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The Personal Finance Podcast
Should I Take on Debt to Start A Business on The Side? (Money Q&A)
00:34:14
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- [00:02]
Andrew Giancola
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- [01:36]
Andrew Giancola
Terms apply on this episode of the Personal Finance Podcast. Should I take on debt to start my dream business on the side? What's up everybody and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney Co, and today on the Personal Finance Podcast, we're going to be answering your questions in this money Q and A. If you have a question, make sure you go to MasterMoney Co newsletter, join the Master Money newsletter and there you can respond to any of those newsletter issues that come out and ask your question via email. Also, don't forget to follow on Spotify, Apple Podcasts, YouTube or whatever your favorite podcast player is. And if you're getting value out of this show, consider leaving a five star rating review on Apple Podcasts, Spotify or your favorite podcast player. And again, if you want to watch these episodes, you can watch us on YouTube just search my name, Andrew Giancola on YouTube and you will be able to find us there. We are going to be pumping out some new YouTube content as well coming up here shortly where you will see some original YouTube videos from us that are not in the podcast. So we're gonna be doing some breakdowns of index funds, we're gonna do some breakdowns of ETFs, we're gonna go through a bunch of financial systems that a lot of times maybe you can't show on the podcast, but we can go really into detail on some of those and we're gonna have some shorter episodes on YouTube as well. So I encourage you to make sure you go subscribe on YouTube. Now today we are gonna be talking through six of your different questions. The first one is should I risk $40,000 from my home equity to launch my dream tutoring center or build more clients first? The second one is should I raid my emergency fund to max out my Roth IRA up front or play it safe and invest in it slowly? Three Is going into student debt for film school in New York City worth it? And how do I avoid drowning in loans? Four is how do I figure out what my pension is really worth when planning my retirement? 5. What are legit remote side hustles to crush credit card debt if I love reading and editing? And then 6 should I pay off 20% credit card with a 7% HELOC or leave it alone and pay it down slowly? We've got all the answers to these questions and more. Let's get into it. All right, so the first question is one that I really really love and I love the way that this individual is thinking about this. So I currently am a full time teacher and tutor on the side. I usually have between four to seven clients at a time. That doesn't seem like a lot, but I can't really take on anymore because of a full time job and drive time and I've turned down a lot of people. I noticed the reason why most parents hire me is because they don't want to fight kids on homework. What I would like to do is open up a 1200 square foot tutoring center where kids can come for homework and help each week. I would probably charge monthly for $250 twice a week and $325 for three times a week. I would start by running it myself from 3 o' clock to 8 o' clock at night and then gradually add tutors as I get more students. I was thinking about advertising and marketing hard with Facebook ads Flyers and open houses. And I'd like to make it different than some of the other major tutoring centers by making it more emphasized on tracking results and have it be more of a cozy and comfortable vibe so that students are more willing to come. This sounds awesome. I know that I'm selling to parents though and my way of funding it up front is to draw on our HELOC on a rental that we own. It's mostly paid off where we have a line of credit over 300,000. I think I would need only between 25,000 and $40,000. Now if this idea fails and I lose everything, we'd probably just sell the house and buy a new one. It's worth about 550 and we owe $120,000 on the house. I'd love to hear your tips on this. Do you think this is a good idea? Do you think I'm getting in too far ahead of myself and I should focus on getting more clients first? Any advice would be great. So this is a fantastic question and honestly, I like your line of thinking when it comes to this. Now here is what I would think through because I actually really, really like this idea. And for me, sometimes I have to paint and pull back my excitement on businesses because I love business so much and I love business ideas so much. That's why we do the five side hustles that could turn into a full time income episodes. Um, and so I really do like this idea and I think it's really solid. And you're solving the biggest pain point that most parents have. I know what this pain point feels like. The pain point is parents don't want to fight kids about homework. And if you can create a place where they are going to get peace of mind that the kids are going to do their homework. Plus they have tutors there already. This is a win win situation for a lot of people because A, it helps them advance and you are basing this on being able to go out there and see actual metrics and, and actual ways that they are actually improving over time. But B, this also allows you to ensure that parents are going to have peace of mind that it's actually going to get done. And so this is something that I think you already have somewhat of a proof of demand because you are turning people away. And so you have this unique angle because you have results tracking, but you also want to have that cozy vibe and that is clear that you can differentiate from some of these other chains that are probably stale and it just looks like a classroom that they're walking into. So, yes, I think this concept is super, super strong. Now, before you spend 25,000 to $40,000 to test the demand first and before you sign a lease, I would think through this just really quickly is first we need proof that families will commit $250 to $325 per month. And so it keeps your risk lower if you can figure out if families be willing to pay that. Now, if you already have kids coming in that are paying that amount for tutoring services for you, and maybe you have a decent amount where you have those clients in place, then you can think through, okay, well, these people are willing, more people are trying to get in here. Maybe you get a wait list started.
