Get rid of debt to reach your goal of FIRE (financial independence retire early): A recent early retiree’s thoughts...

 

Highpoint Scenic Vista and Recreation Area, Pennsylvania 

My wife and I are recent early retirees at ages 51 and 48. Since our early retirement in August of last year, we’ve been traveling with our companion Toby, a 13 pound Pomeranian dog, to various destinations in the eastern parts of the United States.  

In this post, we’d like to share our thoughts on debt and how it affects financial independence and early retirement.

When we were growing up, no one taught us anything about debt, or finance for that matter.  There was no finance class in junior high/high school that was mandatory, nor was there a mandatory requirement in college.  

Whatever we learned was through our own experiences and learning them the hard way.  Because of our zero knowledge of finance and debt, we really didn’t think much before using debt.  

It quickly became apparent that my wife and I were way over our heads.  What started out as few hundred dollars for a two night overnight trip to a city near New York City, started to add up.  Two night hotel would be just part of the expense.  There’d be other costs like eating, gasoline, tolls, tours/attractions, and buying knickknacks.  The trip may actually cost around $500 to $800.  

At the time, we didn’t think this was a big deal.  We believed in YOLO (you only live once) mantra of live for now, and don’t worry about the future!  If you think the Millennial generation or Generation Z are the only ones using YOLO, then you’d be wrong...

Every generation except maybe the ‘Greatest Generation’ (those who lived through the Great Depression and World War Two) have lived a variation of the YOLO mantra.

The Boomer Generation had their Woodstock, drug culture, love culture, and the hippie culture.  They knew how to live and enjoy life.

Generation X, which I’m part of, created new styles of music including indie, grunge, techno, and MTV.  Generation X also believe strongly in work/life balance.  ‘Digital nomad’ idea was originally coined by Generation X.  

In this environment of ‘live for now’, we were totally unprepared for debt.  Why worry about some credit card debt when new experiences await in Philadelphia or Boston?  What’s a hundred dollars here and there for a memorable dinner in a new city?  What’s wrong with little retail therapy?

Well, the end result was that by the time we had turned 30, we had $20,000 in credit card debt.   At that time, our entire net worth would’ve been under $20,000!  We were a typical house poor married couple,  with no idea on how to budget properly!

The day we paid off that debt, we promised ourselves never to do that ever again!  We learned the hard way, the snowballing effects of compounding interest when applied to debt.  Going forth, we would pay off credit card bills in total each month.  

Buying a home had always been a dream growing up.  We wanted to have a place of our own, and not rent all the time.   When we got the opportunity to buy our first home, we jumped at the chance.  

Back in 1999, the mortgage rate was around 7%.  We took out a 30 year mortgage at the time.  Our monthly mortgage payment was $350 while our co-op maintenance was $1,200!  We didn’t understand how much interest we were paying at the time, nor would we have cared.  Our own home was all that mattered!

If I could tell my younger self,  I would’ve said to choose a 15 year mortgage to save good chunk of money.  The amount paid in interest on a 30 year mortgage was truly mind boggling.  I learned that on a 30 year mortgage, you’re paying mostly interest for first several years.  Ouch!

We had learned two important lessons during our first 7 years of marriage:

  1. Do not use credit cards unless we’re paying off in full each month.  Do not overspend just because credit cards are so easy to use.  ***We found it was always more painful to hand over our hard earned cash than using credit cards...
  2. If taking out a mortgage, choose a 15 year mortgage, if at all possible.  

We understand buying a home is a dream for many, us included.  It’s a good idea to not overextend to get a larger/more expensive home.  Just because the mortgage company pre-approved you for $400,000, it doesn’t mean you need to buy a $400,000 home!

Buy the right sized/right priced home.  Borrowing less money will mean you’ll pay your mortgage company less money on interest.  Why not keep more money in your pocket instead?

If possible, take out a shorter term mortgage than a typical 30 year mortgage.  The interest savings will be huge!

