A Call to Action: It is Time to Pay Off My Debt!

Lanny and I are constantly writing about our pursuit of financial freedom.  We invest every dollar and spend every extra minute we can side-hustling to allow us to break the shackles of the 9-5 (or in our case 7 – 6) jobs to pursue our dreams and focus on what makes us happiest in life.  The dividend and side hustle income will allow us to cover our regular living expenses, take the pressures of working to cover these expenses, and unlock those shackles that are holding us back.  That’s how you take back the control of your life.   Today, I’m going to take a deep dive into one of the largest areas of my personal balance sheet.  No, I’m not focusing on the assets for once.  Rather, I am going to pull back the layers of our debt and discuss my plan for reducing my outstanding obligations taking back control of my personal balance sheet.

Why Am I Focusing on Paying Down My Family’s Debt Today?

I mentioned in the introductory paragraph that the goal is to cover your living expenses.  For me, and many others out there, the largest expenses consist of housing (rent or own), car payments (lease or purchase), and student loan debt (if still outstanding).   Each one of those activities can result in taking out debt to finance the purchase, if that is the route you decide to take.  Based on my family’s recent activities, the expenses in those categories have been leveraged and resulted in an increased borrowings section in our net worth statement. We couldn’t be happier with the choices we made because we put a lot of research and vetted our decisions carefully to make sure each purchase checked all of our boxes and was a great fit for us going forward.   But the end result for each decision was debt.

I’ve had a lot of time to think about a variety of topics while working on tedious tasks on my house recently.  Life, personal finance, sports, music  and politics were some of the topics that were constantly rolling through my mind.  Painting door frames and sanding walls may sound boring, but I had a lot of great conversations and deep thoughts as I worked my way through these tasks.  During these activities, I often found myself asking a few questions about financial freedom and debt (I know, it is a shocker that my mind kept circling back to my financial situation)!   What impact does debt have on my quest for early retirement?  If I truly want to retire with my current debt levels and have dividend income/side hustle cash cover my living expenses, then how much will I need to invest to cover the monthly payments?

My Family’s Debt Summary

I wanted to lay it all out there so everyone can understand my true debt summary while reading this article.  The table below summarizes our debt, and does not include outstanding credit card balances since my wife and I pay off our credit cards in full each month.  I focused on including debt that requires a recurring monthly payment and is not based on an activity such as purchases.  Our current debt outstanding is outlined below:

As you can see, we have four significant loans in three  different categories.  Here is a rundown for each loan and a brief summary about the terms of the loan and the underlying purchase:

  • Auto Loans – My wife and I each have a car because unfortunately we do not live in an area where it is conducive to only own one vehicle or be car-less. If our jobs were closer to home, we could easily do it since we are within walking distance of all other shopping areas (grocery stores, restaurants, etc.).
    • If all of you recall, my wife purchased her first used car at the end of May and she is at the beginning of her auto loan. We financed the purchase of her 2014 Toyota Rav 4 for 60 months at an interest rate of 1.9% and she has 58 payments remaining.
    • For me, I’m at the tail end of my auto loan and I only have 8 months remaining. I purchased a 2013 Toyota Camry and financed the purchase for 60 months as well.  Since I had graduated from college within one year of the purchase, I was eligible for a special 0% financing rate.  Yes, you read that right…0%!  I still can’t believe I was able to secure a 0% auto loan.
  • Student Loans – Earlier in the year, my wife completed a two-year graduate program to pursue a career as a nurse practitioner. It was an online class with in person clinicals, which reduced the costs significantly from in person options and allowed her to have flexibility with her studies.  Which was crucial as she was still working full-time and planning our wedding during the process!
  • Mortgage – I’ve written about this one million times over the last four to five months, so I won’t bore you all with too many details. But my wife and I purchased our first home and are finally moved in! The purchase price was $260,000 and had a 15% down payment, so the $221,000 balance remaining represents the amount financed on the transaction.  Our first mortgage payment will occur in September.

