Today’s post addresses a reader’s question. Do you have a question you’d like me to answer? Contact me!
Recently I had a reader write to me asking for advice about their financial situation.
The reader has a lot of student loan debt, similar to the amount my wife had, and wanted to know whether they should focus on paying off their debt as quickly as possible or focus on living their life.
They want to start a family and buy a home in the near future, but worry their student loan debt may need their attention first.
I completely understand the situation this person is in as we paid off over $80,000 in student debt in just under 3 years.
However, no two situations are alike. Many people choose to live their lives in different ways.
The way I see it, this person has a couple of options. The first is to sacrifice now and pay the debt off as soon as possible.
The second is to pay the loans off over the life of the loan and live a modest life throughout the process.
Of course, there is a middle ground, but those are the two main decisions to start pondering.
Pay The Debt Off As Quick As Possible
We personally decided to attack the student loan debt and destroy it as quickly as possible. We didn’t want it hanging over our head.
The benefit of paying your debt off as fast as you can is once it is paid off, you won’t have to make another payment on it ever again.
That frees up your future cash flow for other adventures from the day you pay the loan off into the future. The downside is you’ll have to sacrifice in the short term to pay off the debt as quick as you can.
By paying off the debt sooner rather than later, we were able to open up many options in our lives that we never would have been able to have if we still had $80,000 of student loan debt.
However, we greatly sacrificed many things in our lives during those three years. We definitely didn’t live a lavish lifestyle during that time, but we lived a life we were accustomed to living as recent college graduates.
In the case of the reader, once the debt is paid off, they will have more cash flow available to save up for a down payment and to start a family. Of course, they’ll delay the start of their family and saving up for a down payment while they pay off their current debt.
Live A Modest Life With The Regular Loan Pay Off Schedule
The other option is to simply pay the loans as normal and live a more modest lifestyle until they’re paid off.
By choosing this option, no extra money will go toward paying down debt and that extra money can be used instead to help start a family or save up for a down payment.
During this entire time, payments will still need to be made on the original debt. The person won’t have as much free cash flow to reach their current goals.
They will be able to spend a bit more now, but over the full life of the loans they won’t have as much money available to use due to the interest they will continue paying over the life of the loan.
Some people are okay with paying interest in order to spread out large costs like school. That’s perfectly fine as long as you’re aware of the cost.
If interest rates are low and you have plenty of money to live on otherwise, it is a perfectly acceptable decision to make as long as the debt isn’t a bad type of debt.
However, I would never suggest incurring excessive amounts of debt based on your future earning potential. Additionally, I would strongly suggest that consumer debt, such as credit card debt, should never be an option to increase your lifestyle today.
Personally, I think mortgages, reasonable student debt and certain types of car loans are the only types of debt that should be incurred.
This option will free up some money to raise a family and buy a modest house in the nearer term. Unfortunately, they sacrifice the interest payments that could make you richer over the longer term.
They must decide which is more important to them and be comfortable with that decision.
Regardless Of Which Option You Choose Don’t Forget To Plan For Your Future
If you’re in a similar situation, you can weigh the pros and cons of each method yourself.
Whether you choose aggressive debt pay off or paying the loans according to the loan terms, don’t forget that the rest of your life must still be taken into account.
Don’t shortchange yourself by not saving for retirement or for your other future goals.
Life can be lived in moderation, no matter which path you choose. Personal finance is very personal, after all.
What would you do if you were in the reader’s situation? Would you pay the debt off quickly and sacrifice starting a family and buying a house in the short term, or would you pay the debt off slowly over time and start saving for a family and house?
Do you have a question you’d like me to answer? Contact me!