Written by: Corey Janoff
I imagine most people who have debt aspire to be debt-free one day. The idea of debt-free living is quite appealing. Today we will dive into some of the benefits of living debt-free and ways you can accelerate your debt-free journey.
When it comes to debt, there are both financial and psychological factors at play. The financial ramifications of paying interest ultimately exacerbate the total cost of a purchase. The fixed cost that comes with a monthly debt payment limits your ability to do other things with your money.
Many people get a pit in their stomach from a psychological standpoint, thinking about debts they owe. It's almost as if they are letting down themselves or others. We don't need a scientific study to know that debt causes feelings of stress, anxiety, and depression. Too much debt is not suitable for your health.
Not All Debt is Bad
In some cases, debt can be a useful tool to help you achieve your financial goals. For example, most people take out a mortgage loan to purchase a house. Too much mortgage debt is a bad thing (the amount you spend on a house is the number one predictor of wealth accumulation). However, without mortgages, most people would never be homeowners. Those who can save up and pay cash for a house would be putting a lot of their other financial goals on hold.
Related: How Much House Can a Doctor Afford?
Student loans are another debt that can help you achieve your goals. Again, too much student loan debt pursuing a career path that doesn't make sense financially is not wise, lest you plan on taking advantage of the PSLF program. But student loans enable you to get a higher education, which can lead to long-term financial success. It's an investment in yourself, which is usually the best investment you can make.
Business loans of reasonable size can also help you accelerate your career goals if they're well thought out and well planned. Again, it's an investment in yourself and your career success.
The debts that I'm not a fan of are debts that don't help you achieve financial goals and are more of a tool to purchase unnecessary things.
All else being equal, being debt-free is better than carrying debt. So let's talk about some of the advantages of debt-free living.
Lower Fixed Expenses Give You Flexibility
In our podcast episode about avoiding burnout with The Physician Philosopher, Jimmy Turner discussed how being debt-free was like lifting a giant weight off his shoulders. He was able to work less and do more work on his terms (rather than at his employer's request), helping him avoid feeling burned out at work. This alone will likely add years to his career and life.
As a parent of three children, he can spend more time doing the things he loves with his family, which is what he enjoys most. It also gives him the flexibility to pursue opportunities that excite him. He has implemented a "hell yes" policy for himself at work – when asked to take on a responsibility unless the request generates a "hell yes" reaction, he passes on it.
Wouldn't we all prefer to work less if we could? Most of us are griding away because we have to in order to pay for all of the bills and expenses we have taken on. Most of our largest expenses are repayments of debt: student loans, mortgage, car loans. For many people reading this, eliminating those three debts could cut out $50-100k of annual expenses!
Getting rid of $50-100k of annual expenses, after taxes, could allow you to take a $75-150k (or greater) pay cut and still maintain your lifestyle! You might choose to keep working away to pursue other things (such as early retirement). You may also reassess and decide to work less or pursue the lower-paying job that is more appealing to your interests. Being on track to achieve financial independence has its perks.
It's worth exploring those career and lifestyle choices that living debt-free offers. The ability to say "no" is powerful. Think if you had the power to say "no" to your boss or the hospital administrators. "No, I'm not going to take overnight call. I don't need the money. Either find someone else to do it, or I'll go find another job that doesn't require me to work nights." Being able to afford to say "no" allows you only to take on responsibilities that excite you.
With your excess cash coming in, maybe you choose to hire a full-time scribe out of your pocket to take notes and enter all the necessary info into the electronic medical record system. Saves you time and energy. Allows you to see more patients, boosting your RVU's and earning potential, or take breaks in between patients.
Having more control over your career, job duties, and workload is a great thing. The greater sense of control you have, the happier you will be.
Debt and Spending Habits
Where debt gets people into trouble is when it enables them to buy things they don't need. Going back to the mortgage example above, a mortgage can help you buy a house, but too much house in relation to your income will be a source of stress and frustration. In my opinion, banks will approve borrowers for too much mortgage, enabling people to buy more house than they can afford. Sure, you may be able to afford the mortgage payment, but you won't be able to afford much else if you borrow the maximum amount you get approved for.
I've said before: try to finance below two times your gross income when buying a house. Can't find a house you like for that price? I feel for you, but the laws of math don't care. And don't try to justify it by saying your primary residence is an investment. Your primary residence is an expense that you might break even on overtime when you add up all of the costs that come with it. It's likely a lot better than renting long-term, but the ROI is depressing (especially with short-term homeownership).
Houses are typically the biggest debt-laden expenses people have, but debt fuels plenty of other unnecessary spendings. Some of the other culprits include home renovations, cars, furniture, vacations (timeshares), and other consumer goods that aren't necessary to your wellbeing. For most things in life, if you can't afford to pay cash, it probably means you shouldn't buy it.
If you can pay cash for something you want, you don't have to deal with financing, interest, or minimum monthly payments.
Debt and the FIRE Movement
Most of you reading this are probably aware of the FIRE acronym: Financial Independence, Retire Early. You don't have to retire early if you don't want to, but financial independence is something I want everyone to achieve. One of the keys to achieving financial independence is living debt-free. By definition, if you have enough saved up to where you no longer need to work anymore, you are financially independent. The lower your monthly expenses, the less money you need to support your lifestyle. Eliminating debt is one of the easiest ways to lower your monthly expenses.
Related: On FIRE, with Physician on FIRE
Two iterations of FIRE are leanFIRE and fatFIRE. The former involves living a miserly lifestyle to retire as soon as possible on as little as possible. The more preferable, in my opinion, is fatFIRE, which is more suited to high-income professionals. It involves saving aggressively to accumulate a lot and retire early while still maintaining an above-average lifestyle.
How much money do you need to retire? It may not take as much as you may think if you plan correctly. If you don't have any debts, how much do you really need to live comfortably? Your big expenses will be property taxes, home/auto insurance, health insurance, utilities, food/groceries, travel, and entertainment. Sure, you could spend a lot on those things – there is no limit to the fun. That said, you could live a pretty comfortable and enjoyable lifestyle spending $6,000-7,000/month for a couple. Again, debt-free.
Using a very conservative 3% withdrawal rate, if you have $2.4-2.8M in today's dollars, you can afford to retire and live on $6-7k/month for the rest of your life adjusted for inflation, potentially more. If you start saving $50-60k/year and increase for inflation, you'll hit that goal in about 25 years. Save more as debts get paid off, and childcare expenses go away, and you'll get there even sooner. It sounds like a lot of money, and it is a lot of money for most people. But if you're a doctor making upwards of $250k/year, this should be more than doable – it should be the expectation.
I tell clients to save at least 20% of gross income for retirement. Do that for 25-30 years, and you should be on track to retire comfortably at a reasonable age. 20% of $250k is $50k. 20% of $300k is $60k. Start saving in your early 30's, you'll be on track to retire comfortably in your late 50's early 60's. Want to retire earlier? Save more. Keeping your debts in check and living debt-free will only accelerate this trajectory.
Debt Free is the Way to Be!
I'm not here to tell you how to live your life. Some people are proponents of avoiding debt at all costs, paying cash for everything, and having all debts paid off before you can retire. However, I have seen people successfully retire while carrying debt. Debt isn't the root of all evil like some make it out to be. That said, there are many benefits to living a debt-free lifestyle.
Debt is simply a form of spending that we partake in when we can't afford to buy something that we want today. Sometimes taking on debt can make sense and help you achieve your financial goals. In many cases, though, debt enables bad spending habits and delays the time it takes to achieve financial independence. By thinking twice before spending and living within your means, you can set yourself up for financial success and accelerate your path towards financial freedom.