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Student loan debt is something many if not most households have to deal with at some point. This debt alone can put a major dent in any plans to retire early. A couple of years back, we were sitting on roughly $135,000 in student loan debt. We knew that if we wanted to reach financial freedom, we had to buckle down and pay off this pile of DEBT.
The silver lining of student loan debt is that it wouldn’t be there if you hadn’t received some form of education. Ideally you got a degree and landed a job a little easier because of it. So often, it doesn’t even matter what you majored in. My degree has absolutely nothing to do with my current profession in project management.
I think employers prefer four-year degree holders because they make better indentured servants. Can’t up and leave with student loan payments, right? Here I thought they wanted me because I took the time to learn Remote Sensing and Landscape Architecture…
The Rate Game
Knowing how your student loan interest rates impact your debt situation is key. That $75,000 chunk of our $135,000 total had a fixed interest rate of 4.6% The rest of the debt, roughly $65,000, sits forever at 2%.
Understanding that inflation historically averages around 3%, it makes zero sense to target paying off the $65,000 ahead of schedule. Let that pile sit and ferment! Pay the minimum forever, because you’ll make more money by investing in the market than by freeing up the relatively small monthly payments on your balance sheet.
As for the rest of the debt, that $75,000 at 4.6% we felt worth tackling, even though we could still get better margins with investments. This is similar to our situation with the mortgage payoff, where instead of putting our dollars towards pay-off, we could have let the mortgage ride and make a margin of maybe 3-4% in index funds…
…But We Don’t Like Debt
By paying off $75,000 of our student loan debt at the higher rate, we eliminated over $300 in monthly payments that are now going towards the mortgage pay off. I guess this is how a “debt snowball” works. It is rewarding to see it in action and watch your net worth climb out of the doldrums slowly and steadily.
So how did we make it happen in less than two years? While paying childcare for twin infants? Looking back, I think we were on autopilot most times due to lack of sleep. But here, let me break down the key actions we took. Hopefully you will find it useful!
How We Paid Off That Nasty Debt
- Live SMALL. And don’t buy that bigger house. We in fact were THIS close to buying a bigger house because, well, we were expecting twins. And that’s just what you do, right? WRONG! Another dirty secret for you fine readers: we got turned down for a mortgage on a $435,000 house just a few blocks over from our $275,000 gem. Why? Because you need to rent out your rental homes for at least twelve months for it to count towards your income. We had only been renting ours for nine months, so we looked like over-leveraged stooges to the lender. Point is, we got lucky getting turned down. Nowadays we look back and are grateful things wound up where they did. The twins are doing just fine sharing a room, and we find our 1,500 square feet of living space more than adequate.
- Become a landlord. This one helped big time. If you’re able to scrape up enough capital and get that first property going, you’ll quickly yield some nice margins on rent. The hidden benefits come at tax time, when depreciation and maintenance expenses help reduce your overall tax burden. My dirty secret? I had to use a home equity loan on our house to pay the down payment on our first two rentals. But I quickly paid that off with rent money within six months in each instance. Get into rentals – it’s a game changer.
- Be the employee (and entrepreneur) of the month. Something happens to you when you have kids. Yes, my wife and I became zombies there for a while with twin babies. But, we also became that much more responsible. I think that translates to your work life somehow. Subtle, but true in our case. I turned a bad situation into a good one at the office, moving laterally into a job where I excelled. Bonuses and raises seem to come easier with a newfound responsibility back at home. An irony, when all you want to do is be home with your family! At the same time, highly successful Mrs. Cubert was killing it with more and more patients coming to get her services. I tell my employees to get results, and make friends in the process. Good things follow.
- Use Credit Cards. Yep. We hacked bonus points. I was about to tell you we didn’t travel for two years but I’d be lying if I did. In truth, we’d go bonkers if we didn’t get out of the Minnesota cold at least once in the winter. I signed us up for a Chase Sapphire card and Chase Ink for our businesses. We combined our bonus points, and flew to Nevada for free. We stayed with the in-laws, so there was no lodging expense. If you have to travel, don’t pay for it. Use credit card bonus points if you can, otherwise, limit yourself to road trips.
- Sell shit. I can’t tell you how much crap we’ve accumulated over the years. Because I sold most of it. Seriously, we had a lot of stuff you just don’t need or care about anymore when you become parents. I sold a TAG Heuer watch on eBay, comic books, and my Honda Accord on Craigslist. I unloaded my sweet audio system and speakers. What am I going to blast with babies sleeping all the time? Certainly not “The Chronic.” There’s two key benefits to minimalism: less clutter leads to less stress, and two, you make a little coin selling off that crap you don’t need.
In Closing: What Not to Do
Living within your means is probably the most obvious and least prescriptive advice you’ll get for reaching your financial goals. There’s much more to it than that. Certainly, you could live small, drive a used car (or better yet, ride your bike.) You could even rent out an extra bedroom if you’re stuck in a large luxurious home that’s underwater.
The flip side of the coin is to focus on how to make more money at the same time. Don’t just focus on saving! There’s only so many pennies and dimes hiding in those couch cushions. If you want to deal with debt, and quickly, you’ve got to find side gigs that pay. Start a blog. Rent a house, condo, or room in your basement. Get a part-time job.
Even better, become the A player at your office with a focus on strong relationship skills. The snowball rolls that much quicker when you put emphasis on the money-making side of the equation.