Find out the state of debt in the U.S., tips for consumers and small business owners, and how to prioritize payments.

19 minute read

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Hey everyone. You’re listening to the money girl podcast, where my mission is to help you live rich and love the journey. I’m Laura Adams, author of a brand new book, money smart solo preneur, a personal finance system for freelancers entrepreneurs and side hustlers. If you’re interested in the new book, there are some awesome free bonuses and giveaways.

You can claim if you preorder it before it officially goes on sale. September 22nd, 2020 to learn more, just text the word, preorder, all one word preorder to the number three, three, four, four, four, or you can visit Laura D adams.com. I’m excited about today’s show it’s about a topic that most of us have a love, hate relationship with that’s debt. We like it to buy homes, cars, and pay for college, but we don’t like it when we are feeling strapped by debt payments that leave us unable to reach critical goals, such as saving for retirement.

According to the federal reserve, consumer debt was near $14 trillion after the second quarter in 2019, that’s the 20th consecutive quarter of debt increase in the United States.

That staggering number is the total of Americans home auto student loans and credit card debt. If you are struggling with how to prioritize debt or making payments right now, believe me, you’re not alone while it might sound simple. The key to digging out of debt is staying focused on wise solutions, not dwelling on problems.

You can’t do much about the past. You have to look at what’s going on right now with your finances, how you can make some different decisions and move forward in different ways. And one of questions that I often hear about getting out of debt and staying out of debt has to do with setting priorities. Many people are really confused about which debts to tackle first and whether it’s smart to eliminate all their debt.

The best way to create a plan for getting out of debt is to understand the difference between good and bad debts debt that allows you to make money or to increase your net worth is good, but debt that causes you to lose money or for your net worth to go down is terrible. So we’re going to talk about that in today’s show. And let me give you a quick example. If you have an affordable home mortgage, that’s generally a good debt because it allows you to buy a home that may also appreciate in value over time. And auto loan is generally a bad debt, even though it may be necessary for most people in order to live their lives and get to work because vehicles depreciate quickly and they rarely make money for the owner. You get the idea going into debt for things like a vacation clothes, electronics, or furniture is not a wise investment in your future.

Likewise, buying a home that’s out of your price range is never wise. Even though I said that a mortgage is generally a good debt, a debt that’s good has to be affordable in the first place, if you have debt, but you’ve also got plenty of savings and a steady income to cover it. It may never turn into a problem for you, but if you use debt to finance a lifestyle that you just can’t afford, or if you’re paying sky high interest rates, that should be addressed sooner rather than later. So to get the perspective of a debt expert, I interviewed Howard Dworkin. He’s a CPA MBA, personal finance author, serial entrepreneur, and chairman of debt.com. Howard has founded and served on numerous boards of directors, including the United way, the better business Bureau, American heart association, and junior achievement. He’s received many, many honors for his community leadership and philanthropic work in South Florida.

I was honored to connect with Howard and interview him for this show. We talk about the current state of American debt and how consumers who are in trouble can find help. We’re going to cover a variety of topics, including the debt environment in the United States, how the pandemic has changed the consumer debt landscape, the difference between good and bad debts tips for struggling consumers to pay bills and protect their finances when you should or should not consider declaring bankruptcy and how to prioritize debt payments when you can’t make all of them. So without further ado, here’s my conversation with Howard. First of all, tell me a little bit about how and why you into the debt and the credit business. What’s your background there?

Well, it kind of died in by accident and I think it really goes back to, you know, growing up when I, you know, came from a very entrepreneurial family and I had little businesses, uh, even at eight years old, I had a small little thing going on, but then, you know, in high school I had a snow removal business in New Jersey that was actually very, very profitable enough to hire people and buy equipment. And, uh, and then I went to college and I studied accounting. And, uh, when I came out of grad school, I turned around and I was doing a lot of tax work, but then was called, they had a savings and loan crisis. I got thrown into the middle of it. So I was doing lots of workouts for my clients during the week. And on the weekends, I was shutting down savings and loans.

So I saw it from both sides, the debtor side and the, uh, banking side. So it was very interesting. So I kind of developed a, a strong understanding of debt restructuring during that period of time. And then kinda just fell into this business of, of, uh, helping people get out of debt. And it’s really probably the most rewarding career I could ever think of. And frankly, it lets me do two things, which is help people and basically tell people what they should do.

