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Paying Off Debt – Which Strategy Is Best?

My highest debt load was when I was married, in total we owed $900k, nearly half was student loans and the rest was credit cards, auto loans and mortgages. I count mortgages as debt as long as the property is a primary residence. A mortgage on an income property is more of a business loan so there is less urgency paying it off.

With around $50k in credit card debt and another $130k of student loans I wasn’t doing too bad but had a lot of tough decisions to make. The credit card debt was my second round of maxing them out. Back in 2005 I had around $40k in credit cards, I used a credit card counseling service to negotiate down the interest rate to create a single monthly payment. After several years I got that down to $0… until 2009.

By 2012 I had around 5 credit cards to pay off. Two of them were at 0% interest but needed to be paid off in 10-12 months otherwise I would have gotten hit with heavy interest penalties. The other ones ranged from 8-15%.

I struggled with which ‘payoff method’ to use. I had come across a few debt-payoff-techniques, there are all sorts of catchy terms used to describe these, but in 2012 I stopped believing in gimmicks.

It’s important to use a method which makes sense to you, one you believe has potential to succeed and one you can justify when times get tough and stick with.

I started paying off the credit cards that were at 0% because if I didn’t knock those out in time they would have cost me the most. I threw a little at the highest interest ones as well. I hadn’t yet gotten onto YNAB so my expenses were in the $7,500/mo range (probably higher).

I kept detailed spreadsheets, they served as an encouragement, keeping me focused on this nearly 2-year process of paying off the damn CC-debt.

The credit cards were relatively easy to figure out, I felt guilty having them, so it wasn’t hard finding the motivation to pay them off. The student loans were a whole different beast, at only 2.75%, I was highly encouraged by my previous financial adviser to make minimum payments on this and drag them out as long as possible – after all, the rates were lower than average inflation rates.

I followed his advice for a while, making minimum payments of $400/mo, not realizing my principal was going up. When my minimum payment suddenly went up to $600 it finally dawned on me that due to my own ignorance I got totally bamboozled by Scandalous Mae, that little &%@#. I was mad, I was gonna pay this shit off as soon as possible.

This was around the time that YNAB and I had formed a really strong bond. I thought I would never leave YNAB… but, in the end men will be men and I stepped out on her, for a little bit. But YNAB got plastic surgery and became web-based and we’ve been in love ever since. Because of YNAB I was able to drastically increase my disposable income.

I had also started up with a new financial adviser at this time… he too, was okay with me dragging the SL’s out. My problem wasn’t whether to delay paying them off, I was torn over the age-old question, invest or pay off debt?

I think I had about 20 journal entries regarding this and I mentioned it in passing to my BFF over email. Her first response was ‘What are you stupid? Pay off your debt you moron!’, yea she is a sweetheart (moment of silence for her husband’s self-esteem).

She realized that I didn’t want to completely give up investing money either… she suggested to split the difference, 50% towards investments and 50% towards student loans.

This method worked great for a while, I was building up my savings faster than ever, but the student loans seemed to not budge. I think it was 5/2015 when I finally had enough, it was time to bust out a spreadsheet and attack these loans, which I did and I won that battle.

I got a lot of encouragement from my lawyer buddy, she was totally supportive of me attacking the student loan debt and getting rid of it completely despite of the math.

It’s important to appreciate that as physicians we have the advantage of earning a high income. This is perhaps the biggest limiting factor in the average individual’s personal finance scheme. Combine that with picking up extra shifts and lowering our monthly expenses and we have a ton of leverage.

My daily driver was my 1971 Ford Maverick but on a whim I ended up buying a $65,000 Hummer in 2012. I drove it for a year and parked it for nearly 3 months because it was just idiotic commuting in that behemoth. I could have applied my debt-destruction plans to it as well. But I also had a $288k condo.

The path of least resistance would have been to keep all that the same and just make them part of my debt-payoff plan. I don’t find that effective, however. Whenever I’ve decided to get something done I try to attack it from as many directions as possible.

If one is determined to make major changes it’s better to aim for the stars and fail rather than chip at something so slowly to the point of burning out. So, I got rid of the Hummer (ended the lease early and owed only $125), bought a Smart Car (I know, right?) and sold the condo.

Bam! Instant $353k of savings, debt that I didn’t have to pay back, not to mention pay interest on. It may seem obvious to you but many people just assume the debt they have is debt they must keep.

Worst case scenario, I could have always gone back and bought a new Hummer, I could have bought a new overpriced condo. I assure you, this economy will give you plenty of opportunities to upgrade, it’s the downgrading that is met with so much resistance.

The one thing I have learned is that I need to trust my instincts more. If I feel that I just don’t want to do something any longer, without even fully realizing why, then I need to set out and research the alternatives.

If you are tired of carrying around your student loan debt then try an imagery exercise in your journal. Let’s say you have $200k in student loan debt. Picture yourself with that debt 5 years from now… you would have some money in savings … perhaps you would have more equity on your mortgaged home… would you be happy with a balance of say $130k in 2021? Write out how it would make you feel. If it came up in a conversation with a loved one how would you justify your decision to them.

Picture yourself instead sending every last disposable dollar towards your student loan debt. It’s 6/2016 as of this writing, write down how you would feel if you had a balance of $0 by 8/2016. You probably had to work extra to make it happen, was it worth it? You savings probably flat-lined for that time, is that okay? Maybe you even raided your savings to make it happen faster, are you going to feel insecure even though you could totally depend on more income coming in from your job?

When it comes to emotional decisions don’t let science and math dissuade you. If a purchase is important to you on a higher level than just satisfying an urge then commit to it. If a debt is nagging at you and makes you feel uncomfortable when you look at it then set out to pay it off. Use your savings as long as you feel that your career offers you stability.

I raided my brokerage account to pay off the last bit of my student loans and to buy my condo in cash. I felt a little bare after that but my job was secure and I had disability insurance… now looking back at it that was the best decision I could have made. Confirmation bias? Maybe, but I’m at peace with my finances.

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