What's Considered "High-Interest" Debt in 2024?

This episode focuses on understanding what constitutes high-interest debt in the current financial climate of 2024.

1. High-interest debt: Interest rates on debts like credit cards can vary significantly, with some reaching as high as 30%, which are universally considered high-interest.
2. Impact of economic changes: The current economic environment has adjusted typical definitions of high-interest debt, particularly because risk-free returns on savings are relatively high.
3. Personal financial management: Effective debt management is less about the specific interest rate and more about one's overall financial management strategy.
4. Investment over repayment: For younger individuals, investing might take precedence over paying down debt, especially if the debt carries a manageable interest rate.
5. Strategic financial planning: It’s crucial to understand the broader financial picture, including savings rate and investment opportunities, rather than focusing solely on debt interest rates.

1: Understanding High-Interest Debt

This chapter defines "high-interest" debt and discusses its common types with focus on how these are influenced by changing economic conditions. Brian Preston: "Credit card debt can often carry an interest rate as high as 30%, which is definitely high-interest."

2: Economic Impact on Debt

The hosts discuss how current economic trends affect what is considered high-interest, emphasizing the importance of keeping updated with economic shifts. Bo Hanson: "What you make on your cash is considered the risk-free return, which influences perceptions of what is considered high-interest debt."

3: Strategic Debt Repayment

Focus on strategies for managing debt smartly rather than just trying to eliminate it, with insights on when and how to prioritize different types of debt. Jake Taylor: "You need to understand where you are in your financial journey to decide how to manage your debt."

1. Assess your debt: Evaluate your debts and interest rates to prioritize which ones to pay off first.
2. Consider your financial stage: Your strategy should align with your stage in the financial order of operations.
3. Focus on savings rate: Increase your savings rate as a priority over merely focusing on debt repayment.
4. Utilize automatic investments: Automate your investments to maintain consistency and avoid emotional investing.
5. Keep informed: Stay updated with economic trends as they significantly affect debt strategies.

"I'm turning 40 soon and just discovered the FOO. What debt interest percentage is considered high interest debt?"

People

Brian Preston, Bo Hanson, Jake Taylor

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Abound Wealth Management

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Brian Preston
Okay, next question is from steps. Steps. Steps. Like literally foot in front of the other foot. Steps.

Bo Hanson
Okay. Steps. Yes, sir. Ready for the question? I'm ready.

Close to giving that a sound effect, but we didn't keep going. It says, when you're only starting to invest during the messy middle, are you supposed to pick the high yield, high risk portfolio in order to catch up, or should it always start with conservative ones? And I would say, okay, he's in the messy middle and he's trying to start. What should he do? Yeah.

Cause there's two different things going on there. There is. Where in the financial order of operations are you, but then also in addition to order of operations, how should you invest allocation wise, you know, with your investments? I think that's a twofer. Yeah, I think that, first of all, if you're in the messy middle, I'd argue you're probably not behind yet.

Jake Taylor
Now there's a chance you're not where you could be, and maybe you're not as far along as you would like, like to be, but there's a really good chance you're not behind. And so I would encourage you at this stage, I would not major in the minors. I would not focus on the things that are not the most important things for you to focus on because you said, okay, well, do I start with an aggressive portfolio and then try to make up for lost time, or do I start with a conservative portfolio to kind of build a base? I would argue your allocation should not be the thing that's taking the majority of your concern. What I really want you focusing on is your savings rate and your behavior.

How much money am I saving? How much am I building for the future? Because no matter if you have the most aggressive portfolio in the world, that this year is going to make 15%, or you have the most conservative portfolio in the world, that's only going to make 5% if those are your two options. But you've only got $1,000 saved up. You just haven't moved the needle a ton.

I want you focusing on how much you are saving and the decisions that you're making and how can I save today and save consistently, and then how can I, I get better at saving through time? If you can do that, what will happen is your portfolio will begin to build and grow and build and grow till ultimately you reach the escape velocity, you reach the tipping point. You reach that critical mass point to now where, okay, at this point, I should start focusing on my allocation, not just my accumulation, but early on accumulation is going to matter. So in the messy middle, I'm going to encourage you to focus on your savings behavior. How much am I putting to work?

