My inner nerd is going to really come out today, ya’ll 🤓 because I’m so stoked to share this debt free info with you.
There’s an overarching feeling out there that “debt” and “loan” are dirty words – that debt is a bad thing and having any sort of debt is terrible.
I’m here to tell you that debt is not necessarily a bad thing. And actually, I don’t believe in being debt-free. There’s such a thing as healthy debt (as well as bad debt), and there’s a way you should be thinking about debt to make it work for you.
Student Loan Debt
A lot of people don’t know, but Chance and I started our marriage with $200,000 of student loan debt. As I write this, we now have $26,000 left to pay.
I’m very hard on myself. I’m an overachieving perfectionist (and I’m working on that!). So my first reaction to that number is “Ugh, we STILL have $26,000 left.” But honestly, if I think about how far we’ve come in the last 8 and a half years… that is pretty incredible, y’all.
We both qualified for loan consolidation and extended payment plans with our student loans because we had so much. When we got this opportunity, we were just starting new jobs and buying a house, so we knew we needed lower payments at the time.
But to put it into perspective, if we had continued to pay the minimum on our loans for 30 years, we would be 52 and 54 years old when our loans were paid off.
52 and 54 years old.
Our CHILDREN would be in college by then, and we would still be paying off OUR student loan debt! That’s CRAZY! That wasn’t going to work, so we knew we had to make a change.
Here are two things that helped us pay off our student loan debt:
- The consolidation and refinance lowered our interest rate. Interest rates can make a huge impact when paying off loans.
- Making additional payments each month. I kept an amortization spreadsheet (I’m a nerd, and proud of it!) and figured out how quickly we could pay off our loans, because I wanted all of the loans paid off before I was 35. We tackled the loans with the highest interest rate first, and then figured out how much extra we could afford to pay each month on those loans.
Most of our loans were at a 5-6% interest rate, but we had some loans at the 8% mark. Those were the ones we tackled first.
To give you perspective, when we purchased our first house that same year, our house’s interest rate was 4.25%, then we refinanced after a year for a 4% rate. So, the 8% student loan was really what we needed to hit hard.
In the beginning, we were only making additional payments of $50 a month on our loans. Our mortgage was $1400 a month, and the minimum payment on our loans was $1600. Any extra money we got each month went on top of that minimum. At the highest point, we were sending $2,500 per month to our loans – literally any extra money (outside of our emergency savings) was being sent towards our loans. Over time, we were able to chip away to the current $26,000.
Was it great that Chance and I started our lives with $200,000 in loans? No. But this debt, in our minds, gave us our education. Our degrees. Our careers. That will continue to provide for us long after this debt is paid off.
Healthy Debt
There is actually such a thing as healthy debt. These are things like the mortgage, and maybe even an auto loan. It’s all about considering the interest rates, balancing available cash, investment opportunities/returns and looking at the overall financial picture (that’s why knowing your numbers is so important!).
For example, our interest rate on our home right now is 2.8%. If you’ve acquired a mortgage in the backend of 2022 and your interest rate is 7% or 8%, you probably should be making extra payments each month. But if you have a 2.8% like us, there is literally no reason to pay that loan off BEFORE tackling other debt or making wise investments that might be giving you a return of 4-5%!
Cash is King
Another thing to consider are 2 sayings my dad always told us growing up (and still reminds us now 😉): Cash is king, and banks won’t loan you money when you need money.
I use this example when talking to clients about a line of credit, whether it’s a business line of credit or a home equity line of credit (HELOC). Take the HELOC when the bank is willing to give you the HELOC. Banks will charge you a nominal (IMO) fee each year to keep your HELOC open, so you can literally have a large sum of money – let’s say $50,000 – just sitting there, available to you.
This comes in handy if something unexpected happens. We knew somebody who had a house fire, and they had to start a GoFundMe because they didn’t have ANY money until their insurance paid them out… which could take a really long time.
We even saw this firsthand when we had to buy a new car back in May. We did NOT expect our car to be totalled, and you know what happened when they totalled it? The insurance company said, “Go clean out your vehicle, it’s being towed to our yard. We’ll send you a check in a few weeks for the payout, but you need to return the rental car in 3 days.”
What?!
And of course, this was in a post-COVID market where there were NO cars to be found, so there was no negotiating, and we had to pay $5,000 over MSRP… but that’s another episode for another day.
All that to say, what would we have done if we didn’t have $15,000 sitting in a savings account to cover us until the insurance check arrived? I’ll say it again: cash is king and banks won’t loan you money when you need money.
Having a HELOC on your home is not bad. That is healthy debt. As long as you are using that money strategically and you’re paying it back (NOT just the interest payment, but the principal, too), it’s healthy.
Credit Card Debt
“Debt” itself is not bad, but yes, credit card debt is bad.
Not only are credit card interest rates 25%, but you shouldn’t be putting something on a credit card if you can’t pay it off. Everyone should have a credit card, because it’ll help your credit score if your utilization is low – but you have to pay it off every month.
I’m actually a huge fan of using credit cards, because I like to play the points game. But I’m paying it off every single month. I’m not charging anything I can’t afford, and that is a healthy mindset around healthy debt.
Debt Free Tips
Debt is not inherently bad. Your mindset around debt is what needs to be solid.
As a review, here are some tips to use debt and help pay off debt in a healthy way:
- Be cognizant of interest rates and what you’re able to pay off
- Make small, incremental additional payments
- Be smart about which debt you choose to pay off early
- Know your numbers
