Before starting this blog, I had been writing in my notebook, with the main purpose of creating accountability and motivation to eliminate the student debt that my wife and I had accrued. As mentioned in my other Debt Demolition posts, our student loans at one time totaled over $80,000.
The lions share of this debt, at over $70,000 was acquiring interest to the tune of 7% per year.
This was a financial drain that was not only washing away our finances, but was also a source of discouragement, as the payoff was scheduled to last for years. Something had to be done, and in January of 2015, my wife and I decided to forgo all other investments, while cutting back on spending in favor of focusing all our extra income towards the loans. This Debt Demolition project went exceedingly well, allowing us to lower our total student debt to around $52,000 by October of 2015.
During the preceding months, while diligently sending every spare nickel and dime towards the loans, I had been working to refinance the student loans through Sofi (referral link), and in October of 2015, we were approved, allowing our interest rate to transform from a fixed 7% to a variable 3.5%. Ordinarily, I try to avoid a variable rate loan like the plague, but this refinance was a major reduction.
The ability to quickly eliminate the loan if needed, and the fact that the variable rate was capped at 8.5 allowed me some peace of mind.
Upon receiving the refinance, I originally, planned to continue paying off the loan as quickly as possible, with the goal of having it eliminated by December of 2016. So, what is our current balance? The loan balance is currently, $46,812.18!
Good heavens, what happened?
I’m happy to report, we did not suffer a debilitating job loss, serious injury, or any other calamity. We just changed course, following a path that I believe to be more efficient in the long term. The “no debt is good debt” crowd is surely sick to their stomachs right now, but allow me to explain, and I think you will see the wisdom in my decision.
First, I feel certain that over time, I can earn a better rate of return on real estate, or in the stock market via my IRA and 403b accounts, which I had not been funding during the previous debt demolition boom. Therefore, I diligently, contributed to my 403b account during December of 2015, and during the first 6 months of 2016, allowing me to nearly reach the maximum contribution levels for 2016. Due to a paperwork snafu, I stopped contributing to my 403b one pay to soon, resulting in my 2016 contributions being $16,500 instead of the maximum of $18,000.
I realize I had plenty of time to fix this situation, but I didn’t, so that’s where my 2016 contributions ended.
For the remaining 6 months of the year, we simply placed as much money into our savings account as possible. At the end of the year, we had moved $21,777.45 into our savings account. Wow, that is shocking to me seeing it in print. When combined with my 403b contributions, including December of 2015, which is when we really switched the focus of our goals, we have saved or invested $42,777.45. Meaning if we stayed the course, we would have only missed our goal of eliminating the students loans by a month or so, since our current balance as I noted above is $46,812.18 (small pat on the back please).
So, I’ve invested in my retirement account, as I stated I would, but what happened with the real estate? I’m glad you asked.
We are currently hoping to purchase an investment property in the spring of 2017 (update – didn’t happen, they didn’t sell). This property is attached to our current home, it is vacant, and we have mentioned to the owners that we are interested in purchasing the property. They have expressed a willingness to sell, but they have also left the property vacant for the better part of the last three years, so we’ll see if this opportunity actually comes to fruition.
Not to be one to rest on my laurels, I’m putting all this money in the savings account to work.
I have used a large percentage of these savings ($13,635) to reduce the principle balance on my primary residence. This is where this plan gets interesting. Unfortunately, we have been paying for mortgage insurance at a cost of 79.56 every month. The reduction in my principle balance allowed for that payment to be eliminated, which provides a return on investment of 7% (better then our student loan).
Pretty good, don’t you need the cash for the investment property?
Yes, I do, but in way I not only still have the cash, I’ve increased it. By reducing my outstanding principle balance, and combining with the increase in my homes value since we purchased in 2012, I should be able to receive a home equity line of credit much larger then the $13,635 I spent to reduce my principle and eliminate the mortgage insurance.
I can then use this line of credit towards the purchase of the investment property.
After I have made repairs to the property, and placed a tenant in the home, I should then be able to place a mortgage on the property in order to pay off my line of credit. I have already used this strategy for 2 of my rental properties. The ability to invest via my line of credit is why I believe it is more beneficial to pay off my primary residence prior to paying off my student loan. Sure, elimination of the student loan will increase my monthly cash flow, but it won’t allow me greater investment flexibility. By paying off my primary residence, and then establishing a large line of credit, in theory, I can make investments in real estate using this same line of credit over and over again, and ultimately increasing my net worth and investment income faster then if I had just paid off the student loan first.
What do you think?