So I am a very opinionated person and I have strong opinions and frankly, this business allows me to do it. And usually I’m correct in what I preach. But at the end of the day, I started this business, uh, the credit business where every great businesses started at somebody’s kitchen table, which was my kitchen table at the time.

And, uh, started out and gave up a job that I was making a very nice salary and understood, you know, I wasn’t going to get where I want it to go and the timeframe and quit my job in 1992 and started this business right. The first year I doubled my, what I was making. And then again, doubled it and doubled it and doubled it. And you know, it was a great business and it allowed me a lot of opportunity. But at the end of the day, foregoing, the, the financial rewards, it’s really the most rewarding business you could think of because you are changing people’s lives.

Yeah. I like your entrepreneurial roots. Tell me a little bit about what you think is going on right now with American debt levels, going up, going down what’s happening right now.

It’s interesting right now, debt unsecured debt is going down, which is very surprising. But when you look at it, it was going up, up, up until the, this pandemic hit. And now people who aren’t paying their credit cards, they’re not paying their, their mortgages. They’re not paying the rent. They’re not paying their student loans. They’re taking that extra mile and they’re getting stimulus money from the government. They’re actually taking that money and paying down their credit cards.

That’s most people. So the overall debt in America has dropped by $76 billion in unsecure credit cards, which is the largest drop in the history. Uh, in recent history that I know of, I will tell you, that’s probably going to change as the government tightens up the stimulus money and the programs, because in January, all those programs are going to expire and people are going to have to go back to paying their student loans, going to have to pay their mortgages, pay their rent no more deferrals on, on credit cards. So I do believe that consumers will get choked at some point, and we will be here to help people obviously. But I do believe the usage of credit in America, uh, America is addicted to debt and that addiction is not getting going away anytime soon.

So what mistakes or maybe misunderstandings do you see people having about debt? Maybe, you know, not just right now, but, but over and over, what are some of the biggest mistakes that people are making when it comes to debt?

The biggest overall mistake that I’ve seen for the last 20 years is their financing lifestyles I can’t afford, and it’s not even picking up only credit card debt. They’re also leasing cars that they can’t afford. And so basically they’re making smaller payments to get a better car or a bigger brand or whatever the case may be.

But at the end of that lease, they own nothing versus buying the car. And at the end of three years, they still have that car and they could drive it for another three or four years and then trade it in. So that is a very big problem that the availability of unsecured debt has allowed consumers to basically find the lifestyles that they can’t afford. And, and, you know, as our parents taught us, you know, you need to save and put away money and don’t carry too much debt that went out the window with this generation after the baby boomers and even the baby boomers at the tail end of the baby, boom, you’re seeing seniors pick up debt because at the end of the day, it’s just more expensive to live right now. And you’re, there’s a place for all your dollars. And certainly your excess dollars.

One distinction that I know you make is the difference between good and bad debt for someone who has never heard that distinction, how do you describe good and bad debt?

All debt is bad in my opinion, but bad debt is credit cards. Things that you don’t necessarily need, but you want going out to dinner and, and charging a hundred dollars on your credit card, where you’re already carrying a balance and increasing the balance by a hundred bucks, 12 hours later, you get no benefits from that dinner.

However, good debt could be construed as a home mortgage, meaning you’re in debt, but you’re the asset. At least you have something to show for it or car, you know, it’s that? Yes, and it depreciates the car, but it gets you it’s worth something. At the end of the day. Also, that car gets you from point a to point B. So you can go earn money a house. Hopefully if you keep it for 20 years, it appreciates you make a lot of money.

So that’s acceptable. Debt student loans is good. Debt, student loans. You’ve got an education, assuming you got an education and you just didn’t buy the degree, which happens.

Unfortunately these days with some of these private universities, but at the end of the day, a student, student debt is probably good debt because you would take that degree. And it allows you to get a job that you can make extra money at. Then you would, if you didn’t have that degree,

I agree so good debts can help you earn more or increase your net worth bad debts, usually cause you to lose value and lose net worth. And it is so true that if you’re abusing bad debt, it’s going to catch up with you. You know, and as you said, all debt can be dangerous in one form or another.

But if you are using a credit card correctly, you’re paying it off. You’re not letting any high balances, the interest accrue over time and you’re, you’re paying off your balances. You’re not letting too much accrue there. You know, certainly you can use a credit card why wisely, but yes, uh, the good debt, bad debt can be confusing for a lot of people. And it can cause people to do things like pay off the mortgage before they pay off the credit card. You know, not prioritizing debt.