Investment and Dividend Income Needed to Cover the Debt

My calculations above show that I pay banks or other financial institutions $1,975.54 each month for the right to own a product!  That doesn’t even include the expenses that come with each of these items such as utilities, insurance, internet, and so on. The bottom line is that the principal and interest payments for the money I owe represents a large cash outflow each month! But I should say that I knew this ahead of time when my wife and I decided to take out the loan.  We planned for it.

If my end goal is to have a portfolio and side hustle income large enough to cover these fixed expenses, I thought it would be a fun exercise to calculate the portfolio needed to produce enough annual dividend income to cover the $1,975.54 monthly payments.  When calculating the overall portfolio needed to cover the expenses in the table below, I assumed a 3% portfolio yield as this is reflective of the dividend yield of my portfolio (and many other dividend growth investors’ portfolios).

Based on my calculations, my wife and I would have to grow our portfolio to $790,216  JUST TO COVER these monthly debt payments.  Holy cow did this number catch me off guard.   I understand this number will change, especially 8 months from now when I make my final car payment and the monthly $363.04 payment vanishes.  But still…WOW.  Currently my portfolio hovers around the $170k (based on the mood of Mr. Market), which means I am nowhere close to where I need to be to cover these expenses.  And again, what’s even crazier is that this doesn’t even include all of our other living expenses such as food, real estate taxes, utilities, and all the other items referenced earlier.  I have to invest $790k just to cover the darn DEBT PAYMENTS!

My Plan To Pay Down My Debt

Will having debt prohibit me from reaching financial freedom and retiring early?  Absolutely not.  Through an aggressive savings rate, side hustles, and other revenue generating venues, you can absolutely amass income streams large enough to cover your regular living expenses and debt payments.  Building a sufficient portfolio takes time though, and as the chart above proves, the larger your debt totals the larger the portfolio you need to cover your monthly payments (obviously).  Having debt and required monthly payments pushes that retirement date further away to allow for the additional time needed to save and invest.

This is definitely a wake-up call for me.   My goal is to reach freedom as soon as possible.  Bottom line.  Going forward, I cannot ignore my outstanding debt.  I can also shorten the time needed to retire and save by reduce the amount of outstanding obligations I have to cover with an income stream.  So now, I have developed a plan of attack to begin chipping away at my debt load.

First, I need to pay off my wife’s high interest rate student loan debt as soon as possible.  One of my initial goals for 2017 was to pay off $4,000 per quarter and have the student loan debt paid off in just six quarters.  I held off on paying $4,000 in the second quarter as I began stockpiling cash for our big house purchase.  While this was fine for one-quarter due to the size of the purchase that was made, I cannot continue to ignore this goal going forward.  If there is one goal I should accomplish in 2017, it is this one.  So today, I transferred the amount needed to increase the balance savings account that was created for her student loans to $4,000.  Soon I will have accomplished this goal for the third quarter and will take a nice chunk out of the outstanding balance.  Further, I am committing to use every single dollar that I make from sides hustles such as Swagbucks (referral link here) to pay down the debt as soon as the cash hits my account.  Each $25 cash out will instantly result in a $25 payment towards my wife’s student loans.

In 8 months, my car loan will be paid off.   Since the interest rate on this account is 0%, I do not plan to pay off my auto loan early like Lanny.  This isn’t where I want to focus my additional capital and would rather use any cash to decrease my wife’s outstanding student loan balance.  If we could pay off her student loans and finish off my auto loan in 2018, that would cut down the required portfolio to cover my monthly debt payments by $243k!

Once we pay off her student loan debt, which will likely occur after the completion of my student loan, I will focus on paying down either her auto loan or the mortgage next.  But since the interest rates for her auto loan and the mortgage are low, I am going to find myself in the age-old “Should I Pay Down My Debt or Invest” question that we are always debating on this website.

summary

In summary, I didn’t stumble on any new, earth-shattering personal finance theory.  Simply, after seeing where our life choices have taken us over the last twelve to twenty-four months, I realized that it is time to start paying down our debt and reducing our required cash outflows on a monthly basis.  We always play great offense on this site and find ways to increase our cash inflows.  Heck, we even play great defense by focusing on maintaining a high savings rate.  Now, I want to add another layer to that and focus on reducing my debt outstanding.  I am officially calling myself out!

