of these balances to get the rewards. And the reality is that there are thousands, if not tens of thousands, if not millions of Americans who can't play that game. So they are depending on credit cards to get them month by month. They're not reaping the rewards, so somebody else is. And listen, 40% of people who don't pay off their balances each month get slapped with crazy high interest payments. And sadly, they're the ones who are getting crushed under the weight of interest and payments and all the things when it comes to this idea of having rewards. So again, people play their rewards game, but the truth is you get those rewards

because other people are suffering. And that's the truth of it. Here are a couple other things to consider. Number one, a credit score is not your friend. So the FICO score didn't even exist until 1989. And now it's this new standard that we have to measure up to, and it's this number that basically mathematically is calculated all by debt, and it works more against you in your money than for you. Number two, credit cards aren't a good solution when it comes to emergencies. A lot of people

say, well, I have my credit card in case of an emergency. But if you have a car emergency and you go and pay for it with the credit card, you just went from a car emergency to now a money emergency if you don't have money in the bank because you're going to be paying interest and paying fees on top of that. So instead, save up for an emergency fund and let you be your emergency fund versus the credit card. And number three, credit cards aren't a good cash flow plan. So listen, having monthly budgets, have your actual money leave your account when you pay for something. So you're not left guessing, okay, how much do we owe? Or if there's enough in the bank to cover everything, it just makes it way simpler.

And number four, it's always a risk that you fall into this trap of credit cards. Because more than 45 million households are weighed down by debt. And playing the credit card game puts you at risk to be one of those statistics. And number five, credit cards are a new concept and not a need because it's only been in the last 50 to 60 years that people really have become dependent on credit cards. And credit cards aren't an economic necessity. They are a business that blew up at the rise of consumerism in our culture. Now, go back with me and picture your favorite story again. What if it's time that you're at the checkout and you feel 100% confident in your ability to be able to pay right then

in there. You don't have to play the game. You don't have to open up another credit card to save on the sales tax. You just have peace because you have the cash that you need and you can move about your day. And if this sounds like a far-fed stream, can I just tell you, it is possible. And if you are somebody that doesn't know where to start, I would highly suggest that you take Financial Peace University. FPU is one of our best courses that we have. It's nine weeks, nine lessons that you go through and you learn all of the basics when it comes to money, everything from budgeting to insurance to getting out of So if you need some education when it comes to money, financial peace university is your best bet. So we've seen a lot of trends become popular since the infamous year of 2020.

But one financial fad I've noticed over the last four years that is on the rise is helox. So it was a perfect storm four years ago, being stuck inside all day, endlessly scrolling social media, going stir crazy with your loved ones. and that will make anyone feel desperate for a change of scenery. So what do people do? Well, they started looking around their homes. Like, well, we could fix this, this, this, this, this. And they started taking out home equity loans.

They would do this for home renovations. They would even do this for travel into some other things. So, listen, I love a renovated kitchen as much as you do. But trust me, a HELOC is not a smart way to do it. So let's talk about home equity loans and why people get caught in this trap and what you should do instead. plus I'll share what my husband and I are doing right now instead of pretending our house is a bank. If you don't know, Helock stands for home equity line of credit. It's a type of home equity loan.

A home equity loan offers you, the borrower, a sum of money taken out of your home's current value with an interest rate that is higher on average. So for example, let's say you bought a home five years ago for $300,000, and it's appreciated three, five percent annually. and now it's estimated to be $360,000. But instead of selling it and getting that cash profit in your hands, you decide to keep your house and ask the bank for a $60,000 loan. Helox are a type of home equity loan that gives you access to cash on a as-needed basis, and they also come with an interest rate that fluctuates. It's like using your home's value as an ATM,

but also throwing money away in interest. So you're robbing your future self and going backwards with your net worth. So why do people do this? Well, it's a great question. There are all kinds of reasons that people are convinced to make a risky financial move like this one. And usually they fall into this trap because they haven't set themselves up well for smarter, better options. And a few common reasons, again, I hear from people that take out HELOCs. Mostly it's for home renovations.

Some people do it to pay off their debts, like cars, medical bills, and student loans. retirement living expenses, buying vacation homes or investment properties, taking long breaks from work, emergencies, and even paying for a kid's wedding, or even kids' college. So as you can see from this list, a bad idea can easily seem like a good idea if that's your only option. So a lot of people become convinced that HELOCs are legit because you're supposedly borrowing from an actual thing that you own your home's value. But if you're like most people, you haven't paid off your mortgage yet, so you don't own your home outright. So all you're doing is adding new debt to the existing debt. And a HELOC uses a revolving credit line just like a credit

card. So this means that as you pay back what you've borrowed, the amount you paid back becomes available to you to go and spend again. So it's imaginary money is what it feels like until it's not. The difference is that a HELOC uses your home's equity as collateral. Remember, equity is the difference between how much you owe on your home versus how much it's grown to be worth since you bought it. And collateral is basically a fancy word for a security deposit. It's the thing that you promise to give the lender if you can't pay back what you owe. That means if you can't pay back the he lock, the lender can foreclose on your house. So keep in mind that any form of debts can be called at any moment, and if you don't have the money to pay it off,

you're not in a good position at all. Okay, so stealing from your home's projected value is just piling on more risk. And when you finally sell your home, you don't get to keep the full profit of the sale. Instead, you're going back in your pocket and taking the money from the sale to go and pay off the second debt that you took out on the house. Okay, here are some things that I recommend doing instead of taking out a home equity loan. Have an emergency fund to fall back on. Instead, use the debt snowball method to pay off. your debt. Also, save for your family's vacations and home renovations and all of that with cash.

Invest 15% of your income into retirement so that you have money when you retire. Sell your current house if you want to and downsize keep some of those earnings and cash flow renovations to get the house that you want. Also do renovations slowly so you can cash flow those improvements so that you're able to say, okay, I'm going to be able to do these things, but I'm doing it at the speed of cash. Another thing this HELOC trend has made me think about is about how addicted our culture is, just a quick fix. Because I would ever happen to just the phrase, well, we can't afford it right now. Because we live in a culture that is constantly telling us that if you just push this button,

you can do it. Even if it's not the wisest or safest method, it is available to you. Debt will always be there. And listen, it's not a bad thing to have to wait for something that you want. You know, Winston and I are in this process right now. saving for a pool. We've been saving for about five years. And again, it's something we started back when we built our house. We didn't have the money to put it in when we built. So we're like, we'll just wait, and we will save. And we've been saving and saving month after month,

certain months. We have to adjust our budget to make sure we're hitting our number. But it has taken time, you guys, like literally years. But it is going to feel so great when it is done. And it's done. Like, we're done. So delayed gratification is really nice because also a pool that we would built five years ago probably as a different pool than today, right? So it actually gives you time to decide what you really want instead of just rushing into something. So instant is not always better. There is something valuable that happens when you're patient and you delay that gratification. Something is built within your character and who you are as a person. And money is such a great place to do that, you guys. Save up and pay for things with cash. Don't take out a

he lock. Well, thanks, you guys so much for listening to this episode. Make sure that if you love this episode, leave a review because your feedback is so helpful. And also subscribe, share it with your friends, with your family, because we want everybody to be able to have control of their money and be able to know the truth on how to handle their money well. So thanks again, you guys. And remember to take control of your money and create a life you love.