Meet David Frank

[00:00:00] David: I think it’s important to recognize, and I think everyone can fall victim to this in different areas of life, but when you get an answer that doesn’t make sense to you, that is not your fault. To the extent there is a fault, it’s the person who’s trying to communicate to you that is not meeting your needs in terms of how they are communicating that piece of information. And that ambiguous communication might be an intentional strategy on the part of the salesperson.

[00:00:29] Linzy: Welcome to the Money Skills for Therapists podcast, where we answer this question. How can therapists and health practitioners go from money shame and confusion to feeling calm and confident about their finances and get money working for them in both their private practice and their lives? I’m your host, Lindsay Bonham, therapist turned money coach and creator of the course Money Skills for Therapists.

[00:00:50] Hello, and welcome back to the podcast. Today, I am excited to have Dave Frank back on the podcast. We are digging into a topic that is so relevant to so many of the students, that go through Money Skills for Therapists. and I know folks listening to this podcast, which is balancing debt repayment.

[00:01:10] How do you figure out how much to focus on paying down debt? How do you balance that with your life in needs life? We talked today about separating those emotional components, the shaming that can happen around debt, the big voices in the financial space that make debt a shameful thing, and how that impacts our relationship to debt versus the actual cost of debt, which is the literal interest cost, understanding those two things when it comes to your debt.

[00:01:36] We talk about the difference between simple interest and compound interest. So we get a little technical today. Dave gives a great, really straightforward explanation of the difference between those two things, and understanding what kind of debt you have and how that debt is going to act over time.

[00:01:50] That can help you understand how to prioritize paying down debt. And generally exploring the idea that these things are often simpler than we think that they are. And if there is complexity, if you’re being given complexity by a financial coach or professional… if they’re making something seem very confusing and opaque you just need to trust them. If you get any kind of confused vibes and something feels unclear, you should take that as good information.

[00:02:19] That’s a good red flag, especially being the communication professionals that many folks who listen to this podcast are. So lots and lots of ground covered today. Here is my conversation with Dave Frank. 

[00:02:46] Linzy: So, David, welcome back to the podcast.

[00:02:49] David: Thanks so much. I’m excited to be here.

[00:02:50] Linzy: I am excited to have you here. The conversation that we’re planning, to start to dig into today, one of the things we’ve talked about talking about is a topic that on reflection, I’ve covered many times in coaching conversations on this podcast, which is about debt pay down. Something that I see in my students sometimes, folks who are in Money Skills for Therapists is it can be very stressful having debt.

[00:03:15] And it can kind of hang over your head, especially types of debt that are like student debt or consumer debt, like mortgages inevitable part of being a grown-up.

[00:03:22] In fact, we see a mortgage as a symbol of success in adulthood. Like, Hey, 500,000 dollar loan.

[00:03:27] High five! You’re a grownup. But when we have other types of debt, like that, as I mentioned, the student loan I noticed has a lot of charges consumer debt, like any credit card debt or a line of credit can have a lot of weight for people.

[00:03:40] And then there can be a lot of urgency around the desire to pay it down or pay it down faster than the schedule. And so I wanted to dig in with being someone who helps therapists with the personal finance side of things on your thoughts of how do you balance this? How do you balance paying down debt and knowing what is strategic versus having money to live life, like holding both of these things at the same time?

[00:04:05] David: Yeah. It’s such a great topic, and just as you were sort of teeing up this conversation, what came to my mind is that I think sometimes what can happen is that earlier in our lives we are perhaps a little bit less focused on some of our finances. And so maybe we accrue some debt, and we develop some… I don’t even like the word bad habits, but we learned some lessons and we did some things.

[00:04:29] So we’re kind of almost at one end of the behavioral spectrum if you will. And then all of a sudden we realized, wait a minute, something’s not working here for me. And so now I’m going to fix it, and I’m going to fix all the things overnight. And we quickly go all the way to the other end of the spectrum. If we start to dive into the world of personal finance online and some of the bigger voices out there, they do

[00:04:53] like demonize debt and make it seem like it is the worst thing in the world. And so, yeah, especially consumer debt and, and student loan debt… They can be very triggering, and there’s a lot of shaming sort of around having debt as well. And so I think that can be a different type of danger, like racking up a bunch of debt without really thinking of it is a bit dangerous, but equally paying debt down aggressively and quickly without being thoughtful about it is, I would argue, equally dangerous, just sort of in a slightly different way.

[00:05:26] And so I think, as with most if not all things in life, the trick is to find the balance, is to find the middle ground or the middle path. And so that’s, in general, how I try to coach people.

