How We Improved Our Net Worth By $730,000 In Less Than Three Years

This month marks a big financial milestone for us as we (finally) have a positive net worth.

There hasn’t been any grand secret for us. We didn’t hit it big on leveraged positions on hot tech stocks. We worked hard in residency and obtained lucrative jobs and save more (a lot more) than we earn. We refinanced our student loans to very good rates.  In an average month, here is our breakdown of our spending:

  • student loan payments $12,500/mo
  • mortgage payment $3,000/mo
  • retirement contributions $7,500/mo average (401ks, Roth IRAs, HSA)
  • 529 contributions $400/mo

There is certainly an element of luck. We have benefitted from fairly good returns in the market the past few years (although we’d benefit a lot more from a deep bear market as discussed in one of my favorite finance books). We are certainly grateful for our family’s good health (although we are well-insured against illness and death).

We haven’t deprived ourselves greatly to get to this point. We partake in selective extravagance – hiring a housekeeper to come twice a month, going on a few nice vacations, attending local sporting events, buying a nice (nicer than we needed) family vehicle. Like PoF, I can’t cut the cord. We bought a very comfortable home with room to grow into that we hope to own until our children leave for college (and plan to pay off in less than eight years). We have had two kids during this period and taken two sets of maternity and paternity leave and employed a nanny throughout. We could have taken jobs that earned even more and that were located in states with no/low state income tax but we picked a part of the country we love and a city with great public schools.

One of the adorable reasons we will be working an extra year or two at the end of our careers.

At times we are also selectively frugal. We don’t shop at expensive grocery stores and I use my old cell phone rather than constantly buying new ones. We grow a lot of our own food in our garden (which we mainly do because we enjoy it and not for financial reasons). I’m lucky enough to wear scrubs so I don’t spend much on clothing.

But by and large we have reached the conclusion that our path to financial independence will not be based on cutting out the occasional latte or some of the other extreme frugality espoused online, but rather will be paved by working hard, having a stable combined income in the 99th percentile for the country, and devoting a large percentage of our income to debt repayment and retirement savings. We are confident we will reach our goals by age 50 by making a lot of money, setting our investments on autopilot and forgetting them, and avoiding some of the common physician pitfalls of divorce, huge real estate losses, timing the stock market/day trading, failed side business, etc.

What are your keys to financial success?

 

Paying Off Debt: Debt Snowball or Some Hybrid?



One of  my great readers commented after reading my post, Our Debt Paydown Plan, with a few thoughts of his own:

My wife and I are also a dual-physician couple finishing our 4th year in practice. Starting to plan for a family so will look forward to your future posts on how you operate your household. We also practice in Canada – so marginally reduced student loan sizes, a whole different series of retirement account acronyms as well as the benefits of incorporating a small business for planning, although likely disappearing this year.

You state you have adopted a “modified snowball” debt repayment strategy. I recognize this is based upon the positive psychology of getting loans off the balance sheet as rapidly as possible, math be damned. But when I look at your repayment priority it appears to be: student loan A, car loan, student loan B then Mortgage.

A pure snowball would be: car loan–>A–>B–>mortgage and the “avalanche” method, paying highest interest first, would be B–>mortgage–>car–>A.

Just asking for a little more rationale for the approach you have taken. Combined you have stable and excellent income, focused goals, realistic lifestyle expectations, a long runway to retirement and are through the high impact maternity/paternity years – you’ve won at each of these but I don’t follow your strategic decisions for this plan specifically.

My takes:
1. You have committed yourself to debt repayment as a priority (versus accelerated retirement savings) for the better part of the next 10 years. Many would argue that you’d be ahead by accumulating savings and subsequent investment income versus the relatively low interest rates you’re paying down. And now you’re paying your cheapest loan first.
2. Usually debt snowball is setup for individuals with a lot of small loans – so in a series of months the number of loans on your balance sheet grows smaller. You’re a couple years away from the first being removed from yours – and the relief from its final payment a lot of nights and weekends on call away. Do the same benefits apply?
3. Are there specific requirements of your loan refinancing that force you above the minimum payment for some loans versus the others?

I don’t me to challenge you significantly but on the surface it appears that you’re less likely to achieve the benefits of snowball at the expense of paying more over time.

I really enjoyed this comment and I thought the best way to address some of the issues raised was to go through point by point and discuss our rationale for doing what we are doing. First, as a refresher here is our current breakdown of our debt:

It’s not all bad. The good news is that it will all be paid off by my 40th birthday (if all goes according to plan):

So, let’s break this thing down.

You state you have adopted a “modified snowball” debt repayment strategy. I recognize this is based upon the positive psychology of getting loans off the balance sheet as rapidly as possible, math be damned. But when I look at your repayment priority it appears to be: student loan A, car loan, student loan B then Mortgage.

A pure snowball would be: car loan–>A–>B–>mortgage and the “avalanche” method, paying highest interest first, would be B–>mortgage–>car–>A.

Just asking for a little more rationale for the approach you have taken. Combined you have stable and excellent income, focused goals, realistic lifestyle expectations, a long runway to retirement and are through the high impact maternity/paternity years – you’ve won at each of these but I don’t follow your strategic decisions for this plan specifically.

