Feeling trapped is exhausting, it can drag you down. Keep you in a slump. Once you get out of that slump, once you are free, you can finally live again.
You might feel dragged down by your student loans, car loan, or maybe you went a bit over your means with that credit card and now, you simply do not know how to get out of it. It is hard to see the freedom line, way ahead. But trust me, it is there. Somewhere stands the freedom line.
If you already reached, or are close to reaching, this magical Zero net worth, you are doing amazing!
In the United States, debt is embraced, it is normal to carry loans. It is normal to carry a balance on your credit card even if the interest rates are around 20%. It is normal to take out a car loan for 7 years on a depreciating asset that you will want to upgrade after the second year. But that does not mean that it a good idea.
From the chart above, we can see the debt breakdown from people from positive net worth all the way to -$12,400, to -$46,300, and finally, to -$520,000 net worth. It is fascinating to see the breakdown of each. Ok, maybe not fascinating but at least modestly interesting 🙂
Most people with a moderately negative net worth (from $0 to -$12,400) hold 55% of their debts in form of credit card balances and car loans while the lower net worth individuals (anywhere from -$12,500 to -$520,000) are largely dragged down by student loans.
It makes sense; the other large debt most people hold is a mortgage but they are to purchase real estate that increases your net worth.
If you carry large student loans (or even small ones), we highly suggest you check out SoFi. They specialize in student loan refinancing and is one of few lenders that can consolidate and refinance both federal and private loans. You can get started today with SoFi in a few clicks and start inching towards that dream net worth a little faster!
Calculating your net worth is quite simple, simply subtract everything you owe from everything you own that could be sold. Here is where it gets simple; you do not need to count all your right and left socks to count your net worth. You only need to consider what could be sold for a considerable value on a fairly liquid market. Stocks and real estate are obvious but do not include your furniture or your stamp collection in your net worth (unless you are this guy). Another one some include and some others don’t is cars. Since they are a depreciating asset, some people just consider them an expense.
Once you know what you own, take a look at all the outstanding debts you have. Credit cards, personal loans, student loans, mortgages, that $20 your co-worker lent you when you forgot your wallet at home. Then you simply subtract. Another cool way to calculate your net worth is to signup for a free account with Personal Capital and check out all their fun tools.
If you own more than you owe, you are in the green! If you owe more than you own, don’t worry, you are not the first one and plenty has gotten out of it.
Getting out of debt and rocking it!
We reached out to a few of our friends and asked about their own personal debt story. We were particularly interested in knowing how much debt did they carry and what did they do to pay it off. Their stories are inspiring and just go to show how anyone can get out of debt and achieve great financial success once they focus on it.
Our friend Ms. 99 to 1percent had $40,000 in student loans and, extraordinarily, paid it all off before graduating!
I started looking for a job 1 year before graduation just in case it was going to take me a long time to find a job. But I got a job right away and did a lot of overtime while still attending evening classes. I was able to pay off that $40,000 within a year just before graduation.
Her husband also had a $35K car loan/credit line that they paid off right after getting married. Talk about a quick turnaround! Wonder how they are doing nowadays?
Currently, we are trying to pay off our $500K+ mortgage within 5 years by 39 years. We are halfway through and on track. It’s very tough and challenging especially that we just had a baby and we are no longer DINKS, but it helps that we are part of the Dave Ramsey community. We are looking forward to reaching BabyStep7: Build Wealthy and Give. Dave likes to say “Live like no one else so later you can live and give like no one else”
Their advice for paying off so much debt so quickly is:
- Make sure you are on the same page as your spouse
- Make a plan
- Pay it off as fast as you can manage (Dave Ramsey calls this Gazelle intensity)
- But don’t stress yourself too much, have option A, B, C,…
- Cut unnecessary expenses and spend mindfully
- Find ways to increase your income.
- Find a community to keep yourself motivated and accountable.
Our friend Cody from Femme Cents also shared her personal story with us. She and her husband both graduated college completely debt-free. However, the American Dream caught up to them and they bought two new cars at once because they could “afford” it.
Turns out, life happened and we couldn’t afford it. We had to sell one within a year (luckily we weren’t underwater). The other we paid off as quickly as possible (and intend to keep as long as possible!). I had planned to cash flow my master’s degree as I went through, but didn’t end up doing it because we had the car payments, so I took out student loans.
I learned that debt limits your opportunities and can exponentiate when you are giving your paycheck to past priorities. My debt problem grew because I couldn’t pursue the things that my life had moved on to without more debt.