[00:05:39] Linzy: Yeah. And I love your point there because this is something that certainly in my work with finances over the last few years, I’ve started to pull apart with students when they have charge around debt is there’s two different pieces here. One is the narrative around the debt. And as you say, there’s a lot of narratives around debt out there now that are very shaming.

[00:05:56] Like it’s a moral issue to have debt and I think some of the larger voices in the financial space can be rather conservative voices, Christian conservative like there is a real kind of like intense morality infused into it, even if it’s not named.

[00:06:09] It’s there, right? That it is bad. You are bad. You are not in control, is kind of the, the messaging in that. So that creates an emotional weight to the debt, and that’s part of it. But then the other part is the actual cost of debt, right, which is as you mentioned earlier in life when you don’t have so much money… you know, when I look back on some years in my 20s, I’m amazed I got through.

[00:06:28] I’m like, how did I live on 11,000?

[00:06:31] David: Amen. 

[00:06:31] Linzy: I’m not sure. I think it was probably cause my parents bought me dinner sometimes, and bought me a winter coat. You know, like that, like truly is what got me through. And so it is very normal that in our earlier years, we tend to earn less. That’s just normal for all career paths.

[00:06:43] accumulate more debt, and not necessarily think about our future. And then you, you can end up with these, these debts, right? A large student loan too. Like I think the way the student loan, industry works, if we could call it that, you know, where they’re just like, Hey, here’s a hundred thousand dollars.

[00:06:56] You’re like, what? Amazing. You know, the free money feeling that can come with that can leave us with a lot of debt and debt comes with a literal cost. It just literally costs you money. And that’s kind of the other side of when you’re talking about the danger of the debt, that’s what I would see as the danger.

[00:07:12] Is that what you’re referring to just like, it costs interest to have debt? 

[00:07:15] David: Just I mean, it’s just an expense. There’s like, it costs interest.so I, the distinction I make is, is just sort of, exactly what you said is that when we come to financial matters, there are two sides or two pieces of it. Part of the work is internal work, sort of like our emotional reaction, the stories that we’re telling ourselves about our behavior and our future and all that.

[00:07:35] And then there’s the external work off of, you know, what are the accounts and the amounts and the dollars and interest and, and all of that stuff. And the external part also includes what is the right approach and path for you. So, that’s really what a financial plan is. I mean, I’m a financial planner.

[00:07:52] I put together financial plans for folks. And that’s just a holistic approach that looks at all of the elements of your life and says, okay, given what you want to do in life, what’s important to you, how you’re working your family status, the reality of what your today looks like, including how much debt you have, what is the best way to, to move forward?

[00:08:13] We can’t change the past, but we can change how we move forward. So I think that’s just sort of like the framing. It’s just like, let’s, let’s work to sort of forgive ourselves for our past mistakes. Because guess what?

[00:08:24] Anytime you’re dealing with a new area of life in any capacity, we make mistakes because it’s new for us. So why would money and borrowing money be any different? Like, of course, it wouldn’t. So, what I always say is, hey, when I talk to a lot of my clients, they’re, they’re therapists, right?

[00:08:39] Most of them have their therapist. So stuff will come up as we’re working through it. And I’ll, you know, talk about it a little bit and I’ll be like great. So we’ve identified some amazing things for you to go out and talk to your therapist about; what we’re going to work on is the sort of external piece.

[00:08:56] And I’m always happy to have an internal conversation, but I want to be clear that I’m not the person for that, right? Like I’m not a mental health professional, and it will be our work together, our external financial work will be much more powerful if you are also doing some of the internal work with your therapist or maybe you even want to find a specific financial therapist, which is something that’s out there. But yeah, let’s like think about this thoughtfully So like let’s just look at the debt and figure out what makes sense to do.

[00:09:23] Linzy: Yeah, that holistic view. Because I think about what can happen with debt, and if I think about some of these coaching conversations that I’ve had with folks before, there are two that come to mind, I’ll just mention for folks who are listening to the podcast, there was a coaching conversation I had with Jeanette Dove, another one with Aaron Davis, a couple of previous episodes, where we dug into this question of, yeah, holistically, what does the debt mean in your life?

[00:09:44] Right? And then what is the importance of paying down the credit card super fast compared to having a bit of an emergency fund at home or your kids being able to play hockey this season or not, right? Because something that I think about, too, as a parent, and I know lots of folks who listen to this podcast are also parents, is it is this very specific season of life, this chapter, that is over fairly quickly, you know, there’s only really like a kind of like a 15, 18 year period where your kids are like with you, and they need everything and you’re like helping to shape, their growing up, their childhood years.

[00:10:16] And then that, that chapter of your life is over and you’re still a parent, but you now have adult children who are off doing their own thing. 

