Today, I listened to a really good interview on YouTube with the fellow from Debt Ascent. He and his wife had over $500,000 in student loan debt. They paid it off in 5 years, while buying a house and also fully funding their registered retirement accounts. This was a great interview for two reasons.
Not everyone has fat to cut.
What I loved about this interview was that Mr. Ascent acknowledged that not everyone has the same ability to pay off debt as quickly and as easily as he and his wife. While both of them earned good six-figure incomes, they chose to live on one income while pursuing their financial goals. One of the things I loved best about this interview is that Mr. Ascent articulated that it is easier to meet your financial goals when you have a larger income.
Don’t misunderstand me. If you’re earning $300,000 per year and spending every penny, then you are in the exact same financial boat as the person who earns $35,000 per year and spends every penny. Both of you are living paycheque-to-paycheque. However, if both of you realize that you need to make financial changes, only one of you has the ability to make significant changes in a relatively short period of time.
Mr. Ascent acknowledges that there is a baseline of spending. In order to pay for the basics, everyone has to spend a certain amount of money. While it might fluctuate based on location, let’s say that the baseline is $35,000.
When you’re earning $300,000, you can choose to cut expenses. Doing so frees up a good chunk of money for you to fund your financial goals. Maybe you decide to pay off the auto loan in 18 months instead of 5 years. Perhaps you switch to cash instead of credit so that you can pay off your credit cards faster. Once your debts are gone, you have the ability to re-direct debt payments to funding your retirement accounts and paying off the mortgage.
At the other end of the spectrum, an income of $35,000 doesn’t allow you to make such big financial changes. At that salary, you’re going to need the vast majority of it just to pay for your life.
Unlike the vast majority of personal finance bloggers out there, Mr. Ascent expressly acknowledged that it’s easier to meet your financial goals when there is a lot of fat to cut from your budget.
Paying for yesterday, today, and tomorrow.
The other fantastic part of this interview was hearing Mr. Ascent talk about how he and his wife prioritized their money. In his words, they made choices to maximize every dollar. They were able to get a mortgage rate of 3%, and had a rate of 2.95% on their student loans. He disclosed that in order to get such a low rate on their student loans, they had to agree to pay $4,000/mth for 7 years. Further, they knew that they were responsible for funding their retirement so that was priority number one. And, of course, they had to pay the mortgage or else they’d lose their house. Every “extra dollar” was sent to their student loan debt rather than being funnelled into an investment account.
Why? Isn’t the common wisdom to invest while paying down debt? Don’t all the calculators show that doing both works out best over the long-term?
Perhaps… Yet, personal finance is personal for a reason. What works for one won’t necessarily work for all.
The Ascents took a different view. In Mr. Ascent’s words, they wanted to prioritize their money in order to maximize their cashflow. They realized that the sooner they rid themselves of that $4,000/mth minimum payment, the sooner they could earn and keep that money for themselves. In other words, eliminating that payment would mean an immediate increase in their household’s disposable income. The Ascents realized that they would be able to cut back to working 4 days a week if they chose. The former student loan payment could be re-directed towards their mortgage, resulting in even more disposable income sooner.
So that’s what they did. According to Mr. Ascent, registered retirement accounts were funded first as they were the highest priority. The next highest priority was paying the mortgage. Finally, the minimum student loan payment was made. And when there was extra money, it went to the student loans.
If I understood him correctly, they were completely debt-free within 7 years of finishing their respective graduate degrees. They paid off half a million dollars in student loans as well as a $200,000 mortgage. On top of that, their retirement accounts have hit the half million dollar mark. Their starting salaries after graduation were a combined $200,000 and they managed to double that in less than 10 years.
Again, Mr. Ascent was humble enough to recognize that he and his wife were in a very fortunate position to be able to do what they did. At not point did he ever try to make the argument that everyone could mimic their choices, no matter their income.
Well, anyone could do that…
… if they were earning that much money. That’s the common response upon learning that the Ascents earn big bucks as a dual-income professional couple.
I think that response is short-sighted. There are many people who earn high salaries, and are living paycheque-to-paycheque. Having a high income provides you with the opportunity to pay off debts fast, to fully fund your retirement, and to rid yourself of your mortgage. A high income is not a guarantee that any of those things will happen. The choice to spend money belongs to you. The Ascents are an example of a high income couple who chose to live below their considerable means in order to achieve the goals that they set for their money. Again, they chose to live on one salary while the other salary went to paying off debts and funding their retirement accounts. The choices they made after graduation paved the way for them to have full control over their entire paycheque.
There is absolutely no doubt that having a very high income was beneficial. That fact should in no way diminish the choice that they made to live on one income. They made the choice not to upgrade their lifestyle once they finished graduate school. Together, they decided to eschew the path of consumerism and to focus their energies on removing the shackles of debt from their lives.
Again, anyone could do that!
You’re right. Anyone who earns more than the baseline income needed to survive can make the same choice as the Ascents. To be clear, I absolutely understand that some incomes are just not large enough for more that subsistence living. This post is directed at those who do have the fat-to-cut in their budgets, yet choose not to align their spending with the dreams they have for their lives.
Just like the Ascents, you have the choice to prioritize your financial goals. Nothing is stopping you from living below your means in order to fund those goals. It might take you longer than 7 years, but so what? Would you rather spend every penny and not ever achieve your dreams? Or would rather work a little bit longer to see your long-term goals become a reality?
As soon as you decide what you want, you’ll be in a position to start figuring out ways to make it happen.