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Prioritizing, paying off, and managing debt
Welcome to Financial Foundations, a mini-series of Financial Feminist, brought to you by State Farm. During each episode of this limited series, we’ll be tackling financial basics like budgeting, investing, debt, and what it really means to be a Financial Feminist to help you get on track no matter where you’re at with your money journey. Through short, actionable episodes and simple homework exercises, I’ll help you build a financial plan you’ll actually want to stick to. Thanks again to our sponsor, State Farm, for making this series possible. Like a good neighbor, State Farm is there.
For many of us, the concept of debt can trigger a complex range of emotions, including feelings of shame, anxiety, and dread. Why is that? It’s not uncommon to hear opinions that having debt or taking it on is a bad decision. In this episode of Financial Foundations, brought to you by State Farm, Tori will explain why you should release yourself from those feelings of shame.
You’ll also learn:
How to prioritize debt
The logic behind paying debt off
What steps to take to pay it down
Whether or not to refinance your student loans
How to determine “good” versus “bad” debt
Some questions to ponder from this episode:
Has the stigma of having debt kept you away from addressing it?
Do you know the details of your debt? (Balances, interest rates, loan terms)
Write out all of your debts, from highest interest rate to lowest, to see what to pay down first. We’ve laid this out for you in our Debt Payoff Worksheet.
Make it fun, and create a coloring sheet or some kind of visual representation of your debt so you can see progress as it’s happening.
Welcome to Financial Foundations, a miniseries of Financial Feminist brought to you by State Farm. During each episode of this limited series, we’ll be tackling financial basics like budgeting, investing, debt, and what it really means to be a Financial Feminist to help you get on track no matter where you’re at on your money journey. Through short, actionable episodes and simple homework exercises, I’ll help you build a financial plan you’ll actually want to stick to. Thanks again to our sponsor, State Farm for making the series possible. Like a good neighbor, State Farm is there.
Hi, financial feminists. I’m so excited to see you. Welcome back to the show. Welcome back to our Financial Foundation series. This is episode three in this special series. So if you’re joining us for the first time ever on the show, well definitely go back and maybe listen to some episodes first. But if it’s definitely your first time here for the Financial Foundation series, please check out episodes one to two. We’re doing this kind of literally episodically like you would watch a TV show. Don’t dive into the third season of the show without watching seasons one and two of Outlander. So just go back and listen to episode one and two and then we’ll meet you back here for three. You’ll definitely want to be working through some of the homework and the journaling prompts of the last couple episodes. So again, very important that we listen to one and two before we progress towards the third episode.
Today we are talking about debt, and I know you just heard the word debt and you’re like, “I want to throw up. I don’t want to keep listening. I don’t want to do this. Debt makes me nervous and fills me with a lot of shame and dread and anxiety.” So I just want to level the playing field here. I am never the financial educator who’s going to make you feel bad for going into debt, for taking on debt. For many of us and for many of our life goals, debt is actually the way we progress. If you think about these big life milestones, buying a house, going to college, starting a business, most of these, for the average person, are completely inaccessible unless you take on debt. Debt is not something to be ashamed of. Debt is usually actually a strategic choice meant to get you to the next level in your life, to literally up level your life.
So I need you to just give yourself a shit ton of grace, but specifically with debt, there is inherently so much shame and judgment around debt and also this feeling of I should’ve have known this sooner, I shouldn’t have done this. I’m so stupid for doing this, and I just need you to forgive yourself for the debt you do or did have, and understand that you likely did it for a very good reason. And even if you didn’t do it for a very good reason, there’s no shame in that. You’re here now, it’s okay. We’re going to work through this together. So a reminder from previous episodes on where debt sits in order on the financial priority list. The financial priority list is, again, your emergency fund first, at least three months of living expenses in a high yield savings account followed by your high interest debt, then starting to invest while paying off your lower interest debt.
Now, what’s the difference between high and low interest debt? It’s the rule of 7%. 7% is the average amount we can expect in returns on the stock market. It’s seven to 8% depending on who you talk to. So if your debt interest rate is higher than 7%, this is all credit cards, this is some student loans. If it’s more than 7%, we’re going to work to pay that off first because it’s costing us more money than we could be making on the stock market. If it’s under 7%, we’re actually going to prioritize investing before we prioritize aggressively paying off our debt. Now, does that mean we stop payments to our debt? No, it just means we’re not contributing any extra money to it while we prioritize other goals. The reason we do the emergency fund first, one of the biggest is that I don’t want you going into debt or into more debt trying to pay for an emergency.
