Everybody, this is Dan Thompson with wise money tools. Thanks for joining us on this video. So in the past couple videos, we've been talking about the five elements to wealth. And today we're gonna talk about one of the other elements. Remember our formula, y=a(1+r)x. And each one of these things has it's own little element. That's part of it a is our cash, pay yourself first. One is our capital and debt equation. How much money can we grow? How much money have we saved? Our is the growth that can either be a plus or minus, depending on the safety and risks that we take. An "x" is the leverage or exponential growth that we get by using leverage. So in this video, we're gonna talk about 1. Okay, we're debt and capital fight against each other.


I think we'll all agree that debt can be a wealth killer. I mean, it takes money that you could be saving, growing and compounding, and you're sending your capital or your cash or your money to someone else. The problem is, if all we do is concentrate on our debt, and never pay yourself first. They there's a little battle there because you could be missing out on years and years of compounding, while you're trying to get yourself out of debt. Now Dave Ramsey, he's kind of the Guru of getting out of debt. And for the most part, I would agree with him, but I call his particular formula of getting out of debt, the beans and rice formula. Because he's all about literally sacrificing every single dollar towards getting out of debt and living just as frugal as you possibly can.


And again, getting out of debt is a good thing, but done wisely and in order. So Dave kind of reminds me of talking to some of those older guys. You know, the guys kind of like the early 1900s great, great, grandpa types. They remember the day when they didn't have electricity. They ate gruel once a day, they had to walk through four feet of snow to school and it was uphill both ways. You know, it's just life is so easy right now and they try to compare what it used to be back then. Well, Dave kind of reminds me of the guy who wants you to live like that. No enjoyment, no entertainment, you put all that on hold you don't go to the movies. You don't do anything fun. You're just getting out of debt, debt, debt till you own your home free and clear.


And it kind of reminds me of the movie, Oliver, you know, little kid holding up his bowl. And he says, Please, sir, can I have some more? Please, Dave, may we go to the movies? That's kind of what it feels like to me. I mean, He wants you to forget about life, forget about fun, and you just pound and pound and pound and take it out of debt look and I get it. There are a lot of people who live paycheck to paycheck. And they do it because they're paying so much debt. And debt can be a looming obstacle over a lot of families heads. So we do watch out of debt. The problem is you could also miss out on years of growth and compounding, if every extra dime goes to someone else. Now, I don't know the exact balance for your situation. But you've got to strike a balance. You got to get out of debt for sure.


But you also need your money to grow and compound so that you can start to build toward your wealth. As a rule of thumb, if you're getting a return that's greater than your debt interest. Then maybe paying off your debt is probably not the best move and you can do other ways you can go about other ways to do that. As an example, if the interest on your loan or your debt is let's say 8%. And you can only get 1% at the bank, yikes. Well, it's probably best for you to pay off that debt. One misnomer is when someone tells you that you're making 8% on your money. If you pay off a loan that has an 8% interest rate, say I get what they're saying, but it's really not true. It's a lie. You're still in the hole 8% you're just not making that 8% on the other side. So you're paying out 8% and you're losing 8% from your cash flow, because it went out.


So by paying off your debt, if you have an opportunity to start actually saving at 8% but you're not making a percent on your money, then you're on a treadmill. What I'm trying to say is this, if you can only make 1% on your money in the bank, and your debts 8% is probably best to pay off the debt. Because your growth or your savings isn't even keeping up with the cost of debt. But if What if you could save your money say at 9%? Or maybe even better over time? What then would it be better to save that money and begin growing and compounding sooner or to pay off the 8% debt, then we have to consider both good and bad debt. Yeah, there is such thing as good debt. And it might be defined as borrowing to buy an appreciating asset, such as a home. Bad debt can be defined as buying a depreciating asset, such as maybe some clothes or even a car.


