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The Good The Bad And The Ugly

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

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The Good The Bad And The Ugly

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  1. The Good The Bad And The Ugly

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

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

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

  5. Concepts Of Debt • Good Debt • Bad Debt • Opportunity Costs

  6. Good Debt vs. Bad Debt • Good Debt Appreciates • Bad Debt Depreciates

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

  8. 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

  9. Opportunity Cost • Time Spent In School • Starting A Business • Employee Training

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

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

  12. Compartmental Diagram

  13. Analytic Solution

  14. Analytic Solution

  15. Analytic Solution

  16. Analytic Solution • Notice a pattern

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

  18. Geometric Series

  19. Analytic Solution • Therefore our equation: can be written as

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

  21. Multiple Credit Cards Optimizing Payments Within A Budget

  22. Two Typical Credit Cards How do we pay off both cards?

  23. The Equation

  24. 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.

  25. Two Typical Credit Cards

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

  27. Minimum Interest Equations

  28. Finding Minimum Interest

  29. 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.

  30. Good Debt • Examples of Good Debt • Education • House • Land We will use is taking a loan out for an Applied Math degree. Example:

  31. Assumptions

  32. After 108 months ( 5 years after you graduate)

  33. Till retirement at age of 65

  34. 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.

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

  36. Summary • Good Debt • Bad Debt • Opportunity Costs

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

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