Emergencies happen. Shit happens all the time, right? You get laid off, your hours get cut, you get sick, your dog gets sick, your roof falls apart in your house, there’s a flat tire on your car. There’s a lot of unexpected things that can happen, and I don’t want you going into debt or going into more debt trying to pay for an emergency. And the other thing, like I’ve mentioned before, is that we prioritize mental health here at Financial Feminist, at Her First $100K, and you just sleep better, live better, just exist better knowing that you have something in the bank should something happen. I get why people ask this question all the time. Because, one, Dave Ramsey’s told you that debt is the absolute devil and needs to be eliminated immediately, but two, if you have 10, 20, 50, 100, $200,000 a debt that feels so overwhelming and you’re like, “I need to do something about that right now. That’s the priority.”
However, even if you have hundreds of thousands of dollars of debt, I need you to have that emergency fund first. I know that might seem counterintuitive to what you’ve heard before potentially, but again, for all of the reasons I just laid out, I don’t want you going into more debt trying to pay for an emergency. I want you to know that you have something in the bank to take care of you. The other thing that the emergency plan gives you is the ability to leave bad situations, right? The ability to walk away from a job you don’t want to be in anymore, or a relationship you don’t want to be in anymore. I would argue, especially for women, that is incredibly important. So that’s why we do the emergency fund first before we start paying off debt. All right. How do we actually pay off debt?
There is a step-by-step guide in my book. Chapter four is all about debt. The actual logic of paying off debt is shockingly simple. That might blow your mind, but truly the way you pay off debt is not difficult. The logic of it at least. The thing that is hard is the consistency. The thing about debt that is difficult is not the how, it’s the how do I keep going? It’s not the math or the logic or the strategy of it’s the
consistency part. We know from statistics that actually the number one reason women go into debt is they don’t understand how a loan works. And it’s not because you’re stupid, it’s not because you’re not smart. It’s because no one’s explained this to you. So debt, simply put, is your principal and your interest. Your principal is the original amount of money you took out.
So if you put $1,000 on a credit card, that is your principal. It’s $1,000. Your interest is what’s being charged as the exchange. They’re giving you the thousand dollars on a loan, but they’re going to charge you interest. They’re going to charge you a percentage or money on top of that. That’s the difference, your principal plus your interest. Now, the reason debt often feels like you’re drowning is because your interest keeps accruing. You put $1,000 on a credit card and a year later you don’t just have $1,000 on your credit card, right? You have the $1,000 plus all of the interest that kept accruing and with a lot of loans including credit cards that let’s say 25% interest rate is not just being charged on the original $1,000. It’s being charged on the $1,000 plus 25% interest, and then the next month $1,000 plus 25% interest, plus 25% interest on that 25%.
You see how this becomes a very slippery slope very quickly. This is why debt can often feel like you’re drowning. So how do we actually work to pay it off? Well, one, we’re going to write out all of our debts from our highest interest rate to our lowest interest rate. If you don’t know your balance, if you don’t know your interest rate, this is where we start. Do some phone calls, call your credit card company, log into your student loan portal. This will likely be uncomfortable. It’s okay. It’s okay that it feels uncomfortable, but we can’t get a plan together unless we actually know what’s going on. So first we’re going to figure out how much debt do we have, where is it and what is the interest rate? What is the balance? And we’re listing it from highest interest to lowest interest. We want to figure out next our total debt payments per month.
Are you sending $400 to your student loans, plus maybe $1,000 for your mortgage? Where are you living by the way, because I would love to move there. Plus let’s say you have a credit card debt payment. We’re going to write out what our total debt payments are per month. And then number three, we’re going to look at our budget. Previous episode, we started putting a budget together. We’re going to look at what we’re currently spending, what we’re currently making, and we’re going to see if there’s any extra we could be putting to our payments. Now, we’re not just going to take, let’s say, $100 extra and distribute it to every piece of debt we have. The reason we listed it from highest interest rate to lowest interest rates is because we’re going to put, let’s say your extra $100. And again, these are sample numbers towards the debt with the highest interest, not necessarily the debt with the largest balance.
If you have $5,000 of credit card debt at 25%, but you have $40,000 of student loans at 4%, you might think, oh, I need to put that extra $100 towards my student loans, but your credit cards are costing you more money. They’re a higher percent interest, and they’re also ones that you can get rid of quicker because the balance is lower. So we’re going to go off of the interest rate. That is the thing that’s costing us the most money, and we’re going to contribute extra money to the loan that’s costing us the most because, again, biggest interest rate. Now specifically, where does that $100 go? Again, I mentioned this in my book, but when I had a car loan, I still own my 2014 RAV4. She is my baby, and when I chose to purchase her certified preowned, I took out a loan for her and I opted for a higher monthly payment to lower my length of my loan.
