If you haven’t noticed, we live in a consumerism society where we are bombarded by advertisements that compel us to spend on things we don’t need. Some things are definitely worth spending up on. But for everything else, save your money.
Like many people, I have debt. Although my debt is tied to property, which tends to appreciate over time, it’s still debt that I plan on getting rid of by 2027. I don’t have any revolving credit card debt because their interest rates are absurdly high.
Earlier this year, I got rid of $815,000 of debt by selling a rental house for roughly 30X annual gross rent. I don’t miss the rental income because I don’t miss the $3,400 monthly mortgage, the $23,000 in annual property tax, the $3,000 in annual maintenance, the $2,000 in annual insurance, and pain in the ass tenants.
Despite the large pay down, I still have about $1,000,000 in debt spread between my primary residence and my vacation rental in Lake Tahoe. Simple math states that if I can pay down $100,000 a year, I will be debt free in 10 years. Here’s an easy strategy for how I plan to get there relatively painlessly that I recommend you follow as well.
Paying Down Debt The Easy Way
To start, everybody needs to total up their debt and set a time frame for when they want their debt to be paid down. You have to have a deadline or else you will more than likely not take your debt payoff seriously. By 2027, I will be 50 years old. There’s absolutely no reason to still be in debt at this age given my income and current liquidity.
After you’ve decided when you want to be debt-free, set up bi-weekly or monthly calendar reminders to pay down some debt. For example, I have a calendar reminder on the 25th of each month to pay down extra principal. Because I set up autopay for both my mortgages, if I try to pay down principal during the first 16 days of the month, the system will think that I’m trying to pay my mortgage, which consists of interest and principal. But by paying an additional amount after the 16th, I ensure that I’m paying down principal only.
Once you’ve established your calendar reminders, establish new debt pay down reminders that correspond with days of consumption. For example, Valentine’s Day, Memorial Day, Labor Day, Thanksgiving, and Christmas are all popular holidays that encourage us to spend. There’s even Emancipation Day, which you can change to Debt Freedom Day.
Here’s a calendar of the upcoming holidays you can choose from.
Paying down debt when you usually would be spending is the key to achieving a huge sense of financial gratification that will keep you paying down even more debt.
If you’re a football fan, you know the devastation of being on the 5 yard line and seeing your quarterback throw an interception that gets run all the way back for a 12 point swing. If you are a basketball fan, you know the pain of seeing a layup blocked and the opposing team breaking away for a slam dunk for a 4 point swing.
The goal is to be the opposing team which emerges victorious after what looked like a sure loss – spending money. Embed in your head that each day that promotes consumption is actually a day where you will pay down debt. As soon as you turn the equation around, you will realize how ferociously consistent the message becomes to always pay down debt.
Note: The good thing about having an amortizing mortgage is that you will inevitably pay off your principal loan in 15 or 30 years without extra payments, depending on the mortgage type and terms since each payment has a principal and interest component to it. The more you pay down extra principal, the higher the portion of your monthly payment goes to principal instead of interest, thereby accelerating your debt pay down even more.
You Won’t Regret Paying Down Debt
Over two years have passed since I paid off my rental condo in Pacific Heights and I have no regrets, despite the mortgage rate only being 3.35%. I still remember paying off about $40,000 in business school debt in 2008 when the rate was around 3.5%. No regrets here either. I suspect paying off expensive credit card debt would prove even more satisfying.
There’s something amazing about no longer being indebted to anyone or organization. You feel more free. When it comes to making a higher return on an investment, the satisfaction is ephemeral because the money usually just sits in an investment account and provides zero utility. Whereas once a debt is paid off, there’s the satisfaction of simplifying your life with one less reoccurring bill payment.
For the financially savvy, I do recommend following my FS-DAIR investing / debt pay off framework to get the maximum return on your money. We are after all, in a bull market where it’s best to take full advantage until the music stops.
As for my wife and I this Thanksgiving week, we paid off $16,000 of mortgage debt. We were only going to pay down an even $10,000, but while in line at the bank I got bombarded with six e-mails telling me to buy something I didn’t need. Therefore, it was only right to pay down an extra $1,000 in principal for each annoying e-mail.
