Liz: Welcome to the NerdWallet Smart Money podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I’m Liz Weston.
Sean: And I’m Sean Pyles. In this episode, Liz and I are talking about debt and debt forgiveness. First though, in our This Week in Your Money segment, Liz and I are talking about a new interest of mine, cryptocurrency.
Liz: So how did you get involved in this, Sean?
Sean: I have to admit, it was a little bit spontaneous. I was just scrolling through Twitter the other day, as one does, checking in on the status of our republic, doing a little bit of doomscrolling, checking out Dionne Warwick’s Twitter account — which I will tell you is the antidote to doomscrolling. And I saw that Dogecoin was trending, and this is something I’ve been kind of curious about for a while. So I wanted to check on it, see why it was trending on Twitter and the big news . . .
Liz: OK, what in the world is Dogecoin?
Sean: OK. Dogecoin is a cryptocurrency that effectively started as a joke. For those who aren’t familiar, there is this meme that goes back, I want to say almost a decade at this point, of a Shiba Inu, and it is called Doge. It is the Doge dog, and it’s just a meme that circulated for a long time. And so, the creators of Dogecoin wanted to make a cryptocurrency that was a joke, kind of a satire on the whole financial industry.
For that, I found it really appealing. Anything that takes away a little bit of power from the way that money rules our lives I’m all about. So I thought it was interesting. And when I was looking through the trend, I saw that the big news was that it hit a penny in value, which was a big momentous occasion for a Dogecoin, which had been around since 2013 and had not even hit a penny yet.
Liz: So this is what got you involved in crypto?
Sean: Yes. Yes.
Liz: I love it. OK.
Sean: So, I do want to say from the outset here, we’re not endorsing this kind of money. Cryptocurrency is pretty volatile and is a risky investment. This is something that I was doing with some fun money. I only spent $50 on this and I got a lot of Dogecoin for that, because it was a penny at the time. So I just thought it would be something that would be worth dabbling in, because I’ve been curious about it for a long time. So I bought it through a cryptocurrency exchange, and there are a number of these. And I was really surprised by how complicated the process was to get set up. I assumed that much like opening a bank account or applying for a credit card, you’d put in your info and you wait a little bit, and then you are approved. That was not the case.
I had to upload photos of my identification and put in my address, give them my Social, and I had to wait a couple of days for them to verify all of my information before I could then, at that point, wire money from my bank to an intermediary bank that would then be uploaded to this cryptocurrency exchange. So what I thought was going to be maybe a half-an-hour impulse adventure into cryptocurrency took me maybe three days to do.
Sean: So in my few days having this cryptocurrency so far, it really reaffirmed to me that the way that we think about it at NerdWallet, which is that cryptocurrency is an incredibly speculative and volatile buy. We like to think that stock trading of more established companies is less risky than investing in cryptocurrencies because it just goes up and down all the time. So again, it’s not for the faint of heart or those who are going to be putting all of their money into this. That’s maybe a very risky thing to do, but for me it was fun to do at the time.
Liz: Well, I think people see or hear about cryptocurrencies when they go up and people don’t hear as much about when they crash. So that’s something that’s just constantly beat into people’s heads and beat into our own heads, this is gambling. This is like going to Vegas, and there’s no guarantee that you will get anything out of this. The smart thing, if you’re going to do this, is to only risk money that you can easily lose. When we’re talking about investing, we’re talking about something different. We’re talking about investing and putting money into the productivity of companies and actually the productivity of the world. And we know over time that that particular kind of investment pays off. We don’t know that with cryptocurrency. We don’t know which one is going to be the one that actually is in it for the long haul.
I’m not sure one that was created as a joke is going to be the one that really takes off. This is not a way to get rich. This is a gamble and you’ve got to be prepared to let that money go.
Sean: The value of it just depends on people’s interests at the time. And actually over the summer of 2020, there was a big TikTok meme around trying to get Dogecoin up to a dollar. And obviously they failed, because it’s only around a penny right now as we’re recording this. And there was a lot of speculation of, “Oh, is this the time that Dogecoin has its moment?” It seems like 2020 or 2021 would be a great time for meme money to take off, right, in this crazy world that we’re living in.
But you just never know. And in fact, at that time, Dogecoin put out a tweet saying, “Be mindful of the intentions people have when they direct you to buy things. None of them are in the spot to be financially advising all this great advice.” They also said, “Make choices right for you. Do not ride other people’s FOMO or manipulation. Stay safe, be smart.”
Liz: Yeah. In the stock market world, there’s something called a pump and dump. And what that is, is with penny stocks, somebody goes on and tries to hype it up. And their whole point is just to get it bid up, and then they sell and poof, the value goes away. So I would think of any cryptocurrency, any speculative investment, as really, really subject to those kind of pump-and-dump schemes.