- [07:15]
Listener
Okay?
- [07:16]
Andrew Giancola
And so with this wait list, what's going to happen is you're going to say, hey, these are going to be the prices of what is going on here, and I'm going to charge $325 if you want to come three times a week. And so this is the wait list to get on to this tutoring center. I'm going to be there helping your kids and through this process. Now, another thing you could do to test this out with low risk is you can validate demand. Now. So before opening your physical location, maybe you can offer a mini version so you can test out maybe offering, you know, small group homework help at like local community centers and, or a church room or a library study room, or even, you know, if your home has a, you know, a room that you can do this in, then maybe you do it there if allowed, and you can price it exactly how you plan with the tiers or maybe just slightly lower $250 or $325 a month, and you can run it from three to eight just like you would your center's future hour. So, for example, in my neighborhood, we have a brand new library that was just built. And in that library they have like conference rooms basically that you can rent out and you can go in there and utilize those as your way to kind of test this market out first. And maybe you just have a couple of clients or a couple of students to test it out and then see if you can fill those spots before you sign a lease. If you start with, you know, groups of five to 10 kids in each group, and if you can get 20 plus families to commit to that, then that is a really good indicator. This is your beta test, that that is a really good indicator that maybe you should be doing this. Now, if you can find a space where the lease isn't going to kill you. So for example, if you have a space in the area that's 1000 bucks a month that's in a decent area, then maybe that is something you want to consider. If it's 1500 bucks and it's not going to kill you financially, then maybe you can consider that, you know, taking that leap and that jumpstart. Maybe you sign a one year lease and so you kind of invest some of those dollars and be able to do that from there. But you got to think through this first. I would beta test at first before you utilize those funds just to make sure that you have enough families in place where this would really, really work well. And so if you do it in a community center or if you can find a library or a local church, that will kind of help you rent out rooms, I think this is a really cool way to get that ball rolling. Now secondarily is the marketing plan. So I do like your ideas for this marketing plan. You could do Facebook ads, you could do flyers, open house, all those are a really, really great plan. And you can use really low cost Facebook ads. Honestly, you could, you know, use that pain point, stop homework battles with your kids, cozy after school homework, helping your neighborhood. Those types of things are going to be really beneficial I think. And if you do that open house and have that pilot program folks before you rent that commercial space, then maybe you'll be able to kind of get signups early that will help you then get the ball rolling. You can take deposits early on that wait list and that'll help you kind of get the ball rolling and might even get you some cash to help you with the build out with some first month deposits. And so that's another thing to think through and you can kind of confirm if there's real interest in this. Now what I love about this is that you're wise to tap the HELOC carefully because if you have the proof of demand, then you can start to tap into the heloc. If you don't have the proof of demand yet, I wouldn't tap into it immediately and instead I bootstrap that tiny version with a low rent that you can utilize short term. And maybe over the course of the first couple of months, if you just really cannot meet demand again, then it would be time to kind of utilize the HELOC to get that bigger space. Now if you borrow the money and it doesn't work, your fallback is to sell the rental, which has obviously huge equity. But honestly, unless there's a reason that you need to sell that rental. Your fallback is still seemingly fine because the rental is paying its own bills and it's cash flowing, you should be okay to be able use the rentals heloc. That's the cool thing about rentals is at least you could tap into some of that cash and some of that equity over time. But starting small makes this worst case less likely. And if you start small and you do that beta test group, it's really going to help you kind of avoid any of the worst case scenarios, which is why I like all of this. So bottom line, yes, it's a good idea. I wouldn't go full size immediately. I would test it out if you could find just some rooms or conference rooms that you could rent. And I would do a micro launch and prove the pricing and demand and make sure that you can scale up with confidence first. And then if your beta group works out, then you're on the right track and you can move on to the next thing. So I think that's really, really cool what you're doing here. A really, really