I’m really excited to have a guest post from The Frugal Wallet. I’ve been following their story for sometime and when they reached out to me about a potential guest post, I was beyond excited to learn what happens once you pay off your student loans.
When Mollie and Lejla look in their rear view mirror, they see tremendous debt. $130k of student loans, 5 figure consumer credit debt, and a mortgage that would make some cry. The realization that life was passing them by without spending time doing what they wanted to do, rather than what they NEEDED to do was enough to spark a change.
Enter the FIRE movement and frugality. Now the pair spend their time sprinkling nuggets of frugal wisdom into the web with a bit of sarcasm and humor. Check out more at The Frugal Wallet.
Now sit back, relax and enjoy a big dose of motivation!
Our journey to financial independence and freedom from financial limitations started like so many others. Swimming in a river of $130,000 of student loan debt without a paddle.
It was paralyzing. Our lives were limited significantly because of this massive hole we had to fill in. We couldn’t start our financial future because we were still paying for our past financial decisions – regardless of if those decisions were “good” or “bad.”
So, the hard work began.
We started to question everything and call every purchase into question. Not in some crazy maniacal way, but we started with big purchases.
Step 1 – 4400 sq foot house. That’s over 1450 sq ft per person. One might think we didn’t like each other. Easy solution. Sell it, cash out the equity and pay off a huge chunk of debt. We downsized to an apartment for a year to pay even more towards debt. Use the monthly savings to pay off more debt. However, we know we are the homeowner type, so eventually we moved into a 2400 sq foot house – much more reasonable for our 3 person family.
Step 2 – get rid of one car. Use the cash to pay off more debt. Use the savings each month to pay off more debt. We only really need one car and the second car was just a financial burden.
Steps 3 – cut cable, get rid of clutter that we can sell, figure out side hustles, budget for groceries, track spending, on and on and on. Pinterest has 1,000 ideas for how to make extra money or cut spending.
And we continued on this path – for four years. Until one day – the unthinkable happened.
We made our LAST STUDENT LOAN PAYMENT EVER. We finally were able to pay off our student loans!
The end meets the beginning
It was a glorious day.
I took a picture with my daughter in my lap making the final student loan payment to mark the occasion. I posted that photo in various reasonably applicable social media groups I’m in and called my parents. You know, I probably told the worker at Starbucks about it. Who knows. It was a blur.
Everything we had sacrificed, the changes we had made, the discomfort and personal growth we had to endure….it was all worth it. A big fat $0 balance.
After the excitement died down and the rush of making it to our goal wore off…it was honestly a bit anti-climactic. There was this…void…that just lingered there.
We had spent so much time, energy and effort on the greater goal of paying off these god forsaken student loans that we hadn’t really made much of a plan of what to do once they were paid off.
It seemed so far off, like such a helpless cause that there wasn’t much point in considering what to do once we achieved this goal.
And I know it’s silly – we were tracking spending, I was updating spreadsheets on the regular. How could this take me by such surprise? I guess my head was just down and I was on auto-pilot. Every dollar went to myfedloan.com.
It wasn’t easy, but it was simple…if you catch my drift.
So now that we were able to pay off student loans, we’ve had to do some soul searching. What next?
We certainly are not financially independent, but we are fortunate to be in a position where our only debt is our mortgage. So, we were faced with a set of options going forward with any excess cash we had.
- Max out investment accounts (401k and IRAs)
- Build up 6 month emergency fund
- Pay down (off??) the mortgage
- Start contributing to a taxable brokerage account
- Hire a personal chef to make us tacos every night (yes, we are one of those people).
We realized that it had been so easy to determine what to do first.
It was staring us in the face, but the next step was really a gut check decision we had to make. No one is going to argue that you should try to pay off student loans as soon as possible.
But if you tell someone you are paying down a mortgage actively when you don’t have your 401k account maxed, people will freak.
If you say you don’t have a 6 month emergency fund, but you’re maxing out your 401k and IRAs, Dave Ramsey loyalists will burn. down. your. house. How’s that for an emergency?
