How I Eliminated Significant Student Loan Debt
First and foremost, it was not easy. Debt payoff typically isn't.
The reason it is difficulty is because you have already spent money that you do not have. That's the way debt works.
It's confusing for most of us, especially the frugal-hearted.
We are all told we need to achieve the "American Dream" and are all led to believe that a college education is a must. That's a myth I plan on diving into further in future posts.
How did I accrue $96,000 of debt?
Actually, this is only the amount that I paid for graduate school. This amount doesn't even include the amount I paid for undergraduate.
I got to this amount because I became a doctor of physical therapy. As a DPT, we go to 3 years of schooling, during which you are not supposed to work.
Well, too bad because I chose to work full-time anyway, despite these "school regulations".
At the time I worked as a personal trainer. Being a personal trainer is actually quite a lucrative gig, but the hours are typically not that sexy.
For nearly 3 years straight, I would open one studio at 4am up to three times per week, and 4 times per week close a local health club at 10:30pm. Throughout the day I would travel from studio to studio, gym to gym, day after day.
During the weekends, I went to school all day, both days. Work during the week, school during the weekends. 3 straight years. Rinse and repeat.
Sound like fun?
Well actually it was. Let me explain.
The truth about debt payoff
See, it actually was fun for me.
I am very competitive person. I turned debt payoff into a game. If you have a significant amount of debt, especially student loan debt, I suggest you do the same.
You have to game it out. You need to be aggressive. You need to be a machine. Become an "animal" in the process and set your sights on what needs to be done - debt payoff!
Debt payoff is literally the goal. Debt is the enemy.
During debt payoff, there should be little else on your mind. You need to get focused. Do the math. Find out where your money is going. Calculate your life energy and where it all goes.
If you want a very detailed, impossible to beat formula for how to calculate your real hourly wage, you need to read Your Money or Your Life immediately! This will help put your hours and dollars into perspective.
My success in paying off debt is actually due to Dave Ramsey's Total Money Makeover book.
After reading this book I understood how to become focused on the objective. The only thing that mattered was freeing up as much money as possible so that it could all be used to aggressively pay down this student loan debt.
Every extra dollar, whether it be cost cutting or selling shoes on Craigslist, needs to be contributed to getting this toxic debt out of your life once and for all.
How exactly did I payoff $96,000 of grad school
Truth be told, I paid for some of it along the way.
For the exercise-minded folks out there, personal training can be a lucrative gig. In 2012 I was actually averaging a little of $30/hr as a wage. The lowest wage I got was from a health club making $12/hr, however having this experience on my resume allowed me to land some gigs as a personal trainer in a private studio paying up to $60/hour.
The cost of school was about $30,000 per year and I was making a bit over that.
However, at the time, I also had other expenses including but not limited to: insurance, utilities, groceries, cable/internet, phone, fuel, maintenance, and some miscellaneous expenses such as laundry, travel, occasional entertainment, and a few other odds and ends.
Notice what I did not have: car payments or housing payments. I did this on purpose to free up as much money as possible.
The way I was able to avoid housing payments is I stayed with my parents for 2 of the 3 years in graduate school. In the third year of PT school, I moved into an apartment where I negotiated an agreement to trade labor/maintenance on the building itself as a rent payment.
Move back home. Get a roommate. Negotiate a bartering agreement. Airbnb.
The way I avoided toxic car debt was I drove a '96 Toyota Camry with 200,000 miles that I paid for in cash. Get a grip. Unless you have extreme concerns about safety ratings for a family of 5, swallow your pride and drive a cheap used car. Period.
If you already have a new car or car payments, call the dealer immediately and see what you can get for it. Decide if the amount you get offered is worth cutting bait and getting out of that monthly payment to free up that extra 200, 300, or even $400 plus per month to hurl into that debt.
My final year of PT school I needed to take out loans because I was on my clinical rotations to finish my doctorate.
I borrowed $34,620 the final three semesters. I did not need to look this figure up. I remember it because it was a focus of mine everyday. It was part of my game. It was part of my life.
When I made that final payment I realized that I had the option to do whatever I wanted with the extra money that I was using to pay the debt. Of course, I also saw a dramatic increase my annual salary because I was a doctor of physical therapy at the end of graduate school.
