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