Debt Financing Explained! Real Estate Investing, Money, Finance, Debt, Leverage, Interest Explained | BrainyMoney And Son Han, CFA,CPA | Skillshare

Debt Financing Explained! Real Estate Investing, Money, Finance, Debt, Leverage, Interest Explained

BrainyMoney And Son Han, CFA,CPA, Personal Finance Made Easy!

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17 Lessons (54m)
    • 1. 01 Intro to Debt Financing

    • 2. 02 Define Debt

    • 3. 03a Incentives for Banks MP4

    • 4. 03b Incentives for Banks Explained

    • 5. 04 Credit Card Pros and Cons

    • 6. 05 Credit Card Compounding Interest

    • 7. 06 Promotional Interest Rate Comparison

    • 8. 07 Credit Card Takeaways

    • 9. 08 Auto Loans

    • 10. 09 Auto Loan Amortization

    • 11. 10 Cash Back or 0 Percent

    • 12. 11 Home Mortgage Intro

    • 13. 12 Understand Mortgage Inputs

    • 14. 13 Understand Mortgage Outputs

    • 15. 13a Total Investment in a House

    • 16. 15 Int Rate vs APR

    • 17. 16 Outro to Debt MP4

36 students are watching this class

About This Class

This class is built for you to understand different types of debt financing. 80% of Americans have debt and that's another reason why this class was created.

We will dive into the following types of debt:

  • Credit Card Debt
  • Auto Debt
  • Mortgage Debt
  • I am creating a separate class for school loan debt as this is a complicated subject

Like all of my classes this is interactive so you'll be working on the attached spreadsheet to learn how:

  • Daily compounding interest works on credit cards
  • Loan amortization schedules work for both auto and home loans
  • Be able to decide if a cash back or 0% interest financing offer is better for cars

At the end of this class you will:

  • Understand banks' incentives for you to get a loan (they make a lot of money off of you)
  • Understand how the different types of debt financing work - credit cards vs. auto loans vs. home loans
  • The Pros and Cons of each type of debt
  • Myths of Personal FinanceĀ 
    • Do you really own your home?
    • Do you have to keep a balance on a credit card to build your credit?

I hope you enjoy my class as this is my dream job! Helping average people like you and me control their finances, earn their financial freedom and live a stress free life!