And also how do I keep my lifestyle tamped down as much as possible so that it doesn't run away from me? Because there are some things that happen in the messy middle that are unavoidable. We have kids and obligations and this kind of stuff. But there's a lot that happens in this season that we do get to control, that we can put our thumbs on to not let us take us down the path that we don't want to go on. And I think even though it's hard in this season, it is especially important in the messy middle to make sure you're focusing in those areas.

Bo Hanson
While you were kind of laying all that out, I was fine tuning what steps question, because I think his question is like, and you hit a lot of it with the behavior, but savings, and when do savings become investments, and then how to do investments even better. That's why I wanted to point steps to the financial order of operations. Go to moneyguy.com resources. This will at least tell you what to do with your next dollar to figure out is that money that should go towards savings. That's really steps one and four versus paying down debt versus, you know, investing with your employer, which is the free money from your employer.

And then when you get to step five, well, really two and five, because your employer, you go take advantage of that because it's dollar for dollar or $0.50 on the dollar, 50% or 100% guaranteed rate of return. That's pretty spectacular. You don't want to miss out on that. But when you get to these investment steps. Cause you will go from saving to now investing.

You're starting to get overwhelmed and you already have a lot of stress because you're in the messy middle. You got no time. You got money's being pulled in all directions, too. So you're like, and now you guys are telling me this complexity of how to shut out invest. Deep breath.

It's going to be okay. We'll get you through this period where, yes, the days are long, but I promise the years are short. Just think about how much can you save and how much can you squeeze into those investments now that you're at that stage, and when will you need it? And if you can answer those two questions, you can then go consider and do research on indexed target retirement funds. Three biggest providers, vanguard, Fidelity, Charles Schwab.

And remember, when I say index, target retirement funds. They don't have the high expenses of typical target retirement funds. If you'll go do research on every one of those big providers, you'll look at every one of their asset allocations, figure out which one has the risk profile that you're comfortable with, and then now you have solved that problem. You can focus on getting more time with your family, more money in the bank, because the investment is going to be a set it and forget it and always be buying type opportunity. Love it.

Brian Preston
Awesome. Okay, steps. Thank you for the question. We'd love to send you a money guy tumblr. If you would like to cash in on that, just email Matt M a t ty.com.

Jake Taylor
I just saw a comment come in. Can I say this one? Someone just commented and they said, hey, the money guy show should not be at 435,000 subscribers. That should be at 435 million subscribers. Yeah.

And I agree with that assessment. But you know what? We cannot do that. If you don't subscribe right now, you don't subscribe. So if you love this content, if you love what you're doing, make sure you subscribe to the channel so that we and the rest of the world knows that you're out there.

I just thought, I thought, well, no, I appreciate it. This is probably a good point to say it. Some of the things I struggle with is that I know we're doing good work and we're sharing the information, but do you even. You were talking about somebody, something that's been sliding into your, you know, when you go on YouTube and other things and you're like, man, it is like the worst of the worst. Cause they have like the dangerous stunts that they do.

Bo Hanson
They have scantily clad people in it. You said they had wildlife in it. And then I was like, do they have weapons? Because that's the only other. If they have that, then it's an all of the above of every one of the emotional triggers or things that will draw people in and is kind of.

We're running a financial. You're saying we don't have that. We don't have it. So that's why. That's why it really does.

And I'll make it even worse. We don't have a big corporation. That's right. There was a, you know. Cause think about how many brands, in dealing with this whole book publicity, I've realized how fake the world of media.

I probably shouldn't say that out loud because it gets me in trouble, but there is so much fakeness out there with the way the structures, and it's got this big push from the big corporate entity that's kind of driving in collaborations, and then there's all this input. It is, it falls, it brings it full circle. Back to your point. We need you guys. If you feel like we really are making the world a better place, especially the wonderful world of finance, it kind of falls more on you guys.

