Debt 101: Is being in debt always bad?
In today’s episode, we kick off part one of our two-part series on debt. Next week, Cassidy will share her personal story of paying off $18,000 in student loans in just 10 months. But first, we’re diving into our general philosophies on debt — when it’s helpful, when it’s harmful, and how to know if you should prioritize paying it off.
We also share:
A surprising (and a bit frustrating) Dave Ramsey clip about debt that sparked our discussion
Average U.S. household debt statistics (hint: you’re not alone if you have debt)
Our thoughts on “good debt” vs. “bad debt” — and why those terms aren’t always helpful
Practical questions to ask yourself when deciding whether to take on or pay off debt
How to balance emotional vs. mathematical decisions about managing debt
Whether you’re wrestling with credit card balances, student loans, or just trying to figure out your next money move, this episode is for you.
✒️ Resources mentioned:
✨ Stay tuned for next week:
Cassidy shares her inspiring journey of paying off $18,000 of student loan debt in 10 months, along with actionable tips you can use to start your own debt-free journey.
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Transcript
Emily: Welcome to another episode of the Finance Girlies podcast. This is going to be part one of a two-part [00:01:00] episode all about debt. Next week, Cassidy is going to share her story of paying off $18,000 of student loan debt in 10 months.
So, definitely want to tune into that next week. But today we'll just talk about our general philosophies around debt and how to know when you should focus on getting out of debt.
Cassidy: Okay, before we begin, though, Emily, I want to play you at this 2-minute clip from Dave Ramsey, and it goes over his take on debt, and for context, a fan submitted this question to him on Instagram about if all debt is actually bad debt. Um, and this is his response. And just for context to the video, I grew up on Dave Ramsey's advice. But we will, we will get into that in a little bit. Okay, here's the video clip.
Emily: I'm so excited.
Audio clip: Nathan is on Instagram. Why do you think all debt is bad? Isn't some debt okay? Like a house or student loans? Nathan, when you ask a question that is [00:02:00] actually a statement that's called a passive aggressive, aggressive question. So you weren't really asking a question. You were just saying, you think all debt is not bad and I'm wrong. That's the truth of your statement. Now, so you and I will now argue.
Cassidy: Is that not like the rudest thing you could say in response to a fan submitting a question to you?
Emily: That's hilarious. Great start.
Cassidy: Like, if someone asked you that question, would you think they are being super passive aggressive?
Emily: Never.
Cassidy: Yeah. Okay, we'll continue.
Audio clip: Here's the thing. It's not necessarily what Dave Ramsey thinks. I happen to be the aggregator of the information, meaning I've gathered the information over thirty years of walking with people. With millionaires and billionaires and broke people. So I have a lot of data. A whole lot more than your broke brother-in-law with his opinion or the idiot you were playing golf with yesterday and his opinion. Our data says that the shortest [00:03:00] direction, the shortest distance between you and wealth is having no debt. Our data comes from researching millionaires in detail, formal research projects, having had 5 million families go through Financial Peace University, having answered 15 hours of questions on this show for coming up on 30 years now, having read the Bible and what it says about money, and there's no time in there that it says student loans are a good idea or a mortgage is a good idea. So get out of debt.
Emily: Woo!
Cassidy: Do you have any initial thoughts?
Emily: So many, um..
I mean, the Bible at the end really threw me off, to be honest.
Cassidy: Mm hmm. The Bible does not say that student loan debt is a thing, or mortgage debt.
Emily: Um, before that left turn, when he was saying, like, the data [00:04:00] proves, I'm gonna get this wrong, the data proves that having no debt is the clearest path to being a millionaire, or something like that.
Cassidy: To build wealth. Yeah, yeah. That part stood out to me, too.
Emily: Yeah, um, one, like, is that really true? And two, if it is, is that because you grew up in a family or just the luck of your circumstances in the world led you to not need to take out debt to get where you want to go? I guess what he's saying just, it's not helpful in any way.
Cassidy: Yeah. Yeah, yeah. It was like, at face value, that statement does make sense. It's like, if you have absolutely no debt, of course that's the clearest way to build wealth because 0 percent of your money every month is going toward debt payments. So, of course, you can then throw all of that money toward your debt but like, that's not the case for the average person or average household as we'll soon dive in. It's very, very, very unrealistic to [00:05:00] throw those expectations on people.