powerful lesson for a lot of people who want to jump into entrepreneurship. And I absolutely love some of the things that you are thinking through here. So congratulations on the demand for your services and I can't wait to hear what happens. So if you do this, please let me know. I want to hear the results of this because I love this stuff. All right, the next question is, I make about $58,000 a year and I plan on working another 10 years. I'm contributing 18% to my 401k, currently at $54,000. And I've maxed out my HSA and Roth IRA for two years and I have an emergency fund with seven months of expenses. Should I pull 8,000 for my emergency fund next January to fully fund my Roth IRA immediately or slowly fund my Roth IRA over the year and leave my emergency fund alone first? Amazing job at saving aggressively and maxing out your HSA and your Roth. And the fact that you have a seven month emergency fund is a really, really powerful thing, especially since you have it in cash now. You're planning on retiring the next 10 years too. And so you're way ahead of the game now. Option one is to use your emergency fund to max your Roth early. The advantage of this is that the earlier you get your money moving, you can actually, you know, utilize that for compound growth and you can, you know, take advantage of market returns depending on what happens. And the Roth IRA growth is Completely tax free. And so front loading. This is going to help you become a really powerful wealth builder. The risk is you reduce your safety net. And that's the part I don't love, because you reduce that safety net. If an unexpected job loss or a big expense comes up, then your safety net goes down. Some option two is to leave that emergency fund loan and just dollar cost averaging the Roth over the year. And this is going to keep your financial cushion intact and you're still going to be able to max out that Roth over the year. It's just slower. And so I think overall we got to think of our emergency fund as our shield. Now if you want to use one month of your emergency fund and you're comfortable enough with six months on hand, I'm okay with that. But for most people, I think you keep the emergency fund intact and then what you would do is in overtime just dollar cost average into the Roth. Now a lot of people ask me this question because I always say, hey, I front load my IRA at the beginning of the year and I do a backdoor Roth IRA as early as I possibly can. But I don't think you have to do this. You can dollar cost average over the year, you're still going to get some great returns by dollar cost aver. It is not a requirement to front load the Roth. In fact, you're only going to be just about one year ahead if you front load it the first time. And then outside of that, it's not going to make a huge difference. And so what you really want to think through here is honestly keeping that emergency fund intact. That's why we have so much emergency fund content on this podcast, because it's so incredibly important to keep that thing intact because you have no idea what is going to happen. And then instead allocating and automatically investing those dollars over time back into the Roth is the way that I would look at this. Now, if you have a little bit of extra cash on hand, let's say you have enough to fund a Roth twice, then you can start an extra Roth bucket if you wanted to in your high yield savings account where you're saving into that bucket. And then over time, you know, maybe it takes you two or three years, then you can start frontloading at the beginning of every single year where then you have this extra account. So maybe it takes you one year, maybe it takes you two years or three years, but if you want to front load account, I would just save it in cash slowly over time, then you can start to front load and Then all of a sudden, your Roth contributions, every year, you're just funneling it back into this bucket and you're front loading. And so that cycle begins again. So that's how I would think about it and that's how I would do it, is I would have an extra savings bucket in place that over the course of the next couple of years, then you could start to front load your Roth if you really want to take advantage of that. And again, it's not going to make a huge, huge difference to front load it. I would just dollar cost average over time, I think it's a better way to do it and it protects that emergency fund. Speaking of protection, if you guys don't protect your finances online, this is the number one thing that you need to make sure that you are doing. Because there are data brokers out there who are taking your information from the Internet and they are selling it to other people. And sometimes they sell it to the wrong people and your information gets into the wrong hands. And there are scammers on the Internet who can get a piece of your information. And if they go to some of these data brokers who have your information and they sell that information to the scammer, they may be able to put together the pieces of the puzzle that is your personal profile, meaning they can maybe get your address or your