Sean: And obviously, there’s always going to be risk when it comes to investing. There’s never a guarantee of return of any sort, really. But that is especially true when it comes to cryptocurrency. And yet, despite that, I decided to take this little adventure and again, as you said, I’m doing it with money that I can lose and feel OK with losing, but that’s just what I wanted to experiment with really.
Liz: Yeah. Well, that makes sense.
Sean: All right. So for those who are interested in learning more about crypto, we’re going to link to one of our key articles on this. It’s called “What is Cryptocurrency? Here’s What You Should Know.” It includes seven different things that you should know about cryptocurrency, but we will link to that on our show notes post. So, please check that out. And with that, I think we can get onto this episode’s discussion around debt in 2021.
Liz: Sounds good. Let’s do it.
Sean: All right. So for the next installment of our #NewMoneyGoals series, Liz and I are focusing on the perennial goal of getting debt-free. But I’m actually of the perspective that we are in a really unique moment in the history of consumer debt in this country, and I’m kind of convinced that we’re in the middle of a debt crisis and we have been for a while, and it’s just really boiled over in the past 12 months or so. So to start, Liz and I are going to set the context for where we are right now. And then we’re going to talk about managing debt in 2021.
Liz: Yeah. And Sean, you just read a book about this topic, right?
Sean: Yeah. And this is the book that inspired this conversation. It’s called “Debt: The First 5,000 Years,” by the late David Graeber, an anthropologist who was really active in the Occupy movement. And this book is mammoth. It’s around 400 pages with a following 200 pages of just footnotes, basically.
Liz: Oh, wow!
Sean: Very deeply researched, but it truly opened my eyes around the way that money and debt and credit had been intermingled and have had so many different shapes throughout human history.
Liz: And one of the things that you mentioned was that credit actually predates money.
Sean: Credit really was the first form of money. And this is dating back to Sumerian credit ledgers that go back to around 3,000 BC. And throughout history, money was virtual and then it became metal-backed, and then it became virtual again. Then it became metal-backed, and now we’re again in a virtual form of money with the dollar not being backed by the gold standard, so many different shapes of money throughout history. And that has helped me understand how a lot of what we’re in right now is of our own making and design and we have these very strict rules around paying debt and feeling morally obligated to do so, but much of this is a somewhat recent convention and has changed over time.
Liz: Well, yeah. And that’s I think important for people to know, is a lot of times people think the rules around debt have been engraved in stone for those 5,000 years that Graeber’s talking about. In reality, there have been a few changes in the past few decades that have led to the current situation. And one of those changes was the repeal of usury laws. Back in the day, states had limits on how much you could charge on interest rates. Isn’t that right?
Sean: Yeah. I mean, historically, an interest rate of 20% was around as high as you could go. That was a standard in ancient Egypt, actually. And even before that, charging any kind of interest was deemed immoral and has been illegal at certain points and in certain places in history. But now, we have just sky-high interest rates. A 20% APR on a credit card is actually pretty good in our current context, and we don’t even need to talk about payday loans, which just have astronomical interest rates.
Liz: What happened was in 1978, the Supreme Court basically said that companies were only limited by the usury laws of the state where they were located. So obviously, a bunch of lenders moved to states that had no limits on interest rates. And this did a couple of things. One of the things it did is it greatly expanded availability of credit because lenders could charge more for riskier borrowers, and then we saw a real expansion of who could borrow and how much they could borrow. That expanded credit made credit much more a part of our everyday lives.
Sean: But at the same time, since that’s happened, we’ve seen wages stagnate from around the 1970s or so. And so, at the time where people have been able to take on more debt, more expensive debt, they’ve also been less and less able to pay off this debt. And now we have debt in so many endless shapes in our country. We have student loan debt, we have medical debt, we have children who have lunch debt. It’s kind of mind-blowing, the fact that we just accept all of this, and people are suffering so greatly and they really aren’t able to move ahead in their lives because they’re limited by what they owe.
Liz: Well, and one of the problems is when people’s ability to repay isn’t considered. We want people to go to college. We want people to be able to get an education because that increases their ability to earn, which increases tax receipts, all that good stuff. But we’re allowing 18-year-olds, 17-year-olds to sign up for mind-boggling amounts of debt, perhaps that they can’t repay. And that situation has led to what we’re seeing, which is so many people with more student loan debt than they can possibly repay.
Sean: Yeah, and you’re right. Debt can be a tool, but it’s about having debt within reason. And historically, debt was seen as an obligation between equal parties where one would pay the other back. And I think that equality has eroded over time as wages have stagnated and people just take out debt to get their groceries, or now they’re putting rent on a credit card, and this has led to the debt crisis that we’re in right now.
