Hi, it's Neil Cowmeadow here with episode 448 of the Tutor Podcast, the Monday morning shot of over-caffeinated uncommon sense for anyone who wants to start, grow, and love their own tutoring and coaching business the same way as mine.
My aim is to bring you the ideas that have helped me in my business journey and life, as a teacher, property investor, mentor, and parent (even in a no-nonsense no-BS kind of way), in the hope that it helps you to ave as much fun at work and in life as I do.
I don't have all the answers and nobody does. Maybe you got a some better answers that would be helpful to myself and to others. Again it's info@neilcowmeadow.com or @TutorPodcast on X, formerly known as Twitter.
If you're good with all that, well okay, let's crack on with today – And we're following up from last episode, 447 - when we spoke about the fear of money and some ideas around it.
In episode 447 I promised to go through some fundamental ideas about money which have been helpful to me over the years.
So Let's have a look at one of the fundamental ideas in business and personal finance that people are terrified of: credit.
Many of us, myself included, grew up in environments and families and social groups where credit was seen as a bad thing, where you were encouraged never to be a borrower. If that sounds familiar to you, you're not alone.
Not taking on a bunch of expensive debt is often a good thing but sometimes it can be a missed opportunity.
Fundamentally we all need to understand the difference between good debt and bad debt because they are very different animals.
Let's take a look at bad debt first because that's the one that we were really being warned against I think.
Bad debt is the loan or advance of cash that you take in order to buy something that has no greater return than the value of the debt you took out. This might be something as daft as borrowing a ton of money to go on a holiday, or for designer clothing, or an expensive car, because you think it gives you some kind of social status. The problem is that the initial cost of the item is just the beginning. When we buy things on long credit we have to pay additional charges to the person or organisation that loaned us the money.
That's pretty bad in itself, come on, but a lot of times we'll buy items which depreciate in value. At the same time we're paying extra just to own that depreciating asset.
Just suppose you go and spend a couple of thousand pounds on a bunch of new clothes for yourself. Maybe they've got the right labels on and are all the rage. By the way, the instant you put them in the bag and take them out of the shop, they're worth very little because they're now secondhand.
The same thing applies if you buy a new car. The instant you put the key in and drive it off the forecourt, the value of that vehicle falls significantly. You will feel good for the first week or two whilst you have a brand-new car but that brand-new car is now only worth a percentage of the sticker price on the forecourt. If you bought at that sticker price on credit, the amount you owe for that now-depreciated vehicle is much higher than the sticker price.
Congratulations. In the time it took you to put the key into the car and drive it off the forecourt, you may have lost as much as 20% of the sticker price!
Certain electric vehicles seem to be particularly prone to even higher rates of depreciation – there are some horror stories out there - but the average annual rate of depreciation for a typical electric car runs at about 20%, which is a few percent higher than that for an internal combustion engine vehicle. Do you opt for an electric, petrol, or diesel car? The new car carries a premium cost and if you're buying it on credit, that premium cost is even greater than the burden of depreciation, Because you're going to be paying it off for the next few years, And the cost of that time is paid for in money.
The same story applies if you're using your credit cards or a personal loan to buy Depreciating or wasting assets.
If you must buy such things and you can do it legitimately, buy it through the business. For me an example of a wasting asset is a guitar, but that's a tool for the teaching business, isn't it?
To put it in a nutshell, bad debt is debt that costs you more than the value of the thing the debt is paying for.
That's the dark side of debt. We'd better have a look at the bright side now.
This is the concept of good debt, which I needed to have explained to me a long time ago by my then boss, Mark, who is an absolute business genius.
Good debt is money that costs less to borrow than the value of something it buys. Simple but I never really thought of it that way. I was still saddled with the idea that all debt was bad and I should avoid it at all costs.
Let's say that you have a fantastic opportunity to acquire business premises for what you do. The impact on the business is all positive. You can teach more in that environment because it's not working out of home. When you're not working in there you can rent the room by the hour to other teachers and tutors. The problem is you don't have the money to acquire those premises so you will have to borrow the money. Borrowing the money for those premises can be very good, because if the premises generate more money than the cost of taking out the loan, you’re quids-in. By taking out the loan you acquire an asset which pays for itself and gives you a profit on top. This is a good example of how good credit works.
In my property businesses: I use borrowed money where I can to fund deposits, then I leverage that borrowed money again using mortgages For the balance of the purchase cost. If I am creative enough. I can acquire properties with little or none of my own money. Provided the rental property produces more revenue than I need to service those debt obligations I'm making money out of thin air.
These days I'm not afraid of using credit - Provided it is good credit and not the bad kind.
It's very, very important to understand the difference between those two things. One will make you wealthy. One will eat you alive.
Here's a quick tip about credit in general. It is called the Rule of 72 and it's a quick and dirty way of calculating how fast your money will double or halve in value (depending on whether you're making money by or paying interest to a lender). All you have to do is divide the number 72 by whatever interest rate you're earning or paying. This will give you a good approximation of the number of years it will take to either double your investment principal or halve the value of a depreciating asset.
Let’s say you have an investment which returns 5% per year. Divide 72 by 5 and you come out with a number just over 14. That means it will take just over 14 years to double your initial investment.
If you could make it 7%, it’ll take around 10 years to double your initial investment, and so on.
Likewise, if that new car depreciates at 20% per year it will be worthless in around three and a half years – at least on paper. In practice there is always a floor: the scrap value of the metal itself.
That’s the big difference between good and bad credit.
The financial difference is more profound, because it is a spread: the difference between the value of an appreciating asset (say, a property) which makes you money and a depreciating asset (say, a car).
The good credit funded positive asset might make you 10K per year, the depreciating car, watch, iPhone or gadget might be costing you thousands of pounds per year as its value falls – lets say the car depreciates 1oK this year. The 10K positive and the 10K negative are a combined spread of 20K: both outcomes are built on credit: which one would you like?
We're going to wrap it up there because I've got things to do, people to see, and I know you do too. So I'm always trying to keep this brief. If you enjoyed the show, please like or subscribe. Feel free to send any questions or feedback to info@neilcowmeadow.com. Leave me a message on X where I am @TutorPodcast, and all being well, I'll see you in the next show. I hope this has been useful to you. Till next time, stay healthy, stay useful. Remember that you're always loved and you're never alone. Have a fabulous day.