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Readers, what are some fun and easy ways you pay down debt? Have you ever thought about turning the consumption cycle around to your advantage? Have you ever regretted paying off debt? If so, what was the circumstance?
Updated for 2020 and beyond.
Hi Sam,
As always, great article.
Understood for wanting to pay off any consumer debt as quickly as possible. However, for investment-related debt, I have a higher debt tolerance and I pursue the strategy of maximizing IRR. This means maximizing secured debt to a level I am comfortable with that makes sense for that particular asset. I have found this to be particularly helpful to increase my returns for both my real estate and private company investments, instead of paying down my mortgage with a 2.54% interest rate (Canada). I am in my early 30s today, but I still expect to pursue this strategy when I am older for the equity portion of my portfolio, similar to how blue chip, dividend paying companies have a reasonable level of debt to lower their WACC.
I am curious why you would not have a reasonable level of debt exposure for your equity portfolio to increase your returns? For yourself, is it for peace of mind at your later life stage (50) and the freedom you feel from not owing anyone anything? I feel this is a personal preference/risk tolerance item and no wrong answer per say, but curious how you think about it.
Cheers
You should keep a 2.54% interest rate. That’s a great rate.
For me, I feel like the good times are over. See: DIRE: Delay, Inherit, Retire, Expire
I want to lock in a guaranteed return now after seeing a 5X increase in my net worth since 2012. Everybody should have seen huge increases. Now it’s about protecting one’s gains! With money market rates at 2.45%, that’s pretty awesome to me.
I just hate losing money. At 34, I no longer wanted to work. But if you still want to, feel free to take more risk.
In addition to automatic extra principal payments I look at the total amount owed and try to get down to the nearest thousand. For example, if I owed $112,890 I would make an extra payment of at least $891 to bring the total to $111,000. This method gives me a sense of accomplishment.
I meant to say $111,999.
Sam, to destroy debt quicker is easier once you have the extra cash as you do.
What I think most people in debt are caught between is:
a) stop 401k contributions or lower to get company match and everything else goes towards debt
b) stop 401k contributions altogether to eradicate debt
c) use savings you may have to pay down the debt as long as you have a buffer in the savings account
d) get a 2nd job to pay it down
e) some mixture of a/b, c, & d
As you’ve mentioned in the past you avoided debt and made sure not to get in non-asset bearing debt.
Thank you so much for the enlightening post! As you quite rightly point out, debt CAN be used to our advantage such as through low interest rates on property, and perhaps even borrowing to invest. However I rarely see ANY advantage to consumer debt.
Your analogy to football also rings true. Instead of a small football (soccer) bet that I would place each weekend (in my past life before discovering FIRE!), I now send the same amount to my mortgage as an overpayment. Simple, and I “win” every game!
Please keep up the good work, you inspire us more than you know!
Call me a heretic, but I like debt. Buying properties using mortgage finance got us to financial independence and early retirement a lot quicker than otherwise. We also decided not to make early repayments and carry mortgages into retirement.
Also, with prevailing interest rates below the rate of return on investments, we are in no hurry to make early repayments on any of outstanding mortgages. Further, we’ve decided we would prefer to carry a modest amount of debt indefinitely as a partial hedge against long term inflation.
Do you suggest putting a huge hole in your savings account to pay down consumer debt like a Dave Ramsey type thing?? Or do you suggest waiting to pay off a bunch of debt after you have a larger emergency savings?
Consumer debt, as in credit card debt? I would follow my FS-DAIR chart, which would say 100% allocation to credit card debt since I’m sure the interest rate is higher than 10%. But of course, you need some money as a buffer so have at least 3 months of expenses in cash.
Thanks Sam. By consumer debt I meant a combination of things. I have a high income but I am also having to tear through some personal debt before I can tear into a student loan. I read another article that reported with 100K area income there is “no excuse” to skip max contributions to a 401k. Does this still apply with big student loans?? Or since the loan is 6% interest and will take a few years to pay off, is it better to do like a 60% debt and 40% savings combo? Would appreciate your thoughts!