What do you think of my debt pay down strategy?  How do you view debt when calculating your early retirement age?  Are you planning on being debt free before you retire?

-Bert

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45 thoughts on “A Call to Action: It is Time to Pay Off My Debt!

  1. I love this! It’s tough to figure out if you should be investing vs. when you should be paying down debt. We took the get-out-of-debt trail first before investing. I want to have as few expenses as possible so we can pump our funds into savings; it’s also a big bonus to retire with less bills to worry about. 🙂

    • Thanks! You’re right, it is a tough debate. The best answer is most likely a blend of the two. But the best part is that each person has their own philosophy. All that matters is that you develop a strategy that makes you the happiest, reduces your stress levels low, and allows you to retire peacefully. The only way you can go wrong is if you pick a route that isn’t going to make you happy.

      Bert

  2. Bert, Nice job calling yourself out. I think you have a good plan. The income needed to cover any debt payments ensures you’ll be working longer to produce money to cover them. I much prefer to not have any debt payments in my life and live a more frugal lifestyle and possibly be able to wean myself from the office sooner. I’m down to $3640 in consumer debt (currently no mortgage) and expect it to be gone soon. Now I just need to boost my portfolio! – Brian

    • Brian,

      Man that is a TINY amount of debt. Congrats on maintaining such a low debt load. I deserved to be called out and I want to put myself on the hot seat. Now I am nice and motivated to get out of debt and clean up my personal balance sheet.

      Bert

  3. Debt free is the way to be! My wife and I are similar age as you, DINKS, and even similar careers (I’m a CPA, she’s a pharmacist). We purchased a home in February as well, so had a large purchase to allocate capital to, but over the last 12 months we’ve averaged $3,200/month in student loan payments. We’re tracking to pay these off mid to late 2018 which will free up tons of capital to invest and reduce mortgage debt. Thanks for sharingr your thoughts on here, I enjoy following your journey!

    • EMU,

      Accounting/Medical field. That is definitely a familiar industry pair. Always nice to meet a fellow pair of DINK haha That is a great plan and I am loving the aggressive pay off of the student loans. You’re right, once you are debt free, it is going to be awesome to have an extra $3,200 in cash flow to throw into your investment account each month. Hopefully we will continue to hear from you on the comment board! Best of luck paying down your debt.

      Bert

  4. I would have loved to make additional mortgage payments …. but we ended up having some unexpected expenses. Going forward we might make some additional mortgage payments. We have 12 payments left in our auto loan … i see no major benefits paying it earlier.

    • Dividend Geek,

      Unexpected expenses are going to happen. Luckily you were able to work through the expenses (I”m hoping so) and they are behind you. The only benefit for paying off you auto loan in my opinion would be to free up cash flow. Do you have a target payoff period for your mortgage? Do you want it gone within X number of months?

      Bert

  5. I am only following your blog for a short time now (but loving it!), so I probably missed this, but how did you end up with a 170k portfolio while you still had non-mortgage debt?
    Why not use (sell) a part of your portfolio to get rid of all debt except maybe the mortgage? This will clear both your balance and your head (no need to worry about that anymore). Plus it will free up many hundreds of dollars each month to grow back the portfolio at double speed!

    • Martin,

      Fair question. I would ask the same question. The student loans were over a two year period and we prioritized investing while she was in school. One thing I didn’t mention is that some of the hospitals have re-imbursement programs for recent graduates. So hopefully my wife can get a job at one of those places and earn the nice bonus. I don’t want to take a step back with my portfolio and take away some of my income. But going forward, less extra cash will be flowing into my portfolio and will go towards paying down my debt. But I do see where you are coming from about how nice it would be to be debt free, have nothing to worry about, and start pumping a lot of money into my portfolio. Who wouldn’t want that!