Here are some examples:

On a 30 year mortgage at 3% interest rate of a $300,000 home and down payment of 20% or $60,000, the interest amount at the end of 30 years equals $124,000.

Same scenario above, but a 15 year mortgage interest amount equals $58,000.

The difference is over $66,000!

Now we understand if a 15 year mortgage is difficult in the beginning when you’re just starting out.  We’ve been there ourselves...What you can do, is to start making additional payments to your mortgage.  

Most mortgage companies will not charge pre-payment penalties, but be sure to confirm this before doing that.  If allowed, make extra payments whenever you have some money left over for the month.

For those that have credit card debt, please pay this off FIRST!  This probably has the highest interest rate among all your debt.  Experts would agree you should pay off the smallest debt amount first for psychological benefits, but I disagree with this one.  I actually recommend paying off the highest interest rate credit card first.  

For example, if you have a credit card with a 13% interest rate vs another with 10% rate, I would tackle the 13% rate first.  Be sure you’re budgeting so you can figure out exactly what comes in vs what goes out...It’ll require discipline to pay off debt and then to save for the future.  It can be done though!  Push yourself, plan/commit, then do it.

Once you pay off your credit card debt, then I would take the next highest interest rate debt on the list.  It may be a student loan or a car loan, or it may be a personal loan.  Same concept here.  Commit/plan then  do it.

One of the most common questions people ask when paying off debt is whether or not they should also invest for the future.  The answer is yes!  If you have a company 401k that gives you a match of say 3%, then you definitely should put away at least that much, so you at least get the ‘free money’ in company match.  It goes without saying, the more the merrier, but do what you can, if you have heavy debt burden.  

Paying off debt is one of the hardest things to do.  We’ve done it throughout our lives, and there are probably millions out there right now who are doing the same thing.  We had a credit card debt of $20,000 and three different mortgages in our lifetime.  It will take discipline, commitment, and possibly changing your behavior and your lifestyle to do so, but in the end, it’ll all be worth it!

As usual, budgeting will be crucial to paying off debt so you can eventually ramp up your retirement savings.  As in my post about budgeting, find cheaper alternatives for the 3 most expensive categories in any budget:  housing, transportation, and groceries.  

This should free up extra money to pay off or save.  The less (or no) debt you have, the faster your retirement will be.  To me, there is no good debt vs bad debt.  Debt is debt.  It means you’re paying someone else your money each month.  Don’t do that!  

Our tips for dealing with debt:

  • There is no good or bad debt, but rather just debt.  Debt means the money you earn is going straight to someone else (credit card companies, student loan companies, mortgage companies, etc.).  Having less debt or no debt equals earlier retirement!
  • Pay off the highest interest rate first.  
  • Budgeting is crucial. Free up extra money by reducing expenses, then pay extra each month.
  • Change your lifestyle to accomplish this.  You may need to forgo vacations, expensive restaurants, spa treatments, or any of the other YOLO (you only live once) activities.  No one said it was easy, but nothing worthwhile comes without effort, sacrifice, and discipline.
  • Modern economies rely too much on consumerism.  Don’t fall into that trap!  Buy things you need and not want. Don’t buy things on credit.  Live within your means!  
  • The less you spend, the more money you’ll have left over to either pay down debt or save for the future.
  • Look at this as a long game, like a marathon, and not as a sprint.  This will take time to accomplish.  Don’t be discouraged if it seems like you’re not making a dent at times.  Keep at it as budgeting takes practice and patience...

In conclusion:

The journey to reach your financial independence and to retire early will take a long time.  Treat it like a marathon and understand you’ll have ups and downs during this journey.  The important thing is to keep at it, and not quit.  It’s so easy to quit, but so hard to do the right thing...

We wish everyone dealing with debt to know that everyone has dealt with debt at one point or another in his/her lifetime.  It’s part of our psyche to use debt, but it doesn’t mean we need to be bound by it.   Free yourself from debt by spending less.   Spending less means you can pay off more debt!  Once you’re debt free, you can really start ramping up your retirement!

Thank you all for reading!


Jake

Wandering Money Pig 


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