However, as much as David like you to pay cash for your cars, and other major purchases, he never considers opportunity costs. It may actually cost you more to pay cash than to finance a car. What you need to understand is how money works, how to take advantage of that knowledge and the benefits of when and how to use debt. The problem is with fanatic debt reducers mentality, they're gonna miss out on the one thing that we all run out of every single one of us. We start to lose it every day and that is time. We also live in a very low interest rate environment, and saving your money in the bank just isn't gonna do it anymore. On the other hand, oftentimes debt costs are so low, that it's not hard to supersede that cost of money with the compounding of your money.


Now, you may have heard of two types of interest. Basically, there's simple interest and there's compounding interest. And understanding the difference can be huge and help you make good financial decisions as well. Simple interest is how most debt is structure. Okay. Suppose I make an investment of $1,000 had a simple interest rate of 5% With simple interest, I'm gonna get that 5% every year until I get my investment back. So let's just say it's gonna be a five year investment. So I get $50 each year for five years, or a total of $250. It might look something like this. Here's my thousand dollars, 1st year I get $50, 2nd year $50, 3rd year $50, 4th year $50, 5th year $50. Okay, now using that same 5% but now let's use compounding interest instead of simple and let's see how that turns out.


In year one, I get fade paid 5% which is $50. But then in year two, because now my account value is $1050 I get paid 5% on my thousand of course, but I also get 5% on the 50 I made last year. So I'm getting paid 5% on 1050. So it looks like this year one $1050, years two $1102.50, year three $1157.63, year four $1215.51, year five $1276.28. If I compound at 5%, I have $276.28 earn interest 76 more dollars than if it was simple interest. Well, you may be thinking, well 27 bucks isn't that big of a deal, right? But as you get into larger sums of money, and more time, this can be huge. Now, since dead is typically simple interest calculation, and many investments are compounded oftentimes. It's better to keep productive money growing and compounding, while paying simple interest and using smart deaths.


Now, is this always the case? Absolutely not. First of all, I'm not really a big fan of debt to begin with. So we got to control that but going back to Einstein's quote. He talks about interests and he says he who understands it earns it. He who does not pays it. The question is, can you do both? The one thing that's rarely discussed when it comes to making purchases for cash, and what I've mentioned with Dave is that he always misses out on what's called opportunity costs. Suppose I have to buy a car. Now both Dave and I would agree that buying the least expensive car would be the best. However, Dave has a no excuses no qualms no alternative way you go and you pay cash for that car. But what they misses is that even paying cash has a cost. See, I can either borrow money and pay interest, or I can pay cash and lose interest.


If I take cash out of a productive asset or for go putting money in a productive asset. So that I can purchase a car my money loses the opportunity to grow and compound literally forever. Once it's in a car, I've got a depreciating asset that's guaranteed to be worth less every day that I drive it. If my cash can be used to help grow my money at a greater rate than the simple interest I may be paying, it might be better off to finance the car and let my money continue to grow and compound. I use this simple example. Suppose you can lend your money or invest your money at 10%. And let's suppose that the cost of financing will be 4% doesn't make any sense at all to take your money from an investment earning 10%. So you can avoid paying 4%. So in this case, to take my money from the investment. I give up the opportunity for that money to earn money, which again is opportunity cost forever.


Okay, So hopefully you get the idea that can be a killer, no doubt. However, there might be ways to use smart debt capital used wisely can benefit you for a lifetime. That leads me to the next video where we're gonna talk about compounding and growing your wealth. You don't want to miss it. In the meantime, just think about this. Think about the debt you have the amount you're paying out, and is there any way you can curtail that? Is there a time in your life where it might be smarter to be growing your money, then paint all your income out to someone else? That's really the balancing question that we have to make. And it's not sometimes really easy to figure out, but we can figure that out together.


Well, don't miss the next video. Make sure you subscribe. If you have any questions you have any questions at wise money tools.com. I'll answer them just as quick as I can feel free to make comments below as well. And if you ever want to talk about your particular situation, just click on the time trade link, and a few minutes together, that's about it till next time, these are the five key elements to wealth. We're gonna be on to the compounding and growing next. So, take care.