Retirement and 401k News
Here's How People That Retire In Their 40s Pay Off Huge Debt Loads In Just A Few Years
There’s an obvious debt problem in the U.S. According to the Federal Reserve, 43% of anyone who attended college has student debt, which represents 30% of all Americans. Among those that have had unexpected medical bills in 2018, 40% used debt in lieu of paying the bills outright. About one-in-four carry a credit card balance “most or all the time.” And that doesn’t include all those homeowners that view their mortgage as “good debt.”
Once you have this burden on your family’s balance sheet, how do you get rid of the overbearing debt load? It’s an area where super-savers, like those within the FIRE (financial independence retire early) community, have expertise. They will go to great lengths in order to up their savings rate to 50% or more of income. But in order to do so, they first need to cut the amount of debt hanging over their head.
Here are the strategies that some extreme retirees use to repay their debt within a few years – instead of decades – in order to save more so they can retire by 30 or 40.
Put As Much Towards The Debt As Possible
In 2013, Julien Saunders and his wife Kiersten were $200,000 in debt, between credit cards, student loans, cars, back taxes, and mortgages. Within five years, they would pay off the entire sum. To do so, they had to put a significant chunk of their salaries towards the repayment plan.
“At our peak, we were allocating about 50% of our joint take-home pay to debt,” said Saunders. “Every two Fridays, we would toast to a bottle of wine and send an entire paycheck [sometimes more] to the debt.”
In order to place 50% of the income towards debt repayment (they continued to save for retirement as well), you have to cut down costs. A big one for Saunders was no longer eating out. They also resisted buying and saving for new things, like cars or other luxury items.
This made it possible to allocate more of their income towards the debt repayment.
Avoid Upgrading The Small House
At the time when they began their extreme debt repayment plan, Saunders and his wife were preparing to have their first child. Like many new parents, they contemplated moving into a larger home that would fit their larger family.
They avoided this move, and instead invested in upgrading the home they lived in at the time, so it would work for their more frugal lifestyle. By renovating the house, it “helped us to resist the temptation of buying up for a few more years,” said Saunders, who blogs about his family’s journey to reach FIRE at Rich And Regular. He credits this as the biggest reason they paid down the debt so fast.
When they eventually moved into a larger home, they turned the fully paid off, upgraded home into a rental property.
The same tactic can be used when deciding to initially buy a house. If you have a large amount of student loan debt or credit card debt, it’s a good time to reevaluate whether your current rental home will suffice, so you can pump as many funds into the loans.
“ It’s far more impactful to have a roommate, live in less than ideal housing or move back in with your parents if possible than it is to try to earn your way out of a large debt load,” Saunders added. “[It’s] a temporary inconvenience that pays off big time in the future.”
Tackle Your Highest Interest Rate First
Taking on the highest interest debt first is a common tactic for repayment plans, in part because it’s such good advice whether you’re looking to retire in your 30s or expecting to step away at a more traditional age. All you need to do is look at the math.
If you have credit card debt that’s running interest of 15% or higher, then it’s best to tackle that one first.
Say you have $10,000 in credit card debt and $10,000 in student loans. If you make a payment of $500 a month to the credit card debt, then you will pay it off in two years and it will accrue $1,579 in interest with the 15% rate. The student loan, with a 6% interest rate and 5-year loan repayment schedule, will be paid off in year-and-a-half using a $500 payment plan, with the total interest reaching $570.
Now, say you take the $1,000 monthly payment, put about $800 towards the credit card debt and $200 – the minimum payment – to the student loan. Then you’ll pay off the credit card in 14 months, paying just over $940 in interest. Meanwhile, the student loan, after 14 months, will have over $7,700 left with a total interest of $640 paid. You would then move the $800 you budget for credit card debt towards student loans, helping you pay off the student loan debt in about 8 additional months or 22 months in total.
The strategy of focusing on the high-interest debt first would allow you to pay off both loans in less time, and you’ll pay hundreds less in interest as well.
Don’t Forget About Savings
There’s always a battle when paying off debt whether it’s best to pay more into the debt or save as well (since you’re taking advantage of compound interest the sooner you invest the funds).
When Saunders had to make a choice between the two, “paying down the debt became a priority,” he said.
By not having debt and keeping costs low, it has allowed him and his wife to focus more on income-generating opportunities. “We always felt we had time on our side to make up for any lost time in the market,” Saunders added.
Others will argue that if the interest rate is lower than the expected returns in the market, then invest before paying off the debt. While that’s true, if it’s the debt that keeps you fretting at night, then there’s value in addressing it first.
September 3, 2019 – Forbes
From a financial standpoint, parents have plenty to worry about while raising a kid. But their greatest financial concern isn’t affording the bundle of joy. According to a recent survey by insurance marketplace Policygenius, 33% of married parents say paying down debt is the financial goal they’re most stressed out about. Parents fretted more about the debt than saving for retirement, saving for college and buying a house. It was also the top financial concern for single and divorced or separated parents, as well.
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