So my monthly payment I think was about $400, and there was one month, I think it was November, when I had gotten some extra money and I was like, “Cool, I’ll send in this extra $50 in addition to my $400 normal payment and it’ll help me pay off the loan faster.” But then what happened is I got my balance in December. I got my bill in December, and instead of $400, I owed $350. Now you’re like, “Cool, okay, well you paid $50 towards the next month.” But here’s the deal. That didn’t actually do anything. It just saved future me some money, it didn’t actually lower the price of the car. So when I called Toyota and I was like, “Dingdong, hello, how do I submit money to just the principal?” Which as a reminder is the original amount of money I took out.
They were like, “Oh, well if you want to do that, you’re going to have to send the additional money you want to go to the principal to this random PO box in Iowa.” Companies are sneaky. I’ve talked about this on the show before. I talk about this in my book. Companies are sneaky. They don’t want to give you this information if they don’t have to because it keeps you in debt for longer, AKA makes them more money. It wasn’t in the online portal when I logged in, it wasn’t on my statements. I had to call Toyota and sit on hold for a little bit and then ask them, “Hi, how do I actually do this?” And they’re like, “Oh yeah, PO Box in Iowa.” So when you’re submitting this extra money to go towards the debt with the highest interest, we want it to go to the principal the original amount of money we took out. Because if we can lower the principle, we’re going to pay less interest, right?
If we can lower the original amount of money we took out as a loan, we don’t have to pay as much interest, which is what we want. If you’re unsure how to do this, call and ask. Call and ask your bank, call and ask your credit card company, call and ask your student loan provider, how can I contribute to the principal of this debt? Let’s talk briefly about student loans. We’ve done previous episodes about this and we’ll continue to do more deep diving episodes about student loans. Is it smart to refinance my student loans? If they are federal student loans, if they are public student loans, you will not be eligible for student loan forgiveness in the future, which we are praying for and hoping for and supporting. You will not be eligible for that student loan forgiveness if you choose to refinance. So if you have public or federal loans, refinancing, probably not a good option.
On the flip side though, if you have private student loans, if they’re through a particular company or organization, it might be worth looking into what your options are to both lower your interest rate and potentially shorten the length of your loan. We have resources and tools we like for looking into refinancing on our website, on our tools page, herfirst100k.com/tools. All right, let’s talk about if there’s good debt. I was talking about this before of most debt we’re taking on to further our lives. We were talking before about debt used actually as a tool, right? As a tool to up level your life. There is this narrative that all debt is bad and the truth is not really. All debt can be used for good. I would just argue some are more dangerous than others. Credit card debt, because of the interest rate and because of how easy it is to go into credit card debt, is a very slippery slope.
If you’re going, I actually have a lot of friends who did this. If you’re going to get a master’s degree and you’re taking on debt to do it just because you’re like, “I don’t know what to do with my life, but all I’ve done the entire time is school and that feels like what I’m going to do next is school.” Not a good use of taking on a loan. Get a master’s degree because you actually need it slash want it for the career you want to pursue, not just bec
ause you don’t know what to do next. Maybe I’m calling you out. Sorry about it. So debt that advances you, right? Is the debt that we’re considering good or net positive, right? This is mortgages, again, business loans, student debt. I talk about this in my book. We have a whole thing where I wax poetic about debt and if it’s ethical or not.
The hard thing is that you do have to balance this lie you’ve been told sometimes is that you do have to get a college degree no matter what and go into debt. Again, various people you talk to will say various things about it. Some people are like, “Yeah, I’m glad I went to college. It was a good experience. I got the degree I needed. Yes, I went into debt for it, but it was a net positive.” And then there’s other people who are like, “I’m drowning in debt and I am underpaid and I am underemployed based on the degree that I have and it’s not worth it.” So we don’t have a lot of people out there who are in their teens listening to this, but if you are like 17 and trying to figure out if college is right for you, please look at all of the options you have, not just like, yes, I need to go to college.
If you are going to go to college, there are a ton of opportunities for you to get scholarships, federal aid, community support in a way that prevents you from taking on debt or taking on as much debt. John Malaney has this great bit about how when he was 17, he was in sweatpants and signed on the dotted line to spend $120,000 to be an English major. And he talks about how that was a crazy thing to ask a 17 year old to commit to. So this is a larger conversation about student debt crisis and how little I think education is around what student debt actually means, but I would actually think critically and think for your situation about whether it’s worth it or not. All right, and finally, when we’re thinking about should we take on debt? Is this good debt? What does this look like?