Share it with your friends and family, because we. Our biggest goal is for the abundance cycle, and it's so noble and it's cause because I started this in 2006. Think about this show. Started in 2006, not with the understanding. This is a brilliant, brilliant way to grow.

Our financial plan for it was really written with the idea or started with the idea. Education should be available for all, because education changed my life. I come from humble beginnings, but I realized, hey, I was good with math. I saw things a little differently, and I was just so floored with how the opportunities of education, and I wanted to pay it forward. And it's you guys that made me realize, hey, no, doing this could actually grow the business.

And now we've created this, this great coordinated thing where you benefit. But all I ask is, once you get so successful that your life gets so complex from that success that you consider taking the relationship to the next level. Well, you see how this symbolic, you know, we have this relationship where it's full circle. I love it. You might even call it a cycle, like an abundance cycle.

So please tell your friends and family, let us love on them, let us help them, and we can continue to change the world. One viewer, one listener at a time. And y'all are a big part of that love. It couldn't have said it better myself. I don't know what we do with that because this is just part of a q and a show, but it's kind of fun.

I do think about this stuff all the time. I love what we get to do, and it's fun. And then, like, I was watching and we won't go tomorrow at the sidebar, there's these. There's these new channels. Maybe they're not new.

Maybe it's new to me. These channels that expose scammers and all this other stuff, and they do whole exposes. It's kind of like investigative reporting of old. You know, you used to watch 2020 at night and other things. Well, now there's a whole breed of content creators that go behind the scenes, and there's been a lot of content, like with FTX and all the.

The scams that kind of came out of that we've never gotten caught up in any of that stuff because, and I don't, we don't do a lot of advertising and other things, but it's all back to the point. It's, you guys are the big driver of that. And I'm just so thankful that we get to kind of be pure at heart on what the purpose is, even if there's, you know, look, we get trolls, so I consider myself a troll whisperer, but. But I still am very thankful for all we get to do. I'll quit being sentimental.

That's. You get to be 50. You get sentimental, so I'll quit. Jake said, strap in, everyone. Actually, it started at 40, if you guys are approaching 40, and I even.

Who was I talking to recently? I'm sorry, but I was talking to them recently, and they were in their forties, and they're like, man, I'm just so sentimental. And I was like, this is the. This is what happens. Yeah.

I mean, Bo is still. You're not at 40 yet, so you. You're still, like, warrior trying to bash and take over. You get to my age, and I just turn into the old teddy bear. That's just so sentimental.

Brian Preston
Hmm. Well, great. All I have to say. No, I'm done. I'm done.

Yeah, I was wondering. Next question. I wanted to make sure it was. All out of the way. There's a tornado coming our way, so we need to go to the next question.

Debatable if it is or not. Unclear. Unclear. They're closing down schools here early today. Actually, I just got the early dismissal notice.

Jake Taylor
This went through. It's official. No, no, don't check, don't check, don't check, don't check, don't check. I should have given my phone to somebody to at least tell me if I get a text from my daughter's school since I'm in charge of picking her up today. Wow.

Brian Preston
This was so. That was four sidebars that we just. Do you realize how my brain works? You oughta think if you had to try to go to sleep with this brain. More tangious than a geometry book.

Jake Taylor
Isn't that what they say? Yep, that is what she said. All right. I do have a question up next from Connie. Connie, if you'd like to answer it.

Brian Preston
She says, the husband and I are 36 and 37, and we want to fund both our 23 and 24, so 2023 and 2024 Roth Iras by April 15. Oh, that's a good cause. Our cash is in a high yield savings account, earning 5.5% would you recommend holding it in a Roth IRA money market account to dollar cost average over time or investing a lump sum now? Okay, this is so the question. This is the question I would ask for them, not knowing their specifics.

Jake Taylor
I really wish I knew where your household income was so that I knew if the way that you are contributing to the Roths was directly to the Roths, or if you were having to do backdoor Roths. Right. So it's pretty easy if you're trying to contribute for 2023, if you're trying to put in $6,500 for last year, you don't have a lot of time left. The dollar cost average, you got like, you know, 13 days or something like that to get your money put into the Roth IRAs for last year. So those are probably going to have to be lump sum.

