Personal Finance Learning Guide
<<< Section 4: How to Decrease Expenses
<aside> 🗒️ In this section: Before we get into saving and investing, let's understand what debts are, how they work, and the forms they take in real life. Debt isn't necessarily bad - in fact, it played a huge role in the history of money.
To learn about strategies to reduce debts, check out Section 8.
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<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/114cec6e-ab53-418a-8de1-5643268d38c9/yawn.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/114cec6e-ab53-418a-8de1-5643268d38c9/yawn.png" width="40px" /> TLDR: A debt is defined as money you owe somebody else (a loan).
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In exchange for a lender (typically a bank) to let you borrow money, they charge the borrower a fee known as interest.
<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/2b8a6f53-3d66-4ec7-a156-ca20d1e7ac6f/yawn.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/2b8a6f53-3d66-4ec7-a156-ca20d1e7ac6f/yawn.png" width="40px" /> TLDR: Interest rates ensure you end up paying more money back than the initial amount you borrowed. The higher the interest rate, the more you (the borrower) pay back.
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What's an interest rate? Watch to find out!
What's an interest rate? Watch to find out!
<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/062a56c2-ffdc-40c8-9daa-5d74a7913235/Favicon-simplify.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/062a56c2-ffdc-40c8-9daa-5d74a7913235/Favicon-simplify.png" width="40px" /> Not all debts are bad, some are good: a house, business or student loan allows you to buy a home, start a business, or attend college even if you don't have the money to afford it right away.
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To learn more about liabilities and how debt works, check out HowStuffWorks.
Credit card debt happens when the amount of money you charge to your card is more than you can afford to pay. It is known as the worst kind of debt because:
Student loans are common for college students to get given the high cost of college. More than 42 million students have student loan debt of over $100,000 🤢. Student loans can take years to pay off (don't worry, we have some hacks for you in Section 8)
<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/98c2e543-1cc3-4117-b7e3-0ca8f3942954/Favicon-simplify.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/98c2e543-1cc3-4117-b7e3-0ca8f3942954/Favicon-simplify.png" width="40px" /> Watch the video to make sure you think about college expenses correctly!
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Coming soon: we'll have a future section on how to apply for college scholarships to help avoid student loans.
https://s3-us-west-2.amazonaws.com/secure.notion-static.com/a5b02fea-b419-496b-9f85-3e07dd0afbcf/CollegeWorthIt.mov
Car loans occur when you borrow money to buy a car. These are known as bad debt because cars are depreciating assets (they go down in value over time). With a car loan, you end up paying more for something that is worth less by the time you're done paying off the loan.
<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/e271b959-9be7-4f38-9413-f0eddf5bbaaf/Favicon-simplify.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/e271b959-9be7-4f38-9413-f0eddf5bbaaf/Favicon-simplify.png" width="40px" /> To avoid car loans, see if you can either find a used car that is cheaper, or use Uber/Lyft/public transportation instead.
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Home loans or mortgages are common as most homes cost more money than the buyer has. These loans are considered good debt because they allow you to afford something that you otherwise couldn't on something that is expected to grow in value.
To learn about strategies to reduce your debts, check out Section 8.