Emily: Right, and like, one little example, like, you need a job to make money, to build wealth, what if you can't get to your job, and you need to buy a car, but the only way to do that is to borrow money, the only way to get a good job is to take out money with student loans to go to college, you know, there's just so many, yeah, we'll get into it, but.
Cassidy: We will. But yeah, I saw that clip in researching debt and was like, I need to play this for Emily because it is so layered and so troublesome.
Emily: Yeah.
Cassidy: So, before we dive into our own personal philosophies around debt, we just wanted to present to you, dear listener, some average statistics about debt just so you can see, like, what the average household has. So right now, as of Q3 2024, the total household debt is [00:06:00] $104, 215. So the average household has about $104,000 in debt. That's like the total household debt minus mortgage debt. Of that, average credit card debt is around $6,000. The average mortgage debt is around $260,000. The average auto loan debt is $24,000. And then digging specifically into auto loans, the average monthly new car payment is $734. And the average used car payment is $525. Um, and then the average student loan debt, including private loans, is estimated to be about $40,681 among those people who do have student loan debt.
Emily: So if you have debt, you are not alone, I think is what this data is telling us. Um. Yeah, so that, I mean, if you're [00:07:00] stressed about having debt, like, we'll get into how to know when you should be paying it off and, like, eventually we'll get into strategies for doing so, but you can at least take some comfort immediately knowing that this is not a unique problem.
Cassidy: Yeah.
Emily: There are other people dealing with it, too.
Cassidy: Yeah, yeah, yeah. There is so much shame wrapped up in having debt, and I think just knowing the averages can really help you realize, okay. I'm not in this alone. Because I feel like sometimes if you have debt you're like, I can't talk to anyone about this, it’s a big secret. Um, but yeah, maybe hearing some of these numbers give you a little bit of comfort or solidarity as you move forward.
So, Emily, do you want to start us off with your personal philosophy around debt?
Emily: Yeah. Simply put, I guess my personal philosophy around debt is that it's not inherently bad. And I think, kind of got into this a little bit earlier, but sometimes debt is the best or [00:08:00] the only tool you have for achieving certain goals or making decisions that you have to make. So, for example, if you want a certain job, you want to take a certain career path, like you may have to go to school in order to do that.
And the cost of going to college these days generally means for most people they need to borrow money in order to do so. Similarly, buying a house, very few people can afford to buy a house outright. So, a mortgage is a tool that is meant for you to use to help you buy a house. You know, especially if you otherwise would never be able to do so.
So sometimes, again, it's like the best or the only option you have, but that doesn't mean it can't be harmful in certain situations.
So I have like a general rule of thumb around whether or not you should take out debt. And there are three [00:09:00] questions I think that you can ask yourself to kind of gauge like what that answer is for you. So the first is, do you understand the implications of taking out the debt? So like, do you understand how this loan works? Do you know what your interest rate is going to be? Do you know what your monthly payment is going to be? How long are you going to be paying off this debt? And just understanding like, how that works, what happens if you fall behind on payments? What does that obligation look like?
Number two is can you afford to take on the debt? So once you know what your interest rate will be, can you afford the monthly payment? And like, does that fit into your budget? And then number three is, whatever you're using this debt to purchase, is it something that you actually need? Because you can take out debt to buy essentially anything. And sometimes, if you're buying a house or you're going to school or you're making an emergency repair on your vehicle or [00:10:00] your house, like, sometimes, you know, these are things that you need and debt is the only way you can afford them.
But if you're taking out debt to just buy something that you want instead of saving up for it, generally, my philosophy is, it's probably not a good idea to go into debt for something that you don't really need. So, in a nutshell, that's kind of my philosophy. If the answer is no to any of the questions, as in you don't understand the implications of your debt, you can't afford the monthly payment, and it's not something you need, then you probably want to avoid debt if you can.
Cassidy: I love that rule of thumb.
Emily: What's, what about you? I know yours has changed over the years.
Cassidy: It has changed a lot. So, I grew up in South Georgia and Dave Ramsey was the sole person that you got your financial advice from, which is why I was so eager to play you that clip in the beginning. Um, so I grew up believing that all debt is bad debt. [00:11:00] It didn't matter what the interest rates were, if you had it, it should be a spot of shame and something you should look toward actively eliminating every chance that you get.
Um, but of course, in college, post-college, as I became a finance writer I started reading about other people's philosophies on personal finance, looking into like what the math says about is all debt, bad debt and things like that. Um, and my philosophy or, I should say the, the belief system that I was handed as a child began to kind of unravel and I was like, oh, actually, I don't think that all debt is bad debt. I don't think that it should be a source of shame. I do think that it's something we should talk about more openly. So my ideas just began to shift on it.
