Discipline is the key

In contrast to what the “debt consolidation” or “debt relief” commercials would have you believe, there is no secret or easy formula for paying off debt. The mechanics however are quite simple. You figure out how much you owe, how much money you have available after taxes, how much you need to live a “bare minimum” lifestyle, and then you throw all the rest of the money at the debt month after month for years until it is gone. This does not require complicated math, but it does require a healthy dose of discipline.

Digging the hole

Throughout medical school and residency, my financial knowledge was nonexistent. I took out the maximum in federal student loans and even took an extra year to complete a research project through the NIH (extra year of tuition!). Despite a net worth plummeting into oblivion during this time, I purchased a $25,000 new car on credit, four $3000 bikes, ate out at “The Farm” in Park City, indulged in two trips to Maui, one trip to Mazatlán, and multiple weekend getaways in fancy hotels. I did not track my spending during this time, but I estimate it at around $30,000 per year. I did not save any money during residency and did not fund my Roth IRA (big mistake). Luckily, I somehow managed to get through all of this without any credit card debt or private loans.

Tallying up the damage

Near the end of my residency in 2014, I somehow stumbled upon the White Coat Investor and Dave Ramsey. I decided that the debt needed to be annihilated to have any chance of a secure future with options and freedom. I added up all of my debt, which came in over $400,000. This was exclusively federal educational debt, but it came with a bloated 6.8% interest rate.

Damage Control

Although I knew very little about personal finance at this point, I could calculate that 6.8% interest on $400,000 was around $28,000 per year. That seemed ridiculous, and around this time, student loan refinance companies such as DRB and Sofi were competing to refinance federal student loans. I applied with DRB and Sofi. Sofi came out the winner, offering me a 5 year 1.9% variable interest rate. I decided to take the risk on the variable rate, as fixed rates were 3.5% or higher. At 1.9%, I was now only wasting around $8,000 per year instead of $28,000 per year, which sounded like a huge win.

Developing the Plan

To be successful at anything in life, you must have a plan. The plan must be SMART, or Specific, Measurable, Attainable, Realistic, and Time-Based. Here’s how I developed my plan:

After 14 years of higher education (5 years of undergrad, 5 years of medical school, 4 years of residency), I had lined up my first job with a base salary of $250,000. I estimated my federal, state, and payroll taxes on this salary to be around $75,000. This meant that I had approximately $175,000 available for living expenses and paying off debt. Using an excel spreadsheet with various budget categories, I estimated that the bare-bones living expenses for my wife and I living in a high cost of living area would be around $40-50,000 per year. My wife also had a job making around $40,000 but she had around $20,000 worth of her own debt and we had decided to tackle our own debts separately. After living expenses, the amount available to pay down my debt was around $125,000/year, or around $10,000/month. Therefore, my initial goal was to pay off $400,000 worth of debt in 40 months, or around 3.5 years. I made an excel spreadsheet with a goal to pay $10,000 per month towards my loans. I updated the spreadsheet every month to keep myself motivated and on track. It looked something like this at the beginning:

Staying the course to the end

Again, the math is easy but the discipline is hard. As luck (opportunity? hard work?) would have it, I made some bonuses after my first year at my job, which allowed me to accelerate my student loan debt payoff to around 2.5 years. My wife took on a second job which helped her pay off her $20,000 debt in two years. We did NOT increase our base expenditures or lifestyle with the additional income, which all went towards paying off debt. We lived in a 1200 sq. foot apartment, paid off our cars, didn’t buy any new bikes (a big accomplishment), went out to eat no more often than once per month, usually at Qdoba, purchased items on Craiglist, shopped at Walmart, and did not take any exotic vacations. Of course, many people live more frugal lifestyles (Mr. Money Mustache lives on under $30,000 per year). However, in my estimation, some luxuries, like fruits, vegetables, outdoor gear, road trips, and a safe place to live, keep you rested, healthy, and energized to keep destroying the debt. It’s amazing how great it feels to finally hit submit on that last loan payment.

Your Turn

What do you think? How much debt have you paid off and how long did it take you? How do you keep yourself motivated?

Remember, it’s not about the money; it’s about the freedom.