Search

Personal FUNance

“Financial fitness is not pipe dream or a state of mind it's a reality if you are willing to pursue it and embrace it.” ― Will Robinson

The real cost of debt

I am sitting in bed right now looking over my student loan and thinking about how much I loathe debt. In fairness, my student loans have opened a lot of doors for me. I was able to make a pretty substantial career change that has led to a more challenging work and a larger income because of my graduate program. And I am incredibly grateful for that. The career opportunities I have had since completing that program are the type of work I was hoping to be doing when I went back to school. The older I get, the more I make a conscience effort to focus on gratitude. And I am grateful for the doors grad school opened.

But the aftermath of graduate school also included an incredible pile of loans that I desperately want to pay down. Each month I make that payment I just think about the different ways that my wife and I could use that money: more into our Roth IRAs, build up taxable savings, take a trip to Europe, or invest more for our soon-to-be born daughter’s future.

Tonight as I am thinking about those student loans, or any form of debt really, those commercials about “The Real Cost” of smoking popped in my head. That’s exactly how I feel about debt! So to show why, I ran some numbers really quick on my student loans to show how debt can completely crush your ability to be financially free, and that isn’t just about that monthly payment that is coming out of your pocket.It’s about the opportunity cost of the interest that you are paying back on that loan, whether it’s a credit card, mortgage, or car loan.

The first example I have is shows the power of an interest rate and how much of an effect that has on how much we end up paying back on a loan. I currently have just about $98,500 in student loan debt and was paying a 5.875% interest rate with 8 years left on my loan (initially a 10 year loan). I was making about $1212 as a monthly payment. A couple of weeks ago I got a letter in the mail from SoFi with an opportunity to refinance. I didn’t think much of it because I had already refinanced before and I didn’t think I would benefit from it. But I filled out an application anyways to see what happened and I am glad that I did. I got approved for a 7 year loan with a 4.25% interest rate. So at face value that’s one year fewer I have to pay back this debt, at a lower interest rate. But what about the monthly payment? My monthly payment on a loan that is one year shorter, with roughly a reduction of 1.6% in interest rate only increased by $70 per month.  That’s also the power of a lower interest rate! Even more amazing, over the life of the loan, the total cost decreased from $25,190.63 to $17,864.72. That’s $7,325.91 less over the life of the loan. Here’s a quick table I pulled together to show how it all works out.

table

That’s roughly $7,300 that can be used to take a trip to Europe, or better yet, put towards financial independence! Over a 10 year period, at an estimated 5% return that would grow to $11,364.89. All because of a lower interest rate!

As another example I checked an old credit card statement that we paid off about a year and a half ago. At the time we had $12,938.77 in debt on the card. If you check your credit card statements when they come, you’ll notice that credit card companies outline how long it will take you to pay off your credit card, and how much it will cost you. Then they show an alternative payment. Here’s what ours looked like on this statement:

credit card.png

Twenty-one years to pay off the card making the minimum payment! And roughly $10,000 in interest on top of what is already on the card! $10,000 may not seem like a lot of money over a 21 year period of time, but again, think about what happens to that money if you invest it, or have it available to take a trip and make memories with loved ones?

One final example real quick is a mortgage. On a 30 year, $200,000 mortgage with a 5% interest rate, you end up paying $186,511.67 in interest payments alone if you only make the minimum payment every month. That’s almost 20% of a million dollars that is spent on interest alone. That brings the total cost of a $200,000 mortgage to $386,511.67. You almost pay as much in interest as you do on the value of the property itself!

So the next time you’re thinking about running up those credit card bills, don’t forget about the real cost of debt. It isn’t just about that monthly payment, it’s about all the other things you could be doing with that money and those interest payments that are part of the equation too. Maybe one day we can start an advertising campaign for debt like we have today for those smoking commercials!

Advertisements

Time > Money

When I first realized that retirement before 65 could be a reality, I instantly thought of a phrase that we’ve all probably heard countless times before.

Time is greater than money.

How many times have we all heard that and nodded in agreement or subconciously thought “Of course, duh”? Or perhaps we just rolled our eyes at this cliched catchphrase because we all knew it was true? I know that I have done both of those things. Smugly agreeing that time is certainly more valuable than money like it’s the most obvious thing in the world, while other times being the one to roll my eyes and think to myself, “Of course I know time is more valuable than money. No need to beat a dead horse.” I thought I was living a life that embodied that mantra.

Then one day, just like that, when I least expected it, I got knocked off my high hose and everything I thought I knew about time, money, and how I was living my life changed. The early retirement forums opened my eyes to a way of life I didn’t think was possible. You can retire in your 50’s? I didn’t think people did that unless they won the lottery or inherited huge sums of money. Then I dug a little deeper and that some of the people on those forums were retiring in their 30’s and 40’s. I was blown away. How was this even possible? I wanted to know more. Needed to know more.

The financial side of how to reach early retirement was one thing. There were no get rich quick schemes here. Just a group of people who worked hard, saved their money, and watched where they were spending it (that last part on watching where you spend your money is one that’s taken a long time to sink in for me). I certainly learned a lot about 401k’s, Roth IRA’s, annuities, social security, required minimum distributions, HSA’s, and other financial terminology and jargon that had previously been lost on me. But the real eye opener was lifestyle and values early retirees embodied. These were people who were changing their lives, delaying some gratification now in order to gain ultimate freedom down the road. Sure, they were forgoing some things now in hope of a better tomorrow. Nicer cars, expensive vacations, designer clothes, and fancy electronics may not be at the top of their priority list, but the trade-off was being free from the shackles of a job and Corporate America at an age much younger than the average person, with resources that most people won’t have even when they retire at 65 .

I found myself perplexed. Confused. Unsure. After all, I had spent the last two years in a graduate program that was designed specifically to develop and train managers to be a part of Corporate America. But here in front of me was another way of life that I had never considered. Another way that spoke to me more than anything I had learned in graduate school ever did. Quite frankly, it looked better than the path I was on. I started to examine what I really wanted. Did I want to be shackled to a cubicle day in and day out for 40 years? How did I really want to spend my time? Did I really like putting together those powerpoint presentations that went to the board? Or would I rather be catching up on my video game backlog, exercising, learning how to cook better, spending time with my loved ones?

I looked at my weekdays versus my weekends. My weekends were packed with so much more enjoyment and living then pretty much any day during the week. I was able to pursue hobbies, work on goals that mattered to me, spend time with family and friends, the list goes on and on. I was also catching up on day to day things that I couldn’t keep up with during the week when I was trapped at work. You know, the standard day to day things like grocery shoppoing, laundry, cleaning. Catching up on those things was further cutting into my free time to purpose my hobbies and the things that really interested me. I realized that no matter how much I enjoyed my career, I wouldn’t be going to work every day if I didn’t have to.  It was then, at that moment, that it hit me.

Time was greater than money. No matter how many times I had heard that phrase before, I now understood it for the first time.

I was on the road to FIRE. I didn’t know how I was going to get there, or even how to get there. But I knew it was my final destination.

So where does this blog come in? It’s my way to talk about the things I’m learning and share them with you. If I’m lucky I’ll inspire someone the way I’ve been inspired. It’s also an opportunity to share some of our progress from a financial point of view. I also hope to learn from those of you who have found your way here. Money is such a taboo topic in our society and financial education is nowhere to be found. Hopefully this blog can help that, even if just a little bit.

I hope you get something out of this, and I’d love to hear from you as well. Welcome to the inner workings of my own personal financial resolution.

And remember….

Time>Money

 

 

Blog at WordPress.com.

Up ↑