And so now that I'm older and hopefully a little bit wiser, I have realized that there is a stark distinction between good debt and bad debt, [00:12:00] and I'll go through what the definitions of those are, because there are a couple of different ones. Um, and that good debt is, is okay, and very, very normal, and, like Emily said, we'll go into how to know if it's time to pay off your debt or not, but, but by and large, having debt should not be a spot of shame for people.
And so, let's talk about the definition of good debt versus bad debt. I think the most popular definition that you'll see is that good debt is anything with an interest rate below roughly 7 or 8 percent. And the idea is that if you have debt with an interest rate that's below 7 or percent, you could keep on making your monthly debt payment as is and invest any extra money into the stock market and still earn roughly 8 to 10 percent on average per year in the stock market, which is more than the interest rate you're paying. So, like, you keep making those minimum payments, invest any extra money you have, and still be building your wealth.
On the [00:13:00] flip side, bad debt is anything above 7 or 8 percent, because the idea is that even if you had extra money to invest in the stock market every month, you would still be losing money because your debt is accruing interest faster than you're earning it. So it's better to pay off that, quote unquote, bad debt, and then resume investing your money because that, like, makes the most mathematical sense. Any thoughts on that before I move on?
Emily: Well, yeah, a little bit, this, I think makes logical sense. And so a lot of financial experts use this as a guideline when they're like teaching people about debt. And, like, I kind of agree with it, like, I'm personally okay with lower interest debt and I'm also, because it is such a mathematically kind of cut and dry way of looking at it, I'm just, like, more baffled by Dave Ramsey's little rant from earlier, like, if you're looking for a mathematical decision, or you're trying to make a mathematical decision [00:14:00] on whether or not you should get rid of all your debt or not, like, this is it. This is how you do it. The answer is not always, get rid of your debt. I think if you're looking at it from like a, a logical mathematical perspective.
Cassidy: Yeah, I agree. Like, we aggressively paid off our car loan back in, I think, 2019 maybe and were not investing yet until our car loan paid off because we were still under the philosophy of all debt is bad debt, like we need to get all of this gone so we can start building real wealth. And our car payment had an interest rate of 2. 99%. Like, it was so incredibly low and we held off on investing for at least a year, like, later than we probably should have because we were like, this debt has to be gone. And even though, like, you know, it's fine, everything works out, like, I'm not too upset about it, but I think we would have even more wealth now if we just continued making [00:15:00] that minimum payment. And then started investing sooner.
Emily: Right.
Cassidy: So yeah, and I will add the disclaimer. So on this definition of good debt versus bad debt, I don't like that phrasing in general, because there are so many people that have, quote unquote, bad debt for very good reasons. Like maybe they faced a health emergency, they were laid off, they needed to charge something to their credit card to keep the lights on. And so, that's why I kind of like this second, probably lesser known, definition of good debt versus bad debt a little bit better. Um, and it's not as mathematical.
But the definition says that good debt can be any debt that you take on to grow in your personal life or your finances. And bad debt can be anything that's for an unnecessary expense. And I like that so much better. Yeah, especially now, the federal minimum wage has not been raised since July 24th, [00:16:00] 2009. Meanwhile, education expenses are astronomically higher, housing is astronomically higher, day-to-day living expenses is astronomically higher. And so I think it's very, very, very unrealistic and out of touch to be like, all that is bad debt and you never need to accrue a single penny to your name or else you’re not going to be able to build wealth. Like that is just, such a siloed argument that I think holds no weight.
Emily: Yeah, yeah, it's true that, like, maybe 30 or 40 years ago, like, we would have thought differently about debt based on the cost of living and what wages were, like, compared to that at that time, but, like, I don't know, I don't know when that video was from that you showed. The Dave Ramsey clip, but like,
Cassidy: I think it was from 2018.
Emily: Okay, he's probably saying the same thing today still.
Cassidy: His philosophy has not changed.
Emily: Yeah, yeah, it, it, it doesn't make sense [00:17:00] today.
Cassidy: I remember I had a professor in college who was near retirement, like, if I had to guess he was probably 60. And he, I remember, told the story one day in class about how, like, he didn't want to go into debt for college. So he had, like, worked all summer, the summer after high school, to be able to, like, pay for his first year of college.
