The Most Valuable Thing Debt Takes From You Isn't Money — It's This


Financial planners always stress the miracle of compound interest. The earlier you start saving, the more compound interest works in your favor. Time is on your side.

When you have debt, however, compound interest is the worst. It's what makes paying down credit card debt so difficult. It's one of those things that make it harder to gain financial independence. Luckily, even when compound interest is working against you, time is still your friend. You just have to turn your relationship with time from a long-term partnership to a short-term fling. (See also: Lifestyle Inflation: The Ultimate Financial Trap)

I am hugely motivated to pay down my debt by the icky sensation that I am just one step away from the poor house. I will do just about anything to avoid feeling finance-related stress. I am all about pain avoidance. (See also: Your Debt is Killing You)

My husband, on the other hand, has a much higher emotional tolerance for debt. He hates scrimping as much as he hates paying the bank for previous purchases. That said, once he discovered that paying down debt quickly saves a crap-ton of money, he jumped on the frugal bandwagon.

Think of the Time When You Won't Have Financial Stress

As of today my husband and I have both been unemployed for 177 days. Luckily, my husband starts working at a fantastic, new job tomorrow, so I will finally be able to go to the dentist without worrying about paying the bill.

That said, even with the new income, my husband and I are going to continue to live on our no-frills, crisis budget, until we pay off all our debt.

The big lesson of the last six months has been this: Regardless of how upper-middle class we appear, as long as we have debt we are actually poor. That's kind of the definition of poverty right? Not having money. So, as long as we have debt, we not only have NO money, we've got less than no money.

After 177 days I don't see the point in extending our poverty for one day longer than we need to. We've got five years to pay off my Home Equity Line of Credit. But why extend our poverty for half a decade when we could save three years of financial stress and pay off the debt in two years instead? We've just lived through six months of grinding poverty, which was no fun, but survivable.

Is 24 months of the same, cash-poor life, worth the reward of early financial freedom?

I think so.

Less Time in Debt Equals Huge Financial Gains

Paying of my HELOC early will also save me thousands of dollars in interest. Money that I can turn around and spend on furthering my education, so I can get a higher paying job, put toward my retirement fund, or blow on an extravagant vacation.

While I love to travel, what I will probably end up doing is using the savings to pay down the mortgage on my rental property.

Like most Americans I don't have enough money put away for retirement. People in my family live to be 90. That's several decades of retirement income I've got to find sooner rather than later. Instead of a 401(k), I have a rental property that currently breaks even, but will be an income generator, once I pay off the mortgage. (See also: Just Saving Isn't Enough: How Cash Flow Allocation Helps You Retire)

While most people, even bank loan officers, refer to my house as an asset, I don't. Unless something makes money for me while I sleep, it's not an asset.

I'll just come out and say it: I'd like to make money in my sleep ASAP.

Shockingly, As Soon As Possible is a lot sooner than I expected. Using a debt calculator, I discovered that I could be making a passive rental income from my house that's bigger than my current poverty budget in just 13 years.

Here's the Math

If I make the minimum $1800 mortgage payment on my house every month with my current, yucky interest rate of 5.9%, it will take me until March of 2037 to pay off my house that cost $270,000 (including my HELOC). In addition to the $270,000, I will also spend a whopping $220,866 in interest.

However, if I spend just $150 more per month (the equivalent of an one additional mortgage payment per year), I will pay off my mortgage in November of 2033 and instead pay $183,979 in interest. If I really stretch myself and my budget and start paying $2500 a month (an additional $8400 per year), I will pay off my house in May of 2027 and pay a total of $115,940 in interest. So what's the obstacle that's keeping me from becoming financially independent almost ten years sooner, saving $104,926 in interest, and owning a rental property that (by the current rental market) will make me $2000 per month in profit?

$8400 per year.

Do I think I can find a way to make an additional $8400 per year with that kind of incentive?


Have you ever paid off a debt early? Please share your story in comments. Was it worth the extra suffering?

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Guest's picture

An easy way to save money over the past few years would have been to refinance that atrocious 5.9% mortgage rate. The 30-year fixed bottomed out at around 3.5% which would have saved you tens of thousands over the course of the loan. You could still probably refinance today and knock off 1.5%.

Max Wong's picture

Hi Greg!

I have made three separate attempts at refinancing my rental.

Refinancing a rental property is actually a near impossible way to save money on a mortgage, at least in California. There are separate standards banks use to judge risk on rental properties vs. primary residences. Apparently more people walk away from their rental properties than their primary residences, so even with excellent credit and a property that is worth $500,000 more than when I bought it, I have been shut down. When I ask the banks why, with my credit history, they think I'd walk away from my most valuable belonging, I get the same line about "we calculate risk with an algorithm."

This is one of those banking practices, that came out of the sub-prime mortgage debacle that keeps people poor and actually incentivizes bad financial behavior.

Guest's picture

That's the one blessing that I found with unemployment too. I learned to make due with less, I cut my budget significantly and when I eventually found a new job I kept (most of) that lifestyle. Now I'm saving a significant portion of my income and it doesn't feel like I'm trying anymore.

Guest's picture

Not only did I pay it off early, I paid it all. I have been debt free for 4 years and have seen my wealth grow exponentially. Since I don't payments, I can invest and save for purchases. There is no way I would ever go back to using credit cards or any debt of any kind.

Max Wong's picture

Hi Robert!

Thanks for your inspirational comment. Do you have any tips on how you managed to pay down all your debt early? That's a super achievement.