Fair enough. There are some mitigating factors that I didn’t discuss in the original post that lead us to our current strategy of aggressively paying down my wife’s student loans. For cash flow (and psychological/behavioral) purposes we decided when we refinanced our student loans to focus the majority of our capital to one of the two student loans versus equally splitting our money between both loans. Since we were planning on aggressively paying off my wife’s student loans, we felt comfortable taking the gamble and refinancing her loans into a five year term variable rate loan (refinanced through Sofi). We only felt comfortable doing this because we had no intention of taking the full five years to pay off these loans – and therefore the risk of the variable rate increasing dramatically enough to seriously hurt us was low enough we were comfortable proceeding. We then refinanced my student loans (also through Sofi) into a 20 year fixed rate loan, which allowed us to have as much extra money available as possible to pay toward her student loan principal.

Since we budgeted about $12,350 per month to student loan repayment essentially our options came down to the following (rough numbers/even numbers used because I don’t remember the exact details!):

Option A:

Student Loan A: $400,000, rate 4% (fixed) 10 year: $4,049/mo. Additional principal payments of $2,126/mo. Loan paid off 6 years, 2 months from origination date.

Student Loan B: $400,000, rate 4% (fixed) 10 year: $4,049/mo. Additional principal payments of $2,126/mo. Loan paid off 6 years, 2 months from origination date.

Option B:

Student Loan A: $400,000, rate 2.6% (variable) 5 year: $7,116/mo. Additional principal payments of $2,539/mo. Loan paid off 3 years, 8 months from origination date.

Student Loan B: $400,000, rate 5.25% (fixed) 20 year: $2,695/mo. $355,380 principal left upon payoff of Student Loan A. Then refinanced to 5 year variable loan at 2.6%. Loan paid off 6 years, 2 months.

So the interesting thing to note here is that the month that we definitively pay off all of our student loans is the same regardless of which option we pick. What we gain by picking option B (and why we went this route) is: 1. The psychological benefit of more quickly paying off one of the two loans (on target for two years from today). 2. Once my wife’s student loan is paid off our mandatory minimum payments decrease dramatically. Even though we intend to snowball her student loan payment into mine, we are both looking forward to the day when our mandatory minimum loan payments are not $12,000/month. This may allow my wife to go part time sooner. Of course, should the variable rate offered increase dramatically over the next 6 years we may pay slightly more in interest and extend our payoff by a month or two.

While we would love to pay off the car first (we could do so in about seven months if we paid the minimum on everything else in the meantime, or right now if we emptied out a chunk of our emergency fund), we’d rather eliminate the loan with the variable interest rate and decrease our mandatory minimum loan payment. The auto loan will be paid off in the month after my wife’s student loan is wiped out. Then the focus turns to my student loan, and then the mortgage (probably, see below).

1. You have committed yourself to debt repayment as a priority (versus accelerated retirement savings) for the better part of the next 10 years. Many would argue that you’d be ahead by accumulating savings and subsequent investment income versus the relatively low interest rates you’re paying down. And now you’re paying your cheapest loan first.

I am reminded a little of a recent post by the White Coat Investor discussing his decision to pay off his mortgage in spite of the fact he almost certainly could make more investing the money elsewhere. There are clearly psychological benefits to paying down debt that really speak to some of us and not as much to others.

As I mentioned in my original post, we have gone back and forth about what to do with this extra $13,000/month once we only have a mortgage left. Dr. Cory Fawcett makes a compelling argument for paying off your mortgage as soon as possible in this scenario in his book The Doctor’s Guide to Eliminating Debt. Dr. Fawcett makes the argument that being debt-free is empowering and liberating and that the argument supporting carrying a long mortgage for tax benefits or a hedge against inflation is largely overstated. I would tend to agree with him.  

From the point we send in our last student loan payment it will only take us three years to fully pay off our mortgage and be totally debt free – at age 40. As I mentioned in the prior post, since we are very aggressive with our investments (100% equity) due to risk tolerance and our young age/career longevity, I view this equity as being the equivalent to the bond portion of a portfolio. Since we would only be 40 at this point, we would still have a decade or more to aggressively fund our kids’ 529s and our brokerage account. If we decide to go part-time at this point it would be easy to do so given our monthly expenses would now be $17,000 per month less than they previously were.

Essentially the idea of not owing anyone a dollar and still having a decade or more of productive earnings ahead appeals greatly to us even if paying the minimum on the mortgage and investing the difference might result in a slightly greater nest egg at retirement age.

2. Usually debt snowball is setup for individuals with a lot of small loans – so in a series of months the number of loans on your balance sheet grows smaller. You’re a couple years away from the first being removed from yours – and the relief from its final payment a lot of nights and weekends on call away. Do the same benefits apply?

I think they do. I view the debt snowball for us as a safeguard against lifestyle inflation. Currently we allot over $17,000/month of our take home income to debt repayment (along with roughly $8,000/month to retirement savings in various forms). If we continue to maintain that same monthly commitment to debt repayment we will have paid off all of our debt by age 40 and set ourselves up for one or both of us to work part-time at that time and/or to retire by age 50. Of note, once debt free we plan to take that $17,000/month of take home income and invest it fully between 529s/brokerage accounts.

3. Are there specific requirements of your loan refinancing that force you above the minimum payment for some loans versus the others?

Covered above.

Thanks to my readers for following along on our journey. Good luck to you all and please share your stories in the comments section.