      Bert

  6. I invested some while I paid down debt. Eventually the debt was gone. Finance people told me I should only pay down debt before investing, but I considered the smaller investments that I was making as part education expense and a way for me to feel as though I was contributing some to my overall future financial life. I get what the financial guys were saying and yeah I probably did pay a bit more interest, but investing made my life a bit more interesting. I am debt free. I enjoy Dividend Diplomats.

    • James,

      A nice blended approach. I understand the finance guys you mention as well. There is something peaceful/nice about being debt free. Sure, investing definitely makes it interesting and it must have been nice proving that 1. You can build a portfolio while paying down debt and 2. Not having to build a portfolio from scratch once you were debt-free. MY fear would be that I spend so much time paying off debt and ignoring investing that I miss appreciation and growth from re–invested dividends. Ultimately I do not think there is a wrong answer to this question, but I definitely prefer a nice blend of the two.

      Thanks for stopping by and the kind words. Hopefully we will see you around more in the future.

      Bert

    • James,

      I am taking the blended approach also and totally agree with the educational expense. This approach only allows me to invest small amounts and the risk is lower while I learn what I’m doing. It’s nice to have these posts to read and comment, learning from people just starting out and from well seasoned investors.

      Brian

  7. nice Man, great to write it down like that. Personally I would cash out enough of my portfolio (if you can tax free) to pay off her student loan. Her rate is higher then what your making in dividends. The market is definitely high atm and would be a fantastic investment paying it off. She would be ecstatic too, maybe she would wear something nice for ya and bust out a new move. haha. Then with that monthly payment gone move down the list smallest loan to biggest.
    Either way your on the right path. I have a mortgage but other then that we are debt free. Its a amazing feeling and most people are shocked we have “no” debts. Mortgage is good debt imo.
    cheers

    • PCI,

      Thank you very much haha I’ll have to look into the fastest way to pay down my debt. But man, taking a step back and watching my dividend income fall would definitely be a tough pill to swallow. Unfortunately, I don’t think I would have enough losses in my taxable portfolio to sell that would offset any of the gains. I don’t mind having a super low interest rate mortgage loan. I’m assuming yours is as well. It would be a great feeling having no debt outside of a mortgage and we are going to work our butts off to ensure so in the future.

      Thanks for the fun comment and the great laugh.

      Bert

  8. Fantastic work Bert, looks like you are quite motivated to get this debt paid off and quickly. Over 700k needed for investments to pay this off… ouch! Best to pay it off with cash for now for sure. That way, once it’s done you can snowball your payments into more investments! Good luck!

    • Thanks BHL! You’re right, I want this debt gone as soon as I can. It was weird seeing just how much it would take for me to have to invest to produce the cash flow stream to pay down my debt. However, I want to make sure I do it in a way that doesn’t sacrifice my long term financial situation. But for now, I definitely need to pay off the high interest rate student debt. What’s crazy is that I can only imagine how much I could invest once I have no cash outflows to make to bank/financing companies.

      Thanks for the comment!

      Bert

  9. Hey there,
    I love this. It’s quite inspiring to see how motivated you’re towards paying off your debts in the quickest manner possible. I really enjoy following your journey toward a debt free life. Decisions on how to invest and pay off debt simultaneously are tough. I ever tried it, it was the worst experience ever but and thank goodness, I eventually settled the debt. Debt free is the way to go, that’s why I’m really enjoying Dividend Diplomats. In my opinion, as much as it may be hard to do without debts, I think it’s always good to shun them before investing. Thanks for sharing these fascinating insights.
    Best Regards,
    Paul.

    • Paul,

      Thank you. Very kind of you to say. The one nice thing about not having any debt, besides the additional cash flow, would be the piece of mind of being cash free. You’re right. Paying down debt versus investing is not an easy feat. But I am sure that there is a balance to be struck between investing and paying down low interest rate debt. Once the student loans are paid off, I’ll work to find that balance so I’m not sacrificing future dividend income and growth just for the sake of paying everything off.