So 65. 65, that's what, $13,000. You probably can do that lump sum. Now, the great news is, for the 2024, Ross, you actually have until tax filing deadline next year to get those funded. So there's nothing wrong with setting up an automatic dollar cost averaging strategy, where every month you just buy into a low cost index fund or a low cost target retirement index fund inside of your Roth and just set it and forget it.

Have it be on autopilot. That's a great solution, unless, and there's only a little caveat, it gets super annoying if you're doing backdoor Roths to do like, twelve conversions throughout the year. So what I would argue is, if you are someone who is a backdoor Roth contributor, it just makes the logistics a whole lot easier if you contribute once annually in a lump sum. So I think it depends a little bit on how you are putting money in the Roth. Well, I was.

Bo Hanson
Connie, I was going to give you. The simple part of the answer is, I always prefer automatic behavior more than manual behavior, because automatic takes away a lot of the variables that can create, you know, distraction or not being consistent. It's just. It's part of being a human, as I think we get distracted or our attention span goes a different place. So, I love dollar cost averaging because it's an automatic behavior and it creates the path towards inevitable wealth.

However, even with that, that preference complexities change the equation. And Bo just laid it out. You know, if you. If you're a person, your income is quickly approaching the Roth income limits. You don't want to fund it.

Dollar cost average, because it is so hard to unwind these things, or it adds a level of complexity. Don't do it. I'd rather you build the money up and then make the contribution all at once after you get your tax projection or you're getting your taxes prepared before April and you can fund it. That's a complexity that would come into that. Or you, maybe you're at the point where, you know, there's just something that's going on that's going to create, you know, you've got a big purchase or something that's making it where or your income doesn't come in monthly.

It might comes in quarterly because you're commissioned or on bonus sales incentives. Those type of things will change the automatic behavior. But I do prefer set it, forget it, always be buying because it just takes out all the human elements and creates the automatic millionaire. I love it. I love it.

Jake Taylor
And good for you guys. For Max, not Ross. We love Ross. Absolutely. 36 37.

They are going to be their future self will be thankful they max, not tax free. Millionaires love it. Connie, thanks for your question. If you would like a money guy Tumblr, you can just email Matt Matt and we'll work on getting that sent out to you. Jeremy's question is up next.

Brian Preston
He says, is there an income requirement to be able to do a mega backdoor Roth conversion? I know you must first max out 401K contributions, but I've seen mixed info that you must not be eligible to make normal Roth contributions. Can you help kind of iron this out for him? Yeah, yeah, we can make it good. We can make an incredible care for you.

Jake Taylor
There is not an income requirement to be able to do mega backdoor Roth. For those of you that aren't familiar, when you have a 401k, there are generally two ways that you can put money into a 401k. You can do pre tax contributions or you can do Roth contributions. Pre tax. You get a tax deduction.

Now Roth, you don't pay tax when you pull it out later. However, there is a third type of contribution that some 401s allow called an after tax contribution. And what's great about this one is you put money in, you don't get a tax deduction, but then the money grows tax deferred. And when you pull it out, you pay tax on the earnings, not tax on the money that you put into it. So it's a third way to contribute.

And the other great thing about it is where your pre tax and Roth are capped at the $23,000 salary deferral. Your after tax contributions are not capped there. They can go all the way up to the section 415 limits. Which I think this year are $69,000. There you go.

So your question is, is there an income component to be able to do this? No, but yeah, there's definitely, let me tell you, to do the mega backdoor Roth, to truly get all that money is just saying saving $69,000 a year, even if it has a portion that your employer, you got to have a big income. I mean, it's just kind of, it's just part of the equation. I was going to share just what we have seen in our experiences. Typically, the people who are actually doing the mega backdoor Roth are employed and they have big w two s.

Bo Hanson
And let me tell you the difference why you don't see it as often you can. I'm not telling you you can't do it, but it's just if you're self employed or you are the managing person of your company, you're less likely to do it because you might use the, there might be other planning opportunities or levers that you pull, like a cash balance plan, pre tax contribution, pre tax contribution. There's going to be things you're going to pull the lever on. But if you're an employee, but maybe an executive, you don't have complete control of everything. But you do know, and we see this like, we saw some auto executives that we go and speak to that.

