After four years of dental school, I walked out with 300K of student loan debt. Yes, you read that right — and I know I am not alone.
According to Experian’s 2019 Consumer Debt Study, “The average American carries an average personal debt of $90,460.”
I paid off the loan in less than 3 years.
Never give in to the thinking that your income is too low to pay off debt. It’s just an excuse. These methods work regardless of your income, regardless of whether you’re paying back 300K or $30,000 in student loan debt.
All you have to do is to take the first step.
Change Your Mentality About Money
To get started, you need first to change your mentality about money. Stop using, “But people use 30 years to pay off their loans all the time” as an excuse to make minimum payments every month. I used to think like that, and I’ve never been so wrong in my life.
After I worked like a maniac and paid off my 300K student loan debt in 3 years, I felt true independence. I started regaining love for my work again because I focused less on my paycheck and more on my patients. I felt less reliance on my work and, as a result, felt happier.
How did I change my mentality about money?
On my long commute to work every day, I listened to podcasts on achieving financial freedom. I subscribed to Youtube channels on the FIRE movement (financial independence, retire early). I joined Facebook groups that discussed saving and investing. My goal was to bombard myself with so much information about finances that paying off my loans early became the only option. I started to understand that every dollar I put into the loan at an interest rate of 6% is like investing with a 6% return. By increasing the positive energy around me, it gradually changed my mindset about money.
You’ll never be wealthy if you manage your money with a poor mentality.
At the same time, I also decreased the negative energy around me. I minimized interactions with materialistic friends, those who cared about what I wore and what I drove, those who believed that taking out loans was the “American way.”
I knew what I wanted.
Don’t let anyone else tell you otherwise.
Minimize Expenses: Be Creative with Alternatives
You will never pay off your loans if your expenses remain high, even if you make a lot of money. Jot down a list of all your expenses and tally up the costs. There are many convenient phone apps out there, so there is no excuse for not doing it.
Don’t ever think, “I don’t need to write it down. My expenses are minimal”. Do not depend on your brain. The simple act of jotting them down will make you realize how many expenses you have every month. Don’t forget to include small costs, such as your monthly subscription fees to magazines and Medium.
Next, go down that list one by one and categorize each expense. You have two choices. You can either get rid of it altogether or find a cheaper alternative.
It’s important to keep in mind that you don’t have to give up your quality of life to pay off debt. The key is to analyze your current lifestyle and challenge particular parts of it by finding creative alternatives. We often think we need to have something, or else we cannot survive. The truth is, when we start to challenge those thoughts, we realize that there will always be alternatives.
Make Payments Automatic
The key to paying back loans is to AUTOMATE, AUTOMATE, AUTOMATE! I allocate my monthly earnings into the following 4 categories.
1. Retirement Accounts
20% of your net earnings should automatically be routed into your retirement accounts like 401K or IRA every month. This is easily set up with your retirement plan servicer. This money should never even cross your eyes because once it does, you will want to spend it.
Invest the money into something simple with reliable results, like the S&P 500 or a total market index fund.
The key is to invest in something with consistent results that will motivate you to continue putting in money into your retirement accounts as you see the balance increase.
Take 10% of your earnings and automatically route it into an online savings account with a good interest rate. Savings accounts in a brick-and-mortar bank tend to have extremely low-interest rates, whereas some online savings accounts will offer as much as 2.2 % interest in a good economy. That is 2.2 % in a guaranteed return, not bad for a place to park your emergency fund.
Many Americans struggle to set up a six-month emergency fund, which is crucial to have when you lose your job or when a loved one gets sick.
With automation, you will be surprised to find how easy it is to set up and maintain your emergency fund. It’s all done without you even knowing it.
“As a general rule, you want to spend no more than 30 percent of your monthly income on housing.” — Elkins, 2018
A mortgage is usually the highest monthly cost. Most people complain that it’s taking up a considerable chunk of their earnings, but it really shouldn’t. If your mortgage is taking more than 30% of your monthly income, that means you have to do something about it.
Consider moving to a cheaper area and commuting more to work.