Default on the mortgage before you default on the credit cards, which we saw quite a bit in the last downturn, we saw people actually falling behind and becoming delinquent on their mortgages and cars before they gave up on their paying their credit cards, which was frightening to me. But I could understand that they were living off their credit cards.

They didn’t need the house. The other thing is you can use credit cards, as you said, but if you pay the bill off, when the bill comes in at the end of the month, pay it off a hundred percent. It’s a fine method for, for transacting or better yet use a debit card, which only allows you to charge as much as is in your account. So those are two great things to do and focus on.

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When it comes to insurance, it’s nice to get it right. Today’s episode is brought to you by a unique podcast. That’s been making a splash lately. It’s called something on my mind, hosts, David and Cindy. Mellowness use their financial backgrounds to give a refreshing perspective on personal finance and all things money.

They talk about current events with a side of humor, so you can improve your financial health while having a little fun, whether they’re talking about how to manage your budget or how to plan for retirement, or just taking a detour to chat about anything, you’ll feel like you’re right there, listening to two smart friends, having a conversation, and you’ll hear about surprising and funny financial topics like the town in Washington.

That’s begun printing wooden money, except it as a local currency within the town. Take a few moments and go to something on my mind.net or your favorite podcast app to subscribe this podcast will enhance your life and empower you to have fun while managing your money. Again, that’s something on my mind.net, Howard, how do you feel about using debt in a business? What advice you give? Let’s say someone who is a solo preneur, a small business owner, and is thinking about expanding and using debt. What advice can you give them.

Bins? I mean, to be Frank with you, I see it time and time. Again, a lot of people hauled that.com over and over and say, yeah, I tried to start a business and I took it. I use my credit cards and, and it didn’t work out. And my point was, you know, my response would be, well, let me ask you what was your margin? And if I didn’t get the blank stare from that question, they would say maybe I was making 10, 15%.

And they, and then I would say, well, what was your credit card charging you for that outstanding debt? And they would say, well, probably about 25%. I said, so every time you use your credit card, you were actually losing money because you were only making 15%, but you were paying 25% interest credit card uses and basically funding businesses.

Really. You didn’t see it back in the eighties as much in the nineties, in the mid nineties, there was a actor called Robert Townson and he financed a movie using his credit cards and it got a lot of press and the movie was actually quite popular. And a lot of entrepreneurs started using their credit cards thinking, Oh, I’ll do this and I’ll pay it off.

Well, the fact of the matter is a lot of businesses don’t make it to year two or even through year one, some cases. Um, and then people are stuck with debt. And again, if you have the ability to pay off your debt, your credit cards, when the bills come in, pay it off. If you don’t have the ability, then you shouldn’t be using those credit cards, whether it’s for business or personal use.

If a listener is really struggling right now, let’s say they’re having some financial hardship due to the pandemic and they’re behind on debt. What tips or advice can you offer? What should they be thinking about in terms of prioritizing debt or maybe dealing with collectors, if it’s gotten that far, how, how should they be thinking about managing debt in the scope of their, all the other challenges going on right now?

They need to do some research. I mean, certainly if somebody went to desk.com, they would find a tremendous amount of information on how to get out of debt. And that’s important to know an educated consumer is a better consumer. And it basically, there are too many landmines that you could step on when you’re making decisions about debt.

And it’s really challenging, uh, to me to see that, uh, you got to go to an authority that actually is trustworthy, that can get you out of debt. That can point you in the right direction, not one product or not. One method of reading yourself of debt is the best. You know, there’s several ways to get out of debt.

When somebody comes to me, I always say, there’s five methods to get out of debt. One is you could pay your minimum payments, uh, and it will get you out of debt in probably 30 years, which probably is not an option for a lot of people too, is you could stick your head in the sand, like an ostrich and hope that things get better hopes, really not a great strategy.

Either three, you can file a bankruptcy, which people bring up all too often without knowing the implications of that without having the knowledge of what that entails. And it’s probably not, should be the last case scenario rather than the first thing out of people’s mouth.

They can go into a credit counseling program, basically the underpinning of my entire debt relief business, which basically gives people a great idea of what their options are and tries to point them in the right direction. And then there’s a settlement program, which we all see on TV and you’re on the radio and see you on the internet, which may or may not be a good thing. But at the end of the day, you know, you have a bunch of options and they need to educate themselves on those options.

Since mortgage rates are so low and attractive right now, a lot of people are considering buying homes. There are a lot of first timers who are thinking about it.