[00:10:22] David: Yeah, totally different. 

[00:10:23] Linzy: Money gets easier at that point, but when you’re in those years, it can feel impossible to balance the field trip with the rep hockey out of town tournament with the credit card that is going the wrong way.

[00:10:37] It’s getting bigger, not smaller. It can feel like this impossible bind for folks. And when you do have that intense charge around debt of like, I’m failing because I have this debt, right? This says bad things about me. I think it can make it, become more of a priority than maybe it ought to be for many folks when they think about what matters to them.

[00:10:58] David: Yeah. Yeah. So, let me just share sort of like, the approach that I kind of walk through with, with debt for people. So, you know, again, I work with therapists, so big surprise most folks show up, with debt, especially student loan debt. So there are lots of different sort of flavors of debt, I guess I would say, but I’ll put them in three kinds of general buckets.

[00:11:17] There’s a mortgage, which most folks have, if you’re a homeowner, you probably have a mortgage. Then there’s student loan debt, which, yeah, that’s that. And then there’s what I call consumer or revolving debt. So that would be credit card debt principally, but it could be, also maybe a home equity line of credit or something that you had to, had to draw on.

[00:11:36] So, I kind of say, in general, the mortgage, I kind of set it to the side, and I’m just like, you know, it is probably just okay. We’re not going to focus a lot on paying this down. And there are a lot of reasons for that. We will focus on paying it down, but just by what’s called an amortization schedule, which is just, it’s just a fancy table that determines what you pay every month and you’re sort of, every month making a flat payment.

[00:12:00] Part of that payment is going to pay down the principal, what you borrowed. That’s the other part of the payment is going to pay the bank for lending you money. That’s paying interest. So usually we just set that aside and say like, we don’t need to worry about that. And, in most cases, paying down your mortgage more quickly than that amortization schedule dictates, which 

[00:12:20] typically 30 years, is usually probably not the smartest financial move. And we can talk more about that in a little bit. But so like, let’s set that aside. The only time it makes sense to look at a mortgage is, you know, sometimes we just find there is what I might call sort of a structural issue in, in a financial plan, or in your financial life, where your income just can’t support the mortgage that you’ve got and like that’s not a fun conversation or spot to be in. But if you find yourself just doing a lot of work around your budget and debt pay down And you just can’t seem to stop racking up debt. Probably there’s either a structural financial issue, so that’s an external issue also, or there is an internal financial issue that’s kind of sabotaging you.

[00:13:03] So that’s a time to do a little bit more work. I think sometimes in that situation, there’s a desire to find a magic bullet solution. It’s like, I just have to find the right product or the right strategy to solve this problem. When in fact, it’s just a simple problem. Not simple to solve, not comfortable to confront necessarily, but it’s a more basic problem.

[00:13:23] You don’t need to find a fancy strategy to solve it. So I kind of went off on a tangent but like mortgage debt is generally not so bad student loan debt is equally generally not so bad. There are a lot of alternatives and complex alternatives to deal with student loan debt. For student loan debt, it’s just like I just want folks to be looking at it and let’s think about it I mean, then there’s the last piece that consumer revolving debt or credit card debt.

[00:13:47] And that is certainly the most expensive form of debt, by which I mean, the interest rate is going to be the highest. So that means it’s expensive to have. That high interest rate makes it even more difficult to pay off. So I think if there is consumer or revolving debt with higher interest rates, that’s what I’d like to focus on first.

[00:14:05] Those other categories, student loans, mortgages, let’s just pay those by the terms that the lender has given us. Let’s focus on consumer debt or credit card debt, and then let’s be balanced about it. Because debt, as you said, Linzy, there are moral judgments around it, but at the end of the day, debt isn’t good or bad.

[00:14:22] It’s just a tool. It’s an available tool out there. And there are some circumstances in which it makes a lot of sense and can be very helpful. And I am a huge fan of the sort of when you’re working to pay down that type of debt to split your goals. Yes, be paying down the credit card debt. And yes, also be building up an emergency fund. Because if you’re paying down debt as aggressively as you can and not putting any money towards an emergency fund, well, guess what?

[00:14:49] Something’s just going to happen again and you’re going to end up back in debt like that. I’ve seen that happen so many times. It’s not necessarily bad. It’s just sort of what’s happening. You’re kind of learning, but I think building up liquidity and by with that, I mean, kind of having an emergency fund is important for everyone. It’s particularly important for those of us who are self-employed and any therapist and private practice, whether you’re a group practice owner or a solo practitioner,

[00:15:16] You’re a small business person like you’re in business for yourself, and having personal liquidity funds in addition to potential business emergency funds really can make a big difference and help reduce stress overall.

