ShmoopTube
Where Monty Python meets your 10th grade teacher.
Search Thousands of Shmoop Videos
Accounting: Assessing the Net Cost of Debt 1 Views
Share It!
Transcript
- 00:00
Accounting Allah shmoop assessing the net cost of death We're
- 00:07
going to dive deeper into debt land as we go
- 00:10
further into the jungle the mighty jungle But for the
- 00:13
moment well all we care about our metrics We used
- 00:16
to establish appropriate debt levels forgiven company like appropriate What
Full Transcript
- 00:21
is really appropriate Let's start by bringing clarity to this
- 00:24
notion of quote appropriate debt levels unquote with some rational
- 00:29
thinking about loans in general Well first let's make up
- 00:32
a little personal story that hits home Over the course
- 00:36
of three years you have saved forty thousand dollars by
- 00:39
working weekends In addition Tio you're normal weeks at work
- 00:43
is a professional ferret breeder Surprisingly high demand in the
- 00:47
industry you find just the right home underground pool that's
- 00:50
an intentional underground pool Firehouse pole to slide down killer
- 00:55
stereo system Price tag Three hundred grand So you do
- 00:58
quick math on your fifty thousand dollars a year salary
- 01:02
Can you afford the home well on fifty grand in
- 01:05
income or gross income or total income You pay about
- 01:09
ten grand in taxes CNet forty grand after tax like
- 01:13
that But if you have a big fat mortgage oddly
- 01:17
York tax bill will feel a little easier to pay
- 01:20
Why Well because the interest you pay on your mortgage
- 01:24
is tax deductible How does that work Well you decide
- 01:27
on an adjustable rate mortgage and get a teaser rate
- 01:30
of S A four percent to start which goes up
- 01:32
to six per cent in two years and then just
- 01:35
floats as lie Boer plus two hundred basis points meaning
- 01:39
it's taking the best interest rate they send out there
- 01:42
in London from the Queen who loans money or that
- 01:45
their central bank Really Then he add two percent to
- 01:47
it and that's your rate that live or think offloads
- 01:49
all the time moves up and down up and down
- 01:51
Okay well a basis point By the way Just saying
- 01:54
is generally the most granular unit as applied to interest
- 01:58
rates for consumer It takes one hundred basis points to
- 02:01
equal one percent so you can think of a basis
- 02:05
point as one hundredth of a percent or coin Oh
- 02:08
one percent They're used in common parlance to simplify the
- 02:12
more granular details of the cost of renting money like
- 02:15
pennies When you pay your rent check to the landlord
- 02:18
you know the man or the woman so you're good
- 02:21
but not the best So you pay two percent more
- 02:24
than live or like live or would be the price
- 02:27
if the country of Dubai was renting money from England
- 02:29
or something who feel like that So then after those
- 02:32
two years pass and you're just lie bore plus two
- 02:35
hundred basis points Well at that point if Lie board
- 02:37
went all the way down to one percent well you'd
- 02:39
pay three percent in monthly interest if live or ballooned
- 02:43
up to be seven percent Well then you'd pay nine
- 02:46
percent interest All right Yeah simple So you put forty
- 02:49
grand down and you borrow two hundred sixty thousand dollars
- 02:52
as a mortgage and you pay for percent interest to
- 02:55
start That's ten thousand four hundred dollars a year in
- 02:58
interest payments all deductible So you're really now paying taxes
- 03:02
about eight grand instead of ten grand That fifty thousand
- 03:06
dollars a year salary is really forty two thousand dollars
- 03:09
in your pocket and you paid out twelve thousand dollars
- 03:12
in the thirty year mortgage payments Your payment is about
- 03:16
a thousand bucks a month because you have to pay
- 03:18
down a bit of the principle you owe each each
- 03:20
month really But thirty grand is left to pay taxes
- 03:23
of five grand a year and still you know live
- 03:26
even maybe furnish your place a bit Well you have
- 03:29
twenty five thousand dollars to pay your car loan E
- 03:31
drink Clothe yourself a fur heave water insurance whatever else
- 03:36
you need for your pet there And then the economy
- 03:38
heats up two years later and you get a raise
- 03:41
of five thousand dollars to now earn fifty five grand
- 03:44
a year You're feeling pretty good right now You know
- 03:46
how these shmoop videos they never end well Your taxes
- 03:49
go to about ten thousand dollars from the eight thousand
- 03:52
dollars that they were two years earlier So after attacked
- 03:55
you have forty five grand which you now have to
- 03:57
spend The economy is hot Jobs are aplenty So the
- 04:00
governments of the world decide that they're nervous about elation
- 04:04
getting out of hand Oh yeah right Interest rates rise
- 04:08
to combat inflation like central banks of the world and
- 04:11
US fed all raise rates to try to cool down
- 04:14
the economy And woe is you fly Bore has just
- 04:17
jumped to six percent Big jump It means you're now
- 04:20
paying eight percent interest The semi good news is that
- 04:24
well in the last two years you paid down about
- 04:26
ten thousand bucks of principle So now you owe only
- 04:29
two hundred fifty thousand dollars on your mortgage but at
- 04:32
eight percent interest on two hundred fifty thousand dollars Your
- 04:35
payments are now two thousand dollars a month for twenty
- 04:38
four grand a year Yes they're all deductible So take
- 04:42
your fifty five thousand dollars salary Your take home W
- 04:45
two and subtract twenty four thousand bucks from it And
- 04:48
you pay taxes as if you'd earned thirty one grand
- 04:51
I'ii not much in taxes maybe in five six grand
- 04:54
But you still have your five thousand dollar a year
- 04:57
real estate taxes And now all of a sudden things
- 04:59
air tight despite you having gotten a big fat raise
- 05:03
Yeah it's a tough here Here's the math You earn
- 05:05
fifty five thousand dollars a year pretax but then subtract
- 05:08
six thousand in taxes Twenty four thousand in mortgage interests
- 05:11
An additional four thousand year in mandatory principal pay down
- 05:15
Because that's just how you structured your adjustable loan You
- 05:18
rolled the dice You took the risk on the Fed
- 05:19
You thought rates would never go up much but they
- 05:23
did You also have five thousand dollars in real estate
- 05:25
taxes and your fixed recurring expenses out thirty nine thousand
- 05:30
dollars Well that only leaves you sixteen thousand bucks toe
- 05:33
live on car payment Ramen noodles Yeah pet food whatever
- 05:37
Well that three hundred fifty dollars a month car payment
- 05:40
is starting to feel really heavy food Yeah well how
- 05:43
much our ramen noodles again by the bulk Found or
- 05:46
ton Maybe And then a robot knocks on your company's
- 05:49
door one day and replaces you There are jobs for
- 05:52
you if you move So you have to sell your
- 05:54
home quickly find another job or start posting for extra
- 05:58
You know jobs on Craigslist This is how people go
- 06:02
bankrupt people And more or less it's how companies go
- 06:06
bankrupt as well Net cost a debt appropriate means you
- 06:09
can pay it down quickly if things should go arise
- 06:13
So uh you know good luck with that
Up Next
What do you get when the guy who wrote “The Raven” makes a serious effort to write in verse? Poe-try… Now, when you’ve detached your eyes f...
Related Videos
Incidents in the Life of a Slave Girl, abridged. Ready? Go.
Emily Dickinson: Along with Van Gogh, proof that you’re never really famous until you’re dead.
So the revolution was pushed along by… pamphlets? Sure, what the heck, let’s go with it.
We’ll take one order of liberty, but hold the death.