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Decoding debt

When is borrowing a good investment? Here’s what you need to know about the right financial instruments – and which asset yields the best return.

October 30, 2018

By Cory Phare

Coloradans have debt on the brain this fall.

At the ballot box, the state is considering placing limits on payday loans this election cycle with Proposition 111. In their wallets, Coloradans are reaching for plastic more than ever, with households carrying an average of $9,108 in credit card debt, according to a new report by financial data analytics firm ValuePenguin. Meanwhile, after The Federal Reserved bumped interest rates higher at the end of September, new home buyers saw 30-year mortgage rates in the state rise from 4.75 percent to 5-plus percent in a matter of days, adding significantly to the cost of home ownership.

With debt getting more expensive by the day, how can you determine when borrowing is a good investment? Experts agree that it’s vital to understand how you can make money work for you. Spoiler alert: Investing in your education may be your best bet.

“In personal finance, good debt has historically been where investment yields a greater return than what you’ve spent going into it,” said Keith Fevurly, senior lecturer in Metropolitan State University of Denver’s Department of Finance. “Think of [good debt] as any asset that’s likely to appreciate faster than what it’s going to cost to borrow.” 

And if you’re thinking about borrowing money, it’s important to talk about it with financial professionals, trusted advisors and even family to make the best choices, noted Haley Kline, initiatives manager with MSU Denver’s Office of Financial Aid and Scholarships.

Far too often money is relegated to the realm of religion and politics as a topic to avoid, she said.

“We talk about wellness in terms of physical and emotional well-being, but often leave out important elements of financial health,” she said. “There’s both a sense of overconfidence and misjudgment in situations that can be financially precarious.”

Haley Kline and $AFE - Students Accessing Financial Empowerment - are resources for Roadrunners to prevent and address financial fragility. Photo by Mark Stahl
Haley Kline and $AFE - Students Accessing Financial Empowerment - are resources for Roadrunners to prevent and address financial fragility. Photo by Mark Stahl

Plastic trap

It’s no surprise to many that the worst form of debt is accrued by swiping those colorful plastic cards in our wallets. 

But that concept can be elusive to young people, many of whom have been led to believe that credit card spending can improve their financial futures, Kline said. 

“We’re seeing a misconception among younger people that using credit cards is good because it helps build credit,” she said. “But it’s a dangerous game to get into, especially if you can’t pay them off every month.”

That danger is driven by compound interest and the high Annual Percentage Rates (APR) cards often carry, Fevurly said.

Say you swipe that credit card with an 18 percent APR for a $1,000 purchase. If you only make the minimum monthly payment on that debt, it would take more than 7 years and 6 months to pay off – and that $1,000 purchase would end up costing $2,993.

“If you use credit cards – and really, you shouldn’t if you can avoid it – try to pay them off completely at the end of the month,” Fevurly said. “And if you can’t do that, make as much of a payment as you can.”

Fevurly also advises to only carry one credit card; if you do have a debt across multiple cards, concentrate on paying off the lowest balance, he said.

And if you’re having trouble making the minimum monthly payment on a credit card, contact the banks issuing the card directly to negotiate a payment plan.

“Often if you tell them, ‘I can’t continue to make these payments,’ they’ll work with you to either do a debt extension or reduction,” he said.

With an average of credit card debt load of $9,108, Colorado is seventh in the nation for the amount owed per person. Keith Fevurly suggests paying off as much of a balance as possible, having only card, concentrating on lowest balances and negotiating with the companies.
With an average of credit card debt load of $9,108, Colorado is seventh in the nation for the amount owed per person. Keith Fevurly suggests paying off as much of a balance as possible, having only card, concentrating on lowest balances and negotiating with the companies.

Nest egg or money pit?

Most people think of a home mortgage as good debt. Rather than flushing rent down the drain, you’re building equity with each payment you make on your mortgage, right? 

That may be true, but only including equity in the home ownership equation overlooks the hidden costs that eat away at wealth, Fevurly said.

When home improvements and maintenance costs are considered alongside mortgage payments, the typical house appreciates only about 1.5 to 2 percent, accordingly to Fevurly’s recently released “Plan Your Financial Future (2nd edition).”

It’s also critical to pay attention to fluctuating interest rates, as a little change goes a long way and experts predict The Federal Reserve will raise rates one more time before the end of 2018. 

Consider a 30-year $250,000 mortgage at a 4.5 percent interest rate. Over the life of the loan you’ll pay a total of $456,016. But if that interest rate creeps up by 1.5 percentage points to 6 percent, over the life of the loan you’ll pay more than $539,000 – more than double the interest (and original mortgage amount).

The bottom line?

“You buy a house to live in it – don’t look at it as an investment.” 

Based on BLS data from 2017, there
Based on BLS data from 2017, there's a clear correlation between educational level attainment, reduced unemployment and median usual weekly earnings.

Find value in yourself

So, what can you invest in that will provide an internal rate of return of up to 15 percent?

Yourself.

“From gaining the skills needed to change careers to opening doors you didn’t even know about, the best investment you can make is in yourself and getting a college education,” Fevurly said.

And though the nature of how college transforms students makes it difficult to quantify long-term outcomes on the same plane as other more tangible items, it’s also hard to argue the value proposition of an investment that can net someone well over a million dollars more than a high-school diploma alone.

That statistic comes with a caveat, though.

“A place like MSU Denver offers an excellent value for the money, but you need to get the degree to have it pay off,” Fevurly said.

The Office of Financial Aid and Scholarships is currently helping students complete their FAFSA and scholarship applications, both now open for the 2019-20 academic year. Doing so automatically puts applicants into consideration for more than 150 separate funding options.

MSU Denver also offers students the opportunity to learn how to manage student loans and other debts through programs such as Students Accessing Financial Empowerment ($AFE), which is dedicated to enhancing upfront literacy and reducing financial fragility.

Kline and $AFE help students see the need to take a nuanced, proactive budgeting approach to minimize future loan payments. Her first piece of advice for students considering loans is for them to look at the average starting salary for the industry in which they hope to find employment.

“There’s a definite tendency among students to be optimistic, then they have to deal with the realities of lower salaries,” Kline said. “Ultimately, the worst kind of student loan is the one that you take out without finishing your degree – you have the debt without the earning power [a degree provides] to pay it down, creating more barriers.”