My Journey Out of a Pit of Debt
Last week the lease agreement on my car expired and I bought out my car in cash. I’m officially debt-free*. The asterisk on “debt-free” would be that I still have a mortgage. So, technically I am free of “consumer debt”. I’d also add that since my mortgage rate is currently 2.49% it makes much more sense for me to focus on investing, rather than paying off my mortgage.
From $50,000 to $0 in debt in 6 years
I finished grad school in the fall of 2013. At that time I had just over $50,000 in student loan debt. I had been carrying the majority of that debt since my first year of undergrad in 2006.
At that time, I opened a student line of credit to help cover tuition and other school costs. I quickly learned the major difference between government student loans (in Canada) and private student lines of credit.
- If I had a government student loan I would not have to make payments until after graduation. In some cases, new grads don’t need to start making payments until they land a job.
- With a private student line of credit, I was on the hook for payments from the day I borrowed from that line of credit to pay tuition.
I had been making (and missing) payments on that line of credit since I was 18. If you take one thing away from this story make it this: You need to be absolutely crystal clear on the terms of any loan before you sign off on it. Being on the hook for debt payments while trying to struggle through school caused a great deal of financial anxiety from an early age. Thinking back on it, this experience was all the more frustrating because it was so easily avoidable.
Living like a student
In 2013, I landed a job working in public policy less than a week after graduating with my Masters in Economics. If I make that job search sound easy, I assure you it was not. I began sending out multiple job applications every day for nearly 6 months before graduation.
I had moved across the country to do my Masters. Even while working multiple jobs during grad school I only had enough money to last me 1 month after graduation. If I did not find a job during that time, I would have to move back home, penniless. So, I made it my mission to land a job before graduation.
Even though I was making a decent salary for the first time in my life, I decided to keep living like a broke student for as long as possible.
- I continued to live with roommates in a disgusting apartment above the health food store. Why? Because the rent was $350 per month.
- I continued to drive my dented, 15-year old, purple Chrysler Neon. Why? Because I needed a car for work, otherwise, I would have sold it and bought a bus pass.
- What’s on the dinner menu? Rice and Beans.
- Date night? Make a meal at home and go to the park.
- Vacation? What vacation?
You get the idea.
This turned out to be the best financial decision I’ve ever made. Living like a student, while increasing my income, provided me the additional cash flow I needed to start aggressively paying off my debt. At this time I had never heard of the Financial Independence, Retire Early (FIRE) movement. I realize now that I was pulling the two levers of FIRE.
- The income lever
- The saving lever
By continuing to live like a student, while I steadily increased my income I was able to put a major dent in my debt within 18 months of graduation. This is a reminder of how simple personal finance is. You don’t need formal education or lots of technical knowledge. All that is required is a gameplan and the discipline to stick to that game plan no matter what.
By the time Trish and I were living together and preparing to buy a house in 2016, I only had $5,000 of debt left. Trish, who had paid off the last of her government student loans a year earlier, had a significant lump sum of money she was keeping in her checking account.
After a quick discussion and run through the numbers we agreed that she would pay off the last $5,000 of my student loans and I would pay her back over the next two years.
At the same time, I got unlucky when I brought my car in for a brake inspection and found out that my 18-year-old car would need $10,000 worth of work to stay on the road. So, I decided to lease a new car instead of investing in this old rust bucket.
I got a great deal on the lease, but at the same time, I was frustrated. I had JUST cleared off the student line of credits and already had to take on a new monthly payment in the car lease.
Goodbye monthly payments
This is a picture of me after signing the ownership of the car from GM Financial into my name.
Now that the lease is up, I have an additional $250 per month in free cash flow. This is where the discipline of personal finance comes into play. Many people in this situation would look at an extra $250 as an opportunity to spend more money and buy things that they don’t value.
This is referred to as lifestyle inflation. The phenomenon that as people increase their income they spend more money. It is what keeps even those with a high income on the wealth-building treadmill. You don’t need to be an expert in finance to understand that the more of your income you save today, the easier life will be down the line.
Personal finance is simple. But, it is far from easy.