And then the next summer, he worked all summer to pay for his next year, and I just remember thinking, how did you earn that much money in one summer? And it wasn't until I began to realize, like, just how much education has increased drastically over the decades that I was like, oh, college was relatively dirt cheap for you. It probably did just take a summer to collect everything that you needed to pay for it in full, so.
Emily: Like, cool for you dude, but it's, it's not gonna fly in these times.
Did you want to touch on this reel you were telling me about?
Cassidy: Oh, yeah. Yeah. Um, my last [00:18:00] kind of philosophy on debt, not necessarily my philosophy, but just a philosophy that makes me giggle, um, Your Rich BFF, that's her Instagram handle, did this whole reel on, like, what's considered trashy if you're poor, but classy if you're rich? And her answer was borrowing money. And her argument was that when poor people borrow money, it's called debt, but when rich people do it, it's called leveraging. And I think that's so funny because it's true. Like we see rich people all the time taking on debt to build their wealth. They're using it maybe to start a business or buy rental properties or like, save money on taxes somehow. Like they have all of these, like picture the meme with the woman with like all the math behind her head like they're doing all of this stuff. Like they're taking on debt to save, to ultimately save them money and help them build wealth. Um. It's just ironic that if you're, quote unquote, poor and have debt it's bad, but, yeah, it's just kind of like all in how you view it.
Emily: Yeah, like, if you're [00:19:00] poor, you can't possibly have the foresight to, like, use debt as a strategy to help yourself. Instead, you need to feel ashamed of it. But if you're rich, you couldn't possibly make a stupid mistake, like, taking out unnecessary debt.
Cassidy: It's cool if the rich people do it, but if the poor people do it… shame.
Emily: Yeah.
You wanna chat about how to know when you need to get out of, out of debt?
Cassidy: Mmhmm.
Emily: Okay. so you kind of got into this when you were explaining like, the numerical definition of good versus bad debt. Like that's kind of how I think about prioritizing paying off your debt. So I guess I should say first things first, you should, like, to your best ability, always make minimum payments on all of your debt, and that is because if you don't, you're going to accrue more interest, and the debt is going to cost you more over the long run, and [00:20:00] missing loan payments, credit card payments, all of that is going to hurt your credit score over time, too, and make it even more expensive and more difficult to borrow in the future. Whether you're buying a house or trying to buy a car or anything, it's going to be harder to do. So always make your minimum payments.
But when we're talking about, like, aggressively paying down your debt, that means in many cases, especially with, you know, credit cards, making more than your minimum payments or else you're not, at some point, you're not going to be making progress if you're only making your minimum payments, because your balance is going to keep accruing interest and it's just kind of going to snowball. So that's kind of a little bit of background. But back to what Cassidy was saying, about the good and bad debt.
Essentially, if your debt has an interest rate, that's higher than what you could be earning investing that money, You want to aggressively pay that off as quickly as you can while making sure [00:21:00] you're making minimum payments and everything else, and all of your bills and things are taken care of.
On the other hand, if you have low-interest debt, so below that, like 7 to 8% mark, you can probably make more than that in the stock market. And so there's less urgency, I think, to pay off that debt. And people have different comfort levels with debt. So like, for some people even having like maybe a 5%, car loan might just feel uncomfortable. And if that's going to like keep you up at night, even though you could be making more by investing the difference, maybe it's not worth it to you. Maybe you just want to like, get rid of that loan and not have to think about it anymore. So I think it's like a matter of balancing those numbers and your own comfort level with debt, to figure out, like what the best strategy for you is.
But I do think I think it's smart to, like, spend some time with [00:22:00] those numbers and, like, figure out how much money you could potentially be earning by investing the difference. I think doing that exercise maybe can help you, change that comfort level a little bit rather than just, saying, I need to get rid of this debt and then I'll focus on investing.
I think there's a middle ground that is worth spending some time thinking about. If you've never thought of debt, in this way before it can be kind of foreign, but, yeah.