Liz: So I know, Sean, that you are really hoping for some kind of student loan forgiveness to come out of the Biden administration. And that actually has some historical precedent, right?
Sean: Debt forgiveness goes back thousands of years. Graeber points out in his book that dating back to Babylon, kings would often forgive debt. Let me read this brief passage here. He said, “Faced with the potential for complete social breakdown, Sumerian and later Babylonian kings periodically announced general amnesties, which was a period of debt forgiveness.” And if there was ever a time for us to have this because of social unrest and because of overwhelming debt, I think right now is the perfect moment to have some kind of debt forgiveness beyond student loans. Think about all of those people who have nine months of back rent and how are they expected to pay that off while also managing keeping the lights on and feeding their kids and all the other things that you need to have an existence beyond just mere subsistence?
Liz: Bankruptcy law has evolved over time so that at least people will have that option to get rid of their rent debt and their other debt that’s been built up. And the whole point of bankruptcy is so people can have a fresh start, and it’s essential to capitalism. You have to have an ability to wipe the slate clean, otherwise, you wind up in the equivalent of a debtor’s prison, where there’s just no way to pay off what you owe. Unfortunately, because of the way the bankruptcy law has evolved, we do have that situation with student loans.
There is a debtor’s prison there. And it wasn’t meant to be that way. It used to be that you could get rid of student loans, if you were insolvent. The current situation is just sort of a weird confluence of court cases and Congress kind of not coordinating, so we have this horrible situation. And hopefully, even if we don’t get student loan forgiveness, there will be some progress in changing bankruptcy laws so that people who are completely unable to pay those debts can get some relief.
Sean: Well, one thing that’s so interesting to me that came out of this book is the connection between debt and morality, especially in this country. The United States was actually fairly late in the game in adopting bankruptcy laws, even though it’s in our Constitution. And we have this idea that you must pay what you owe, your debts must come due, and this is your obligation.
Liz: Well, I think most people do feel that obligation. I think it’s pretty innate. Most people take out loans or use credit cards fully intending to pay them back.
Sean: But again, bringing it back to the idea of being able and being in an equitable position in society to be able to pay your debts, that’s just not where many people are. And I think the more that we can separate you as a person versus you as a dollar amount that you owe to a financial institution that was made up in the last hundred years, the more we can live happy, fulfilled lives, and hopefully get out from this burden of debt that so many people are experiencing.
Liz: And Sean, you and I have both come across people who are so unwilling to file for bankruptcy that they’ve depleted their home equity and depleted their retirement accounts and they wind up in bankruptcy anyway, so that huge stigma is still there. And unfortunately, it’s preventing people from getting the relief that they are entitled to. One thing that we’ve also noticed is that there are a lot of people going into retirement who have this kind of debt, just crippling debt. That didn’t used to be the case. You had your mortgage paid off. Now people are entering retirement with student loans, which is just kind of insane.
Sean: Right, really mind-blowing. But there is a little bit of good news. Credit card balances went down over the course of 2020, because people who were in the top part of this K-shaped recovery, who were doing better and weren’t spending as much on travel or going out to eat, were able to reduce their balances. And also a bit of good news is that if people do want to pay off their debt in 2021, the nuts and bolts strategies that we talk about really haven’t changed all that much.
Liz: That’s true.
Sean: So let’s dive into some of these practical tips here.
Liz: Obviously the first thing you need to do is catalog what you owe, who you owe it to, how much you owe, the interest rates, minimum payments, stuff like that.
Sean: Maybe make a spreadsheet. We have calculators at NerdWallet that will gather all of your debts in one place for you. Just get something sorted, so that you can visualize what you owe, and that way, you can begin to figure out how you might want to approach it. I also think it’s important for people to dig deeper into their budgets and see where they can maybe trim some expenses to channel more cash toward their debt payoff. One area that I’ve been trying to cut down in my budget personally is groceries, because I’ve been spending more and more because I’m cooking more. And I’ve been trying to pivot and buy things in bulk, so that I can shave down my grocery budget, which has just ballooned over the past year.
Liz: Yeah. And in general, what you’re looking for is paying off the toxic debts, the stuff that’s high-rate, like payday loans, credit cards, things like that. You don’t need to be in such a rush to pay off student loans necessarily, or your mortgage. And you need to come up with some kind of a payoff strategy. Again, I will include links to our various calculators so you can figure out the one that works for you.
Sean: Right. Debt snowball and debt avalanche are two really popular methods. And they’re kind of similar, but they have a couple of key differences. With the debt snowball, you pay off your debt with the smallest balance first, while paying minimums on your other balances. And then once that smallest debt is paid off, you roll that amount into your next-largest debt and so on and so forth. Like you’re rolling a snowball down a hill, gaining momentum as you go.