Follow FS-DAIR: https://www.financialsamurai.com/pay-down-debt-or-invest-implement-fs-dair/
6% is pretty expensive, so I would use 60% of your cash flow to pay down the debt and the remaining 40% to Invest.
Awesome. Thanks for your thoughts. Hope the new year is treating you well thus far!
what are some fun and easy ways you pay down debt?
Back in the days when I had a mortgage, I used excel to create an amortization schedule. Then I could truly see the benefits in what that extra principle payment meant in future cash flow. It became a spiral, to the point I paid off my house in 5 yrs.
I really like the debt and investment ratio chart. It makes total sense for figuring out how much debt to keep vs. how much to get rid of. It’s always a struggle for me to see the big number I owe, but remember that the interest is super low and the money is working harder for me in the market right now. But then the extra monthly cashflow when debt is gone is awesome. You put it out there in black and white so I can see how to get the most bang for my buck. Thanks!
I had $40K in student loans and took longer than expected to pay if off. But when I did, it felt really to get that out of the way and focus on being debt-free, investing, and saving. Now as we search for home and when we find one, we will start paying off the mortgage. Our plan is to get a 15 or 20-year loan and hopefully paid it off sooner than that.
When we moved across country and downsize dour house we were able to lose a high mortgage and buy outright. It was incredibly liberating. We currently have zero debt other than monthly credit cards that are paid in full. Long may it continue.
I like your game of paying extra on the mortgage around holidays or when tempted to spend. Maybe I’ll make myself pay an equivalent amount down on the mortgage every time I spend money on clothing…which I don’t do often but tend to do in seasonal sporadic chunks.
However after paying around $2000 extra a month on the 30 year mortgage for awhile, we refinanced to a 15 year note. So we are already paying it off sooner than we otherwise would have.
And to play devil’s advocate, I actually paid off a rental mortgage a couple of years ago after getting a windfall from selling another rental, and I was surprised and disappointed I didn’t feel differently. Now that my income far exceeds my expenses it’s kind of like Monopoly money I guess – whether I put that chunk on a debt (meaning more cash flow each month that I just reinvest) or into stocks or cash doesn’t change my life much. I sold that paid off property this spring and could have paid off another rental mortgage (at 5.125%), but I dumped it into an index fund instead.
I don’t have any debt but I use a variation of your system for investing. When I get bored I want to spend money. Instead of buying “stuff” I usually buy stock. It scratches the itch. My little itch scratching account has turned into a nice chunk of change over the years. A added bonus is not having a bunch of “stuff” to worry about.
Thanks, Bill
Great post Sam, and I agree. I paid off my mortgage years ago, and have never looked back. In fact, I’ve never heard anyone who has paid off their mortgage regret it. There’s something oddly satisfying about having no debt – even more than having a big pile of assets but with big liabilities.
I’d be more aggressive with your debt paydown schedule though. Getting even 6-8% out of this market over the next few years is going to be tough.
In essence paying down debt is the opposite of holding bonds, where a dollar cost strategy could be used.
I’m surprised your post focused on linking debt payments with holiday dates rarther than a payment plan / optimal schedule. Interesting.
I assumed everybody knew about automatically paying down a mortgage: a monthly automatic mortgage payment that includes interest and principal pay down. If one does not pay extra principal payments, usually all mortgage debt is paid off within 30 years or 15 years, Depending on the mortgage amortization period and type.
Thanks for highlighting one of my blindspot assumptions. I will make it more clear for people in this post. Do you have a mortgage?
As for credit card payments, the minimum has to always be due. But I Recommend nobody ever has revolving credit card debt. As I wrote in this post.
Yup got two mortgages.
Did you know: ‘mortgage’ is in the same family group of words as ‘morg’ (grave), Mortician (the Adams family), Mines of Morier (lord of the rings). All relate to death.
It originates from a time where mortgages were passed from parents to children and was literally for life/ until death.