What happens after the debt is gone?!
The choice is yours. Many people celebrate at this point. I didn't.
I chose to invest my monthly payments- that I was previously making to the school or federal lenders- into low cost index funds. Only 4 years later, I have a net worth (with my wife), of over $300,000 even with a massive correction in the recent financial markets (at the time of this writing, in 2020, the COVID-19 virus and shutdown is in full-effect).
I am not special. My circumstance is not extraordinary.
We paid for our own wedding, in full. I paid for my entire undergraduate, in full. My wife paid for her schooling, in full. My wife even paid off a brand new SUV approximately 4 years ago.
We paid for a lot, by ourselves.
I remember my best friend telling me how much money I would "make" by having a wedding. What I did not realize at the time is that he did not pay for his wedding.
Remember, focus on yourself. Eliminate the outside stories that other people tell you because you have no idea what their circumstance is. You have no idea if they had houses paid for. Weddings paid for. Travel paid for. Honeymoons paid for. Cars paid for. We had none of those. We paid for all of those ourselves.
Why would I tell you this? To brag obviously. No, that's not actually why I told you this. I told you about my story because I want you to write your own, equally extraordinary and unique story for yourself. It can be done. Find a way.
Make extra. Save extra. Cut costs. Get creative with housing and cars. Take on a second, third, or fourth job the way we did. Remember, it only has to suck for a little while until you get this debt paid off.
Share your story in the comments below. Let us know if this motivated and lit a fire under your ass to do better and get more aggressive. I write for you guys. I am telling my story to motivate you.
This is certainly not professional financial advice nor do I know what the hell I am talking about. That said, look at my results. They speak for themselves.
Until next time,
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” - Albert Einstein
How dramatic is the effect of compounding?
For finances, and nearly anything else, the value of compounding grows exponentially logarithmically, not in linear fashion.
This means that as you move along the horizontal (x) axis, the growth on the vertical (y) axis grows exponentially.
Frequently, in the personal finance community, we value money on the horizontal (x) axis, and net worth or money on the vertical (y) axis as follows:
After 10 years, your initial $10,000 (assuming you added nothing else), grows to only $19,990. Not bad, but this will not get you rich.
After 20 years, your initial $10,000 (again assuming you add nothing), grows to $43, 157. Again, not too bad considering you never added another dime - which is typically very unrealistic for those interested in saving and investing.
Fast forward to the 50 years mark, your initial $10,000 investment turned into a whopping $434,274. Again, this does not adjust for inflation and just shows you what your initial dollar amount will potentially turn into after 50 years of passive index fund investing.
The Power of Saving PLUS Compound Interest
You may feel somewhat underwhelmed after that first example. That is fine. The power of compounding is quite dramatic, however some folks argue and become upset when they hear about 50 plus years of investing. It might just be too far out for most people to imagine and remain motivated on the path to F.I.
This is where demonstrating the power of saving plus compound interest comes into play.
Take our initial investment of $10,000, use the same parameters of hypothetical growth at 8% compounded annually, and add $500 a year.
This time it only takes 43 years to cross the $400,000 mark. At the end of 50 years, your initial investment of $10,000 plus an additional $500/yr, compounded at 8% annually, turns into $720,000.
Now what if you simply take your initial investment of $10,000, and add $5,000 per year to an IRA, compounded annually at 8%. Essentially this would be nearly maxing out an IRA every year ($6,000 contribution limit as of 2020).
Following this process of $10,000 initial investment, plus $5,000 contribution annually to an IRA, compounded at a hypothetical rate of 8% annually - you would be a millionaire in 36 years with your investments growing to $1,078,364.
At the 50 year mark, you'd have potentially $3.3 million in the bank. Not too shabby.
So what does this all mean...
As you can see, compound interest takes time to reveal its' magic. The earlier you start, the longer you have for compound interest to work in dramatic fashion.
Consider the rule of 72. Take your annual interest rate (in our example 8), and divide 72 by your rate. This will tell you how many years it takes your money to double.
In our example, 72/8 = 10.3 years. In other words, every 10 years our money would double.
How do I make compounding more powerful?