1. 01 Intro to Debt Financing: So our class today is gonna cover day. Why are we covering debt? Because 80% of Americans have some sort of debt out there. And I think that's really important fact. Understand one that 80% of people have debt, but also on top of that, if you don't have any debt, you're ahead of the game. I have students between the ages of 16 and 20 years old, and I think it's a really great class for you to understand the different types of debt on the intricacies of dead as well. So let's start this class like we always do with the agenda which could see below. These first went about finding dead. What is dead. How does it apply to you? Four types of debt. We're gonna cover auto loan debt, credit card debt, student loan debt in mortgage dead. We're not gonna dive a lot of details to student loan debt because it's such a complicated subject. I need to make a separate class for that. So with credit card debt wouldn't go into compound interest compounds daily. It's crazy. I know if you're taking my compound interest, which is investing one a one, you kind of know what contacting interested in this case against you is for you to talk about auto debt. How that secure mortgage debt. How that secured the pros and cons of each type of debt. Lots of cons, very little pros. And then what we finally talk about is our loan amortization schedules. So you'll see actually, how long tails really work instead of type into a website. We're gonna actually do in Excel spreadsheet together. So just like all of my classes, not a sit back and relax black classes get engaged, do the stuff with me, do the research with me, watch me do the research and then get engaged and really understand what that is. We have finished with a PR versus interest rate. We've heard those terms. We don't really know what a PR is. First of nature's great. I'm going to find that very easy, digestible terms and then finally will conclude like we always do face to face, because it's so important that you understand debt. And so in this class, like we started it, you'll actually see one other time in this class because how, based on make money off through debt It's gonna be important line Now I want to be there with you. Explain it. You could see the passion in my voice on and hear what I have to stay and see. My face is well, so they give you a little bit of story behind me. I've had that as well. Just like you. I currently don't have any gets on 30 years old right now and have no death. My network is $400,000. I started when I was 22 years old with $60,000 of student loan debt. So it went from 60,000 to 400,000 over the last 10 years because of what I know in the knowledge that I have obtained. That's what this class is about. It's the 10 years of knowledge that I have compacted into our roughly class. So please take this, understand it research What? You don't think I'm right on? Prove it to yourself, you know, and check over my work. But please understand that this is really, really important because what living a debt free life allow you to do is be a better husband. Better wife being better family member. Because she will have this dress rocked up on top of your back, carrying all this weight. You don't have that anymore when you're debt free and that's my goal, for people become debt free so you don't have all that stress with that being said, Let's go and get start. 2. 02 Define Debt: So now that we cover the intro, you can see how passionate I am about this because I think that could do such a number on people's psychological well being. Let's cover death. What is dead? That is the amount of money borrowed by one party from another that is used by many corporations and individuals, which were really focus on individuals today as a method of making larger purchases that they could not afford. Under normal circumstances, a debt arrangement gives the borrowing party permission to borrow money under the condition that is the BB A paid back at a later date, usually with interest. Very few times you'd not have to pay interest, and we'll cover that later on today. So moving on to the next slide the types of debt. The most common forms of debt are loans including mortgages and auto loans and credit card debt. Under the terms of alone, the borrower is required to repay the balance of the loan by a certain date, typically several years in the future. The terms of the loan also stipulate the amount of interest that the borrower is required to pay annually, expressed as a percentage of the loan amount. Interest is used as a way to ensure that they lender is compensated for taking on risk of the loan, while also encouraging the borrower to repay the loan in orderto limit his total interest expense. Credit card debt operates in the same ways alone, except that the borrowed amount changes over time, according to the borrows, need up to a predetermined limit and has a rolling or open ended a repayment date. This is what we call a revolving line of credit. In the corporate world. You pay down, your credit card limit goes back up, you spend money, your credit card limit goes down on DSO. That's what ever evolving. Let it crying. A line of credit is we will cover the main three types of debt today. Karnak our debt, which is unsecured auto debt, which is secured mortgages for your home, which are secured. We won't cover student loan debt because as I get again, as I said, it's complicated time making a separate class for that, just like all of my courses. Don't take what I say as gospel. Go do your own research and decide for yourself what is right and as I, as always, I will prove my point through math and spreadsheets. To that being said, Let's move on. 3. 03a Incentives for Banks MP4: so I actually wanted to explain this slide together with you. So you see my face? Because I think this slide is so important that it's important that you see how important it is to me how passionate I am about this slide. So incentives for banks, they make a crap ton of money off of you. And how did they do that? If you can see the little cycle here, what they do is they borrow from you at 0%. Okay, so I'm like, I'm on the bank. I'm gonna say, Hey, son, give me money. Give me money deposited with my bank. I'll pay you roughly nothing percent. So you gonna you gonna deposit your $10,000 or whatever it is with me? I'm the pay you 0%. But when you borrowed from me, Okay. So let's call the person. John. When John borrows from me is the bank. I'm the bank right now. Johnson Bar for me, you could say at least 5% or 25% somewhere between that range for any debt that he has with me. Okay, So to get this cycle, correct, I'm gonna borrow from us a consumer for a 0%. I'm not gonna pay you anything. But if you borrow from me, I'm gonna charge between five and 25%. You see how profitable they are and why they could make so much money off of you. Do you see the incentive? That's what I want to go through with you here and why it's so important that you've seen my face when I talk about this because I'm not wrong on any himself. We're gonna look this stuff up together. What does he how much? One big pay you when you deposit money with them and how much they charge. You gonna take us like, five minutes to see how much they charge you for auto loans, credit card debt in home loans, and you'll see how hard it is defined, how much they actually pay you when you deposit your money with them. Not a savings account checking account when you're depositing with them and how hard that's gonna need a fine on a website. So that being said, let's go in and dive into the details 4. 