[00:15:28] Linzy: Absolutely, and what I see as the biggest cost for folks who are doing the aggressive debt pay down and then end up needing to put money back into debt because their stove breaks or their car needs to be repaired, is that it’s demoralizing. It’s just so defeating when you’ve been working so hard, and you’ve been sacrificing so much, you’re like not going out for that coffee, and you’re not buying the groceries you want to try to hit this goal, and then you see yourself get knocked back a few pegs.

[00:15:55] Like, that, I think, is the cost of it, is when we become so stubborn or single-minded about something, and we make it, I would argue, more important than it really ought to be in the context, you know… in the holistic view of our life, that it sucks to be defeated,

[00:16:11]  and then, and then you’re like, are you going to go back to being as tight again?

[00:16:16] Like, do you get back on the horse and keep being like, this is the most important thing in my life? This is my top priority paying down this debt. Yeah. So that, that’s what I see is that, and then eventually I think folks end up just kind of giving up when you go all or nothing. Eventually, you go with nothing, and you’re like, I, that I just can’t pay down this debt. Whereas with that middle road, you know… And I think this is where you and I, vibe in a lot of ways is we’re both kind of, I think, balanced middle road people, allows you to still see yourself making progress.

[00:16:43] But as you said, you’re building this financial stability in this other way, which means that if your stove breaks, you’ll still end up spending money to buy a new stove, but you won’t see your debt going up again, right? In some ways, the cash is the same. The numbers might be the same, but the emotional experience is very different when you don’t feel like you’ve just lost, been defeated, or failed again, right?

[00:17:05] This I think is the narrative that comes up for folks.

[00:17:08] David: Yeah, and as you mentioned that… it’s just such a human experience, right, of trying something new, and it fails, and it being difficult, and getting discouraged, and then going back to your quote-unquote old ways, and then feeling bad about that. I think one of the most important tools or powerful interventions that folks can employ for themselves is just bringing someone else. 

[00:17:31] into this relationship between you and money, whether that’s, you know… some good financial planners and advisors do some work like this, although not all of them. There’s also a lot of financial sort of coaches, out there, Just bringing someone that you can trust… and that is a little bit of a trick is finding someone that you can trust. Bringing someone in this conversation, so you can be just like, help me stay on track here. Help me figure out when, I mean, I say to clients all the time. You inevitably hit road bumps here. That’s just the nature of the work; it’s the nature of life, right?

[00:18:03] It’s just like, you will just get discouraged. It’s almost kind of like the stages of change or what is it? 

[00:18:08] I think that traditionally that like didn’t have a stage for relapse. But I think that typically relapse, sort of like just backtracking a bit, is just part of it, and it’s not that you’re broken, or that you’re somehow wrong or incapable.

[00:18:23] You’re just going through that particular stage of change. And it’s just like, Oh, okay. What can I learn here? Like, what am I learning about what’s happening?

[00:18:31] Linzy: And I’ve seen versions of the stages of change. I’m thinking about, you know, some handout that I saw 10 years ago where it’s, it’s not relapse, it’s recycle, where you’re recycling old.

[00:18:38] behaviors, which is extra therapist y. Let’s take out all the weight. 

[00:18:42] David: I like that. 

[00:18:42] Linzy: You’re just recycling old behaviors.

[00:18:44] You’re going back to what you know best. And I think that’s so true. When you can recognize that that’s part of the process, you can make peace…

[00:18:52] David: Yes,

[00:18:52] Linzy: Right? And get back to what you were, the bigger goal in mind. And as we’re talking about debt pay down, something else that I think is helpful for us to think about and talk about is, Simple interest, compound interest, like when you’re paying down debt, does it make sense to still put money into your investments?

[00:19:11] What is your thinking on that? Because I’ve noticed myself, as I’ve, I’ve taken on, a debt related to a backyard cottage that we built. Construction is its special beast when it comes to cost overages, right?

[00:19:22] David: Sure. 

[00:19:22] Linzy: And so we built this backyard cottage a couple of years ago, it’s supposed to cost 200, 000.

[00:19:27] It cost us 265, 000, obviously that 65, 000 had to come from somewhere. So we had a HELOC. And I remember when we went to sign our first HELOC, the mortgage, I should say the woman at the bank who is some sort of bank professional, partially sales, let me tell you. She was like, well, yeah, you can have this HELOC, but also there’s this extra line of credit for 30, 000.

[00:19:51] And I was like, no, no way. We’re not doing this. But my partner was like, well, you never know, like we might need it. And we did, we did need it because our project went 65, 000 over. So I have this HELOC that is not insignificant. It has no emotional weight for me, but I have a plan to pay it down.