As you can see, each of our models demonstrates - after a hypothetical return - a "hockey stick" growth curve. This means your money compounds and grows exponentially upward instead of a straight line.
Of course, this does not happen consistently. The stock market returns look nothing like a smooth line the way our model shows.
The market is actually quite volatile. It takes hard dives and high climbs based on investor behavior, consumer sentiment, inflation, pricing, GDP, etc. Many factors determine market returns.
Most estimates, in the 200 plus year history of the stock market, reveal returns in the 8-10% range. Remember, this is just an average. Do not expect these returns on a reliable and consistent basis. Some years will be higher, and some years will be much, much lower.
However, unless you are assuming that America will "go out of business", there is a potential way to improve the power of compounding.
The concept is quite simple...
START WITH A HIGHER INITIAL INVESTMENT.
To illustrate my point, say you start with an initial investment of $100,000, instead of $10,000. Do not add another dime to that $100,000. Ever.
In 50 years, after an 8% return compounded annually, you'd see your initial investment grow to...
This is approximately $1.4 million more than what you would have compared to if you initially invested $10,000 plus $5,000 a year compounded at 8%.
To illustrate this point further, in the model representing a $10,000 initial investment plus $5,000 annually, you will have contributed a total of $260,000 of capital with a final worth of $3.3 million.
By starting with a greater initial investment, not only will you be worth $1.4 million more - at a total of $4.7 million - but you will contribute $160,000 less of your own capital.
The power of compound interest is one of the primary motivators that keeps me steady on the path to F.I.
Consider visiting a compound interest calculator and plugging in your own numbers.
Remember, our models and examples are completely hypothetical and do not represent real returns, nor are they adjusted for inflation. In no way is this a guarantee of returns. Please seek guidance from a financial professional, of which I am not.
Still, the point remains. The dramatic effects of compound interest are on display.
The most optimal recipe would be to start big and start young. Nevertheless, conventional wisdom and investors agree that although investing as young as possible is key, the next best time would be to start ASAP.
Enjoying our content? Please leave a comment below.
Further, take a look at our favorite resources that built the foundation for our awareness of financial independence, frugality, and investing.
Cutting monetary costs are not the only benefit of these thrifty habits
Some folks need more incentive than simply a lower price tag to practice frugality. Thrifty habits often come with additional benefits, aside from lower cost.
Below you will find some of the dual benefits of common cost cutting techniques. Use this as a means to continue to motivate yourself on why you chose the financial independence lifestyle.
1. Cutting Cable... or just reducing the monthly services
The cost implications of this are obvious. Paying $160 per month just to watch a few games or occasionally flip on the hunting channel? Why not see if you can reduce how much TV you watch by eliminating the channels you barely watch, or even cutting cable altogether.
Some will make an argument that they get great benefit from watching a certain sports team or having access to a certain movie channel. That is entirely your business, not mine.
What I am suggesting is seeing if truly assessing this habit from more than just a monetary cost perspective really yields a positive return on your happiness.
Remember, time is life's most precious commodity. As far as we can tell, it is a fixed commodity for all of us. Consider that, according to the BLS, the average full-time employed American still finds enough time to watch approximately 2 hours of TV per day! Unemployed Americans watch nearly twice that at 3.8 hours per day. This is alarming! Think of all you could be doing if you reduced, or even eliminated, the TV watching habit.
Consider the following additional benefits of cutting/reducing cable, aside from cost savings:
2. Joining a public library
Save money on books and movies. This one actually lends back to our first idea, cutting cable. Stacking these habits would be an excellent idea for maximum benefits of the frugal lifestyle.
There are many free events at the library. Some events at our local library include, but are not limited to:
For those with a family, most public libraries have dedicated areas for children. This can be a great alternative for children to learn and socialize instead of watching TV or playing games on a device.
3. Learn how to DIY
You control the costs because control the inputs.
Aside from controlling costs, think about how DIY might further impact you in the following ways:
Frugality is often about Dual Benefits
Again, as we highlight in "what is frugality", being thrifty is often of great value to those of us leading a life aimed at financial independence.
These dual benefits are an excellent way to continue to properly value our cost saving efforts beyond dollars and cents.
The more you understand about why you have chosen frugality, the easier it will be to stay on track over the long term.
