The Good The Bad And The Ugly

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The Good The Bad And The Ugly

Debt Analysts Tim Sabelko Jason Gilbert Ryan Erickson Matt Bach Jeff Mathes

What is Debt? The idea of owing money to someone else.

Is Debt Good or Bad? How many have a debt? Consider good or bad?

Concepts Of Debt Good Debt Bad Debt Opportunity Costs

Good Debt vs. Bad Debt Good Debt Appreciates Bad Debt Depreciates

Good Debt Taking Out A Loan To Start A Business Taking Out A Loan For School Taking Out A Loan To Buy A House

Bad Debt Holding A Balance On A Credit Card Taking Out A Loan To Buy A New Car Taking Out A Loan To Go On A Trip

Opportunity Cost Time Spent In School Starting A Business Employee Training

Bad Debt: Credit Card Dynamics Model for Paying Credit Card Debt Analytic Solution Simulation Total Interest Paid

Analytic Solution General Formula where: P = payment R = Interest rate x(n) = balance at month n

Compartmental Diagram

Analytic Solution

Analytic Solution Notice a pattern

Analytic Solution This equation forms a Geometric Series This series can be simplified

Geometric Series

Analytic Solution Therefore our equation: can be written as

Simulation We ran simulations to show long it would take to pay off your credit card bill

Multiple Credit Cards Optimizing Payments Within A Budget

Two Typical Credit Cards Card Balance Funds 3000 Interest Rate 18% VISA Discover 5000 12% Y Total Funds 300 How do we pay off both cards? X

The Equation

Minimizing the Interest Question: What is the most effective way to pay of the two credit card balances? Answer: Pay the card with the highest interest rate.

Two Typical Credit Cards Card Balance Funds b 1 Interest Rate r 1 VISA Discover b 2 r 2 Y Total Funds F X

Assumptions Your credit card company will not charge late fees. There will be no further charges made on your card.

Minimum Interest Equations

Finding Minimum Interest

Warning Do not attempt this in the real world. Why? Your credit card company will charge you late fees in the real world. Alternative: Consolidate your credit cards with a home equity loan or low interest credit card.

Good Debt Examples of Good Debt üEducation üHouse üLand Example: We will use is taking a loan out for an Applied Math degree.

Assumptions

After 108 months ( 5 years after you graduate)

Till retirement at age of 65

Your Math Degree Pays • And 758, 648 ahead of the associate degree grad. • As you can see you come out 911, 616 of the high school grad • Well worth your 26, 000 in loans.

Conclusions ü There is a right time to go into debt. ü Just think before you act. ü Do the Math. ü And make you good investments.

Summary Good Debt Bad Debt Opportunity Costs

References Bureau of the Census Bureau of Labor Statistics Dr. Deckelman Bill Kryshak CPA

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