[00:20:07] But something that I’ve decided to do is to simultaneously still put money into our investments. So I’m walking this middle road again, both and. And part of my rationale around that is because of simple interest versus compound interest. I’m wondering if you have any thoughts on balancing not just debt pay down with life, but debt pay down with saving for your future, like retirement savings.

[00:20:29] How do you think about these two things side by side?

[00:20:32] David: Yeah. It’s a great question. Maybe I’ll just start with sort of, a hopefully understandable explanation of the difference between simple interest and compound interest. So simple interest, perhaps ironically named, I’m not sure how simple it is, but like, Yeah. It says the interest is only accruing on the principal.

[00:20:52] So let me explain what that means. So let’s say we make an investment of 100 into the stock market. That 100 is the principal. So then let’s say you earn 10 percent interest on that investment in the first year. So 10 percent of 100 is 10. So your principal was 100. The first year’s worth of interest growth that you’ve experienced is the 10.

[00:21:15] So that’s 10 percent of that original principle So if we were living in a simple interest world, in the subsequent year, you would earn just another ten dollars interest because you’re earning interest on that original principle or the original investment. So year one ten percent, ten dollars. Year two, ten percent, 10.

[00:21:37] That’s simple interest because it’s just looking at the principle and it’s ignoring the interest that’s building up over time. In contrast, compound interest means that you are, something is compounding; it’s multiplying; it’s becoming sort of geometric in growth. And what that means is that you are not only earning interest on that principle, But you are also earning interest on the past interest that you have gained.

[00:22:03] So in this simple a hundred-dollar investment example, in year one, we get 10 percent of the initial principal because we’re just getting started. So that’s 10 bucks at the end of year one, we have 110 now sitting in that account. Over year two, yes, we are earning that 10 percent on the initial principle of 100, and we are earning interest on the 10 of interest we earned in the previous year.

[00:22:29] And so that just continues to happen at all the interest that you’ve earned in subsequent years, in future years is also earning interest. And that’s what’s compounding. That’s compound interest, and that’s what can be so powerful and counterintuitive about long-term investing. You can’t believe how quickly compound interest will build up, but it takes quite a few years for that to kick into gear, for the power of compound interest to show. 

[00:22:59] Linzy: It’s kind of like a snowball, right? It starts small, but the bigger it is, the more that it accumulates, and it just gets bigger and bigger and bigger and bigger. But yeah, it’s a slow-roll, slow-rolling snowball to start. It’s not always obvious at the beginning just how powerful that is.

[00:23:13] David: Yeah, and so that’s one of the reasons why it does… Compound interest, I mean, is typically one of the reasons why we say that starting to invest for your long-term goals like retirement earlier is always better because it gives you more time for that compound interest to start working.

[00:23:31] And so that, that is one of the reasons why I think it does make sense, in most cases, to balance things between paying down debt and building up retirement savings. Though the one caveat that I give to that is that, retirement accounts or retirement plans that you can put money into are great, and they have a lot of advantages.

[00:23:51] One of the disadvantages is that it is typically pretty difficult to get your money back out, so putting a lot of money into a retirement plan or any other spot where it is very difficult and or costly to get your investment back out when you have a lot of expenses like younger kids, or kids in college when you’ve got a lot of debt that you need to be taking care of, it’s not that you shouldn’t be putting any money into those types of investments.

[00:24:17] It’s that you do need to be very cautious and mindful.

[00:24:21] Linzy: Yeah, and I know in Canada, we have the TFSAs, tax-free savings accounts, and RRSPs. And RRSPs are the ones that are locked, where it’s like, you can’t take that out unless you’re retiring, or you’re like a first-time homebuyer. I think those are the only exceptions. Whereas a TFSA has different tax benefits.

[00:24:38] You don’t have to pay taxes on the money you earn in that investment, but you can also take it out. There’s a lot more flexibility there. And what I generally hear from Canadian financial advisors. Advising people is to start with your TFSAs first anyway like max those out first unless you’re earning at a high-income bracket, which is not most folks listening to this podcast.

[00:24:58] That’s usually not a problem therapists have where we’re like, Oh, but I make 300, 000 a year. There are some for sure, but that’s not most of us.

[00:25:04] David: For sure. 

[00:25:05] Linzy: But, so starting with those TFSAs first is usually the most strategic. And also you do have that flexibility because what I’m hearing is like, don’t lock that money up too tightly if you’re going to need it. 

[00:25:15] David: Right.

[00:25:16] Linzy: If you do put it into a 401k, my understanding, would be an equivalent. 

[00:25:18] David: That’s right.