Look at the terms of the loan. This is always important if you’re going to take on debt. What are the terms? What is the interest rate? What is the amount that you owe? How does the interest compound? Does it compound daily? Does it compound monthly? Is it simple versus compound interest? Again, more in my book about this, but all of these are really important for you to dig into, decide if this is worth it to decide if taking on this amount of debt is actually worth it for you. You can also shop your debt. That sounds ridiculous, but I know for me, when I was buying a car, I was literally shopping places to get a loan through and I had a loan all set up through my credit union because that was what I thought was going to give me the least amount of interest rate and the best loan terms.
And then actually when I went to buy my car, the Toyota dealership gave me a better interest rate and that worked out better for me. So you can shop your loan before you choose to take it out. You can shop your business loan, you can shop your loans, look into research, make sure that the terms you not only understand, but you’re willing to take on. All right, let’s recap with some homework. Once we’ve listed out all our debts, we are going to make it fun and we’re going to create a little coloring sheet or some kind of visual representation of your debt so you can see your progress as it’s happening. You know how you go to a blood bank or a school or church fundraiser and they have a thermometer and they color the thermometer? You’re going to do that. Maybe it is a cute little dog.
Maybe it’s the thing you want, right? Maybe it’s like paying off your house and it’s a cute little house graphic. For me, maybe it’s just coloring various body parts on Timothée Chalamet. You get to decide what that looks like for you, but make it fun. Make it something where you can actually not only track your progress, but see your progress. We’ve talked about this before, we’ll talk about it again. The thing about actually looking at your money is, yeah, you think it’s scary, but just like anything and progressing towards any goal, if you’re not seeing your progress, you’re not going to keep going. If you can’t applaud yourself and go, “Cool, I paid off this amount of debt this month.” Or you know what? I wasn’t able to pay off debt this month, but that’s okay, I’ll get back on the horse next month. You can’t see your progress if you don’t see your progress.
So you’re going to give yourself a visual representation and also get a plan together to pay off your debt by starting to understand your interest rate, by starting to understand your balances, by starting to understand your loan terms, you can start conquering your debt in a way that feels accessible to you. And I’ll highlight again, the actual how around paying off your debt is shockingly simple. It’s consistency. Now, I didn’t say perfection. Notice I didn’t say perfection. I said consistency. When you’re two years into paying off your debt and you’re like, “This is awful and I don’t want to do this anymore and I’m so over it.” You have to remind yourself that it’s about consistency in order to get to the point where you’re debt free. Where you don’t owe anybody any money, where you don’t have to answer to anybody, and where you can take the hard-earned money that you were putting towards your debt and put it to something better.
So next week we are going to be talking about credit cards, which is one of my favorite things to talk about. And you’re like, “Tori, you nerd.” And I’m like, “No. I’m about to teach you how to fly to Europe for free using credit cards.” You’ve been told credit cards are bad? No, just you wait. I’m super excited. Thank you so much for joining us this week. I am proud of you. I see you. I see the progress you have and will make, especially if debt is something that gives you anxiety. Thank you for being here and tackling this episode. The first step to learning how to pay off debt and learning how to be comfortable with your debt is just showing up. Small progress is still progress, right? Consistency is just a little bit of progress every day. You’ve got this, and we’ll see you soon for episode four. A huge thanks to State Farm for supporting our mission here at Her First 100K and making the financial Foundations series possible. Like a good neighbor, State Farm is there. Neither State Farm nor its agents give tax or legal advice.
Thank you for listening to Financial Feminist, a Her First $100K podcast. Financial Feminist is hosted by me, Tori Dunlap, produced by Kristen Fields, associate producer Tanisha Grant, marketing and administration by Karina Patel, Sophia Cohen, Kahlil Dumas, Elizabeth McCumber, Beth Bowen, Amanda Leffew, Masha Bachmetyeva, Kailyn Sprinkle, Sumaya Mulla-Carillo, and Harvey Carlson. Research by Ariel Johnson, audio engineering by Eliza Medcalf, promotional graphics by Mary Stratton, photography by Sarah Wolfe, and theme music by Jonah Cohen Sound. A huge thanks to the entire Her First $100K team and community for supporting the show. For more information about Financial Feminist, Her First $100K, our guests, and episode show notes, visit financialfeministpodcast.com.