Money matters. I wish that I knew tall when I was an investor, a business owner and a money educator, understand it better compound international budget investment to recover from debt. No one explained to me that your money to align us at work is about normalizing the conversation. I Welcome to the Money Mechanics podcast. My name is Sarah Poynton. I'm an investor, business owner and money educator, and in this episode of Money Mechanics, we're going to be talking about debt. I believe I was put on this earth to simplify and demystify money. In 2015 I was in about 60,000 pounds of debt, and life wasn't fun, not gonna lie, it was just fucking annoying. I never had enough money. There was always too much month left at the end of my money. I was trying to clear my debt. I never really knew what I was doing, and I just wasn't making any progress. And I think debt is something that we as a society have been taught to believe is a bad thing, actually. But in on a little secret for us, lower middle income folk, debt has been something that the media sensationalized as a bad thing. But in higher income, in business, in big corporations, in super wealthy families, debt is something that drives growth. Debt is something that can be leveraged to improve performance. Debt is, in fact, a great thing. What I want to do in this episode is basically just bust a few myths, talk to you a little bit about the differences between good and bad debt, and really help you understand how you can start clearing your debt so that you can move on to becoming an investor. We talked in the money momentum method, about emergency fund, clearly, high interest debt, and then becoming an investor. So you need to do this bit before you can move on to the next bit. So not all debt is created equal, right? It definitely isn't. And the best way for me to explain this, and I talk about this a lot in chapter four of Money Mechanics, there's a whole chapter dedicated to explaining this in a lot of detail, but I'm going to try and fit it into this episode. Good debt is debt that you can utilize to make more money, to make it, you know, an income to create cash. Bad debt is debt that's draining your resources to have it. So to give you some examples, a credit card that you have used to buy a flight to Ibiza and some club tickets and a few drinks, maybe a new outfit for every day that you're there, book your hotel, all that sort of stuff. Once your holiday is done, you come back and you've just got a credit card bill to pay, you'll realize that that's not adding to your resources to have it. You're right. You've had loads of fun, right? Because I beat is amazing, but it's not added to your resources to have that debt. In fact, it's going to have cost you a load of money, because you'll have unless you've got a 0% credit card, it's going to have an interest rate attached to it, and that means that loan that you've taken out to pay for your trip to Ibiza, you're now paying back a cost of borrowing that money in the first place, and it takes you time to clear it down. You've got a delay. It just takes up a lot of bandwidth, right? So credit cards, not great debt, car loans and the car that you drive, right? Car finance, not great debt, because that asset that you've bought, it's not really an asset. It's a liability. We all think that it's an asset because we're taught by I know I was when I was growing up, buy a house, buy a car, buy these things, and then you'll own it, and then you own assets, and then you've got wealth. It's not actually true, because if you own a car, it's depreciating over time. It costs you money to run it. You have to put fuel into it, you have to get it mot, you have to get it serviced. You have to all these things. It's draining your resources to have it so that finance that you've got, that loan, that credit that you've taken out. Well, this bad debt, it's costing you money. It's not creating value anywhere. Not all debts created equal. And there are also really good types of debt, debt that, when you take it out, is going to add to your wealth. So the most obvious one is a mortgage. Most of you will have heard of a mortgage, and a mortgage is used to buy a house, right? Again, we talk all about this a lot in the book. A mortgage is a loan that you take from the bank, and the bank will then give you that money to buy the bricks and mortar of that house. You then pay that loan back over, usually, 30 years, and you pay back an interest rate. Now, at the moment, the market interest rates are all over the place, quite volatile, and have gone up significantly in the last couple of years. What used to cost, you know, 2% Well, actually we were down at like naught point, 1% at one point it was almost there was no cost to borrowing money. Well, now it's 456, 7% every time you borrow money, that interest rate is applied and you have to pay back the original capital. One. Plus the annual interest rate. With a mortgage on a house that you live in, that's not really good debt, because you're not creating cash from it. But if you use a mortgage to buy a house that you're going to rent out to somebody else, their rent is going to contribute to your mortgage. It's going to pay for your borrowing costs, and maybe leave you with a bit of a profit. It won't be a lot, because renting out properties in today's market doesn't really generate a huge amount of profit. But what it does is it pays down the debt, which means eventually you'd be left with a house that you own, but it had been paid for by itself. It's self sufficient. Basically, good debt is debt that you take out that adds value to you, it's going to increase the amount of money that you're making. It's going to increase your net worth. It's going to increase your wealth. There's a couple of different ways that you can clear your bad debt, and what I'd say is the first point of this is starting with your high interest debt first. So we go for high interest debt, anything costing you more than 7% that's where we start. There's two different methods for clearing debt. You can either opt for the Avalanche method, or you can opt for the snowball method. I'm going to just quickly explain