03b Incentives for Banks Explained: So now that we've talked face to face, you see how passionate I am about this because banks make so much money off of people like you would meet. So let's cover why banks of all sizes and companies of all sizes want you to take on debt. I like to take the economic point of view and start with incentives, water and companies. Incentives to allow you to borrow from them will focus on a bank in this example. So walking through this slide, banks borrow from you at 0%. Banks want you deposit wants you to deposit their money with them, and they usually provide a minuscule interest rate. This 0%. If you're following my mouse right here, let me prove this to you. Let's go find Chase bangs. Current interest rates on checking accounts. This is going to be a lot harder than you think, because rates are unbelievably low. So let's escape out of this and then go on to Google and Google this here and we're gonna go to Chase bank current interest rates on checking accounts. Okay, so when we go here, but this is actually their savings account. So checking account regular. Sorry. There we go. Checking accounts, checking chase dot com. Okay, so let's see there. Get all the basic futures and more plus earn interest. Okay, so let's see the benefits in these here. Here's some benefits. Let's look for the word interest because it's hard to find. Earn interest on interest or an interest. Okay, so earn interest on your balance. Okay. Well, what are my interest rates? Let's go here. See interest rates. So we go see interest rates. Um, and here we go. Right sheet. Right here. Click again. Told you wasn't gonna be easy. Now, let's go. Here. I said I was gonna prove this to you. Like I do with everything. Looking our rates here. Everyone in this class, please look at this. You keep $50,000 with them. Your interest rates 0.1% $10 million. With them, your interest rate is 100.9%. Are you kidding me? This is the money they want. You deposit with them. This is in effect as of Friday, July 20th 2018. Okay, so let's go back to the slide. Improved my point. They borrow from the consumer and 0% cause this is the money you deposit with them. OK, so now you see that in July 2018 the interest rate on checking account rounds to 0% and I can't kind of laugh without saying that it symbolises 0%. Now let's think about this. I want to borrow from money from Chase Bank. How much does that cost? Be? Easy to find, right? So let's go look for that. So when they lend money, tow us okay, it's usually between the rates of 5% in 25%. Where did I get that from? Let's go. Look, let's go back to Google and look up. Chase auto rates. Okay, so this is an auto rate. So let's just put in when everyone here, let's do a used car 2017 and let's do like a very reliable car. A Honda Civic. I'm sorry. Does it matter of Let's put good credit? $15,000? How much is that gonna cost us? You're looking at roughly 8%. Okay, that's 8% for a car alone. Let's look up. Go back to Google Chase Home loan rates. Kurt. Rates for a home loan are 4.5% on a 30 year rate and a 3.8%. So that's like the low end of it. That's where I get my 5% from. And now let's look up, Chase credit card race rates again. We're doing this together because I want to prove it to you. So here's a Chase Freedom 0% intro for 15 months from account opening. Okay, so it's promotional after that, 16% to 25% variable a PR. Okay, so let's go back to this. Live and see if I'm right. Incentives for banks they borrow from the consumer, and 0% cause any money deposit with them, they pay you 0% for and then they lend money back to you at 5 to 25%. So these blue boxes here that make a crap ton of money doing this cycle and debt makes you poor because you're barring in such higher rates. So now you can see the incentives for banks to charge you such high interest rates because they're boring from us 0%. So this is what they call profit. Okay? They're earning 25% between five and 25% so banks pay, Use your percent. Then charge you 5%. Do you see their incentive? They charging 5% for a home loan. So now gone. Auto, Auto loans we call gone over credit card loans. So now do you see it? Banks, incentives on why they want you to borrow so bad and why they want you to say local bio, go buy a car, use our credit cards because every time you decide to do that, they're making crap tons of money off you. Let me repeat this. They pay you 0% for the money you deposit with a bank. This is the money they are borrowing from you and charge you between five and 25% for the money you borrow from them, which is the same money. Now that you know that banks incentives and why so many companies want you to borrow from them, we can start diving into the different types of debt in the details behind 5. 04 Credit Card Pros and Cons: Let's now hit the infamous credit card debt. What is a credit card? A credit card is a card issued by a financial company, which enables the cardholder to borrow funds. The funds may be used as a payment for goods and services. Issuance of credit cards has a condition that the card holder will pay back the original BART amount, plus any additional agree upon charges. The credit company provider may also grant a line of credit Toothy cardholder, which allows the holder to borrow money in the form of a cash advance. The issuer presets borrowing limits, which have a basis on the individuals. Credit rating. So how does an example work When you paid on the credit card, it opens back up that line. Let's go through an example. Your credit limit is $1000. One month you spend $200. Now your credit limit is what, $800 When you pay your credit card bill for $200 your credit limit goes back up to 1000. Makes sense in the corporate world. We call this a revolving line of credit, but before we get started, remember that you should be paying off your credit card every 2 to 3 days because you do not want to have any chance of paying any interest on a credit card because that interest rate is so freaking high. So credit card debt, pros and cons These are the pros and cons of credit cards, and let's hit that quickly. I want to go into a lot of details with the pros as it made design a class that covers it. So I'm not gonna go into a lot of the details because I'm the creative class called Credit Card Rewards. The pros helps build credit rather quickly. That's true rewards. See my travel hacking class fraud protection. See my identity theft class. So those are the pros. So what are the cons? It's very costly, if not used correctly. Banks want you to keep it balance because they make a ton of money off of you via com Pounding interest rates. See my in short of stocks class investing one a. One for how compound interest helps you but will cover today how it hurts you now using an Excel spreadsheet, and it can destroy your credit rather quickly if you're irresponsible. So let's dive into how banks can make a significant amount of money off for you. When you misuse credit cards, you're gonna ask me Sohn, what is misuse? My definition of misusing credit cards means carrying a balance. You should never carry a balance. Watch my personal finance class here. If you wonder one to understand that more. 6. 