[00:25:20] Linzy: Not easy to get it back out.

[00:25:23] David: Yeah, I’m not familiar with the different structures available in Canada, but it sounds a little bit like the TFSA is similar to like a Roth retirement account.

[00:25:32] Linzy: That would be the equivalent.

[00:25:33] David: And yeah, the other one would be a traditional retirement account. Although the TFSA sounds like it’s a little bit more flexible than a Roth account.

[00:25:41] So the Roth is reasonably flexible like you can get your contributions back out, but you can’t take your earnings until later in life.

[00:25:50] Linzy: Okay, I think the TFSA is more flexible, but similar I think these things are analogous enough conceptually.

[00:25:57] David: Oh, yeah. 

[00:25:58] Linzy: Starting with that more flexible investment is the place to start, again, because of that compounding. And what I noticed for myself too, emotionally, if we want to talk about the emotional stories with debt is the nice thing about paying down the debt.

[00:26:10] In a sustainable way, like paying down this HELOC sustainably and saving for retirement, I get to see myself saving for retirement. 

[00:26:17] I could be like, this HELOC is the most important thing in my life, and we’re not going on vacation, and we’re not saving for retirement until it’s gone. Like, if I had a more shame-based narrative around it, I could make it painful.

[00:26:29] Like that, that HELOC could hang over my head every day and every night. But it just doesn’t because I’ve run the numbers on how long it’s going to take to pay it off. I have a monthly payment we make that’s very sustainable. And I’m seeing my partner and I saving for retirement. And I’m running the rule of 72 in my head,

[00:26:44] which helps you understand how long it’s going to take your money to double. And so I’m thinking about, okay, this 750 that I put away a month is going to double in 10 years, and that’s a much better use of my money than paying down this other debt as fast as I can. Right? I think it’s taken me a minute to get there,

[00:27:04] but I do find it gives me enormous peace to be able to hold both of these things simultaneously.

[00:27:09] David: Yeah, well said.  I want to touch back to something just regarding compound and simple interest. So the way we were talking about compound interest is in the area of, investing or savings, the other area where interest rates show up, or interest shows, is on the debt side when you’re borrowing.

[00:27:28] The idea of compound interest isn’t so much a thing in debt. And let me explain, what I mean by that. If you take the mortgage interest, just like the, the most kind of basic debt that we’re more perhaps more familiar with, or kind of basic sort of kind of quote-unquote, good debt or more sustainable debt, you’re borrowing a certain amount of money, and then you’re paying interest on that principle.

[00:27:49] It’s like that initial balance. So that amortization schedule that I mentioned the bankers come up with They’re just like great over the next 30 years, you’re every month going to make a payment. The payment is going to be the same It is going to pay down both principal and interest. In the beginning, you’re paying a lot of interest and not paying down very much principal toward the end of those 30 years Each payment is kind of reversed in terms of where the money is going. It’s paying just a little bit of interest and a lot down in payment.

[00:28:18] And the reason that happens is because as you pay things down, there is less interest. You’re just paying interest on that principal amount. And every month you’re whittling down that balance. So each month your interest expense goes down a little bit. So we can just think of that as simple interest, again, meaning you’re just paying interest on that initial principal amount, the initial amount borrowed. The only time that compound interest works to your disadvantage in the debt world is when you’re not able to fully pay enough money for interest. I’ll explain what I mean by that in a second. That most commonly happens in the world of credit cards.

[00:28:58] So if you’ve got like ten thousand dollars on a credit card, that might have a 26 percent interest rate like that’s not unheard of. So like there’s a huge amount of interest. And you will have a minimum payment that the lender dictates you make in some cases a lot of cases actually that minimum payment is not going to fully pay for the interest that you’ve incurred during that month.

[00:29:20] So the balance grows. So you haven’t earned interest. You have sort of been hit with some interest. And so at the beginning of the month, your balance was 10, 000. Let’s say just to keep things simple over the month, you were charged a thousand dollars in interest. And you only paid 500 for example. Well, there’s an additional 500 of interest that you were charged that you didn’t pay off.

[00:29:46] So now that’s part of the principal balance, and so now that’s bad compounding. So it is out there but for student loans, for mortgages, compound interest isn’t… It isn’t a thing. 

[00:29:58] Linzy: Yeah, and I was wondering that in the world of student loans because the student loan landscape for Americans is fairly different than it is for Canadians. But something that I’ve heard of for Americans that I’m curious what is, is I have heard of folks where their loan payment is low enough that their student loan is growing, not shrinking.

[00:30:18] What is at work there? 