what both of those are. You'll be able to pick the one that's right for you based on what you want to see happen, right? So I utilize the Avalanche method when I cleared my 60k because the Avalanche Method is where you select the highest interest rate first. So let's say, for example, you've got a credit card with an 18% interest rate, you've got a loan with a 10% interest rate, and you've got an overdraft with a 6% interest rate. Let's just say that they're the three things. You've got 18% 10% 6% I think that's the numbers. I said, pretty sure it was with the Avalanche method. What you would do is you would tackle the 18% interest rate first, any money that you're able to put onto your debt. You tackle that first. When you do that, you're going to save more money more quickly, because once the 18% is gone, you're dropping right back down to the lower interest rates. So the Avalanche Method is a really good way of you seeing quite quick reduction in numbers. It actually is a longer route. So it takes longer to do it, because you're tackling the most expensive first so you need more money to do it, but when you tackle it, you're going to save more money over that window of time. Now, the opposite method is the snowball method, and the snowball method is a method that will help you to feel quick. Wins. So if you're somebody that needs to feel things happening quickly to be able to stay focused and attentive to it, then maybe the snowball method is for you, because unlike the Avalanche Method, which takes longer, the snowball method, you get a quick win, because with snowball methods, what we do is we tackle the lowest amount of debt first. So if you've got a credit card that's got 10,000 on it, you've got a loan that's got 1000 on it, and you've got an overdraft that's got 500 on it. With a snowball method, what we do is we tackle the 500 pound first. So we put all of our spare money that we're putting towards our debt budget to the 500 pound, and then that's gone. Then we tackle the 1000, then we tackle the 10,000 because you're tackling the smallest first, it takes less time, and you get that quick kind of dopamine hit. You've cleared a credit card, you've cleared an overdraft, or whatever it is, and it's gone. Now you can write that off and you can move on to the next one. Actually, it costs more money to do it that way, but depending on how you're built as a person, will depend on which one of those methods is better for you. I chose the Avalanche method that was the right one for me because I actually wanted to save the hard and fast pounds and pence that was what was most important to me. But you can choose now. Again, in chapter four of my book, I talk about some of the things that you can do tangibly to change your behaviors around money, so that your debt starts to become an automatic adjustment, so that your debt starting to just go we talk in the book about the B double A, T framework, okay, and B stands for budget. If you've got a copy of the book. In the book, there is a link, which is a Resources link, and when you go on to that link, you can download my budget tracker sheet. I'll put the link with this podcast episode as well. Budgeting is one of those things that often people say to me, I just don't know where to start. I actually just don't know how to start budgeting. I've never done it before. I don't understand it. I don't really get what you do and how you do it. So one, I'll put the link to our budget sheet in this podcast episode, and also on my YouTube channel, there is a video of me showing you how to actually use it, how to plug in the numbers, how to find the information, how to actually select and decide what your budget should be based on your personal circumstances. Because different. Your budget will be different to my budget will be different to someone else's budget. With a budget, you have to start with what you've got now. Look at how much you're earning, look at where it's coming from. Look at what you're spending. Is there any leaks in your spending? You know, those subscriptions, pesky subscriptions, that you. Had a free trial on something, and then you end up paying that one month because you forgot to cancel it before the free trial was ended. We've all been there. We all do it. Those are the things that will be picked up if you really budget effectively. So start with a budget. The next thing to be able to really actively be reducing your debt is to look at avoiding new debt, right? And we talked in episode one about the importance of your emergency fund, the money momentum method, if you remember back to that, the first step is your emergency fund. The reason we have an emergency fund is so that if the shit hits the fan, we can still avoid new debt. Because we use our emergency fund for its purpose. We don't take out another credit card. We don't put it on an old credit card. We don't use our overdraft. We use the money that's there for the emergency and we actually use it for what it's for. If you can avoid new debt, then, as you're moving money to your debt every single month, it will go down and down and down, whether it's Avalanche or snowball, your actual debt will be coming down and down and down, and it will make a massive difference. But if you have to keep taking out new debt to handle life, you're going to struggle. It's going to be a really long period of time, and you're going to feel disheartened because you're not making the progress that you absolutely could be making. The next bit of this is automating your money, and I've definitely talked about it enough for episodes, and I will talk about it again. I have no doubt, because it's one of the most important factors. If you are somebody who's already in a position of being in debt, and already in a position where there's always too much month left at the end of your money, and listen, I was there, right? It wasn't that long ago that it was me. I wasn't disciplined, I wasn't making good choices, I wasn't like taking the emotion out of it. I was sitting thinking, oh, you know, I could just book those festival tickets, because I'm sure be able to pay back at some point. Oh, it's okay. I've had a couple