      Thanks again for the great comment. I look forward to updating all of you on our progress towards knocking it out!

      Bert

  10. Save the mortgage for last! Student Loan, Wifes car, your car, and then make the decision on mortgage or invest. We just recently paid off the last of our mortgage (Feb) in under 5 years and we are debt free. However, it has been a slow road building the portfolio back up again. Maxing out 401K’s that I dont necessarily count towards the Financial Freedom path right now takes up the bulk of our extra saving money. I miss seeing those big dividend months and the continually increases month after month. Something very rewarding about it.

    However, my wife said that she only wants one mortgage at a time and I have always wanted to try my hand at real estate so that was the main reason for paying it off.

    Good luck with whatever you do. Either way, we are all very fortunate we are able to even think about these things. Some are not so lucky.

    ADD

    • ADD,

      5 years! Holy cow that is amazing. After seeing one mortgage payment, I can see why your wife only wants one at a time haha But I guess it would be slightly different having the monthly rental cash flow to offset the second/third mortgages (depending on how many properties you potentially purchased). I appreciate your insight about your journey and seeing how it is taking longer to build your portfolio back up. That honestly is the one thing that has me nervous. I don’t want to be so singularly focused on ridding myself of debt that I lose sight of the investing and continuing to grow my dividend income.

      I don’t want to respond without addressing your last part. You are 100% right. We are all fortunate to be in the position we are. It has hit me recently after seeing what is happening in Texas, Florida, and other places. If this is one of my major problems, then I am one lucky SOB.

      Thanks again,

      Bert

  11. Totally plan to be debt free before I retire. Not having a regular paycheck but still having a mortgage would really stress me out, even if I have enough passive income to cover it. And I agree tacking high interest debt first is priority. But after that the debt to investing ratio should be given serious consideration too. Best of luck to you!
    🙂

    • SMM,

      I swear, there is a price to pay for peace of mind. It is a hard measure to quantify, but if you do not want the stress that a mortgage payment may bring, than get it out of here! Like you, I would love to have all personal debt abolished prior to retiring so my income solely covers my living expenses and not payments to a financial institution.

      Take care,

      Bert

  12. Great plan on tackling that debt and congratulations on the upcoming nuptials and on moving in to your new home! 200K mortgage debt is not bad at all. People here in Vancouver have like 1 million mortgage debt. It’s great that your wife is able to continue working while pursuing her graduate studies, that really helps a lot otherwise the opportunity cost will increase greatly.

    • Thanks GYM! You’re right, there is an element of perspective compared to other markets. I’ve seen the debt numbers on some Canadian blogs and it is startling. I haven’t looked that into it, but I am always curious the difference in income/cost of living compared to my market. Maybe I’ll do some digging over the next few weeks just to see. And to your point, the fact my wife worked during school was HUGE. It allowed us to continue pushing through and focusing on building our portfolio. Otherwise, this article would have a completely different tone.

      Take care!

      Bert

  13. Excellent write up Bert. I absolutely think it’s a great thing you’re focused on paying down debt. I really like the way you broke it down in terms of looking at much your portfolio would need to be to cover your debt payments. I’ve never actually done that, but might take a look myself. The cool thing about that approach is that you can simply reduce the amount your portfolio has to be by reducing the debt obligations. Of course that makes sense generally, but it’s much more of an impact when you see actual numbers.

    By the way, how do you get the table to fit so nicely. Is that google-sheets, or some other program your using? I’m still learning about effective ways to make posts.

    • Dividend Portfolio,

      Thank you so much and I appreciate the kind words. You’ll have to let me know what size of a portfolio you will need to cover your expenses. To me it was eye opening seeing the amount required and it was the kick in the butt I needed to re-focus and start paying down my debt.

      I create the table in Excel/google sheets. Then, I use a snipping tool program to save the table as an image to upload. I’m sure there are other programs that can be used, but it is essentially taking a screenshot and cropping the image to only show the table. Hopefully that helps!

