I have had a few questions from readers about our budget and how we prioritize debt repayment. Here is a snapshot of our current debt and plan:
We are essentially doing a modified version of the Dave Ramsey debt snowball strategy. The lion’s share of our debt repayment effort is being funneled into my wife’s student loans (refinanced with a five year variable rate repayment through Sofi). We chose to refinance my student loan (also through Sofi) to a longer term (at the expense of a higher rate) so as to be able to pay more towards my wife’s loan and pay it off sooner. This was done for both psychological reasons (e.g. the sense of accomplishment that will come with paying off one set of our loans) and for more practical reasons – getting rid of one set of student loans significantly improves our cash flow/decreases our monthly mandatory expenditures. Once her loan is paid off we will take a month or two and pay off our auto debt and then refinance my student loan to the lowest rate/shortest term possible.
So in about two years my wife’s student loan and my auto loan will be paid off, at which point we will use the money we were paying for her loan and the car loan to help pay down my student loan – to the tune of $13,000/month. In 2021 our only debt will be our mortgage.
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. I would tend to agree with him. It will only take us three years from that point to fully pay off our mortgage and be totally debt free – at age 40. 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.
In some sense there is probably no right answer as long as that money doesn’t get funneled into lifestyle expansion. In the same way that I believe we have good risk tolerance (this will surely be tested at some point by a bear market), we also are quite debt averse. This no doubt influences our decision making.
Even with this aggressive debt repayment plan we conservatively expect to have $2,500,000 in our various investment accounts by age 42 (assuming 6% returns, no increase in salary over this time). From that point on the asset side of our portfolio really starts to take off.
What are your thoughts on debt repayment vs. investing?