05 Credit Card Compounding Interest: so hopefully you downloaded this spreadsheet. Now you can do this. Neither Google Sheets or in Microsoft Excel. This is for educational use on Lee. And to show you the compound ing interest problem whenever you borrow from usual credit card Teoh on with debt. So this is the completed portion. So what I'm gonna do is walking through the entire spreadsheet. First, we have the four students were gonna do these together and then completed sheets which are already completed. I do hope that you spend the time to do this with me because it's important that you understand how credit cards work, auto loans and home loans work. So let's start with a credit card example on how compound interest rates really hurry. Start at the top up here. The credit card limit is $10,000. Interest rate is 20% compound in daily. Okay, so it's usually between 16 and 20. Follow four. I took the middle part and just said 20%. So before we get started, remember to pay off your credit card every 2 to 3 days, you're gonna say that I'm crazy, but you should use it like a debit card and we'll go over some missing a second here, so interest rate is 20% daily interest rate. All I did was divide this by 365 until you wind did that in a second. And the credit card balances $5000. Okay, So first, why did I divide by 365? It's because all credit cards compound daily. What that means is, at the end of each day, that's when your interest is calculated. So oversee are made day one to day 365. I put that in 40. I didn't You know not gonna go over doing that together, because we don't really need to do that. So what's my beginning? Balance. I'm putting equal sign here. And credit card balance for war. $5000. That's my beginning. Balance. How much interest will have to pay on Ben if you don't really understand what I'm doing in Excel? I actually have an Excel class which has common formulas. I think you should watch that. But if not, we're gonna do this. I'm gonna assume that you already know how to use Excel at somewhat at intermediate level. So my interest rate I'm gonna lock that cell. So it's an absolute reference times my beginning balance, which is a relative reference. So $2.74 by payments zero, cause I'm not gonna pay anything off my ending balance. Is this beginning balance. Plus, my interests attract out any payments, and that's my ending. Balance will be getting balance for Day two is equal to my prior, prior day ending balance. My interest is 5002 times my daily interest rate. Another 2 74 my payment zero in my ending bounce is equal to the beginning Balance. Plus, my interests tracked out my payments. Okay, so I'm gonna do that one more time, and then we'll just drag down the formulas. Beginning balance is equal to the prior month's ending back prop prior days ending balance . My interest is equal to this times. My daily interest rate gonna lock that cell to 74. Payments equals zero. Ending balance is equal to beginning balance. Plus my interest for that day. Subtract on my payment. Okay, so I'm gonna drag this down all the way down to Day 365 changed zero all the way down. So it changes toe one. Some changes. Zero. So now let's walk through and see what's going on here. My ending balance for each day goes up and up and up, and what's happening is and you can see it here is that might be beginning. Balance is growing. What's happening is that my interest I'm being charged interest upon my interest. That's why they call it calm, pounding interest. So now my interest rate is multiplied by my new beginning balance not on the 5000 but on the 5027. And as you can see, it grows and grows and grows, and I never make any payment off. Let's say, at the end of the year, I'm now being charged interest on $6000. Now, this may not seem like a lot of money, $3 per day, but this is on a per day rate. Writes a daily rate. So at the end of the year, if on a 20% interest rate on a $5000 balance, my ending amount is gonna be $6100. I just crude $1000 in interest in a year. Okay, so now let's look at the outputs here. My original parts. This was for $5000. Now my total cost is 6107. Where did I get this room? The last cell. So what is? My premium is 22%. What is my premium? All I'm doing is taking the total cost divided by the original purchase minus one. So I'm paying 22% more. But my interest rate is 20%. So why are these different? Right, So that's the question. My interest rate was 20% but I'm surmounting 22%. And here's the answer. Your premium was more than your interest rate because Ofcom pounding, you're paying interest on your interest. I mean, it's terrible if it's working for you, that's really great. So you're the banking like, Oh, man, this is awesome. But as the consumer, you're spending a crap ton of money on just interest. And this is why credit card bad debt is so bad. And that's why when it's about misusing where I'm saying is that carrying any balances misusing, so you should pay off your credit card every 2 to 3 days. I do that. My credit scores above a 20. I have a credit limit of $130,000. But I paid off every 2 to 3 days because I am deathly scared of credit card debt and credit card interest. And so should you. You should be scared as well. So that being said now, you know how daily compound interest horse with your credit card. That's kind of crazy, right? That it compounds daily. But it does, and this is how it works. And this is why your premium is so high. So hopefully you fill this out with me and that being said now you know how compound interest works for credit cards. 7. 06 Promotional Interest Rate Comparison: So now we're gonna talk about deferred versus 0% interest. Okay, So someone may say, Well, son, credit cards are good because they offer 0% balance transfers and no interest is paid in full in 12 months or something like that. Or like, in this case, car care one. No interest is paid in full within six months on persons of $199 more, you know, incentivizing us that purchase even more than $199 which is, you know, perverse. But yes, if you are responsible and pay off those before it is due, that's great. But let's say use your credit card for $5000 Temper pedic bed, and it's no interest it paid in full in 12 months. Let's say you have a balance at $4000 at the end of the 12 months. Know what happens? This is a deferred interest promotion, and you will be charged an interest rate at around 20% from the beginning of your balance. That means you're paying 20% back on the $5000 purchase back dated to the start of the program. That's a deferred interest. Example now that zero interest promotion. In the same example, you will start to pay interest on that remaining balance on Lee from the date the promotional period ends. Okay, so let's go through that together. Deferred interest, right? If not paid off in full by promotional date. Interested. Charge from day one on the entire balance. OK, Even if you paid some of it often doesn't matter. It goes back to day one, and they charge you interest on the entire amount. This crap is really scary. 0% interest, if not paid in full by promotional date. Interest is charged on the remaining unpaid balance, which is still really costly, which is 20% which is the normal rate. So this is like a chase freedom 0% interest rate. For right now, let's say 12 months after that, whenever bounce you have will be charged at 20% the current interest rate that they give you. So one other thing, then, being that it's important here in both examples, you could lose your promotional right before the promotional period expires. If you become more than 60 days late on your car, no car payment that ranges could be one missed payment could be smaller than 60 days late. You have to understand what the what the costs are. Because if you trip up just once, which is that the banks want you to do they're gonna make a crap ton of money off of you. Once you've lost that promotional rate, you won't ever get it back, even if you subsequently make your payments on time. So this slide is so important because we were bombarded with offers like this, Okay, especially if you have just slightly above average credit. People are gonna want you to take on debt with them because they're banking on the fact. And I promise you, they have tons of data on this that some people yet paid off and they make no money off of them. But the people that make money off of it makes it so worth it to them. The incentive for the companies like our care wanted. Whoever else is out there doing these is that they're banking on people messing up and they're gonna make profit off of them. That is gonna be more than the lost interest that they made that they lost based off of people that are really, really excellent with their credit make payments all the time. Such few people like that exists. They're banking on the fact that people will misuse it. Miss and promotional, miss a payment loser promotional period or not understand the fine print. Now you as a consumer understand the difference between deferred interest up here and 0% interest down here. Now you have the tools to truly understand the fine print of credit cards and promotional period. 