If you have anything further to add to this article, please place it in the comments below.
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Should you believe everything you hear about Financial Independence?
Most of the folks of the FI and FIRE community have very good intentions. As with any group, there are certainly some outliers. In my reading and research over the years, I have found some common myths that often dishearten the community and the people of the financial independence community.
Let us outline 3 common myths I see continuously emerge and break the spirits of our community members.
The 3 Biggest F.I. Myths Explained...
1. Financial independence is as easy as increasing your savings rate and investing
This is only partially true for some of us.
However, don't be discouraged if you find yourself saying "maybe for them" or "well that's not for me". Everyone, and I mean everyone, has a different starting point. Even siblings can have different degrees of support. These are just the facts of life.
Your friend who retired at 30 because they hit it big on cryptocurrency or another couple who moved their family to the woods after starting a blog, I guarantee they had a different starting point than you did! If you press them on it, I am sure they will admit it. I wouldn't expect that you guys become friends afterwards however. Finances are one of the greatest fight promoters known to mankind.
Perhaps any one of the following is true about your current situation:
Your situation is unique to you. There are many things that will affect your so called "savings rate" and all you can do is strive to improve your situation relative to you. That's it. This is not a competition unless you want it to be and you enjoy competition, in a healthy manner of course.
Besides, maybe your version of "financial independence" is being debt-free and living paycheck to paycheck. If that's your goal and you are fully aware of the risks of living that close to the edge and are content with it, then who cares about a savings rate!
2. Everyone will understand why you practice frugality and will support you in your goals
Mostly false and very, very rarely true.
Most people do not even have an idea of what frugality even is. You will often be called "cheap", albeit mistakenly. You may even have one of the following condemnations thrown your way:
All of these are aimed at indicating that you should just spend more money. Basically, all of these condemnations are aimed at why you shouldn't be frugal.
This is utter nonsense. Again, frugality - to most of us who practice it- adds tremendous value and meaning to our lives. We actually like being frugal (some of us).
A word of caution: try not to spend too much time, or any at all, explaining frugality and your purpose to somebody who is clearly unwilling or unable to understand this way of life. Just nod, smile, and purchase more shares of your favorite index fund with your savings.
3. Real Estate is the quickest path to F.I.
Depends. I mean really, truly, depends.
Transaction costs are typically very, very high when it comes to real estate. Obtaining financing, costs of upkeep, finding tenants, drafting leases, commissions to realtors. Please be sure that you are able to calculate your real rate of return in real estate. Check out road #9 in Ken Fisher's book The Ten Roads to Riches to find out the hard truth of real estate investing, and learn how to do it right.
Sure you can have investors or use other people's money. Leverage is your friend. Be a friend of borrowing to rapidly increase your wealth. Whatever.
Honestly, most of us are coming from significant financial burden and debt. The last thing most of us want is more debt and more borrowing. Perhaps someday I can be convinced otherwise but real estate is not a great investment.
Consider that according to data collected by Jorda et. al. (2019) from the time period of 1870 to 2015, over a century's worth of data, equities beat real estate returns 8.46 to 6.10% respectively after being adjusted for inflation. Although the figure 6.10% does include home capital appreciation--which lowers the total yield of housing return since capital appreciation is less than 1% annually when adjusted for inflation--residential real estate is not the blow-out winning investment it is often claimed to be.
Be wary about real estate. Costs of home ownership are very variable and it's hard to give a true estimate as to your expected rate of return due to the extreme variability in the cost of ownership.
Leave us a comment below on how you feel about the 3 common myths of financial independence.
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If you find yourself frustrated on your path to F.I., remember the 3 common myths of Financial Independence
Finding motivation on the path to F.I.
Many of the authors and content creators I follow in the financial independence space have transitioned their content to an interesting phase. Often I hear them, at their present net worth, gabbing about how great financial independence is.
Undoubtedly, I am truly happy for them. But how does this affect those of us in pursuit? How does it affect the person who is still 5, 10, or 20 plus years away from financial independence.
For many readers and community members, it can be frustrating. It is hard not to compare yourself to another when it comes to finances.