[00:30:22] David: The student loan landscape is so, so, so complicated. But yeah, so what’s happening there, there’s exactly what I was just describing. In the U S, there’s something known as income-driven repayment plans or IDR plans, which an IDR is not an actual plan, it is a category of plan.

[00:30:40] So there are different types of IDR. So if you just say I have an IDR, I’m like, okay, well, which one? That doesn’t necessarily mean anything, but at any rate, the idea is that we are not going to force you to pay back the student loan according to an amortization schedule like a mortgage. Instead, we’re going to allow you to make a lower payment based on how much money you’re making.

[00:31:00] So, in some cases, yes, the interest will be more than the payment you’re making, so the balance does grow, just like a credit card might grow in the example I was using before, but the interest is simple, so you do not pay interest on the interest that’s been accrued but not paid. 

[00:31:20] Linzy: Right. 

[00:31:21] David: But there is an exception to that. When you consolidate your loan, or sometimes when you change the income-driven repayment plan that you are on, sometimes that interest will be what they call capitalization.

[00:31:32] And once the unpaid interest capitalizes, then and only then does it become part of the principal balance that is dictating how much interest you are paying. 

[00:31:42] Linzy: Right. So it can get turned into principal if you consolidate your debt and Turn it into a different type of debt. 

[00:31:46] David: That’s right. But if you are on one of those plans and you see your balance growing, yes, I get that that’s disheartening. 

[00:31:56] David: And Biden’s new plan that’s being challenged in the court would, would eliminate some of that. It would eliminate all of it. We’ll see if it happens. We’ll see what happens. But, even though your balance is growing, your interest burden isn’t getting bigger. So it’s not as bad as it might seem. 

[00:32:11] Linzy: Okay. Okay. That’s helpful to hear. Because I think like, you know, it’s helpful to hear that although it’s growing, it is different than that credit card rate growing.

[00:32:19] David: It is. That’s right. 

[00:32:20] Linzy: Yeah, So it looks the same, but there are different things at play. And I think that’s where folks being able to have conversations with people like yourself who speak policy and bureaucracy cause these things they don’t make them transparent.

[00:32:34] And, I would say to some extent, they’re not transparent on purpose, right? Like in complexity, there are a lot of things that can be hidden, which makes it hard for consumers to make good choices. Or maybe you just don’t even have good choices you can make, you know, you have to take what is available.

[00:32:47] David: Yeah. Sometimes that is the case.

[00:32:48] Linzy: Yeah, but I think that’s where, for folks who have debt, taking some time to understand what is your debt and how it works. Is it simple? Is it compound? Your student loan is growing, but what does that mean financially?

[00:32:59] David: That’s not the worst.

[00:33:00] Linzy: Can help you make those balanced decisions we talked about earlier.

[00:33:03] David: Yeah, and complexity is a great point. Complexity is typically not your friend. There are a lot of financial products and investments out there that are so confusing, that is just generally in the complexity, there’s almost always something hidden. The student loan world.

[00:33:20] I think there’s, there’s a lot of kind of like governmental reasons for that. I mean, it’s just a mess. We’ll see what happens, but you reminded me of something, just in general, like when anyone is working with a financial professional or considering working with a financial professional, I always encourage you to ask two sorts of interrelated questions.

[00:33:37] Number one is how do I pay you and how much, like, how much are you going to charge me? And then you’ll get a piece of information. That’s an important question to ask, but the second question is maybe a more important one. And that is, tell me all the other ways you will earn money in our relationship.

[00:33:55] So that will help you understand what commissions are they going to get, what conflicts of interest they have in terms of the advice that they’re offering you. And that’s an important piece to understand because anytime a service is offered for a very low price, or something feels too good to be true, you know what happens when things are seemingly too good to be true.

[00:34:16] Linzy: Yes.

[00:34:16] David: They almost always are.

[00:34:17] Linzy: Absolutely. I saw an email from, Julie Herres, a colleague of both of us, last week where she used the example of her friend’s toddler as a good reminder to all of us.

[00:34:26] David: Yeah, I saw that. 

[00:34:27] Linzy: Always ask why? I thought that was such a sweet phrase.

[00:34:28] David: Yes! That’s so great.

[00:34:30] Linzy: Just keep asking your questions like, how do you get paid?

[00:34:32] And are there other ways you get paid? And like, just really letting yourself ask every and all questions of financial professionals because something that could happen, and I recorded feelings and finances like short answer episode recently about this is like, we can sometimes fall back into this teacher-student kind of relationship or like where there’s like an authoritarian relationship where we’re afraid to ask questions.