8. 07 Credit Card Takeaways: So our credit card takeaways here. Now you know average interest rates on credit cards. How to calculate how much something actually costs through understanding, calm, pounding interest, the difference between deferred and no interest for motion. And the pros and cons of credit cards when used responsibly and when they are paid off every 2 to 3 days, they're a wonderful tool, and you can make money on the banks through credit card rewards like I do want travel hacking. I've gotten probably 10 free flights around the world based on travel, hacking. Okay, but when it's misusing is just waiting for me to mess up just once, it will dig you into a gigantic financial hole. Also, the myth here that I wanted to clear up okay, is that you have, and this is the last thing down here on the slide. The credit card myth is that you have to leave a balance to build credit. That is a myth credit card company started that rumor to make you pay interest. I have never paid $1 in credit card interest in my entire life. In my credit limit is $130,000. Okay, so Don't tell me that you need to pay interest to build credit. My credit scores above 830. My credit card limit is $130,000. So I prove what I say by either empirical evidence or math. Doesn't it all makes sense now on why banks want you to use credit cards, want you to mess up and stay get? You have to pay them a crap ton of money s so with that being said, that's the end of the chronic court section. 9. 08 Auto Loans: Okay, next up our auto loans. This is what we call a secured loan. Your loan slash debt is secured by the thing you are buying in this case, the car. The car is the collateral. Credit cards are on secured, and that's why they charge a higher interest rate. Does that make sense now? And so if you think about re pope people people, you're a car can be repossessed because it's collateral for your loan. So if you stop making payments, they come and take your car. So let's start like we did with credit cards. What are the pros and cons of an auto? Okay, so the pros are that you don't have to pay it all upfront. You can mash match your cash expenses with your cash inflows. The cash inflows should be your job. So the most most people should on Li buy a car for work, and that is debatable as there is public transportation. Okay, so the second pro is it helps build credit. It's not that much of a pro, because you can build credit for free with credit cards and never pay a dollar interest. If you paid off every 2 to 3 days. So the cons now is that its debt and you have to pay it off monthly. So you have to pay interest on this, and we're gonna go over a spreadsheet together. That shows you how much interest can cost. So sometimes you have to pay a lot of interest in the final con is that your value of your card appreciates. But the thing is, you should try to keep it as long as possible. So to me, it doesn't matter how fast my car depreciates mainly cause I bought a normal person car, not like a luxury Mercedes Benz E class. And I don't plan on reselling in order. I think it's gonna be an antique. It is literally here to get me from point A to point B. I bought a different car like a little bit bigger SUV because I surf in India, fit my surfboard in it, so it serves all the purposes I need. So check out my tips in my personal finance class about buying cars and about how to keep them longer. So if you keep a car for a very long time, it doesn't really matter that it appreciates to me like Yes, of course it appreciates, but it still serves its purpose from me to getting from Point A to B. And I promise you I'll keep my car way longer than five years. My first car I kept for, I think, six or seven years, this one I just bought brand new. It's my first brand new car that I bought at age 31 on band. You know, I plan to keep it for a very long time, change oil stuff like that. So these air auto loans we define them. We covered with the pros are and we covered with the cons are on DSO Now. Let's go into the expert. The expert sells French eat to figure out how they exactly work. So we're moving to our Excel spreadsheet toe. Learn how loan amortisation I know that's a big word works for in cars. I won't cover the basics of the time value money. So if you don't get what I'm talking about, see my finance one a one class because that covers the time value of money, which will actually be using in the loan amortisation spreadsheet. It's really under sporting that you understand the loan amortisation? Because what that really means? That's a big word for how do I pay off my loan? Okay, you take out a loan. But how do you actually pay it off? We're gonna go through the map to show you how to actually paid off. 10. 09 Auto Loan Amortization: So hopefully you have this spreadsheet open. We've already been working with it. If not, please downloaded. It is important to understand how a loan amortisation schedule works for buying a car. So you know how to pay off the car. Okay, so we're buying car for $15,000. Our interest rate is 8%. The loan is for five years. Our loan amount is for 15,000 again interest rate of 8%. My monthly interest rate, because we're making monthly payments is 80.67% which is just my annual interest rate divided by 12. My time and months is 60 because that's equal to 12 months times, five years. Um and I just did average car loan. So the average car loan is five years is five years. Okay, so now what's are beginning balance are beginning balance. $15,000. What's our payment? This is the time value of money. If you don't understand this, I would take my finance One of one class so negative PMT right is equal. 2.6. Everyone lock that cell. How many months? 60 when a lock that cell present value would currently have a $15,000 balance when a lock that sell in the future value zero. So my payments $304. What's my interest? Payment? This 15,000. My beginning balance multiplied by monthly. My monthly interest rate $100. So what's my principal? It's gonna be the remaining of the payment, right? $204. My ending balance. My beginning balance on Lee. Subtracting out my principal payment, which is 14 795 Let's do this again. Beginning balance is now the prior month's ending balance. I have $14,000 a payoff. My monthly payments exactly the same. $304. My interest payment is gonna be a little bit lower now because I paid off my a little bit of my beginning balance. My principal payment is gonna be the difference between the two. It's growing. And what's my ending? Balance? It goes down to 14 590 OK, one more time. And they wouldn't just do a drag down. So beginning balance is equal to prior month ending balance. My payment is still exactly the same, which is why we lock those cells Interest payment $97 Same interest rate, multiple. I might buy my new beginning balance. My principal payments going up and my ending balance is going down. Okay, so now it's dragging us all the way down. All I'm in this highlight it and drive all the way down. Okay, so what you can see here is that at the end of the 60 months, I don't know anything. The amount that goes, the principal increases every month. OK, so two under Florida to invite 206 my interest payments started 100 go down to $2. My monthly payment is fixed. Okay, So that's an important key characteristics of car loans. Is that they're fixed monthly payments, just like a house. In my beginning. Balance starts at 15,000 goes out at 300 that ends at zero. Okay, so now you understand how the beginning beginning balance is calculated. How much in total payment is calculated? You present your interest payment, your principal payment, and then you're ending balance. So what is the total of my payments? I'm gonna some here and I'm going to some all of my payments all the way down. These are outputs. So I paid $18,000 for a $15,000 car. How much interested I pay? I'm gonna somewhat my interest right here. I paid $3248 in interest. What's my premium? Just like we did with credit cards. Where the premium here, which is 18,000 divided by 15,000 minus one. So I just paid a 20 to 21.7% premium for my car because I decided to finance it. Is it worth it to you? And that's up to you. Now, let's change the interest rate, though. Let's say that And I worked at CarMax. Okay, So one thing you may not know about me is I worked at CarMax to pay myself. Paid my way through college. Okay, I still came out of a college with $60,000 a student loan debt because I went to grad school as well. Um, but I actually worked through college that pay off a lot of my debt in college or would have been even higher. So when I worked at CarMax, it was easy to find an interest rate of 15%. People came in there with bad credit or they had filed for bankruptcy. recently, like within the last year to 15% was not abnormal at 15%. Look at this. How crazy is this? 15%. The interest would have been $6400 or premium would have been 42%. They paid a Torrent Bay $21,000 for a $15,000 car. Okay, Now you have to really consider Is this the correct thing to do or not? So that's changing the interest rate. You can change the amortization period. Okay, The time horizon, making the shorter obviously says, Hey, I pay less and interest because I'm only paying in over 36 months or 48 months so you can change that as well. If you change that, you have to change it down here because the number of payments you have are less as well. I'm not gonna cover that. I'm just going to show you how much if I change my interest rate, how much my premium can change. Look over here for my premium. I'm changing my interest rate. My interest rate goes up 1%. My premium goes up by 2%. Okay. I'm bringing it back down to 8%. my premiums. 21%. So I'm paying $3000 in interest. Is that worked in that? Something that you really have to consider? Um And so I want to put the tools in front of you. So you know how much you have to pay and how the banks or the dealership calculate your monthly payment and how your loan amortisation works. That being said, that's the end of this lecture. 11. 10 Cash Back or 0 Percent: So we've all seen the commercial of, you know. Hey, you could either accept a cash back of $2500 or 0% interest and were never really sure which one to take you like I don't know which one. Sounds better. One if I need cash, Maybe I take the cash back. No, that's a terrible way to approach it. You need to determine which one in the long term is better for you. Okay. Looking at the entire picture, which one costs more So what I did with designers spreadsheet for you so you could do the analysis on your own. There's not a four student spreadsheet. This is just a complete one. Wouldn't walk through this. Completed one together. So you're buying car for 15,000. All the stuff is exactly the same. But the question years, you are offered either $2500 cash back or 0% interest rate. What should you take? Okay, so the first thing that they understand is OK, What happens if you don't take the 0% from the bank? What could we go? Finance it for ourselves on? Okay, So maybe go to Chase Bank we finance it for 8%. So then this is the same exact spreadsheet that we already did. So I'm not gonna go over the details of it again. $18,000. Total interest was 3200 bucks. OK, so if we go finance it on our own, it costs us $3200. Now, let's look financing it through the dealership. Okay, so by car 15 interest rate is 0% loans for five years. Loan amounts 15,000. Now, my interest rate has changed. My monthly interest rate is obviously zero, and my time is 60 months. So I'm the scroll over here to the right. Look at my interest. Payment it. Zero. So my entire payment is going to principal now. And what I can see here is that at the end of the 60 months, zero So this works. The total number total payments is only 15,000 right? Cause there's no interest charges. So the total interest paid here zero my premium 0% because I paid $15,000 for $15,000 car. So how much of my saving if I finance it through the dealership? Well, here you go. I've saved $3200. So savings through 0%. I'm comparing the total payments with financing through the DVD dealership and 0% financing it on my own at 18,000. That cost me 30 by savings is $3200. My cash back amounts 2500. So which is better? And I wrote an if statement out here. If you don't understand how that is statement warrants, all you need to do is take my excel class. But which is better the savings through 0% because I say $3200 in interest. So you keep your $2500 I'm gonna take $3200 because it saves me money. Okay, so that's a really important fact on how you can determine which is better for you so you can use a spreadsheet to help gauge which offer is better for you. So that being said, let's go back to the slides. So we went through two examples Here are loan amortisation schedule, which I think is so important. Understand? Comparing cash back off first versus low interest rate offers, like 0% cause that we just see that so often, I thought it was important to go through that with you. So the other tips are a new car. Interest rates are usually lower than use card interest rates. Okay, so new car in streets are lower than used car interest rates, and dealerships will always try to get you to focus on monthly payments. Now you know how to look at the total picture and not on monthly payments at CarMax and at every other dealership. What they're trying to tell you is like, Oh, you can afford it because you can afford the monthly payment. What you need to look at is the spreadsheet and say, Hey, you know what? If this is at 14% interest, maybe I can afford a monthly payment of $349. But do I want to pay 6000 more dollars for a $15,000 car? So my premium is 40%? That doesn't make any sense, so no, I'm not gonna do that. Even though I could afford $350 a month, which is like the average American monthly payment for a car, you can afford 350 but do I want to borrow at 14%? No, maybe 8%. I'm paying 22% premium. Maybe Maybe I do that You have to decide on your own. But now this is the entire big picture that they don't want you to look at. If somebody saw that, they were 15% interest, and they saw that they were paying $6400 in interest in 43% premium on their $15,000 civic . They freak out, which is why they want you to look at monthly payments. Okay, so that being said, that's the end of this lecture. 12. 11 Home Mortgage Intro: so I'm just gonna quickly go If you through a few slides, you can pause it and read it on your own if you want. But I just want to get the main message across. So home loans. Do you really own your home? This is one of the biggest Miss you do not own your home until you completely paid it off. Okay. And the same thing applies to car someone bullet 0.1. Here. You're not only your home until you completely paid it off. And the same thing applies to cars until you've paid it off. Let's say I put 5% down on a home. Then I own 5% of that home and not the entire home. So third bullet point down here is that very smart people will say. Well, son, my name is on the title, etcetera. Well, my response back to them if I own one shared apple. Okay. I own such a small percentage of app. Why do I don't walk around and say that I own apple? Okay, I say own a part of apple on. And that's what you want to do as well. For your house. You own a part of your house. So the reason why you want to go about it like this is to get rid of the societal norm, that there's a ton of debt on your house. If you purchased your house with alone, and that's why it's gonna be so important to think through it and say, Look, I'm financing my home, but I don't own it. So moving on to the next slide pros and cons of a mortgage, the biggest pro that I'm gonna cover together is the emotional benefit. I think that's the biggest thing