name or whatever else they need. And so this happened to me before where there was a phishing incident where somebody got a piece of my information. They went online to data brokers, bought the rest of my information and were able to open up student loans in my name. And so to solve this problem, I went and I searched for a way to get my personal information removed online. And what I found was a service called Delete Me. And what Delete Me does is they go and remove your personal information from these data brokers. They do all the steps that need to be done in order to get your information removed so that scammers out there can't go find your information. If you go Google your name or your address in quotations, you're going to see a bunch of information pop up. Delete Me gets that information removed where you want it removed. It is the best service that I have used over the course of the last couple of years. They've been a sponsor of this show for a really, really long time. So if you go to joindelete me.com/pfp20, you get 20% off your plan at DeleteMo. So join delete me.compfp20, they're absolutely amazing. And I continue to use them year over year because their service is so great. It saves me so much time and I love what they do there. All right, the next question is, I'm self employed, live at home, no rent, and save $100 a week into a high yield savings account. I invest $240 a month into a Roth IRA. And I have an opportunity to move to New York City to attend the New York Film Academy. The tuition and housing are expensive and so I'm considering student loans. But I'm scared of long term debt. How can I manage this debt in a healthy way if I choose to go? So first, huge respect. You're saving and investing and thinking carefully before borrowing, which is way better than what most people do. If their dream was to go to a film academy, they would probably just borrow the money and go without even thinking twice about it and thinking about the implications of what would happen and the issues that would cause towards their future finances. And so this is really, really important. I'm going to give you some steps on how to think about this. Step one is I want you to get the exact numbers. I want you to get right down to the penny, if you can. So before you borrow, I want you to write down the tuition cost for the full program. Put this on a spreadsheet. The tuition cost for the full program. I want you to estimate housing. I want you to estimate how much you spend on food right now. If you don't buy food right now, I want you to think through, okay, well, what does the average person spend on food? Look at transportation and living expenses in New York City.
- [17:26]
Listener
Okay.
- [17:26]
Andrew Giancola
My wife went to an in state school her first year and then went to fit, the Fashion Institute of Technology in New York City. She lived in the middle of Hell's Kitchen. When we were in college. We did long distance for three years while I finished school at Florida State and she continued on at fit. And so when this happened, her expenses and her housing expenses went way, way up. Her food costs went way, way up. Even her transportation costs were really high. Cause she was riding the subway everywhere. But it was higher than even what it was at college. Because on a college campus you can walk a lot and you don't have to drive as much. Everything's pretty close together. And so when this happened, it was a big, big difference in costs for her and her family. And so they had to really think through how this was going to work. And she ended up having to take on some student loans. And that was one of the biggest things when we got married, right when we got married, I attacked those student loans as fast as I could. And then what I want you to do is I want you to subtract any money you've already saved or any help that you're going to get from family members and scholarships or grants or whatever else, okay? So I want you to get these exact numbers again. Full tuition cost. I want you to estimate housing, food, transportation, living expenses, and then subtract any money that you have left over. Now, what is the actual amount that you need to borrow based on those numbers? That's the first number you're going to get.
- [18:36]
Listener
Okay?
- [18:36]
Andrew Giancola
Now secondly is that once you go online and use any student loan calculator that's out there, there's a bunch of good ones out there. I think Bankrate has one. I think Nerd Wallet probably has one. There's a ton of them out there that you can go and look at and plug in that total amount, okay? And I want you to probably round up when it is that total amount. So like, if you're unsure on something, go a little higher, add 10% to it to make sure that this is accurate.
- [18:59]
Listener
Okay?
- [18:59]
Andrew Giancola
Plug in that total amount and expected interest rate. So the federal student loans are usually around 5 to 6% right now in a 10 year repayment program. So those are the numbers I would plug in. So if you borrow $50,000 at 5%, that's about $530 per month over the course of 10 years.
- [19:14]
Listener
Okay?