[00:34:54] We don’t want to look dumb. We’re like, okay, they seem to know what they’re doing. They have a nice desk, so clearly they’ve, you know, figured things out in life. But remember that you are the consumer, like you are the customer and you get to ask questions. And if you don’t like the answers to those questions, or if you don’t like the fact that they’re not answering your questions, and you’re getting a feeling, I don’t know if I trust this person.

[00:35:13] You can walk, right? Like you are the person who holds the power in that relationship.

[00:35:18] David: Yeah, .. I think it’s important to recognize, and I think everyone can fall victim to this in different areas of life, but when you get an answer that doesn’t make sense to you, that is not your fault. To the extent there is a fault, it’s the person who’s trying to communicate you to you. 

[00:35:32] is not meeting your needs in terms of how they are communicating that piece of information. And that ambiguous communication might be an intentional strategy on the part of the salesperson. So it is okay just to be like, that doesn’t make sense to me. You’re going to have to explain again. 

[00:35:46] Linzy: Totally. Well, you know, and for all the generalizations I would make about therapists, one I would never make is that therapists are dumb. Therapists are not dumb people.

[00:35:55] David: That’s right. That’s right. Absolutely.

[00:35:58] Linzy: We are bright people who tend to be able to be very perceptive and pull together complex information in fractions of seconds to be able to do the work that we do.

[00:36:05] So if somebody’s communicating, and it’s feeling unclear, you are a professional communicator. Something is wrong. Right? So like trust your skills and instincts and your gut, more than what somebody is telling you if it doesn’t feel right. So David, thank you. I so appreciate you coming back on the podcast today.

[00:36:22] I so appreciate you having this conversation with me. For folks who are interested in hearing more about you and what you do, where can they find you?

[00:36:31] David: Yeah. So, I am a financial planner for therapists. So my mission in life is helping therapists understand, the external financial world while sort of honoring their internal experiences around it and just putting in place solid, smart financial plans that allow them to realize their goals in life.

[00:36:48] And if you want to learn more about me or just see it. A ton of free resources that I put together, visit my website. That website is turningpointhq. com. So that’s the name of my firm turning point. So it’s turning point HQ, like the abbreviation for headquarters. com.

[00:37:03] Linzy: Love that. Thanks, David.

[00:37:05] David: Absolutely. Thank you. 

[00:37:21] Linzy: One of the key points that I’m certainly taking away from this conversation today is perhaps an affirmation that I received from Dave. Often the middle road is the right road to walk when it comes to balancing your financial goals and your well-being. So for folks who are listening, if you have any debt, and you’re feeling driven to pay down that debt,

[00:37:43] Take some time to do the math and think about what would be the actual financial benefit of paying down that debt faster, especially if it’s simple debt, right? If it’s not debt, that’s going to be growing, if you’re not having to pay interest on interest, as Dave talked about, what is the actual number, the financial benefit, of paying down that debt faster compared to putting money in your investments where it’s compounding, right, where you’re earning interest on interest and that money is growing.

[00:38:09] I certainly in my own life have made the decision that I like to have my foot in a little bit of both. That’s very much my personality, my style, but also it is more strategic, certainly in my case, to be putting money in my investments and know that I’m getting that compound interest and knowing, you know, 20 years from now when I retire that that money is going to grow much, much more than the positive impact I would get from paying down debt.

[00:38:34] So take the time to understand your numbers, think about your own needs, your emotional needs, and the actual numbers, and decide how you want to balance these things in your own life. You were giving yourself such a gift of clarity when you take time to understand your numbers and interrogate some of your stories, right?

[00:38:52] Don’t make decisions simply to try to decrease your anxiety or shift out of a story that you’re bad or that you’re failing, but interrogate those stories. Don’t let those stories run you, alongside making informed financial decisions that have to do with real numbers. It is a huge gift to yourself, and especially to your future self who, you know, will be living off the money that you put aside now in the future for you to take time and be with these things.

[00:39:17] So I appreciated Dave’s perspective on this today. If you are enjoying the podcast, you can follow me on Instagram at Money Nuts and Bolts. If you’re interested in working with me and getting my support in a community of lovely, supported, as I mentioned, smart therapists who are also working on building a better relationship with their money and developing calm and clarity around their private practice business finances, you can check out my masterclass.

[00:39:46] You can think about that as my intake for the course. It’s your chance to learn about my approach, learn about how I teach, and learn about everything in the course. And it’s also your invitation to join us in Money Skills for Therapists, which is my foundational course, where we do all this work with folks.

[00:40:02] So if you are interested in working with me, you can click on the link in the show notes to check out my masterclass and learn more about how to develop common confidence with your money and learn more about my course Money Skills for Therapists. Thank you so much for joining me this season. It’s been another great season of the podcast and we will see you next season. Thanks for joining me today.