Do you want to destroy debt quicker? You’re in luck because I have the best way to destroy debt quicker and boost your wealth faster.
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.
How To Destroy Debt Quicker
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. Destroy debt quicker with discipline.
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.
Pay Down Debt Instead Of Spend
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. 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. At the time, 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. However, 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.
Recommendations To Destroy Debt Quicker
Check the latest mortgage rates online through Credible. They’ve got one of the largest networks of pre-qualified lenders that compete for your business.
Your goal should be to get as many written offers as possible. Then use the offers as leverage to get the lowest interest rate possible. Mortgage rates are at ALL-TIME LOWS in 2021+.
Related: Ranking Debt Types From Best To Worst
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!