With today’s paycheck, I am officially debt free!!!
… However, only in the cash positive sense. I still have debt, but the cash balance of my accounts is enough to pay off all of my debt right now (and then some). This is because I spent late 2015 and 2016 aggressively paying off my debt. I was unable to save much more than a few months rent until late last year. The advantage of this is that I was able to reduce the amount of interest will I pay and secure lower monthly payments very quickly into my career.
Had I been making the minimum payments, it may of only been $600 -$700 a month between my student loans, car payment, and credit cards. I now only need to pay $300 a month. In one year, by throwing all of my extra income at my debt, I dropped my payments in half.
I won’t count anything on credit cards as debt anymore. At this point I will only use credit for cash back benefits, and pay it off in entirety every month so I can save money. e.g. I won’t keep a balance on it and I wont pay interest.
For the record, I haven’t paid any interest on my credit cards to date. But I’ll save that for another post.
By front loading my expenses, and paying more upfront rather than the minimum payment, I saved a ton of money and lowered my monthly debt bill in half. Thus, I’ve made it easier to make a large investment early in my career. My goal is to become financially free and escape the 9 to 5 rat race.
I can’t say this enough, making the minimum payments is a debt trap! Most people have no concept of saving anymore. As the result of decades of abuse of loan systems and market crashes, the debt system has exploded making it difficult for the majority of people to escape and get a head in life. Most people in America can’t afford to buy a starter home!
Saving is important, because the more capital you have, the more options you have. If you want to generate income – passive or not passive – you will need both money and time. For example It costs millions of dollars to buy a McDonald’s franchise. (There are also much cheaper franchises under $50,000 that I am seriously considering)
Most people won’t save a million in their life time! Hell, I am making just over $100,000 as a software engineer in Seattle. After taxes, housing expenses, holiday travel, and other bills I have about $33,000 left over pear year. I’ve paid of about $24,000 in debt since I started working and have about $19,000 more to go. I am also very frugal with personal expenses. After ten years, assuming no raises, I would have $330,000 saved up. Assuming raises and bonuses, probably $450,000. In Seattle, family homes cost $1-3 million easy.
By paying significantly more than the minimum payments, I reduced my total debt quickly. This, in effect, allowed me to lower my payments. As a result, I can now save money faster. More importantly, I have minimized the amount of interest I will need to pay.
You may be wondering: “Well, since you can pay everything off now, why don’t you just do that?”
Because I have significantly minimized how much interest I will pay (and how fast it grows). The amount I pay per month will be much closer to the principal balance. The image below illustrates this concept well (sauce).
Most loans are structured like this, or similarly to this. They try to maximize interest profits. You pay mostly interest the first half of the loan with just minimum payments. Later in the duration of the loan, you begin to pay mostly the principal balance.
By aggressively paying off debt, I am now only paying much less interest with much lower minimum payments (Although I will definitely pay more than that). This is a technique that ANYONE with both debt and expendable income (no matter how little) needs to take advantage of. I will also be able to save more of my income to use as investment capital *hopefully* later this year or early next. This is the first step of my plan to become financially free in the next five years.