here. Ah, most emotional benefits of owning a home is truly a tangible thing. That's the reason why you should be buying a home. It should be purely on emotion and should not be a financial decision. You can look through the other bullet points and just pause the video and read through them yourself. But the main reason why I should buy a home is because the emotional benefit if you're doing it for financial reasons, it's likely not the right decision. So that being said, these are the cons. You pay lots of interest on a 30 year loan. You can expect to pay the price of the house and interests on like a $300,000 home. Let's say that your financing and just like everyone else with, like five or 10% down you're going, you are going to pay $250,000 in interest at the end of that 30 year loan and Jake Thea other cons. I'm just going quickly. Go over your money's tied up, which means that you can't invested in the stock market. It's very time consuming to sell. If you run, want to rent it and move out? You just have 60 days notice. But if you're trying to sell it, it takes several months. Sometimes to sell a home, you lose flexibility. You can't just pick up and move anymore, and that's just not, You know, you're a single person and you want to move. It's actually hey, you know what? Your parents moved to a different part of town. You want to be closer to them so their kids can see their grandparent's or hey, my job moved their headquarters, and now I want to be closer to work. You have to pay operating costs. What a lot of people don't consider when we do our spreadsheet together. It's home maintenance costs, taxes, etcetera. Those are things that you don't have to pay when you live in apartment or when you're renting. And then time spent doing things you probably don't like. I had a co workers whose toilet exploded. Not can. You broke and then flooded two of the rooms in his house. He wasn't like, Oh, my gosh, here we go. I get t change our toilets, and this is gonna be really fun. It was a huge hassle. Cost him over if they cost him several $1000. And so those things that you don't have to pay for when you're renting. So that's the cons of a mortgage. So that being said, that's the end of this lecture. 13. 12 Understand Mortgage Inputs: So let's walk through a home loan amortisation schedule. Okay, so you're when you buy a home, you're gonna get something very similar to this. But they're not gonna include all the costs in there, the true cost of owning a home. And that's why we're doing this spreadsheet together. So our scenario is that we're buying a house for $300,000.10 percent down. Our interest rate is 5%. That's an annual interest rate. Alone is for 30 years. Again, This is for educational use only. So let's go through the inputs. The cost of the houses. $300,000. Like I already said, the down payments 10%. So that times 10% the closing costs in general, about 4% taxes in the insurance here in Texas sets around 2% P. M. I. Which is private mortgage insurance. It's 20.6% and that's only when their loan to value is greater than 80%. We can talk about that more in a second your interest rate of 5%. So this is what we talked about. Your annual interest rate is 5% so we need to calculate a monthly payment So we need to make that on the same scale. So we just divide by 12 right? 12 months in a year. If I that interest rate, this my monthly interest rate time and months is 360 cause we did a 30 year loan. Times 12 months is 360 months, right? Get everything in the months, maintenance costs is 1% annually and then then realtor fee to sell is 6%. Okay, the estimated sales price. This is just a input here. That's $500,000. So now let's go ahead and go through the calculation. 14. 13 Understand Mortgage Outputs: So hopefully you looked over those inputs. You feel comfortable with them, Put in the numbers that you feel comfortable with. So, like cost of your house. But if not, just leave that in there as $300,000 we can just walk through mathematically how this works . So now let's go through the quick run through the formulas. I'm not gonna retyped that mallet. Just because we've already done this with the home with an auto loan. I'm not gonna go through the actual formulas again. So the beginning balance is equal Toe end 10. So this is my loan amount, right? The loan amount is equal to my cost of my house. Subtract out my down payment and then you add in your closing costs. Okay, so that's 300 or $282,000. The total monthly payment. This is a time value of money. I have a class over this, but I'm not going to go over it again on this. Is that your monthly payment? Based on this time value of money formula, you have a copy of this broadsheet so you can dive into the formula yourself. So how much is my interest. My interest payment is going to be that monthly interest rate times my beginning balance for this payments 1175 Cumulative interest is how much interest of I've paid over the life of loans. This is the first payments, the same amount. So that leaves me with the $1500 payment. 1175 Interest in Onley, $339 goes to principal. That's a really important point to take home because look out of my huge payment. Only $339 goes to principal. So here's my ending balance after I make my $339 payment and then my taxes and insurance. So this is really important here. My taxes insurance have cost the House Times taxes, insurance percentage divided by 12 some paying roughly $500 a month for taxes and insurance . PM I That's a cost, right, because I didn't put 20% down. So there is a cost here. You can look at the formula. I only do it up until I paid off 20%. Then it doesn't go anymore. Maintenance costs. This is a really important point No one, No one budgets for maintenance costs. Very few people do talk about my coworkers whose toilets exploded and then he had to call serve pro in a bunch of other companies, like get all the water out of this house. That's what your budgeting for making a separate account for this is probably It's more ideal. So that's $250 a month out your budgeting for you're not going to spend on 2 50 month. But that's how much you need a budget for put into an account. So when that time comes when something happens to your house, you need to replace a roof or change your H fact system, which will happen. You have money set aside for that so your total monthly payment is equal to my principal and interest, plus my taxes and insurance, plus by P M I, plus my maintenance costs. That's the actual monthly payment that you should have already toe put towards your house again. This maintenance cost is just going to a separate account, but this actually goes to the bank. The remainder goes to the bank. So what I have here is the amount equivalent to rent. So this is not going to principles. My interest payment, obviously taxes and insurance is not going to principal PM is not going to printable. And maintenance costs isn't right. So maintenance costs I don't have when I rent, but when I buy I actually, when I'm financing house, I have to pay for myself. So my rental equivalent is $2066. So out of my total payment of 2400 only $339 going to principle. So that means my rental equivalent is $2066. So if I could rent for less than that, I'm actually better off so percent of your monthly payment going to principal. That's equal to 14% and the amount equal to rent is 86%. So that being said now, hopefully take a step, take a step back right here and understand this and then move on to the next part of the lecture 15. 