I think paying down debt is frowned upon in this raging bull market. Consistently I hear people talking about taking out bigger loans as “money is cheap”. It makes me think some people are setting themselves up to get burned with to many debt obligations. I had just graduated high school in 2008 during the last recession so I have known nothing but a bull market when investing. This I think is a bad thing for a lot of people. I hope everyone understand that double digit returns are not a guarantee and are ready for a possible down turn.
Thanks for a great post Sam. There seems to be an internal drive pushing me to horde all my extra cash each month. I think your recommended app “Personal Capital” helps a lot in that direction; I paid off an emergency loan in 1/5 the time and hit a nice double in a single stock. Couldn’t have done either without the visibility you get from PC.
Great to hear David. Yeah, once we can get a bird’s eye view of our finances, we tend to make more optimal decisions with our money. Tracking my net worth helps me overcome my fear of investing by focusing on the asset allocation part of my net worth.
Paying down debt feels really good. I’ve never regretted making extra principal payments. I love your tip on using the various holidays throughout the year to make extra payments especially on a day like Black Friday. There was a time when I was younger that I really looked forward to Black Friday, but it came and went like any other Friday for me this year. There was nothing I wanted to buy so I didn’t even look to see what was on sale. In addition to paying off extra principal throughout the year, I setup my auto mortgage payments to pay extra principal every month too. It all adds up!
Yeah, all I see now is MORE CLUTTER AND JUNK in the house whenever Black Friday or Cyber Monday or whatever comes along. That’s the good thing about living in a relatively small house, not much room for more stuff.
Love the idea of using the holiday calendar to actually pay off debt – it’s measurable, easy to remember and actionable instead of just ‘pay off debt’. No wonder you’re a (Financial) Samurai!
It sure is nice being debt free!
I’m not worried about mortgage debt at all these days. I don’t mind paying it off in 25 years or so. It just isn’t a priority for me anymore. However, we may pay everything off a bit earlier if we sell everything and retire oversea. We’ll see how it goes once Junior graduates high school. That’s 10 years down the road so I don’t worry about it yet.
I totally understand what you mean about getting all those enticing emails to take advantage of the holiday sales! I really wanted to buy something!!! Luckily, we met up with some financially savvy friends this weekend and talked investments so I decided to buy some stocks instead. It didn’t hurt that my returns hit the 100% mark the day after Thanksgiving.
Nice job hitting your return goals and investing instead of spending. Another 12 point swing in football I say!
It’s crazy how bullish this market is. It just won’t quit. Hope it continues for several more years and then gives us clear warning signs to de-risk.
I doubt it will
No way in my wildest dreams would I imagine 100% returns in less than 11 months. Even with a full understanding that this can’t last for much longer I’m not worried since the investments are for the long term.
Love the post!
I must say, carrying debt is stressful, regardless of the amount. But paying it off is a sure stress reliever. My current DTI is 19% (D:$~6,000/month w/ a I: $33,888 (pre-tax, but post 401K and Solo 401K contributions). I currently pay down a substantial amount to my medical school loans w/ the goal of paying them off in the next 4 years (5 years total). We also contribute 24 payments a year for our cars, instead of 12, and I recently bumped up my payments for the Maxima by an extra $500/month (on top of the 24/12 months payments) as we are wanting to get rid of this debt as soon as possible.
As Sam illustrated above, one of the methods my wife and I utilized earlier this year was calculating all of our credit card debts, and divided it all by 5 months (time we gave ourselves to pay them off). This self-set goal kept us motivated and disciplined, and we were able to pay it all off on month earlier. We now pay all of our credit card debts in full each month, while contributing extra payments to our car loans and student loans (all mine). At present time, I save 30% of our post-tax income. We’re giving ourselves all of 2018 to reduce some of our debts to a smaller amount, if not completely pay them off. We’ve set new goals for 2019, which include saving 50% of our after-tax income, while living off of the remaining 50%. This includes being able to max my 401K ($18,500/yr [new contribution limit starting next year]) contributing $20,000 into my solo $401K, and $5,500 into a Roth IRA (backdoor contribution). Our goal will be to live off $138,453 (50% post-tax [my income + $15,000 of wife’s income]), while saving/investing the other $138,453. If we’re successful at bringing down our debt for next year, we’d be able to keep our yearly expenses below $75,000, leaving us w/ an additional $60K to use to may additional payments to my student loans, etc.