- [19:14]
Andrew Giancola
Now seeing this monthly payment in black and white is going to change a lot of people's minds because some people will run this calculation, they'll be like, oh shoot, my college tuition is going to be $160,000. And this is going to cost me, you know, 15 to $1700 per month. That is what I could pay for buying apartments in some places. So that is something where I think you really got to think and look at this monthly payment in black and white first. Then I want you to research your industry's earning potential. So look up realistic starting salaries for graduates from the New York Film Academy or similar programs. Realistic ones, not the high end, not the low end. Kind of just try to find something that is realistic, okay? And then ask the school for average income data also, because they should be able to provide that. I remember doing this early on and it was kind of eye opening what the average income data was. Now here's a rule of thumb. If you're going to borrow money, you need to make sure that you are borrowing less than your expected first year salary, and that's a conservative first year salary. So as a new film graduate, if you're going to make $50,000 per year in your first year, you want to try to borrow at least $45,000 or less if you can. If you're going to borrow money, Okay. I am not a huge proponent of borrowing money for student loans unless you know that there is income potential there. Because this is really a business decision when it comes down to it. Okay, next is to limit how much you can borrow. So when you take off student loans, take as little as possible. What a lot of people do, and this drives me crazy, is they will go and take the full amount that they are given. What happens though is maybe they have some cash left over, it gets commingled in their account and they end up just spending that money. Well, if you think about this, let's say you spend all that money on groceries. Well, you just paid for groceries. That has a 6% interest rate over the course of the next decade. It is really not something that you want to be doing. So you want to make sure that you were taking the minimum amount that you can, if you can draw from that loan account, like if it works like a heloc, for example, some of them do this where you can kind of keep money in there or draw from it. I would try as hard as I possibly could to draw the minimal amount that I would be able to take out. So if you can keep your living costs low, which is really hard in New York City, if you can find roommates, if you can live farther out and commute in, some of those are going to be really, really helpful. Also, if you can find ways to get scholarships to save more money, that is another thing that I would really think about doing. And then step five is I would have a payback plan before you even borrow. So ask yourself, how am I going to cover that 500 to $600 per month payment? Am I still going to hit my investment goals by doing that? Can I freelance or work part time after I work? If I can't get a job right away, can I pick up extra work now to help me reduce the amount that I'm borrowing? And do you have a backup plan if the film career does not take off? Those are some of the questions that I would be asking myself as well. And then considering alternatives, if there are alternatives and if the price is too high. Anytime a student loan is going to cost you six figures, you really need to look at it, it's a big, big impact on your money. It's a big, big impact on the long term. And really you have to take a good hard look at that. And then you got to make peace with good debt. You got to avoid bad debt. Those are two of the big things as well. So the numbers are going to tell you everything here. You need to run the numbers and you need to make sure that you have those in place. In fact, we need to probably work on a student loan step by step calculator for you guys. So I will work on that to make sure that we have one in place. Kind of working through the process that we just talked about here. But bottom line, let's go through one more time. Figure out the minimum you need to borrow, run the numbers to see what the real monthly payment is in black and white. Make sure your career plan realistically covers this payment and then explore every way to lower costs or earn more money on the side if you need to. And if you borrow, borrow with a clear plan. Then work that plan like crazy. That's what I want you to do. And congratulations on this and everything that you want to be doing here. And if it's your dream, it's your dream. And if it really brings you value, it brings you value. But just making sure you run the numbers so that it's black and white is super, super important. 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Andrew Giancola
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All right, first, this is absolutely amazing that you were thinking about your credit card like this and anybody who is in credit card debt. This is the perfect mindset to have is you want to do everything you possibly can to get this paid down because it's a pants on fire emergency and your finances will suffer if you don't. And so it's amazing that you are thinking through it this way. Now I'm going to try to tailor this to what your interests are. And there are websites where you can get started, boom, like right away. And this is going to be something that could be very helpful now because reading and writing are a big part of what you like to do. I'm just going to warn you now, AI is taking over a lot of these remote jobs. They used to be way more prevalent than they are now. But if you are interested in that, we can try to find you a couple of ways to do this. First, it is an awesome move again to that you were looking for remote work. So I would look at legit sites for remote work gigs. So I hire a ton, for example, on upwork. Upwork is a place that I hire a ton of folks and a lot of people think of upwork as like international or overseas help. I have a lot of US based contractors that I hire through upwork that do fantastic work for us. And so this