Sunday, December 17, 2017

Solitary Diner, Debt Slayer

When I was still in residency, my financial advisor recommended that I pay off my line of credit as slowly as possible so that I could maximize my investments.  From a numbers perspective, his advice made perfect sense:  I pay prime (currently 3.2%) on my LOC, and I can earn more than prime from investments, so investing wins.  When he made the recommendation, he followed it with the prescient caveat "Assuming that you aren't bothered by the debt".

"Why would I be bothered by the debt?", I wondered.  I had been in debt for almost a decade, and I was doing a great job of ignoring it, so why would it be any different when I was an attending?  I was a rational person who did not make financial decisions based on emotions.  This would be easy.

After finishing training, I initially stuck with the plan.  I took the one-year grace period before I had to start paying back my LOC, and I poured every extra penny I had into retirement savings.  Then when the repayments started, I paid the monthly minimum with the plan to pay it all off in the required ten years.  Everything was on auto-pilot, and everything was great.

Except...every time I logged into my banking account, I had to see the balance on my LOC.  And it was big.  And ugly.  And even though I had achieved a positive net worth, it didn't feel real, because I still had this horrible six-figure debt hanging over me. 

At the same time that I was not repaying my debt, I was saving cash in my savings account* for a future down payment on a home, meaning that I was basically throwing away interest on my LOC.  Which wasn't a big deal when the down payment was small, but got increasingly painful as the down payment grew.  I eventually moved the down payment into an online bank account to earn a bit of interest, but I was still losing money by not using that money to pay off the LOC.  And I hated it.

So...I started going against the plan.  When my ex and I separated earlier this year, I decided that I would defer buying a home for at least a year, and I took some of the down payment money and put it towards the LOC.  Then a few months later I put some more of the down payment money towards my LOC so that I could achieve this:


For about ten minutes, I was ecstatic about my debt being under six figures!  I would look at the balance and smile, realizing that I had cut my LOC by more than half from its highest level.

And then I got mad about the fact that I still owed $100,000 to the bank.

I have tried really hard to not hate my debt and to stick with the plan of maximizing my investments, but the reality is that I. Hate. My. Debt.  I hate paying almost as much towards my debt every month as I do for rent.  I hate that the debt represents bad financial decisions that I made during training.  I hate that my really lovely net worth feels meaningless to me when I still have this debt to repay.  And I hate that I am making big financial decisions like whether to buy a house based on the debt rather than based on what I most want to do.  (Although I would probably still not buy a house right now even if I didn't have the debt.)

So this week, I said fuck it.  I am paying off this debt.  I am taking every penny I had set aside for a down payment and putting it towards the debt, because realistically I am not going to buy a house until the debt is gone.  I have a big end of the year payment coming up, because the university retains part of my income to control for variability in billing, and that is also going towards the debt.  In the new year, I am going to continue with my regularly scheduled monthly investments, but everything else is going onto my LOC. 

Fuck logic**.  I am done with debt. 

*This is a terrible idea.  Do not do this.  Get an online savings account that will at least pay you some interest.

**I apologize to anyone whom I ever silently judged for using the debt snowball method, which always seemed like a ridiculous waste of interest.  I totally get it now!

24 comments:

  1. When my best friend's mother passed away, instead of putting her inheritance into a retirement or other investment, she paid off her house. I kept thinking how remarkably short-sighted that was - her mortgage was tax deductible, the payment wasn't that much, her wages are low without possibility of increase so she will need retirement funds, etc. etc.

    I asked once and then let it alone, and then recently - years later - finally understood. It's about the psychological benefit. She still has to pay for insurance and taxes on her house so it's not like she's living for free, but she doesn't owe the bank and that makes her feel better. And isn't that what money is for, to make us feel better?

    ReplyDelete
    Replies
    1. Psychology is huge! Not to mention that she has the feeling that her mom paid for her house, which must be really nice.

      Delete
    2. It's also nice because no one can take the house from her. The stock market can crash, you could make a bad gamble . . . but as long as you can pay taxes and insurance, you've got your house free and clear.

      Delete
  2. Objectively speaking, my PhD was a terrible investment. I took four years of my life, and while yes, it was paid for (along with med school and living expenses to the tune of somewhere around a neat half-mil), had I worked as an anesthesiologist for four years, I would have $1,000,000 or some such instead. Minus tuition and living expenses. However, having no debt is a huge psychological load off my back, and I have an extra degree that will allow me to walk away from medicine and step into another interesting career should I choose to do so. Sometimes I feel down Bc I am ten years older than most of my resident peers, but overall I am really happy with my decision. Debt sucks.

    ReplyDelete
    Replies
    1. I feel the same way about my PhD.

      We emptied out our savings and deferred retirement to pay off my husband's law school debt and the psychological benefit to being debt free was 100% worth it for us.

      Delete
    2. OMDG - Not to mention the fact that you seem to really enjoy the research that you're doing. Personal happiness and satisfaction are definitely more important than money (once one has earned enough for basic survival, of course).