And then with debt avalanche, in contrast, you pay off your debt with the highest interest rate first, while of course paying minimums on your other accounts. And then once that first account is paid off, similar to the snowball, you roll that amount into the next debt and continue to cascade across all of your debts until you are debt-free. People like this method because it can save time and money.
Liz: Yeah. It’s the one that technically allows you to spend less money and get out of debt faster. The problem is, is that people tend to get more of a sense of victory and more a sense of motivation if they start with the smaller accounts first, right?
Sean: Yes. That’s why I’m personally more a fan of snowball, because I think that people are more motivated by having wins and feelings of success than the bottom line. Obviously, we all want to pay as little for our debt as possible, but at the end of the day, what matters is the debt payoff path that will have you stay motivated and stick to it over the long run.
Liz: Yeah. And there’s also ways to use financial products maybe to speed this up, especially if you have good credit scores, you can get credit cards with 0% balance transfer offers. You can get personal loans. The great thing about personal loans is that the payment is the same every month and you get out of debt in a certain amount of time. Typically, you don’t want a personal loan for more than three to five years, but at least you are out of debt at that point. You can also refinance. Refinancing student loans, auto loans, your mortgage, to free up more money.
Sean: Right. I have a friend who took out a personal loan to consolidate a few different credit cards that he had. He really wanted the simplicity of having a single monthly payment. And for him, that was why the personal loan was so appealing.
Liz: All these options are available to folks who have steady income, good credit scores. If you don’t, or if you are simply struggling to make minimum payments, you have some other options in the debt relief category.
Sean: Yes. Credit counseling is one that I am a big advocate for. A lot of people aren’t aware of credit counseling, but these are nonprofit agencies that can help you understand your debt and your budget. They provide a lot of free help. They also offer what’s called a debt management plan, where they can cut your interest rate and put you on a plan to pay off your debt over three to five years. The reason that they can do this is because they have agreements with the credit card companies to allow you to cut your interest rate, because that way the credit card companies know that they’re going to get this money eventually.
But interestingly, some credit counseling agencies are now offering what they call a less-than-full-balance program, which is basically their form of debt settlement. And again, you’re still on good terms with your creditors compared to a more traditional debt settlement program, where you can actually tank your credit pretty severely and leave yourself open to lawsuits. So they are trying to adapt to make it easier for more consumers to handle their typically credit card debt in ways that keep them in good standing with their creditors, but they can pay down their debt faster as well.
Liz: It’s really important when you’re considering debt relief options to also make an appointment with a bankruptcy attorney who can look at your individual situation and let you know all of your options. Credit counselors typically want to steer you away from bankruptcy and sometimes, bankruptcy is the best option in a bad situation. What it does typically is erase your debt within three to five months and allow you to get a fresh start, really start over in terms of building your credit and getting on with your life.
Sean: I wouldn’t be surprised if we saw a spike in filings this year. There was a huge drop in people filing for bankruptcy in 2020, according to the American Bankruptcy Institute. Overall, bankruptcy filings fell by nearly 30% in 2020 compared to 2019.
Liz: Yeah, there’s good reason for that, right?
Sean: Right. Well, courts weren’t really open in the same way. A lot of people didn’t really have money to file.
Liz: Well, another thing that was going on is all the hardship programs, remember? That you could put your mortgage on hold for up to a year, student loan payments were paused. Most of the credit card companies expanded their hardship programs to allow you to pay less or even skip payments. So a lot of people found relief there, which took the pressure off and allowed them to put off bankruptcy. But I think you’re right. I think we’re going to start to see as the courts reopen, more bankruptcy filings and more people seeking that kind of relief.
Sean: All right. So while we are in a really difficult moment with consumer debt in this country, I still think that if people want to take the approach of paying off their debt this year, it’s absolutely doable. These methods can really help you make a big dent and hopefully even get completely out of debt in 2021. And with that, I think we can move on to our takeaway tips. Liz, do you want to kick us off?
Liz: Yes. First, understand the moment. Our country is in a debt crisis, so try not to feel so guilty if you’re struggling with debt.
Sean: But at the same time, some of the nuts and bolts debt payoff tactics still work. That means cataloging your debts, finding the best way to pay them off, and sticking to your plan.
Liz: If you’re really struggling, don’t be afraid to ask for help. Think about calling a nonprofit credit counseling agency for free budgeting and debt help.
Sean: And that is all we have for this episode. Visit NerdWallet.com/Podcast for more info. And remember to subscribe, rate, and review us wherever you’re getting this podcast.
Liz: And here’s our brief disclaimer, thoughtfully crafted by NerdWallet’s legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstance.
Sean: And with that said, until next time, turn to the Nerds.