When I saw their 401K plan, I was like, man, somebody who designed this was very well versed and understood the opportunities of a mega backdoor Roth. And a lot of those executives were taking advantage of that opportunity because you just had to make sure that the word of caution, if you are a high income person, a high w two person, and you find out that your employer does offer w, I mean, after tax contributions, and they also offer either in plan conversions or in service distributions, whatever, you know those two things, because you have to have some way to actually turn it into a roth. If you find out those things are there, you can take advantage of it. Just make sure you don't squeeze out the employer's contribution. That's the only other word of caution we always give, is because the government and your employer will let you gladly fully fund that 415 limit.

But if you get to the end of the year and the employer, because a lot of times those profit sharing contributions don't happen until the next year. Usually companies will have all the way up until October of the following year to fund, if they filed an extension to fund those profit sharing contributions. You don't want to fund your after tax and then your employer had a great year last year and they decided to really load up the profit sharing and they say, so sorry because you took advantage of this. You left $5,000 on the table. You'd be pretty ticked cause that's 5000 you could have used for your household and your family to end up at the same place.

Brian Preston
Awesome. Jeremy, thank you for your question. Hope that helps. We'd love to send you a money guy tumblr as a thank you for being here today. Just email matt m a t ty.com and we'll work on sending that out to you.

Okay, next question is from GT probably. GT probably. Does that mean they're considered going to Georgia Tech? I don't know. I was thinking the same thing.

Bo Hanson
I know that's because we're from Georgia. I'm not going to say. But he said GT probably. Probably, yeah. Think about, you know, there's always a great school down the road.

Jake Taylor
I'm about to say there's a few. Little in Athens, Georgia. Yeah. University of Georgia. Finest in all the land.

Bo Hanson
Go dogs. Okay. That's probably not. Gt might be for grand touring or he's a car person. You never know.

Yeah. But being a Georgia boy, I immediately went to Georgia. Georgia where the nerds are. Well, GT probably. I have a lot of Georgia tech friends and as an accounting major from Georgia, we're probably the closest to the nerds as a Georgia tech engineer.

Okay, I'm sorry. The rest you can carry on. That part was for free. Okay. GT probably asks, I'm turning 40 soon and I just discovered the foo, what debt is what debt interest percentage is considered high interest debt.

Brian Preston
And I know we have some thoughts on like what age you are and can you kind of iron that out for him since he's new to the financial order of operations? Yeah, we get this question a lot. What's interesting is there are some types of debt that are objectively high interest. The one that most immediately comes to mind is like credit cards. If you are carrying a credit card balance and you, you know, ten years ago we're paying 12% interest, but now you're paying what, 23, 24%.

Jake Taylor
We've seen some as high as 30% interest rates on your credit card. I don't care how old you are, where you're from, what you got going on, that is high interest debt. That is a no go land. It does not make sense. But there are other types of debt that you may have where at different stages and in different phases of life, it might be categorized as high interest or not categorized as high interest.

Some of the common ones we talk about, Brian, are like student loans. There are times when student loans may be high interest or low interest. And even we've talked a little bit about mortgages. There are times when it makes sense to prioritize, prepaying mortgages, and times when maybe it doesn't make sense to prioritize. Yeah.

Bo Hanson
But I do want to be clear. I think this is a great question that GTA offers, and now I'm more inclined to think that they probably are a Georgia tech type person, just because this is a nerdy question.

I was just trying to give a compliment to the Georgia tech to bring it back, because I called him nerds when we really thought of this. There's two components that went into it, and it is unique because interest rates right now on your cash, you can get four and 5% pretty easily. And why that's important is because what you make on your cash is considered the risk free return. You know, this is if you can just go buy something and get three, four, 5% without taking on any risk, that's. That's pretty incredible.