      Delete
    3. Sophia - I look forward to that psychological benefit!

      Delete
  3. So long as you're still getting any employer-match for retirement, this seems reasonable to me! We definitely paid off student loans before thinking about buying a house.

    ReplyDelete
    Replies
    1. Yeah, no employer match for residents where I work, and certainly not during grad school either, though I could do a Roth then Bc my husband was employed (PhD stipend didn’t count as income). They only allowed us to do the 403b a year ago. Sigh.

      Delete
  4. I hear you - I have a mortgage and a car loan. And if the car loan wasn't at zero percent, I would *really* be itching to get rid of it! As it stands, the mortgage is my big target and, while it feels like it is taking FOREVER, I have to realize that - assuming all goes well - paying off my house in 10 years is a VERY GOOD thing and not at all to be scorned - given that the standard length of a mortgage contract in California is 30 years these days.

    And yeah, I can make more than 3.125% in the stock market - but I am also going to feel SO AMAZING 3 years from now when I don't owe anyone ANYTHING!

    ReplyDelete
    Replies
    1. I can't imagine taking on a mortgage after getting rid of this debt. But maybe someday I'll want a house badly enough.

      Delete
    2. You can also funnel all your debt repayment money toward saving up for a house, and you might get to the point where you'd need no mortgage or a modest one, depending on where you end up living.

      Delete
  5. Being debt free is a feeling money can't buy (?!?). It definitely removes some stress and worry that is always there in the background.

    ReplyDelete
  6. FIVE DIGITS? I long for that day! I completely understand the hate, your words read like a mantra that usually goes over and over in my head every paycheck. I think that tackling the debt for your own peace of mind is worth having to rebuild up your savings again for a down payment once you're loan-free. I would much prefer more mortgage debt to student loan debt - at least you get something that has tangible value!

    Good luck slaying that debt!

    ReplyDelete
    Replies
    1. You will get there! And you will be there long before you reach my age.

      Delete
  7. I hate debt too. I literally paid off my student loan in one fell swoop the week before I had to start paying interest because the thought of paying any interest made me twitch (even tho, yes, I know I would have earned more putting that money in investments. Whatever.). This was easier to do for me since I only owed $13k or so -- I was super careful during grad school to take out almost the minimum. My only splurge was an extra $2k for a laptop.

    I applaud your idea of paying off debt. I think the psychological boost is awesome. I honestly think it's been easier for me to save more for retirement knowing I have no debt.

    Looking forward to seeing your progress! Please keep us updated.

    ReplyDelete
    Replies
    1. That's an impressively low amount of debt! Good for you for paying it off all at once.

      I have already started to feel the psychological boost, and it's wonderful. I can't wait for it all to be gone. I will definitely post updates.

      Delete
  8. Feelings are so real! Financial prudence sometimes takes a backburner to ERASING X WILL FEEL FANTASTIC! I'm in that pickle now, sort of. I have over $100K of student loans and am about to receive a lump sum payment. My current plan is to put some aside for an EF, some for a down payment, and use the rest to pay down the high interest debt and invest a bit. I could pay off one student loan and free up a bit of cash-flow, but I think I would feel better by doing the current plan. Maybe I'm wrong and maybe my liminal relationship status is unduly influencing my financial choices. Who knows?!

    ReplyDelete
    Replies
    1. I think we sometimes forget that paying off debt, investing, and saving are all really good financial decisions. Even though the exact return on each may differ slightly, they are all still way better strategies than spending money (although of course spending money is necessary/fun too). I am learning to pay more attention to what feels right to me and what I am comfortable with than to what will bring in the absolute best return on the money.

      Delete
  9. I'm with you! Debt is evil. Kill it! Kill it dead!
    My debt is holding me back from so much in life. Nothing (other than saving for my retirement) will stop me from getting rid of it so I can live the rest of my life in peace.

    ReplyDelete
    Replies
    1. You have done an amazing job of paying off debt, and your net worth increase in the past year is impressive! I look forward to the day when we will both post about being debt-free.

      Delete
  10. I totally get the desire to be debt free... I'm 10 years out from residency and still have a fair amount on my LOC.

    I would love to pay it off completely, which I could probably do in a year, but I also think it's important not to make financial decisions based on emotions. Not sure if you're in a province where you're allowed to incorporate and what the small biz corp tax rate is for you, but essentially, if I were to pay off my LOC completely I'd have to factor in an extra 30% of taxes on the amount as it'd push me into the highest tax bracket. As you've pointed out, there's also the fact that my investments perform about twice what the interest rate on my LOC is. And lastly, given the tax changes this year related to passive investment income, I really am very glad that I have a nice little nest egg which will be grandfathered instead of getting taxed at 73%. I would be pretty pissed off now if I'd focused on debt repayment over the last 10 years, thinking I could catch up on my investments in my PC.

    ReplyDelete