The advice she shared with us really resonated. We are all human and we like our routine. Once we start something, we adapt to it, we embrace it, and then it becomes our new normal. The same goes with money.
The silver lining to paying off debt intensely is that when you are used to throwing big chunks of money at debt, it easily translates into large savings contributions if you have the discipline to make that transition once the debt is paid off.
Another positive thing about debt is that it can be used in so many ways for so many things. When used to supercharge your returns, it can be greatly beneficial. Our Twitter buddy Slow Dad shared with us that borrowing to purchase great investment properties or profitable businesses can greatly increase your returns but on the other hand, borrowing to pay for a holiday or a car is generally a bad idea.
This might come up in other articles as good debt or bad debt. Most agree that mortgages are good debt given their low rates, collateral, potential appreciation, and all but not every mortgage is good. For example, if you are taking out a mortgage to buy an oversized house that you can barely afford with a tiny down payment, then that mortgage might not be the best for you. Debt is merely a tool, it is neither inherently good or bad. As with any tool, it can be used well or poorly. This is when Slow Dad’s explanation comes in handy. However, whether good or bad, paying off debt always feels good.
An amazing advantage of paying off debt is the freedom it brings. Having free cash flow is a massive boon in your personal finances, and debt severely restricts that. Financial coach Sawyer and his wife decided to pay off their non-mortgage debt when, at that point, they owed a grand total of $75,000.
The original plan was to not change our lifestyle much at all and it would take about 6 years. We ended up going to a single car (family of four), banking small windfalls and salary increases, and getting it all paid off in 3.5 years.
The extra cash flow has allowed us to refinance to a 15yr mortgage at 2.75% which will save a ton in interest, and I plan to purchase our next car with cash next year.
Debt is a problem that so many people face. As our buddy Steven Goodwin puts it, there are so many ways to get into debt.
We had it all. We had car payments, student loans, personal loans to family members, credit card debt, even debt on our dishes. When we started tracking our debt though, we only had student loan debt left. $27,737 worth of student loans. We had some due to Citibank, Sallie Mae, and even University of Phoenix. My wife ended up with a bachelors in health science. I didn’t finish the requirements to even get my associates, but I racked up my share of the loan debt.
It took us roughly two years of working hard, living frugally and paying off debt as fast as we could to finally knock out the entire amount of loans. But, we did it and we won’t be back. The only thing we still have is our home mortgage that we are working on still.
As for our own story, we started our journey with very little debt. As students, we each ranked up five or six thousand dollars on lines of credit but never really needed to borrow a lot. We both worked part-time jobs, worked during the summers, and saved a lot to pay for our school expenses. Being from Canada, our costs were drastically less than any university in the United States. In our province, the average undergraduate pays only $2,851 per year in tuition fees. In comparison, it costs $20,090 per year, on average, for in-state universities in the US. We have that to thank our country for!
Later on, when we wanted a car, we bought a used SUV and paid for it cash. By then, I was already working full-time and Mrs. was still in school.
We got into savings quickly and started saving aggressively early on in our careers. At first, I was spending everything I earned, buying nice Italian clothes, going out a lot and buying frivolous things while Mrs. Xyz was always the saver. I quickly changed once we found a common goal to work towards. We were not thinking about retirement quite yet but wanted to save for a down-payment on a house and wanted to do it fast.
It took us a while but we finally decided to start minimizing our spending and increasing our savings to save up for a down-payment in a single year. Once that was accomplished, we bought our wonderful house but kept saving. By then, the habit was there and it did not feel like a sacrifice to save over half our salaries. Starting early in life with a clear goal was really the key for us. Once we had our long-term goals set out, we just kept saving and started investing to grow our returns over the long-term.
It is easy to see how starting investing early can be greatly beneficial over the long term. Using the Rule of 72, you can quickly find the number of years required to double your money at any given interest rate. All you need to do is divide the interest rate into 72. To calculate how long it will take to double your money when investing in the stock market (using the average net market returns of 8% for example) divide 8 into 72 and get 9 years. This means that every 9 years, your money doubles!
Starting early gives you that head start to double, triple, or even quadruple your initial dollar. The faster you can get out of debt and reach that freedom line, the faster you can start saving for your future. Try to minimize interest costs with companies like SoFi and try to minimize any future debt by living a simpler life. Less stuff, less house, less debt.
We would like to thank all of our friends for their wonderful stories.
Mr. and Mrs. Xyz.