We’ve discussed different options, and for now have decided to use up to $25,000K from the $138,453 (savings amount) for vacations each year. I know this sounds like a ridiculous amount, but we’re really good at budgeting our vacations. For example, we went to Paris earlier this year for a whole week. We budgeted a total of $10,000K for that entire week to do whatever we wanted. After flying business class, staying at an inexpensive Air B&B, etc, we only spent $6,200. The rest we used to pay down other debts.
A mandatory expense of mine includes $1613 per month for life insurance (Term and Life), and Disability insurance. While the monthly premium payment is rather high, it allows me to sleep better at night knowing that my children and queen are covered should anything happen to me.
Love to hear everyone else’s methods/strategies for tackling their debts, etc.
Not judging, but with such a high salary there is no reason for you to have such high levels of debt. It appears you are spending a large amount based on your $25k plan for vacations.
No judgement taken. However, try carrying student loans debts from undergrad, and medical school. Believe me, I’m pretty sure I’m doing a whole lot better than a lot of my counterparts. And the $25K is for vacations 3 times a year. This is nothing compared to colleagues of mine which vacation monthly, given that Hospitalist work 14-15 shifts a month as full time. Having finished residency just 1.5 years ago, the fact that I’m striving pay off all of my loans and other debts to be debt free in the next 4 years (5 total) is something to be excited about, at least I think. I know way to many docs that have been practicing for longer than I’ve been alive and are still paying for the med school loans… That’s just one example. :)
Great job being so focused on paying off debt so soon after residency! When you have focus and a plan, financially good things happen.
Congrats on becoming a doctor too. Your debt will be a distant memory within 5 years. I’m pretty sure of it. Keep it up!
I still go back and forth at times between paying off debt and investing. The name is the game is wealth creation, which should mean keeping low interest debts around while investing the rest. But like you said there is a satisfaction of being debt free. And while lots of investments will most likely make you money, no investment is guaranteed. Ever.
With hat being said, I like FS-DAIR a lot. It gives you some investment return while allowing you to pay off debts quickly.
Don’t forget you have much more freedom to do what you want without debt. Without a debt, you don’t need to be afraid of being laid off… reducing stress is priceless to your health.
We’re balancing our mortgage debt payoff with our investing. It’s probably leaning too heavy toward the debt payoff mode at least in the short-term, but the goal is to increase our income a bit so we can hit both of our targets how we want.
I don’t think we’ll regret paying it off even though it’s a relatively low rate (3.875%) and could maybe get more if we’d funneled all of our money into the market.
People who have debt to defend it as if someone one were to have called their child a bad name. Yet every person I know who has paid off some serious debt has no regrets. Everyone says it feels like a weight has been lifted and how good it feels to actually own your stuff.
We paid off about $34K in student/car loans. Making that final payment felt absolutely amazing. Never once have I thought “dang it those student loans were only around 4% interest rate I should have invested that money since that debt was so cheap”
Currently we only have a mortgage but are toying with the idea of making a serious push to eliminating that in the next few years.
Paying off the mortgage will feel even more amazing.
One year, I was looking for the Mortgage Interest statement for my condo for tax purposes, and then I realized I didn’t have one b/c I had no mortgage! Whoo hoo!
No regrets paying off my 3.25% interest school loans last week. It has been hanging over me for years (12 to be exact) and is nice to be done with it. I have taken the monthly payment and already allocated for investments through a after-tax plan at work.
I agree that it is very satisfying to pay off your debts and you need a debt pay down plan. When I bought my first car and had a loan I aggressively paid down extra every month because I hated seeing the bills with the interest. Within one year my car loan was paid off and only had student loan debt. This was 4 years early.
Since I had student loans at a lower interest rate I also had a pay down plan at a slower pace. After 8 years these loans were paid off 7 years early. By paying off both of these loans early I saved a ton on interest and can now invest the savings.