      Bert

  14. It definitely makes sense to pay down your wife’s loan ASAP based on that rate. You’re not going to find a better guaranteed return than that anywhere right now. I’ve got my car as my only debt right now although that’ll change soon if I buy a house in the next year or so and I’m trying to pay it down faster by tossing some money at it simply because I like the thought of having that free cash flow. The interest rate is low but I’d rather now have debt if I can help it – I just tossed another $300 at it and will be down to below 8k after this month’s regular payment. I might aim to have it paid off by the end of 2018!

    • TITM,

      Agreed, the student loan debt will hopefully be gone before we know it. How nice is it to only have a car loan?? How many more payments do you have? It is interesting thinking about the concept of having the free cash flow versus low interest rate debt. Sure it doesn’t cost much to finance, but having the extra capital to invest, cover expenses, or heck, even use for a trip or something fun would be really nice. I’m pulling for you to be debt free as soon as you can and hopefully you can hit your goal!

      Bert

  15. Bert,
    Debt is a real bummer. It was only 7 months before we signed for our house that I finished off my wife’s student loans. It was nice to be able to say that her diploma no longer had the proverbial lien on it. That being said I like both sides – paying debt aggressively and investing extra. So I do both to an extent – I beef up my car loan and mortgage payment via a solid round up (but not my wife’s loan the rate there is 1.5% so not worth it). And I try to be aggressive about stock purchases.
    – Gremlin

    • Gremlin,

      I love how you framed not having student loan debt. No lien…love it. We will get there soon hopefully! And I think a blended approach, considering the interest rate and the alternative investment opportunities available is the best way to go. A lot of times, figuring out the best option depends on the current environment and what MR. Market has presented to us.

      Take care!

      Bert

  16. Presumably the Nurse Practitioner program, now that it’s complete, will lead to an elevated income level that will help pay off that student loan as well yes?

    It’s noble of you to commit your swagebucks to the cause but the nursing gig should be the one that pays that off in a reasonable amount of time. Advancing a nursing degree is probably one of the few areas of study that actually justifies the leverage these days.

    Once the nurse debt is paid down, I would let the mortgage and car loan ride. You can beat a 4% return pretty easy.

    • Catfish,

      Yes, that is the assumption we are making. My wife is still searching for the right job. However, she will definitely receive a very nice pay increase once she finds her new position. I appreciate your advice about investing more once the student loans are gone. Man do I have a lot to consider here haha

      Bert

  17. I think that it is very smart to pay off those high interest loans early. As you pay off loans start snowballing that extra capital into paying down your other loans. Don’t forget to continue to invest also! I know it is difficult to do with all the loans you currently have but you don’t want to grow stagnant in the market. even if you just put $100-500 away monthly that will be a big thing. As you move to smaller monthly fund deposits maybe you should consider doing a free commission brokerage such as robinhood?

    • Great idea to use the extra capital that I was already committing to debt paydown towards other debt (once paid off). Trust me, I am going to work on increasing my automated investing too so that I am not forgetting to play offense with my dividend income. I would consider Robinhood, however, I am not the biggest fans of the fees. I think I would rather pay down the debt when the extra cash is available than let it ride in the low cost brokerage account.

      Thanks for the comment Dilligent, as always!

      Bert

  18. I’ve been stuck on this same topic aswell. I have done a lot of research amd soul searching and ultimately when it comes to paying off the house vs investing Im choosing to invest. Housing is the single cheapest loan one can ever secure and I’m confident I can secure higher returns in the market. No one ever became rich by paying off debt. I would recommend paying 1 extra mortgage payment per year split into monthly payments. That alone shaves 5 years off. Personally, I’d pay everything else off and invest heavier while still carrying the mortgage. I like having extr liquid cash in the market also. It’s much easier to tap then money put into the mortgage.

  19. Paying off the debts early is always a smart idea. But, sometimes it becomes really hard to manage all the financial issues and pay the debts as well. Maintaining a family is not an easy task. Lots of expenses, & huge loans make life horrible.

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