Rent out the rooms in your existing house. Most of us have a spare room, and by renting it out, it can easily supplement your mortgage, bringing it under that 30%.
Rent instead of buy. If you are struggling to keep a mortgage below 30% and can’t move to a cheaper area, it may be a good idea to rent first. After your loans are paid off, then buy the house you can afford.
Regardless of what you do, keeping a mortgage under 30% is an important decision you have to make. It doesn’t make sense to save and get rid of all your small expenses when your biggest expense is looming over the horizon. Otherwise, you will be in perpetual debt.
4. Student Loans/Debt
I dumped the remaining 40% of my earnings into my student loans/debt. At a whopping 40% allocation, any loan amount will be paid off quickly regardless of your income.
I started with 40% first, and then once I saw the huge number shrinking, it became a game to decrease the balance and made me want to put in more.
In the end, when I only have less than $50000 of debt left, I started taking the 10% that I put towards savings into my loans as well. This allowed my loans to be paid off even faster. After all, throwing money at a loan that charged me a 6% interest is better than saving it in a savings account with a 2.2% return.
The Snowball Method
I had 6 student loans that amounted to 300K debt, each with different loan amounts and slightly different interest rates.
How did I decide which loan to pay off first? Does the order matter? Of course, it does.
I used a method called the Snowball Method. The key to this method is to pay back the loan with the smallest balance first. Since those loans are easier to pay off, they give you motivation and confidence to quickly pay back the bigger loans.
“The idea is that you’ll gain momentum by watching debts disappear, as you would watching a snowball grow bigger and bigger, and that will motivate you to continue.” — Martin, 2018
Live Like a Resident
While you still have debt, live like a medical resident. In other words, live within your means.
When you graduate with a doctorate, people around you assume that you will be making the big bucks, buying a mansion, and driving a fancy car immediately after graduation. After all, you are a doctor, right? This can’t be further from the truth.
Doctors graduate with hundreds of thousands of dollars of student loans by graduation. To materialize the dreams that others have built for them, they rack up even more loans to maintain the “Doctor Image.” Sure, they make a lot of money. But their expenses are also costly to maintain.
If they are not careful, doctors are just as likely as the average person to file bankruptcy. Don’t give in to how others think you should live.
1. Don’t Buy Expensive Cars
One of the biggest mistakes I made was buying a brand new Mercedes Benz immediately after graduating from dental school. I regretted the decision until this day as I cringed at the costs of maintenance and replacement parts.
New cars depreciate as soon as you drive it out the lot. If you want a luxury car, get a used luxury car that’s less than a few years old.
Often, you are given a choice between a rebate if you pay cash or 0% financing. Always pay cash. I would pay cash even if it has 0% financing, and here’s why. By taking the cash option, you get an additional discount on the car price and more room for negotiation. By taking the 0% financing, you lose out on the rebate.
If you can’t afford to pay cash, chances are you weren’t ready financially to buy that car in the first place.
2. Hold Off on Buying a Huge House
Don’t give in to the conventional thinking that you need to buy a big house. You are not depriving yourself of the joy of having a huge house forever; you are simply holding it off until you are ready. Instead, buy a smaller house that you can rent out.
3. Invest in Items that You Will Use for a Long Time
Being financially responsible doesn’t mean you won’t get to shop ever again. It just means you are more careful in your decisions. If you are a lover of name brands, don’t buy everything in name brands. Instead, focus on items that you can use and will use for a long time. For me, those categories are often trench coats, shoes, and handbags. For example, I will buy a name brand trench coat in a neutral color to match many outfits in the future.
The two keys to quickly paying down debt are: automating the distribution of your paycheck and practicing delayed gratification. Through automation, we are hitting three birds with one stone. Your retirement, your emergency fund, and your debt are all taken care of without you even thinking about it.
Tackling down debt is not an easy task. Especially when you have 300K in student loan debt. It takes an initial action, discipline, and perseverance. There are many temptations in life, and by learning to walk away, it buys us some time to evaluate if the item is essential to us and if it will benefit us in the long term. In the end, the reward of paying down your debt is financial freedom, and it will be so worth it.
Disclaimer: “This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.”