Well, that's why to obviously take on more risk, or to go invest the money and not be guaranteed you'll get the money back. There's what's called a risk premium, and I've always tried to pay attention to, well, that should be a spread. You know, you basically take the risk free rate of return, you add the risk premium, which historically has been, what, around 4%, depending upon which time period you look at it. So it was easy to say, and I'm going to give you these numbers, but know that it's been changed a little bit, and then also give you a caveat on this. That's why when we talked about student loans, we've always said, if you're in your twenties, it's okay if you still are funding your Roth IRA, as long as you're not paying more than a little over 6% on your student loans.

If you were in your thirties, that number dropped down to 5%. In your forties, it was 4%, because there was also the balance of risk premium. But there's also a desire to get you out of this debt as fast as possible. So that all seemed great. While interest rates were less than 1%, it was so easy to give that guidance.

But now that we're at this new interest rate, and it's a temporary thing, because there's already pressure for the Federal Reserve to start lowering rates at some point in this year, so I think we'll go back to a lower number that makes this all work much easier. But I do want to put the caveat that I think that mortgages, even though they can be six and a half, even though as high as 7% currently, I'm hesitant to immediately say, because it's over 6%, that that is high interest debt. I think that it's a moment in time that will be refinanced or other changes will happen that I don't know that I'm willing to throw out all of my rules, all of the guidance for this moment in time and have people not funding their Roth IRAs or building their emergency reserves because mortgage rates are at 7%. I'd rather you be more of a balanced approach, more averaged out over the timeframe, and know that it's still probably a step nine because you're going to have that opportunity to refinance or make changes in the future. Well, that's what I was going to say.

Jake Taylor
Even as you think about debt, because he put some additional context, he's considering debt between like 4% and six and a half percent. Didn't say what kind of debt. I would argue that how you approach that and how you think about that is a little bit dependent on where you are in your financial journey. Right. If you're 40 and you are still early on, and you're still in steps one through seven, you're still building, then that's going to cause you to arrive at a different conclusion, that maybe building dollars and getting money to work for me and continue to establish my foundation is the most important objective right now.

But if you are farther along in your journey and you have built up a substantial base, and you are in one of those advanced steps, you're in step seven, eight, nine. Well, then you get to choose. You get to actually make the decision around. Okay, do I want to utilize my dollars to satisfy debt or to knock out that four to 6.5%? So you'll have to define the type of debt that you have, the interest rate that's on that debt, and where debt, and where you are in your journey to determine the most appropriate way to attack that.

Bo Hanson
What you just described, and it's great because GT is turning 40, and that's a very big, you know, kind of a transition point, is you got to know where you are. Are you ahead of the curve, behind the curve, or right where you need to be? Go check out our know your number course. And then you got to financially try do triage to know because that's the part if you're a person who's never invested in your 40 and you, or you're making a decision, do you pay down debt or invest? You know, that's where you do run into a problem, is it's easy to say, pay down the debt if you have a lot of money behind you.

But if you have never invested and you've never done a roth, your financial triage is probably going to say, man, we still need to, we need to get some money in a Roth IRA. So that's why it's very personalized. They put the personal in personal finance and kind of take your financial triage between a net worth statement and know your number course to kind of figure out where you fall in that and what the next step is for your army of dollar bills. Love it. Go dogs.

Brian Preston
Love it. Well done. Well, gt probably if you would like a money guy Tumblr, we would love to send you one. Just email matt m a t tie.com and we'll work on getting that sent out to you. Since we asked your question today, they.

Bo Hanson
Didn'T give us any guidance if that was Georgia Tech. No, he said everyone. So gt we're sorry. You know, don't. It's just, you gotta take the good with the bad.

Jake Taylor
That mind is an amazing thing up there, though. It is. Yeah. It's like playing chutes and ladders, you know, as a kid, you know, it's just all kind of stuff going on. The money guy show is hosted by Brian Preston.

Brian Preston
Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission in accordance and compliance with the securities laws and regulations. Abound wealth management does not render or offer to render personalized investment or tax advice through the money Guy show. The information provided is for informational purposes only and does not constitute financial, tax or legal advice.