of drinks. Now, let's just get around for everybody. It's easy, right to make those decisions. When you automate your money, it takes the emotion out of it. It makes you and forces you to be disciplined. You make a decision on I'm going to send this much every single month to my debt pot, to my investment pot, to my free trade account, to my savings account, whatever you decide. And that way you haven't got to think about it. It just does it. It could be 10 pound a month, 15 pounds a month, but it does it automatically. You're automating it. Now, I use Monzo. I have a Monzo bank account. I love Monzo. Feel free to sponsor us. Monzo, by the way, that would be excellent. I think Monzo is one of the best bank accounts. There are others out there. But what I love about Monzo is you're able to create pots. So I talk about this in detail in the book, but I've got pots for giving to charity. I've got pots for I've got one called my fuck around Fund, which is basically the end of each year. I've got a pot that I can just go and blow on whatever I want to blow it on. I've got a pot which is for tax. I've got a pot which is for investment. And that actually gets automated again, and it goes straight to my free trade. I've got different pots that help me to make sure that the things I've committed to financially, to get me where I want to be financially, are automatically happening. It takes the need to be disciplined away. I'm not a very disciplined person naturally. Actually, I'm somebody that if left to make the choice, I'd either forget or I would choose poorly. Maybe so by automating the choice is taken away from me, the money just goes so automate your money as much as you possibly can, and then the last step is to track so I know that when you've not got any money, because it wasn't that long ago for me that I really didn't have any the behavior is that you just don't look at it, you don't look at your overdraft, you don't look at your credit cards. You just tap your card and hope that they say yes. You know, you go to the Tesco and you put your card in and you hope that it's gonna say yes or, you know, it's the day before payday, and you know, I've totally done this, you know, you're gonna get paid tomorrow. So you go and buy petrol at Tescos, because they don't charge you till the next day, right? That's a real, reality. For a lot of people, you don't look at it, well, nothing's going to change unless you get uncomfortable, right? Unless you look at it and you are disciplined and you're intentional in the way you approach your money. To be a money mechanic is to engineer your money. And if you're going to engineer your money, you have to see it, right? I know at the start it's going to say negative. I know at the start it's not going to be moving in the direction you want, but you've got to look at it. You start with your budget, and then you track your performance against that budget. So if you said, Well, this month, I'm going to give myself 50 pounds for, you know, socializing, for example, but actually you spent 80. Well, you've got an intentional decision to make as to whether or not that extra 30 pound comes out of next month's budget, or whether you've just overspent. If you're someone who's serious about clearing their debt, you'll see it as an overspend, and you'll make sure you don't do it again next month, and you bring your budget back in line. But if you never look at it, you never track it, you never. Pay attention to it, you're never going to know what you overspent. And again, I've totally done this. I just never looked actually, it creeps up and creeps up and creeps up. You don't have to overspend that much money every day to blow 10 round the year. It actually doesn't take that much be intentional. Start with your budget and track your performance, your behaviors against that budget by the end of the year, if you've avoided new debt, and you've been automatic and disciplined in the way that you move your money around, life will look very different for you. So not all debt is it is created equal. We've talked to you, or I've talked to you about how you can start to clear your debt and the approach that you can take. I know for many people, it's going to be a uphill battle. I get it. It's going to be hard, but you've got to ask yourself, Do I care about the outcome enough to be uncomfortable in the moment? Do I care about a debt free life? Because if you do, then make the choices and activate the change that you need to to be able to get yourself to there, because nobody's coming to save you, right? They're not. And with bad debt, if you haven't got it under control, it creates stress, it creates anxiety, it creates worries. It also stops you from doing anything. It creates a lack of freedom and life's for living, right? We don't want to be stuck because we haven't got enough money. In the worst possible examples, when you've not got your money under control, it comes with penalties and fees and potentially bankruptcy and all of the other shit that comes with it. So what I want you to do off listening to this is really think, How can I be showing up differently, totally go and read the chapter before in the book, because it gives you a lot more context and ideas around the details of how you do this stuff, but understand that some debt is good for you, but your high interest debt, that debt that's costing you a load of money, that debt that's not adding to your wealth at all. We want to get rid of that as quickly as we possibly can. I hope that's helped you understand debt a little bit better, obviously, like always, if you've got any questions, stick them in the comments. Drop me an Instagram message. However you want to get in touch with me. I'm available, and I'd love to talk to you if you're watching over on YouTube. Thanks very much for tuning in. Make sure you hit the subscribe button and you give us a like so that we can spread the word. If you're listening on audio only, then make sure you add this podcast to your playlist. Give us a like, share us on across the world, and let's impact everybody's debt. Let's get us out of debt as a society. Let's all become Money Mechanics. You.