Building the Debt Snowball

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After a trying divorce in which I found myself coming out “the victor”, I was blessed with a windfall of cashflow. I had made some financial mistakes in the past, and now I had two paths that lay in front of me:

  1. I could revert back to my former self and treat myself to an extravagant purchase (which I could have easily justified like I have in the past by saying I went through hell and I deserve to reward myself).
  2. Or I could take the path less traveled (and really one I never stepped foot on before) and set myself up for future financial success.

I chose the latter.

I began an aggressive campaign to dig myself out of debt. At this point I had three anchors weighing me down in my quest to financial freedom.

My primary home carried two mortgages (1st mortgage ($340k) at 30 yr 5.625% fixed and 2nd mortgage ($120k) at 15 year 7.95% fixed) and the balance of my medical student loans (approximately $108k at around 3%)

My plan of attack was to concentrate on the highest interest rate debt (2nd mortgage) first. I essentially paid the balance off with one fell swoop from the war chest I had accumulated.

I will tell you the feeling was incredible. To have a large chunk of my debt disappear like that gave me a high far more than a material purchase ever could.

It is true what they say about the hedonic treadmill. Materialistic things quickly lose their appeal as the shine wears off and your mind adapts to each new level of luxury.

But paying off debt was different. Instead of the endorphin rush wearing down with time, it actually created a desire to continue to attack my debt.

There were so many things (including interest generated from previous debt) in my past that quickly devoured any money I made and increased the load of debt I had to bear.

But now my mindset was changed. I became debt averse.

I didn’t want my banks or lenders to be rich. No, I wanted to be wealthy.

With my new found resolve, I proceeded to use all my available positive cash flow to help quash the negative cash flow that had been a major part of my life.

My debt snowball had begun, and it was rapidly gaining momentum. With money that had been earmarked for the 2nd mortgage payment now available to deploy elsewhere, I decided to tackle the dreaded medical school loan.

Astute readers may ponder why I would choose to first attack the debt with the lower face value interest rate.

My rationale was that when factoring the mortgage interest rate tax deduction on the primary mortgage this brought it very close to the same effective tax rate.

Given my income, I could not take advantage of a tax deduction on my student loan interest (in 2014 the phase out occurred with an adjusted gross income of $75k for single filers/$155k for joint).

A minor consideration was also the fact that student loans typically cannot be discharged in bankruptcy.

I eventually paid this financial anchor on May 22, 2014 (I was so proud of this accomplishment that I posted it on my Facebook page).

What was so significant about this date was that it was exactly 17 years to the day that I graduated medical school and received an MD, and almost 22 years when I first became indentured to Sallie Mae, et al.

With the primary home mortgage now in my sights, I rapidly saw the outstanding balance diminish.

And then it happened.

On April 16, 2015, the moment I had long been waiting for occurred. That magical zero appeared and I knew at that very moment I owned every blade of grass on my property.

I had been calling myself a homeowner for years, but prior to this was it really me who owned the property?

I went back to the original amortization schedule and by paying off the mortgage 20.5 years earlier than scheduled, I worked out that the interest I saved totaled $206k (that same amortization schedule showed that at year 9.5 of my mortgage repayment, I had already paid $180k of interest).

Even mowing the lawn felt different and gave me a renewed sense of accomplishment after the mortgage was paid off.

To this day, years later, it still feels wonderful to pull up into the house with the financial peace of mind that occurs when you have a paid off home.

Breaking free never felt so good. A week shy of my 44th birthday and just four years after a brutal and devastating divorce, I actually became debt free.

Now any cash flow coming to me was mine to deploy as I saw fit, and not already claimed by any lenders.

Now the internet is full of debate on whether one should pay off the mortgage early or instead invest that extra money. It all comes down to personal preference.

I would have definitely come out ahead by keeping my mortgage and instead investing all that money into a broad stock index fund given the huge bull run we experienced but this is using retrospection, where hindsight is always 20/20.

Even though I left money on the table by doing what I did, I still have no regrets paying off the mortgage and medical student loan.

There is untold value to having financial peace of mind.

Without debt obligation, changes that have occurred in medicine such as declining reimbursements, etc., do not have the impact they would have had on me.

But what about losing the mortgage interest tax deduction??!?!?!

I know some will argue that I lost a tax deduction (mortgage interest) by paying off my property fully.

As Jim Dahle from White Coat Investor would say, don’t let the Tax Tail wag the dog.

Even at the highest tax bracket you are essentially paying someone $1.00 in interest to get back $0.396 (or in 2018 and beyond, $0.37).

If you still fret about losing this deduction, I will make a deal with you: Fully pay off your mortgage (honestly even if you don’t it’s okay by me (that’s just the kind of guy I am)) and then for every $1,000 you send me I will write a check to you for $396 (which is very generous considering that is the pre-2018 highest tax bracket deduction possible).

And unlike the government that has currently capped the amount of interest you can deduct, I have no problem whatsoever making this valid for any amount.

Superpower take home points:

  1. Get off the hedonic treadmill and get more of an endorphin rush by following a Debt Snowball plan.

  • As you see your debt diminish the increased cashflow created by not servicing these debts can be applied to other debts quickly creating a cascade of debt paydown

2. Don’t underestimate the value of peace of mind of being debt free when considering to use available funds to invest versus debt paydown.

  • With no debt obligations tying you down you can capitalize on opportunities and not be forced to settle for a job you may not want to be in.

3. Although 30-year mortgages are tempting by allowing you to buy a bigger home with smaller monthly payments, I highly advise getting a 15-year mortgage at the longest.

  • Although my mortgage ended up being paid even earlier than that, if I was on the 15-year time schedule, I would have qualified for a lower initial interest rate as banks offer higher interest rates on the longer mortgages.
  • It is highly advisable to try and time your mortgage so that even at the longest time period it will be paid off by the time you anticipate retirement
  • The less fixed expenses you have in retirement, the more adaptable you are financially to weather financial downturns and prolong your retirement savings.

4. Don’t let the Tax Tail Wag the Dog. Keeping a mortgage just to claim a tax deduction on the interest paid is essentially getting a 63% loss (best case scenario) on your money.

The author has chosen to remain anonymous. They recently launched a finance and lifestyle blog called XRAYVSN: https://xrayvsn.com.

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