Last week at work I was having a conversation with a few of my colleagues about spending money now vs spending money later. My view was that if you have debt you should be spending the majority of your disposable income into paying off your debt ahead of time. Obviously there are a lot of factors to consider before making that call, but for my situation I feel like paying off debt early is the best course of action so that I can achieve some of my long term financial goals.
Why I think paying off Debt faster is the right move
My wife and I got married and purchased a house at quite a young age, when we weren’t really earning a lot of money. In hindsight, deciding to buy a house at the peak of the market probably wasn’t the best move that we could have made, but it has turned out fairly well for us and I am not sure I would change it if I was given the chance. Anyway, after only a few months of having to pay a ridiculous amount of interest (interest rates were above 9% PA at the time) and not getting ahead on our home loan, we decided to get smart about our debt and try our best to pay it off ASAP.
We jumped onto an online mortgage calculator and worked out that if we continued to just pay the minimum repayments that we would end up paying around $600,000 in just interest repayments. That is nearly 200% of the cost of the house and it was an insane amount of money. We took a look at our budget and tracked our spending and worked out that if we really tightened our belts we could probably pay off the loan in about 13 years and save ourselves $400,000 in interest repayments.
Fortunately for us the GFC hit and reduced interest rates to about 5% and we moved from paying off the loan in 13 years to about 7-8 years. This in turn meant that we were saving heaps on interest over the life of the loan and could put that extra money into even more extra repayments. If I was in the US or Japan where interest rates are almost 0% then I probably wouldn’t have done this, but you have to play the hand you are dealt I guess.
By the time we finally pay off our loan, I expect that we will have saved somewhere in the area of $350,000 to $450,000 (it is difficult to say with the wild swings in interest rates). In my mind I am happy to forgo a few of life’s little luxuries so that by the time I am in my early 30’s I will own my own home and be ahead about $400,000 in interest to the bank. What I feel many people forget is that by saving on all this interest at such a young age, we will now have the next 30-40 years of not being $400,000 behind the 8 ball. This means that each year we are out of debt and saving, we get to compound whatever we have saved from the year before and by the time we are in our mid to late 40’s we will have more money than what most people retire with. This in turn enables us to retire significantly earlier than the average Joe.
Another benefit that we have with our current level of debt is that our minimum repayment on our mortgage is down to $141 a week. This means that we are afforded the opportunity for my wife to not have to go back to work (if she doesn’t want to) once her maternity leave is over. Plus I also take a 15% pay cut to enjoy the benefits of rostered days off once a fortnight. If we hadn’t paid off our debt so aggressively then there is almost no way either of these scenarios could have happened.
My view on it all is that if you like working for the man for the rest of your life then go right ahead. But if you like spending time with your family away from the pressures of work, then start getting smart about managing your money and in particular debt management.
What would you do?
I am interested in what you would do in my situation? Do you think that paying off debt as early as my wife and I have is a worthwhile exercise? Or should you live it up now and pay off the debt when you get the chance?