The number one thing that knocks people off track and destroys their motivation is comparison. Comparison to others. Comparison to where you thought you'd be at 30. at 40. at 50...
There are two exceptions to this rule:
That said, comparisons are the enemy of happiness in most cases. It can often lead to a path of envy and resentment. Further, it typically only serves negative energy. You will not find a more competitive person on the planet than myself, but even I have had to step away from this one.
This is your path. Not anyone else's.
Keep track of your net worth
You can do this on Personal Capital or use an Excel sheet. Totally up to you.
This can be a great way to remain focused on your individual situation. It also motivates you to keep track of your income and expenses because your savings rate ultimately helps determine how quickly your net worth can grow. It is often said that the only way to improve something is to measure it.
Evaluate if you need to give yourself a break
I do not recommend this one lightly. However, if you have had great stress becoming frugal, tracking your net worth, assessing your real hourly wage, etc., do not be afraid to plan some period of time taking a break from the number crunching.
Take a little time to spend more freely. Take a few weeks off from tracking your net worth. Do not open the budget sheet for a little while. See how it feels to spend more on things. If you happen to like spending more, then maybe you need to redefine what financial independence means to you.
If the thought of this one causes you too much anxiety, then skip it. If you believe you are having classic fear of missing out, try test driving a few atypical spending habits to see if the consumer culture life actually is your calling. If you take this route, I just suggest finding out what the return policy is for whatever you are purchasing.
If you choose to take a break, definitely have an exit plan for when you aim to jump back into frugality or the pursuit of financial independence. This obviously includes not making any purchasing decisions that indefinitely ruin your net worth and personal finances, especially if the cost is high and recurring (think boats, cars, couch payments, etc.).
Remind yourself why you joined this community
Don't like your current job? Most people don't. Most people are also not doing a damn thing about it. But you are!
Love your job but want more free time? I am happy for you as this is a good problem to have. Your time is more precious than anything. Loving your job and what you do for 40 plus hours per week is a rare bird. If you have it, consider the strategies you learn in this community to negotiate more PTO, remote work, atypical schedules, 4 day work weeks, transitioning to part time, etc.
Do you resent debt and do not like to be a slave to the lender? I can certainly relate to this one. Eliminating debt is often an excellent way to remove your burden to work or at least eliminate your need to be a prisoner to a higher paycheck. Eliminating most debt from your life often allows you to choose work you love and enjoy since the pay rate is less meaningful.
Do you just want to be part of a frugality movement as a sure way to be a millionaire someday? Do not be ashamed. As the late Jim Rohn would say, think of what you will become in the process of becoming a millionaire. Unfortunately, money is one of life's greatest motivators for many of us. Admittedly, most of us are driven by attaining a large net worth (or at least the appearance of high net worth). Saving and investing is one of the most tried and true ways to become a millionaire, as long as you remain invested for the long term and practice a fair bit of industriousness and frugality.
So how do I remain motivated for the long-term?
Stay the course.
Value compound interest and time.
Most importantly, continue to assess your current streams of income. Consider most millionaires have multiple sources of income. See if you can diversify. Consider a yard sale. Pick up an extra shift. Search online for gigs helping people move, decorate, clean up, landscape, etc.
The concept is to save as much money as possible as early as possible, regardless of when and where you start. Remember, your situation is unique and all you are looking to do is improve upon your current situation.
Find a way to get an extra $20 a month, invest it in an index fund, rinse and repeat for 25 years and presto... you could have $17,543 assuming an 8% annual return in the market.
An extra $50 a month invested over 25 years could be $43,863.
$100 extra a month, could turn into $87,727 after 25 years.
$1,000 extra a month, in 25 years, could be worth $877,271.
Start small. Aim high. Be consistent. Along the way, look for things that can upgrade your experience. More pay. Less stress. More time off. Family growth. Improving your homestead. Find both tangible and intangible ways to improve your life along the ride.
And yes, enjoy the ride. This is not about a life of deprivation. It is about a life packed with value.
Remember to celebrate victories along the way. Celebrate paying off a car or student loan. Hit a certain number for your net worth, do something you enjoy, even if it costs money. Do not be ashamed to celebrate.