is something that I think is really, really important to definitely get your profile on there. It's competitive because it is the largest freelance marketplace that is out there and it is great for editing jobs, it's great for proofreading jobs or general VA jobs. So if you just wanted to do, you know, help people with general VA jobs, it's a great place to look and you could set an hourly rate. So let's say for example, you wanted to make 20 bucks an hour, you can set that as your hourly rate. And then only jobs that pop up within that rate then you can start to apply for. So that is Something you can definitely do. And so an example for this is like on upwork, I was just looking before this. Proofreading gigs often pay $15 to $40 per hour depending on experience. And so that is one that you can definitely look at there. Fiverr is another one and they help you kind of create packages. So with Fiverr you kind of say, hey, I'm a proofreader and I will proofread one hour of content for $25. Or I will proofread you know, your entire book for $2,000 or whatever you want to think through there. You can put together packages and you can have, you know, resumes, blog posts, college papers, those types of things are great to look at. You can go to niches too. So like you can think through, okay, maybe I only want to proofread for college students. That may be a great place to start. But a lot of college students are using, using AI for that. Now there's an also niche sites like Reedsy R E E D S Y where authors will pay proofreaders, editors and beta readers out there and rates can charge for between $20 and $50 an hour or by word count on that. That is another place where you can do some proofreading and some editing on that. So that is another great spot to look for a lot of folks. Another place though is you can also kind of niche down and specialize in email marketing. So email marketing is still a big, big thing for a lot of folks. If you're good at converting on like sales proofreading or if you're good at helping people with their automations and emails, that could be something where you can do, hey, reading, writing, proofreading for some sales emails. And so that's another place that you can look based on what your interests are. So upwork is where I'd really start and then kind of go from there too is I would make sure to continue to stack income streams like you're talking here. So keep that instacart gig. That is a great thing for people who are paying down debt is to get that quick cash as fast as they possibly can and then have the online gig so that you can kind of work flexibly whenever you want. And if there are other skills that you have, Upwork also has other types of jobs that you can look through to see if there's something that you would enjoy and then use your nights and weekends flexibly for those online jobs to help you through that stuff. And then as you start to pay off that high interest debt, it's really going to make a huge, huge difference. So those are the places that I would look to start for that kind of stuff. And I think you can really do well on some of that. There's people on upwork, for example, I have hired who have made over a million dollars in their lifetime on upwork. So it just depends on how good you are, what kind of reviews you're getting, and how you're improving over time. Another thing that you can do is you can go out to authors and you can start to send them DMs on Instagram, or you can send them emails and try to say, hey, I'm a proofreader and I would love to help you out with any of your projects or works that you were working on. If you want someone here, you know, I'll do the first hour for free or something like that. And you can start to kind of pitch authors via email. And that's another thing I would honestly do. And you can, you know, craft these emails pretty quickly with AI and then be able to send those out. So let me know if you have any questions on that. I truly appreciate the question and amazing that you were thinking about it this way. You're going to get that debt pay down. It's going to be so powerful what you can do and so amazing that you were working through that. So congratulations on that and let me know what you end up doing. I would love to hear how it works out for you. All right, the last question is we're a family of four in Orange County, California. Ooh, expensive cost of living. Combined income is about $180,000. Good mortgage rate at 2.5%. But we have a HELOC of 108,000 at 6.74% and a credit card debt of about 15,000 at 19.75%. Should we use the HELOC to pay off the credit card? All right, so let's talk through this and understand your debt stack. This is a very good question, by the way, and it's a very good thought process for you to have. So your mortgage rate is 2.5%. My mortgage is also 2.5%. Let me just tell you, I will never pay that thing off. I didn't have to. It is an amazing way to just kind of have free money sitting out there. I would love to be mortgage free, but at 2.5%, your boy is not going to be mortgage free. So. Awesome. Keep that untouched. I wouldn't even mess with that. Now you have a HELOC at 108,000 used with 6.74% variable interest draw period ends in 6 years. Then you repay the principal plus interest. Okay, so this is something where HELOCs are not the same as a mortgage. Okay? So the way that they work is they work a little bit differently than a mortgage. And because you have this credit card debt at 15,000 at almost 20% interest, and your HELOC is at 6.74, now, that variable interest rate may go up. We got to make sure we know what the range is. So let's say, for example, on your heloc, you have a range. A lot of times on those variable interest rates, there's going to be a cap and there's going to be a bottom. And if Your bottom is 6.74%, my I'd imagine your cap is somewhere around 12 to 12 and a half percent. Somewhere in that range could even be higher, depending on where you bank at. And so if that's your range, then we need to know, well, what is the ultimate number? The ultimate number is probably still way lower than that, 20%.
- [32:56]
Listener
Okay?