13a Total Investment in a House: So once you understand the first line, you'll understand the rest of it. Okay, so the beginning balance is my ending balance in the previous month. My monthly payments still the same. My interest goes down a little bit every month in my prints. The cumulative interest, Obviously I'm adding the previous month. Plus this month, how much? I paid in interest. And the principal goes up a little bit every month. And here's my ending balance. Okay? Everything else is roughly the same. Not gonna spend a lot of time on this to show you a warps. Here's my ending balance. It starts with 281 grand and ends with zero. So at the 360th payment, I don't have an ending balance of my loan. So walk through this on your own. Now, you know how loan amortisation schedule works When I want to focus on the last thing is my total investment in the house. When I go sell my house, I have to think about my total investment in the house. Okay, so here's my total investment. The cost of the house is I bought it for $300,000. If I bought it cash, I would never have any interest and I would be done right. That would be the cost of my houses. $300,000 because I financed it right at this interest rate of 5%. The cost of my house is actually $562,000 because I had to pay a bunch of interest to the bank. Okay, so that's my all and investment. But that's not everything. I also paid 100 $80,000 worth of taxes throughout the entire life of the house, right? So that's a cost that I need to recoup. If I were renting, I would not be not have that cost maintenance cost roughly put in $90,000 in the House to fix it over a 30 year period, right? And that's at 2% if you think that our 1% annually so that's actually a pretty conservative amount. A lot of people say that you should budget 2% so then you have maintenance Costs are like replacing toilets and the roots and stuff for the cost of the house and then closing costs when purchased. Okay, so I spent $12,000 on closing costs. When I sell it, I have to pay 6% thes. And let's say that I'm selling it for 500 grand. Then those air the realtor fees. Okay, so what I'm showing you here's my total cost in mind. Total investment. The house is actually $874,000. Okay, so you cannot think of a house. The cost of a house is just the initial sales price. If you don't include interest, then that means you bought it cash. And if you bought a cash, you shouldn't include interest. But most people don't buy a house. Cash. This is what you have to understand is the total investment in the house. So I have to sell it for at least $875,000 to break even. This is how we look at it in finance. You have to look at the total cost that you put into the asset that you're selling. These are all the fees and the cost that you put into the house. Obviously, if you bought a cash, you'd be a lot better off. But when people finding and sit, that's what gets him into a situation in which you have to recoup that interest payment. So that being said, I wanted to show you how it works. When you look at the total investment of the house and last things are is the total of payments is $544,000. If I just add up all my payments, Okay, My loan amount was $282,000 take some decimal places and we're away from here. Right? So my total interest paid is 262,981 which matches over here. So I just paid 100 7% premium because I finance the house like I told you in the previous lecture, when I'm financing in $282,000 house. If I'm putting the 10% down like everyone else does, then essentially expect to pay that same exact amount and interest. That's why buying houses in bad if you pay cash. But when you're financing it, there's are very extreme costs to doing so. And this is why when we talk about banks and sentence, they want you to buy a house so bad of Finance House because they just made $260,000 off of you. If you stayed in the house for 30 years and took 30 years, it paid off. So that being said, that's the end of this life. 16. 15 Int Rate vs APR: So what's in a PR versus an interest rate? We've heard these terms. You don't really understand them. Well, here's a very quick definition that will help you understand what it is. Interest rate is the rate for your debt or your loan. Okay, so that is it. I'm gonna go borrow money for a house. My home loan amount is, let's say, 4.5%. My a p r is always going to be higher than my interest rate. Okay, so this is always gonna be greater than my interest rate. And the reason why is it includes the total cost of borrowing such as loan origination fees and other fees. It's expressed as a percentage to show you the true cost of borrowing. Okay, so that's your A P R versus your interest rate. And trade is just the interest rate on your debt on your loan. And you're a PR is your all in cost. So this is what we really want to focus on. Is your a p r your all in costs on the debt. So that being said now, you know the difference between a PR interest rate? I think this is so wildly important. This is why I added this to the the debt presentation 17. 16 Outro to Debt MP4: So now we've included the class and, you know, hopefully you see a little bit of anger has now left my body. I've been very, you know, passionate turning this, to say, the least to say in during this class, because it is so important to me. This class is about how banks take advantage of us as people. They don't care about us as people. They just want to make a profit. We can see that with the slide below me, they are really just in it to make a ton of money, and they don't care what path they tear on. And that's what this class is really about. Understanding debt. If you're one of the younger people watching this class is getting that under control before you get into it. So it's the preventative nature of this class is avoiding that type of devil if you're one of the 80% of Americans in it now, understanding the importance of the different types of debts and how important it is to understand each type of dead. So I think that's very important as well. The last thing I'd say is that thank you for watching this horse I love making courses like this because this in the personal finance course are near and dear to my heart. I've seen so many documentaries. We know people that have been ruined by that divorce is there's documentary about how students college students signed up for credit card debt eventually committed suicide. These air riel things in real stories, and that's why I love this course of much, because it allows me to help try to change the world and to show you and review all the pictures and lift that bale off your head to see. Look, there's a reason why people want you to get into so much debt. And all of these companies want to get you into debt because they can make so much money off of you in my classes for that average American, an average person that doesn't under really understand that. Now you do. Now you have the tools in your support, Teoh understand that. Look, you're not gonna go in there blind anymore. If you get into any mortgage debt, are you getting any type of auto loan debt? You're going there with eyes wide open, and I think that's a really important part. The last thing I'd say is that I truly do believe that all my course there are geared toward financial freedom. Want financial freedom is to give you the time and the energy to do whatever you want. If you're constantly worried about dead and you feel like this and the debt is on top of you, you're not gonna be a good mom and a dad or a husband or a wife. And that's what it really comes down to is that we have such a short time period on this. We need to make the most of it. It's not being shackled up, having can cause a debt and not being able to do anything that we want. And that's what it is about. The more debt that you have, the more debt burden that you have, the less time ability that you have to do what you want. That's the exact opposite of financial freedom. So that being said, I hope you enjoy this horse is very important to me. I love doing stuff like this. This is my dream job, so I really appreciate it and please let me know if you have any questions on. Hopefully, this gave you a broad over the you dove into a lot of detail on debt. And now you understand what you're getting into and when you get into it, that being said, thank you again and I really appreciate it.