Before we begin, this is absolutely not investment advice and I am certainly not a financial professional. Please understand this is entirely for informational purposes only and in no way are we making any claims about this style of investing. Use your head people, this is a blog, not a financial consultation.
So you want to be an investor?
First, you need to attain a savings rate. Without a savings rate, or positive margin above spending, you will lack the most sufficient tool required for investing, spare change.
Yes, I know many of you will protest and say but you could use OPM (other people's money) or perform marginal trading, etc.
For those of you that might say that, please do not continue reading the blog. We are not firm believers in gut-wrenching borrowing on margins or owing money to anyone. We are the type that pays off the full credit card bill - or at least the full statement balance - every month! That's what brings us security.
Deciding where to save it
Once you've broken free from spending every single dollar you earn, you have some choices.
Where do you want to put all these newfound savings (hopefully they need a dumptruck to transport it)...
Here are some of the primary investment vehicles where you can save your money and have access to investing in "the market" (not supposed to be an exhaustive list, just the most common):
I just happen to use Fidelity and Vanguard because I have found they offer the lowest account fees and best customer support around. I have tried MANY other investment companies for various accounts without much success. They will remain nameless.
To open an account in order to begin investing, just visit the company site or call the company directly, and seek advisement for how to open any of the following accounts - or even ask about one's I haven't listed such as a 457 plan, etc.
I do not use a financial professional and choose to pick the funds myself. I do this for the lowest possible cost and the greatest potential return. Read the two books below if you think that you cannot do it yourself when it comes to investing.
How to invest it once you've saved it...
The simplest way is low cost index funds.
If you need more confidence in investing in index funds but are concerned about stock volatility, here are two must-read books for you:
How do you do it?
Sometimes it depends on what platform you are using.
From looking around the community, if you choose Vanguard, folk's love their VTSAX (Vanguard Total Stock Market Index Fund) fund as an example of a low cost index fund that tracks the total returns of the stock market.
For those Fidelity users, FXAIX seeks to match the performance of the S&P 500.
In the end, it does not matter what platform you use. I primarily use Fidelity and Vanguard due to the low cost nature of their funds, and their accounts.
When considering index fund investing, here is primarily what you are looking for:
Leave us a comment based on what you learned from this article. Please let us know what you would like us to post on in the future.
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A term often used synonymous with being "cheap".
Is that a completely fair comparison? We think not!
Here is why.
What is frugality to the "frugalist"?
The frugalist's version of frugality is encompassed and embodied by studying value.
Valuing your time. Valuing your life energy. Valuing your savings rate. Valuing your net worth. Valuing compound interest.
Frugality is also the act of becoming conscious.
Conscious of your spending habits. Conscious about what reliably makes you happy. Conscious about where you are directing a majority of your time and energy (don't worry, I am not big on traditional goal setting).
Finally, frugality is about freedom.
Financial independence and frugality are not necessarily the same thing.
Although they often are recited as part of a FIRE or F.I. war cry, they are not mutually inclusive.
Frugality is merely a tool that you can use to decrease the time it takes to attain financial independence. The concept is that by practicing frugality, monetarily speaking, you are able to widen the gap between income and expenses.
Obviously there are two variables that can be manipulated in this equation.
Income - Expenses = Margin of Potential
What do I mean by "Margin of Potential"?
Everyone has a "Margin of Potential" equation. If you make literally $0 annually, or if you make $100,000 per day, this equation applies to you.
For a vast majority of folks, it ends right there however. That is why I call it "Margin of Potential".
You can choose for this potential to land you in great deal of debt. In this case, the potential energy of your money is negative, especially if it has an interest rate associated with it. Think credit cards, car payments, couch payments, dog payments (yes, this is now a real thing). Financing of depreciating assets is one of the more dangerous things one can do.
I can already hear the arguments this one sounding something like, "But if I avoid paying for these in cash, I can invest the difference".
This brings me to my next point. Defining my version of margin. The "Margin of Potential" is yours in my example, not theirs. In other words, you own the margin - not the creditor.
This is where I hope that you decide to invest your "margin" and allow your dollars to go to work for you.
We will be discussing items such as investing, spending, saving, and more in future posts.
Leave a comment below on your reaction to this. Let me know if you have something to add to the conversation.
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Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.