A lot of people are maybe thinking about upsizing downsizing, a lot of changes going on. What advice can you give people when it comes to knowing if they’re prepared for a mortgage, if they’re ready for a mortgage and maybe some ways to think about how that very large debt taking that on, you know, kind of the role that that should play in your, your overall financial goal and plan.

People need again, to do their homework, need to sit down. And in fact, they could go to desk.com and we have a housing budgeting tool that’s available. And basically those people can go through, fill out the, uh, schedules and understand, you know, right now they may be renting and that’s it. They have a rent due the end of the month or at the beginning of the month.

And they have an electric bill and maybe they have a water bill and that’s it. But now you go and you buy a house. Not only do you have to pay that mortgage payment, which may be the same as your rent, or may be a little more, which has tax benefits, but you also have the electric bill. You have the water, you have the lawn maintenance, you have the pool maintenance, you have insurance, you have lots of extra expenses that you didn’t have before.

So they need to budget out and see really where they are from a cashflow perspective. I will tell you that a lot of people get into houses and they shouldn’t be in because they spent too much on a house. And unfortunately with families, financial pressures, cause a lot of challenges for families and actually is the number one reason for a disillusion of a marriage, the cause of divorce. Number one is financial pressure. So don’t put yourself in the position to add pressure that you don’t need, that you don’t want. And frankly, that you may not be able to handle.

Yeah. Great advice. So, Howard, tell me a little bit about debt.com. I know you provide a lot of great education and resources. You know, what else do you do if somebody contacts you what’s kind of the bread and butter of your business?

Well, I think it’s interesting to tell you how I got the progression of my career in debt relief. I actually, when I came out of being an accountant, I sat down at my kitchen table and started a company called consolidated credit counseling, which now is the largest credit counseling agency in the world, which is, I’m very proud of that. And it’s a great company and it gives people great advice. The problem with credit counseling is it only offered one product. So I decided to move on from there and start dead.com. Uh, and what would happen in credit counseling? You could only handle about 10% of the people that would contact you because signing somebody up for a program that they don’t need, that where that won’t help them is not something I want to be involved in. So we would be very strict, only nine or 10% of the people that contacted us.

We actually did business with@debt.com. We’re able to help probably 40 or more 40% of the people that contact us. So whether they need credit counseling, whether they need bankruptcy advice, whether they need help with their taxes, they need credit restoration, a whole menu of things that we do, and we’re able to help people. So it’s much more satisfactory for me to help as many people as I can. And desk.com is certainly the platform to do that.

But I will tell you, as opposed to maybe some other businesses, we are very strict on doing the right things for our, the people that reach out to us. Uh, every time we don’t want to impede our reputation by doing stupid things. And we won’t push somebody into a product that they don’t need. In fact, a lot of the times it we’ll say go down this path. And by the way, we don’t help you. We don’t have the services available, but this is what you need to do. So pushing people and giving people direction and honest advice is something that I absolutely demand from our staff and frankly from our management team.

Howard, thank you so much. This has been really interesting. Um, your, your ideas and your, your background, uh, in debt is, is really fascinating how you came into this business. I really appreciate you talking about it and being on the show, where can folks learn more about you?

Well, they can Google my name and, uh, certainly, you know, there’s a lot of things about me, Howard [inaudible] dot com. If you feel that you’re overwhelmed, go talk to somebody, whether it’s at debt.com or somewhere else, but make sure that they’re credible and they’re giving you good, solid advice that you can go on and then make a decision with.

A big, thanks to Howard for taking the time to do the interview today. And I hope you enjoyed it. If you have a question about debt, credit, retirement, building a business or any financial dilemma or topic that’s on your mind, I’d love to hear it. You can connect with me by email, by visiting Laura D adams.com.

You can record a brief voice message by calling our voice line. It’s (302) 364-0308. We might even be able to use your audio in a future show. And if you don’t want your audio on a show, all you have to do is say so that’s all for now. I’ll talk to you next week until then here’s to living a richer life. Money girl is produced by the audio wizard, Steve Ricky Berg with editorial support from Karen Hertzberg. If you’ve been enjoying the podcast, take a moment to rate and review it on Apple podcasts.

That’s an easy, free way to give back, show your support and help new listeners find us. You might also like the backlist episodes and show notes that are always available@quickanddirtytips.com.

Most Americans have a love-hate relationship with debt. We like using it to buy homes, buy cars, and pay for college. But we don’t like feeling strapped by debt payments that leave us unable to reach critical goals, such as saving for retirement.

