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Why Paying Off Our Debt Is No Longer Our Top Priority

(Originally posted on The $76K Project on 2/24/2019)

Now feels like a good time to write a back-to-the-basics post in the spirit of why this blog was created in the first place: to help us track our debt repayment. There have been so many other things to discuss lately - Lola Retreat, new job, goals both big and small - but while I was in LA for the retreat, I was reminded that the people who read this blog on a regular basis are primarily here to watch us get our financial act together. And that's why I keep chugging along with the $76K Project. I want to show people that it's possible to fix your finances even when you're late to the game.

As a quick review, we started our debt repayment journey back in April of 2017 when we realized that we were constantly overspending and needlessly living paycheck to paycheck, even though we were making a decent income (~$80K per year).

At that time, we were in debt to the tune of more than $76,000, including:

-a car loan ($1,550)
-three credit cards (just over $22,000)
-two student loans (just over $53,000)

Since then, we've paid off the car loan, the credit cards, and one of the student loans. Our total debt is now $37,850 and consists of one remaining student loan.

Other related events over the past 21 months:

-Both Fortysomething and I have changed jobs (I've changed jobs twice - once with a pay increase, once with a pay cut).
-We decided we couldn't afford to buy a house in our HCOL town.
-We moved from a somewhat affordable but noisy apartment to a not-very-affordable but peaceful duplex.
-We opened a savings account and built an emergency fund.
-We started contributing to our retirement accounts.

When we first started this journey, it was all about paying off debt. We were absolutely obsessed with this goal, and that was a good thing: it helped us obliterate some very bad debt quickly and efficiently.

But now that we've paid off a little more than half of our original balance, our priorities have shifted a bit, and we've been putting more towards retirement and savings.

I've come around to the idea that putting all of your disposable income towards debt is risky business if paying off that debt is going to take longer than a year or so. Sorry, Dave Ramsey.

Let's be honest: a lower student loan balance isn't going to help you pay the bills in the event of a job loss or other expensive emergency. And the likelihood of getting through two, three, four or more years of debt repayment without being smacked in the head by a financial anvil is highly unlikely. You've got to protect yourself. 

Then there's the issue of retirement. We are way behind in that department, and we need to start making up ground now by contributing more of our income to our 401ks, even if that means extending our loan payoff. 

One other thing: you only live once, and you don't know what's going to happen tomorrow. So I'm no longer sold on the idea of living so close to the bone to pay off debt that you don't let yourself enjoy life now.

It's true that there are things we no longer do or purchase. We don't buy books unless we have a gift certificate; we use the library instead. We don't travel internationally (for now). We don't buy furniture or other home goods until it's absolutely necessary (our friends think we have a very minimalistic design aesthetic, but in reality, we just can't justify shelling out the cash to make our home look HGTV-ready). We don't purchase new clothes that often, either; luckily, we live in a town where jeans and sweatshirts are high fashion. In other words, we don't spend our money on things that we don't care about or that don't serve us.

But we do go out to eat once every two weeks or so because it's something we enjoy doing as a family. We do go on frequent road trips. We do pay quite a bit to live in a place we love. And yeah, I did pay $600 to attend a two-day financial retreat. That was definitely a splurge. Sure, we could cut down on all of this and put that money towards debt, but life would be less fun. We're willing invest (yes, I see it as an investment) in the things we care about and that enrich our lives.

Getting our finances in order has helped us figure out what we truly value.

So where are we at?

Income: When I changed jobs last month, I took a $10K salary cut. That's equivalent to ~$800/month. After taxes and deductions for health insurance, my HSA, and our 401k contributions, we now bring in about $5200/month.

Emergency savings: We're working on building a $10K emergency fund. We're about halfway to that goal. $10K would get us through six months if one of us were to lose our job. Once we reach that goal, we'll move that money into a high-interest savings account to help keep up with inflation. This is our biggest priority right now - all of our "extra" money goes into savings.

HSA: I plan on maxing out my HSA to the full $7,000 this year. HSAs are awesome because (a) you're not taxed on the money you put into them, (b) you're not taxed when you take the money out, as long as you use it for medical expenses (before retirement age), and (c) once you hit a certain balance, you can invest your HSA money and let it grow. It's a freaking good deal. I'm contributing $250 per paycheck to my HSA; my employer will also make a contribution.

401Ks: Both Fortysomething and I have ramped up our retirement savings. He's putting in about 7%, and I'm putting in 10%. We both have employer matches. Our intention is to increase these contributions significantly over the next couple of years. To be honest, it's a little tough to see that money go straight out the door (well, straight into an account I can't touch for yearsssss), but I can no longer ignore a) the importance of compounding interest or b) the tax benefits that come with contributing to a retirement fund.

So where does that leave us with our debt repayment? 

Right now and for the next several months, we're paying only the minimum on the remaining student loan. That's $400/month. Once we top off our emergency fund and finish paying off our $2,500 campground membership, we'll increase it ~$1200/month. If we then proceed to put all of our bonuses and raises towards the student loan, we'll pay it off in approximately two years.

We might do that. We might not. It might take us a little longer, especially if we decide to focus on our 401Ks.

Since starting this blog, I've realized that personal finance is both simple and complicated. It's simple in that it comes down to saving more than you spend and investing in the things you value. It's complicated in that every financial decision comes with its own set of pros and cons, risks and rewards. It's not as straightforward as the financial talking heads on late-night cable TV make it sound.

I've also realized that you really can't apply the same financial strategy to every phase of life and to every situation. If I were 20 years old, with years of compounding potential ahead of me, then yes, I'd take a more "scorched earth" approach to debt repayment. I'd give all of my money to the student loan company and just get it done. But at 40+ years old, we're making up for some lost time, and that means paying off debt can't be the only priority or even the top priority - even though it feels really, really good.

I know some people will disagree. But that's okay! Personal finance is personal. That's why I don't give much advice on this blog: what's appropriate and best for our situation might not apply as well to yours.

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