Thanks for the great tips! I too hate debt with a passion. I just can’t enjoy the feeling of being in debt (whether the interest rate is high or low). Hubby and I don’t have any student loans or consumer debt at the moment.
The only debt we have at the moment is our mortgage, which we plan to pay off in two years. We’re also maxing out our 401(k). We hope it will give us financial security in the future.
“The goal is to be the opposing team which emerges victorious after what looked like a sure loss – spending money. Embed in your head that each day that promotes consumption is actually a day where you will pay down debt. As soon as you turn the equation around, you will realize how ferociously consistent the message becomes to always pay down debt.”
Pure effing genius. Use the system to beat the system.
I used to have an SUV and I paid it off in less than a year after I bought it. But I may have been able to make more if I took that cash and put it into a small-cap fund or AAPL or something. I ended up selling the SUV anyway a year or so afterward due to high gas prices and my unwillingness to pay for premium gas. So yes I kind of regret it, but I’m glad I learned from it early.
Love the idea of setting milestones to remind you to pay down your debt. Instead of buying a new TV on Black Friday, take that money on put it towards debt payments!
I like to take any side gig money we earn and throw it towards debt. Even small amounts can have a big impact over time.
Hey Sam,
Interesting strategy to pay down more debt at times when you are more likely to spend. I still have law school debt that I am paying off and while it does hurt to have a chunk of money just go to debt and not to investments, I never regret the decision to send more money after the debt.
I am curious as to what you would do in a situation where you have multiple loan groups. After paying off one loan group, would you “snowball” that group’s payment against another group or just add that to money to be invested?
I would continue to follow FS-DAIR for all loans, starting with the highest interest rate loan first and work your way down.
It will feel AMAZING once your law school debt is crushed!
Interesting concept to utilize debt pay down reminders that correspond to days normally associated with consumption.
Thanks for re-posting the FS-DAIR article; we don’t have any debt currently, but it’s a useful tool to consider for paying off debt. One could arguably look to utilize it for allocating available capital into either investments or cash (to take advantage of a downward market or particular asset) based on expected rate of return or potential market outlook in general. We’re currently setting aside additional, new capital into cash or cash equivalents for buying opportunities.
I once delivered Krispy Kreme donuts to a father and his daughter at 8 in the morning. It was just another day, another task to bring in some extra income to pay off my student loans. I’ve since paid off my $30k student loans and the only regrets I have is not paying them off sooner.
I took on a $561/month car payment right out of college which essentially doubled my total debt at the time. But I didn’t realize it then because the car was distractingly beautiful.
I fully agree with you about setting a deadline to take it more seriously. More often than not, you’ll end up beating that deadline. My goal was to be debt-free by my 30th birthday. I beat it by almost a month!
Nice work D’angelo! And hopefully never again with a $561/month car payment unless you are making 10X the value of the car a year!
It’s good to learn financial lessons early when one has less money. By the time the dough is rolling in, we’ll be making more optimal decisions.
I agree with you – I’d much rather make some stupid financial decisions while I’m young than when I’m more settled.
That’s why I don’t worry about – as a 24-year old – making a few stupid purchases, racking up a little bit of credit card debt. It’s better than stumbling across some decent money and blowing it all when I’m older and have more responsibilities. I can learn my lesson and bounce back much more easily now.
(Of course avoiding debt is better, but easier said than done!)
I regretted paying off $20k in student debt. I freaked out and killed it in 8 months with only a part time position. Had I not been so debt aversive, I would have invested some proceeds to attend graduate school and made myself an more employable candidate.
But (and life is funny that way), if I went to graduate school then I would have been more in debt. I also wouldn’t have met my husband. So saying I regret paying my debt back isn’t about the debt but it’s about how much I love my life now. Since I love my little hovel and husband – I totally lied :) I don’t regret paying that debt back.
Also your last paragraph about the mortgage is what kids these days call “baller status.”
One can never regret actions that helped them find the one!
I’m forever grateful to The College of William & Mary for accepting me. Without their acceptance, I wouldn’t have met my wife in Japanese 101 class. Awww.