Cassidy: Yeah. I love it. I agree with every word that you said. My, like, how to know when to get out of debt is very similar. I would say first and foremost, look at your numbers. You know your finances to an extent, right? Like, you may already know, I know I've got some credit card debt. I know I've got some student loan debt. I know I've got a car payment, but if you've never actually sat down and like listed out all of those debts, like here is my Discover credit card. It currently has this APR. This is my balance. This is my student loan. This is its APR. [00:23:00] This is my balance. This is my monthly payment. Like if you haven't sat down to do all of that, just to get all of your debt right in front of you, that would honestly be my first thing, because I feel like looking at those numbers is going to tell you a lot, and then like Emily said, especially if you have high-interest debt, which is anything over 7%, make paying that off your priority. Even if you're like, but this is my credit card. I can keep on making the $25 or $100 minimum payment. It's fine. Like, that definitely fits in my budget. I don't think I need to pay it off. Um, high-interest debt, some of it, a lot of it, in my opinion, is very predatory. So, for example, credit cards and personal loans have APRs up to 35.9 percent. And then if you have any type of payday loan or something those APRs usually break down to 300 percent or more. It is very, very astronomical.
And so just to give you an example, this [00:24:00] is something I did in a presentation a while ago. So I'm going to read through the math as an example. But assume you have a credit card balance of $5,000 with a 20 percent interest rate, and a minimum payment of about $133 a month. If you only paid the minimum payment, it would take you 277 months to pay it off, which no one thinks in months like that. It's roughly 23 years. Um, and you would pay an additional $7,723 in interest. So you would pay back all the $5,000 plus 7,700 more dollars than if you just paid the minimum payment. But even if you were like, I'm going to put 50 extra dollars toward this debt per month, you would pay off your balance in three years and you would save yourself $6,000 in interest, just by doing 50 extra dollars a month. And that is what Emily means when she's saying [00:25:00] like, don't just pay the minimum, because it is designed to keep you trapped into paying that debt off for literal decades. And to pay double what you originally charged on there. But if you can just pay a little bit more, whatever it is, financially, it will save you so much time and money in the long run.
Emily: I think we should get into this in a future episode, but like revolving credit like credit cards and installment loans, like personal loans, are a bit different in that way. And I don't want to get us too off track, but maybe that's something we talk about in a future episode.
Cassidy: Yeah, if you would love to learn more about revolving debt and credit cards and personal loans, please let us know. Uh, between Emily and I, we have written so many personal loan articles at this point in our lives. Sometimes we feel like we're going cross-eyed 'cause we're like another personal loan topic. She's here, let's write about her.
Um, but yeah. So my last thing is, beyond the math. Like, [00:26:00] I, one, one reason why I think Dave Ramsey is so rigid in his advice and that I do get to an extent is just his idea that money is so emotional and so personal. And his philosophy takes it a step further by being like the math doesn't even matter.
Like money is such an emotional thing that like, you need to get rid of debt. You need to like, avoid all of these things. You don't need to use credit cards because money is emotional and your emotions can cause you to make mistakes even if you have the best of intentions. So don't do it whatsoever. Like that is his philosophy, that is my take on it. Don't, don't quote him on that.
But one thing that I do agree with is that money is emotional. So it's like, look at the math first and foremost, but then turn inward. It's like, how do you personally feel about the debt that you have? If you feel stressed about it, it could be time to pay it off. Even if on paper, all the signs point to you're fine. Your debt does have a relatively low interest rate. You technically do have plenty of money every month to cover those payments, but if you still keep thinking about how nice [00:27:00] life would be without it, what you'd be able to do with that extra money if that debt wasn't there, there is nothing stopping you from prioritizing paying it off. Emily alluded to a really good point earlier, is that this does not have to be an either/or situation. If you decide today, I'm going to prioritize paying off my debt, even though if you're one of the fortunate people where you're like, even though it's not all high-interest debt, like I even want to pay off the low interest stuff, there is nothing stopping you than mixing the two and going ahead and starting to invest simultaneously while you put a little more toward those debts, like you can start doing both now. You don't have to wait until one is completely finished to start the other.
Emily: Yeah, that's a really good point. It doesn't have to be one way or the other, as much as Dave Ramsey may want you to think.
Cassidy: Yeah.
Emily: Well, I think that was a good starting point for talking about debt. Again, there's so much to talk about, including different types of debt, strategies to help you pay off [00:28:00] debt, so we can definitely get into those more in future episodes. But, definitely tune in for next week's episode, because Cassidy's gonna share, again, her own debt payoff journey for paying off $18,000 worth of student loan debts, and regardless of if you have student loan debt or if you have twice as much in student loan debt, anyone can learn a thing or two, I think, from your story. So that'll be fun.
Cassidy: Yeah. No one's story is exactly the same, but I still think we can all glean a little bit of wisdom and whatnot from just hearing someone else's story, so tune in for that.
Emily: We'll pick it up at part two.
Cassidy: See you there!