But right now, we have to ask ourselves what matters the most to us?
This is the point where no one can make the decision for you. You can have analysis paralysis, but eventually, you have to make a decision. So, without further ado, here’s our plan – post student loan payoff.
The Frugal Wallet Master Plan
Priority 1 – fully fund 401k and IRAs.
This allows us for a reduced tax burden, putting more money in our pockets at the end of the day. It was somewhat of a no-brainer, but honestly, different strokes for different folks.
I’m pleased to say this goal is in process/complete. We have adjusted 401k contributions to the maximum IRS limit (or very close to it based on conservative estimations on bonus payout at the end of the year). My IRA is fully funded by way of automatic bi-monthly contributions.
We have held back on fully funding my wife’s IRA until we see the dust settle on the 401k and IRA changes we made. We don’t want to over stretch ourselves without meaning to and ending up in a world of hurt.
Priority 2 – 6 month emergency fund
Once we have ourselves set up fully funding 401k and both IRA, we are going to start building our 6-month emergency fund.
We have goals of being fully FI within the next 8-10 years, but honestly, we may get the itch to do a pre-early retirement sabbatical before we hit FI. Having 6 months of expenses in the bank may just be used for that. Or maybe it’s just a true emergency fund that we never touch. Anyhow, priority 2.
Priority 2.5 – paying down the mortgage.
I say this is priority 2.5 because sometimes I have ADD when it comes to financial goals. I get bored with putting money in one place, so sometimes I mix it up by making random extra principal payments to something else.
We have a long-term goal to pay off the mortgage in 10 years. However, I’d love to be able to refinance once we get the principal balance down enough so we could significantly cut our monthly payment with a re-fi. This might actually push us to FI earlier, depending on side hustle income when we get to that point.
Priority 3 – Taxable brokerage funding
Once our 6-month emergency fund is fully funded, we will switch to a mixed priority of funding a taxable brokerage account and paying down/off the mortgage.
The purpose of the taxable brokerage account is to create a source of funding for early retirement living. 401ks and IRAs are amazing tax avoidance vehicles and great long term planning assets, but they have limited use for early retirees since funds can’t (typically) be withdrawn prior to age 59-1/2 without penalty. Womp womp.
Enter taxable brokerage accounts. These accounts are invested in the same types of assets as your retirement accounts (hello VTSAX), but your ability to access the funds without penalty is synonymous with a bank account.
When I step back and look at this relatively small list of financial goals for our future it both relaxes me and gives me anxiety. It’s relaxing because it’s succinct. We have goals again, and they are actionable. I can settle into autopilot once again as I did when we were paying off our student loans.
It’s anxiety inducing because the realization of most of these goals is so long term.
Priority 1 is almost done, so that’s a future win for us that isn’t too far off and priority 2 realistically is probably a year or so away. Priority 2.5 and 3….those will literally take us until we are FI.
We will settle into the boring routine of working those goals off for nearly a decade. For someone who loves change – this is hard for me to get my head around. I like being agile and dealing with chaos (to a certain extent), so settling into a routine on LONG ass financial goals like this is just so….boring. Wish us luck.
But I guess that’s probably the moral of this anecdotal story.
Reaching FI is possible and I think that in some capacity, everyone should be conscious of that fact and be working towards it.
Your path assuredly will be different from ours. You will have different sacrifices to make, different goals to set, and different feelings about FI. That all is a given.
What I want you to be aware of are two basic realities: 1) if you set goals and keep working toward them, you will reach them; and 2) when you reach them, know what you want to do next.
Don’t let yourself reach the goal of paying off some debt just to slip back into bad decisions. Celebrate checking a box off the list and set your sights on the next box. You may need some time to collect yourselves like we did, but eventually you’ll get excited about your next goal and you’ll start crushing that one. And the next one and the next one.
Then one day, we all with be swimming in a pile of FU money like Scrooge McDuck. Good luck, my friends.