While we are in debt-repayment mode, Mr. DebtFreeJD and I are living off his salary. Our goal is that at minimum, 100% of my salary goes towards repaying debt. During that time we are not:
- Investing any money in my (available) 401K. I only have about $8,000 in an IRA. Obviously not great.
- Saving up for a house.
- Investing in the stock market.
- Participating in any other kind of tax-deferred account, other than Mr. DebtFreeJD’s 403(b).
Does this make sense financially?
Um, probably not.
It did while my loans were still at an 8% interest rate. However, I recently refinanced into a variable rate loan, and my interest rate is hovering at around 3.7%. As a result of my single-minded focus on debt, we are paying a whole heck of a lot in taxes. We make too much to qualify for the student loan interest deduction, and we don’t have kids or a house, so not having any tax-deferred income on my end means we’re handing over a hefty sum to the federal and state governments. Also, house prices in our city are such that it would definitely be cheaper to buy than rent, so every month we delay getting ourselves into a house is costing us.*
So why are we doing it?
I have limited bandwith. It took me a long time to accept that, but there it is. I can only take on so many projects at once, and taking on too much leads to abject failure. Reforming my whole financial house in one go was never realistic for me, and I – in an unusual moment of self-awareness – knew better than to try. However, throwing all the dollars we could at loans did seem like a goal I could focus on. For me, it’s much better to have one big project than lots of small things whizzing in every direction. If I’m writing a brief, I can’t have gchat open, my email dinging, and listen to my secretary** chat outside my door. I need to shut down everything but the brief, close my door, and put in ear plugs. The same applies here. Going after my debt like Dog DebtFreeJd after a peanut-butter stuffed Kong was the only approach that was going to result in real progress.
Is this a good idea for other people?
If you are repaying your loans over a long-term period, probably not from a financial sense. I’m ok not contributing to a 401K (and therefore paying a higher effective tax rate than your average billionaire) and not being in a rush to buy a home because this project is only slated to go on for a year or so. If it were to go on for longer than that, if I was being purely rational, I would sit down, run the numbers, and figure out what makes sense.
On the other hand, I’m not purely rational. And debt sucks. I hate debt. Even though the numbers show student loan debt is not going to collapse the U.S. economy, at least anecdotally, having lots of student loan debt is like having a suitcase full of rocks chained to your foot. I just don’t want to be dragging that thing around for the next five to ten years. Again, my bandwith is limited. So for right now, my radio is tuned to just one channel: W-DebtFree: “Let Freedom Ring.”
*We are actually actively house-hunting. Let’s call that process not-that-fun and very time consuming.
**I love my secretary. She is life-saving, and this is to no way imply any kind of criticism of her. She almost certainly spends less time chit-chatting at work than I do.