So let me lay out my current situation for your voyeuristic pleasure. I am 33 years old, and I own my own practice. I graduated from doctor school almost 6 years ago, with roughly $170,000 in student loan debt. (All of which was from post-secondary education; we worked several jobs, got a few scholarships and grants, and kept expenses low to finish undergraduate college with no loan debt.) As I finished up my unpaid internships, I decided to break out on my own and start my own practice. I did so on some small business loans. The first couple years were rough going, and I was nowhere near the level of high-earner. In fact, was wasn’t even an earner; I was losing money.
As soon as the first student loan payment came due, I was surprised to see an amount payable of over $1,500 each month, for the next 15 years! I was making less than zero dollars per month. So I quickly signed up for Income-Based Repayment (IBR) thru Sallie Mae. (As I hope to discuss in a future post, IBR was a life-line which shortly turned into a financial millstone around my neck.) Our payment on IBR was $0 per month, and I made all my payments on time, with no late fees. After a year, our income had risen only slightly, so IBR payments stayed at zero. Two years of on-time payments, 18 years to go (IBR stretches payments out to 20 years, and forgives the remaining balance at the end of 20 years). Then our income jumped as we started our third year, but our IBR jumped a modest $300 per month; still manageable.
In the fourth year, I really began to see the flaws of IBR. Our income increased significantly, so I expected to start paying down our loans. To my surprise, our student loan payment only bumped up to $600 per month. That wasn’t even enough to cover the interest and stop the loans from growing. With four years of on-time payments, but never paying enough touch the principle, our loan balance ballooned up to $215,000.
At this point, we were making some good money, and we started spending a little more liberally, since that’s what we thought we had to do. Luckily we didn’t get too fancy, but we indulged in a few more luxuries and trips, including a newer car for my wife and purchasing our first house. Even though we were making more, and paying more on our debt, the debt kept growing. And my stress level kept pace with the debt growth.
There had to be a better way.
One day, I read a short news article on early retirement. A light bulb went on in my head. I read more and more about the subject. I researched the math and investment strategies of early retirees, and began applying some of their principles. I figured out that I could live comfortably, but not frivolously, pay down more of my loans, invest the extra instead of spending it on things I didn’t really even want, and become financially independent after 10 years.
I had to tell everyone I knew. I told my other doctor friends. I told my financial advisor, my CPA, and my business coach. I told all my friends, and some relatives. When I spoke of a goal of early retirement, however, I was met with mostly glazed over looks. Many people asked with disdain, “What will you do with all that free time?” (I should have answered, “Whatever the heck I want!”, but instead it went with something like, “I dunno. Maybe I’ll be bored; it is just a goal. Maybe it won’t happen.”)
Quietly, we began putting my new found strategies into place. We stopped eating out except for occasional date nights, and instead cooked and ate most meals at home; we cut out cable; we cut out pointless shopping trips, and buy most of our clothes at Costco or kids clothes at consignment/thrift stores; I started riding my bike instead of driving some places; and we maximized our retirement investments to decrease our tax liabilities. I even started building my own furniture based on free online plans, and using some basic power tools I already had. And, although I was tempted, I didn’t get myself a new car; I still drive our old Japanese sedan that we had in college. Basically, we kept living like students even though we make a little bit more now.
At the point that I stopped from going over the financial cliff, I had saved up about $80,000 in a savings account (I know, I know; it loses money after inflation), so I decided to put that money to work. I started a company safe-harbor 401k, with a profit sharing option on top of our contributions. I started aggressively paying down my loans, and also investing some in ‘boring’ index funds, and some bond funds.
Over the past year, I have been able to lower my student loan debt to just under $150,000, invest $80,000 in our 401k, and invest just over $50,000 in index funds.
I know those numbers are partially the result of me being a high-earner. But I think they are also the result of our decreased spending over the past 18 months.
Since I own my practice, my salary is directly related to collections each month. With that variable salary in mind, controlling spending becomes the most important part of us building wealth. It doesn’t matter how much you make, just how much you keep. You can always outspend your earnings.
Rather than playing into leasing fancy cars and buying expensive toys, we have been able to slash away at some of the biggest stressors in our lives: our debts and lack of investments.
I am so glad I found out that high earnings can buy freedom, rather than just stuff. Freedom can last forever, but stuff is just tomorrow’s garbage.