According to the Federal Reserve, consumer debt was near $14 trillion after the second quarter in 2019, the twentieth consecutive quarter of debt increase in the U.S. That staggering number is the total of Americans’ home, auto, student loan, and credit card debts.

If you’re struggling with how to prioritize debt or make payments right now, you’re not alone. The key to digging out of debt is staying focused on wise solutions, not dwelling on problems.

One of the questions I often hear about getting out and staying out of debt has to do with setting priorities. Many people are confused about which debts to tackle first and whether it’s smart to eliminate all debt.

The best way to create a plan for getting out of debt is to understand the difference between good and bad debts. Debt that allows you to make money or increase your net worth is good. But debt that causes you to lose money or net worth is terrible.

For example, an affordable home mortgage is generally a good debt because it allows you to buy a home that may appreciate. An auto loan is generally a bad debt (even though it may be necessary for most people) because vehicles depreciate quickly and rarely make money for the owner.

You get the idea. Going into debt for vacations, clothes, electronics, or furniture is not a wise investment in your future. Likewise, buying a home that’s out of your price range is never wise. A good debt must be affordable in the first place.

If you have debt, but also have plenty of savings and a steady income to cover it, it may never turn into a problem. But if you use debt to finance a lifestyle you can’t afford, or if you’re paying sky-high interest rates, it should be addressed sooner rather than later.

To get the perspective of a debt expert, I interviewed Howard Dvorkin. He’s a CPA, MBA, personal finance author, serial entrepreneur, and Chairman of Debt.com.

Howard has founded and served on numerous boards of directors, including the United Way, Better Business Bureau, American Heart Association, and Junior Achievement. He’s received many honors for his community leadership and philanthropic work in South Florida.

On the Money Girl podcast, Howard and I talk about the current state of American debt and how consumers who are in trouble can find help. We cover a variety of topics, including:

  • The current debt environment in the U.S.
  • How the COVID-19 crisis has changed the consumer debt landscape
  • The difference between good and bad debts
  • Tips for struggling consumers to pay bills and protect their finances
  • When you should or shouldn’t consider declaring bankruptcy
  • How to prioritize debt payments when you can’t make all of them
  • Advice for using debt wisely when starting a small or side business

Tips for using debt wisely when starting a business

When you started your business, you probably obeyed the mandate, “It takes money to make money.” You either saved, raised, or borrowed enough to get your new company off the ground, and hopefully stayed aloft long enough for revenue to start rolling in.

But there’s a problem with the common expression that it takes money to make money—it doesn’t tell you what you should spend your money on and what you shouldn’t. Here are three questions every business owner should ask before financing a purchase.

1. Would the debt affect customer acquisition?

If you run a delivery service that pulls up in front of your customers, you may need to finance a new car or truck. In their driveway or on the highway, your vehicle is a moving billboard for your company. Customers aren’t likely to trust a rust-bucket with your logo on the side.

However, if your truck is roving from one warehouse to another, a reliable rust-bucket is just fine. The last thing you need when launching a new business is a monthly vehicle loan payment.

2. Would the debt improve your company or your ego?

Many new business owners finance brand-new office furniture and justify it as a customer-facing expense. If you invite customers to your office, are you trying to improve your business image or stroke your ego?

You could argue that new office furniture sends a negative message about a new business. As in, “Why should I hire this new and unproven company when it seems to waste money on new desks instead of investing in new equipment?”

The most tried-and-true sales pitch for a new company is three words: We are hungrier. Hungry means lean and focused. Buying quality used furnishings and vehicles, and keeping them nice and clean, sends that message to your customers.

3. Would the debt hurt your personal finances?

Many new business owners cobble together startup money from myriad sources. They save some, borrow some from friends and family, and take on more personal debt.

Using personal debt is the simplest but deadliest way to start or grow a business. It’s easy to borrow against your 401(k) or take out a home equity line of credit because you don’t need anyone’s permission. You don’t have to make a pitch or write a business plan.

While the loans against your 401(k) come with low-interest rates and are tax-exempt, the problem is that you’re borrowing from yourself and missing out on the growth you’d earn from keeping the money in the account.

As for a home equity line of credit (HELOC), they’re tempting because you can spend home equity on whatever you desire. But HELOCs are dangerous because you can lose your home if values plummet.

The bottom line is that you should plan your business debt carefully and consult experts. And If you have debt that’s grown out of control or that weighs you down psychologically, now’s the time to take swift action to repair the trouble.

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About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release. Laura’s been the writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

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