- [32:56]
Andrew Giancola
And if this is your only option, then we need to look at the heloc, seriously, because this is a big difference in interest rate by doing this. And a HELOC debt is a lot different than credit card debt when it comes down to it, when you run the math. Okay, so credit card debt at 15,000 and you have 20% interest by far. So bottom line is every dollar on the credit card costs you three times more interest than your heloc currently. Three times more when you do the math. Okay, that's a big, big difference. So should you use the HELOC to pay off the credit card? Mathematically, I would say yes. This is not financial advice, but this is what I would do.
- [33:29]
Listener
Okay?
- [33:30]
Andrew Giancola
Mathematically, I would say yes. So paying 19.75% is brutal. It is brutal to be paying that. And credit card interest adds up faster than any other debt. So moving it to the HELOC at least drops the rate immediately to that 6.74%, at least for the short term. And then whatever your HELOC rate payoff is at the time, it is equivalent to instantly saving about 13% interest right now. Now, this is a variable HELOC, so again, this could go up over time, and it likely will as interest rates rise, but when interest rates fall, it will come back down. So an example is, if you keep $15,000 on the card, it's going to cost you about $3,000 per year in interest moving 15k to a HELOC cost you about $1,000 per year in interest. It's a big, big difference. And your immediate savings is about $2,000 per year. But you got to do this smartly, okay? Because you don't just transfer and relax. You have to make a payment plan to. This isn't something where we're just going to transfer it. We're going to take our foot off the gas instead. What I would do in your situation is I would go and I would look at the credit card and I would pay it off with a HELOC in one swoop, okay? But I would also stop using the card for any new charges. You cannot use this card again for any new charges instead. And you may already be doing this. And if you are, fantastic, but do not use that card anymore, cut it up. Now is the time to get the HELOC paid down and get that debt paid off.
- [34:40]
Listener
Okay?
- [34:41]
Andrew Giancola
Then redirect your monthly card payment amount plus extra to paying down the HELOC balance faster until you get at least the amount of the credit card off of the heloc. You're going to pay it off faster because you're going to need $2,000 less per year to get it paid off.
- [34:55]
Listener
Okay?
- [34:55]
Andrew Giancola
You will clear the highest interest debt. You don't have to get stuck with more HELOC debt in the long run. And you avoid mixing spending with the HELOC draw limit.
- [35:04]
Listener
Okay?
- [35:04]
Andrew Giancola
Now what I mean by this is you have to have a plan on the back end. If you pay it off with the heloc, what a lot of people will do is they will just sit there and be, all right, I fixed that problem. No, you didn't fix the problem. You still have to pay off the debt that you currently have because since that HELOC is variable, it's going to go up at some point in time. And so you got to make sure that you were paying that down as fast as you possibly can and then protecting your cash flow. So your real liquidity is $2,000 in savings plus your income. And so making sure you redirect that money towards the HELOC is going to be important and then always have that small cash cushion, obviously, if you're emergency fund and everything else and then pausing new big purchases until you get that pay down is also very important.
- [35:40]
Listener
Okay?
- [35:41]
Andrew Giancola
And so I think these are really, really great things that you're doing. Now another option is if you think you could pay off 20 grand in 12 months, you can look at balance transfer options where they sometimes will have 0% APR for the first 12 to 18 months and then you can get that paid off. So then you have a 0% that.
- [35:57]
Listener
You have to pay.
- [35:58]
Andrew Giancola
You can also see if you can refinance the HELOC to get a lower fixed rate of return because that's going to be a lot safer. And you can tighten spending temporarily on, you know, other extracurricular activities just to make sure that you can get this pay down faster. So those are three other options I would consider. But using the heloc, if that's your only option, is yes, a wise option in order to make sure that you can get off that credit card debt short term. But then paying off the amount that you put on the HELOC is the second step that you must make sure that you follow through on. So that is the second piece there that I just want you to make sure to highlight there. So listen, amazing question and amazing that you're thinking about this. Congratulations on taking your first step and I can't wait to see you get this all paid off. Listen, thank you guys for listening to the Personal Finance podcast. Cannot thank you guys enough for being here and sending in your questions. Again, if you want to send in your question, just go to the Mastermind newsletter by going to Mastermind Co newsletter signing up there and we will answer your question possibly on the show here and if not we'll answer you via email. So thank you guys so much for being here. I hope you got value out of this episode and we will see you on the next episode.