Financial independence is a goal that many people strive for. Two-thirds of Americans would rather be doing something else with their time than showing up to work. In this episode, I’m going to cover the FIRE movement and why people want to achieve it.
Also, how can you achieve FIRE when you’re juggling 6-figures of student loan debt? It’s definitely possible, and I’ll go over some ways that you can make it happen despite your massive loan debt.
In today’s episode, you’ll find out:
- What does it mean to be financially independent?
- Why financial independence is not just a dream
- What if you are in a situation where you owe more than double your income?
- 10% or 20% of the population will be forced into retirement because of health problems
- Are your monthly memberships and your subscriptions worth it?
- Should you contribute as much as possible to your 401K?
- What kind of thoughts should you have when buying a car?
- Does actually loving your job affect any of this FIRE movement thinking?
- Paula Pant’s interview with Suze Orman
- Root of Good
- Go Curry Cracker
- 1500 Days
- Our Next Life
- Mr. Money Mustache Forum
- Your Money or Your Life
- Physician On Fire
- Mad Fientist
Like the show? There are several ways you can help!
Feeling helpless when it comes to your student loans?
- Try our free student loan calculator
- Check out the refinancing bonuses we negotiated
- Book your custom student loan plan
Episode 8 Transcript
Travis Hornsby: Welcome to the Student Loan Planner® podcast. This is Travis Hornsby, founder of StudentLoanPlanner.com.
What is the FIRE movement?
Travis: Today I want to talk about financial independence. Financial independence is a topic that’s been really heavily in the news lately. You’ve got stories about Suze Orman on Paula Pant’s Afford Anything podcast that was talking about how she hates the FIRE movement. Well, what is the FIRE movement?
Travis: Maybe you’ve seen it in the Wall Street Journal, The New York Times, or The Washington Post. It’s really been everywhere lately. So I thought I would take some time to just talk about what it is and how it applies to people like yourself who might have a lot of student loan debt. Fire stands for financial independence retire early this fire movement acronym F I R E kind of got coined in the early 2010s maybe a little bit before that. It’s hard to pin down the exact origin but you know everybody just started calling it that kind of like how old the millennial generation just finally got nicknamed that.
Your money or your life
Travis: So the FIRE movement started off kind of in the fringes. I don’t want to be impolite or anything but Vicki Robin is more of a free spirit. She wrote a book along with another fellow that kind of started the idea behind it. It’s called Your Money or Your Life. And this book basically says that if you buy a $20,000 car and you make $60,000 a year then what you just traded for that car was four months of you going into the office and having a job you didn’t trade $20,000 you traded your time hence Your Money or Your Life.
Travis: So if you think about buying a car what you are really doing to it’s not trading $20,000 of your $60,000 salary. It’s really trading. $20,000 for your $45,000 salary because of taxes. So then when you look at the cost of buying a new car it’s really more like say five or six months of your take home pay five or six months of your life that you’re trading to drive whenever you’re driving. What if you could instead drive a $5,000. It’s paid for in cash maybe a 2011 Hyundai Sonata with 100,000 miles for example. It’s safe enough to drive on the interstate, doesn’t rumble and freak you out when you’re driving around. It’s not unsafe. It’s got side curtain airbags right. The transmission and engine work OK needs some regular maintenance which is not too difficult to do so that $5,000 compared to the $20,000 car might have saved you three or four months of your life.
Travis: How about driving an older car now. How does that make you feel? Now a lot of people think that financial independence is kind of a silly concept especially if you enjoy your job which is the best kind of situation to be in. By the way, if you enjoy your job you’re in a situation where you don’t have to worry about wanting to quit and feeling like you’re doing the wrong thing with your life or you’re depressed or you don’t enjoy going to work if you enjoy your job if you like what you do. That’s good. About two thirds of Americans either don’t care for their job that much or don’t really enjoy it.
People would rather be doing something else then showing up to work
Travis: Which is really kind of concerning right. Two-thirds of Americans would rather be doing something else with their time than showing up to work. You know even one of my family members who recently graduated from college said Travis it really kind of stinks feeling like this is what I have to do with my life just going into the job and punching my clock so to speak and doing kind of something similar every day and doing something that I’m not super passionate about. So whether or not you love your job don’t like your job or you just think of it as math you just like it. Financial independence is something that might be able to help you out. So what does it mean to be financially independent to be able to say that you do not have to work? That’s what financial independence really is not needing to work for money to hit that level to hit that threshold.
Importance of investing to receive financial independence
Travis: You need 25 times your annual expenses in investments. So investments mean a brokerage account which is taxable investment money that you didn’t get any kind of special deductions on. That’s not a retirement account includes your retirement accounts or you’re for a 401K or IRA. Things like that and your bank accounts your savings account your home equity your business equity. That kind of thing. That’s your assets. Subtract your liabilities and that’s equal to your net worth.
Travis: So if your net worth is twenty five times your annual spending then you are financially independent and you do not need to work. You do not rely on your paycheck to make a living. Let’s look at an example. Pretend we have a veterinarian with $80,000 of income. If she were to retire completely right now to maintain that $80,000 lifestyle she would need 25 times that which is equal to two million dollars. That might be a tall order and maybe that thousand dollar a year veterinarian is a good saver. Maybe she only spends forty thousand dollars a year. In that case, she would need 25 times for expenses and 40,000 which is equal to a million. Now let me ask you this how long would it take for a veterinarian to hit a million dollars. Well, let’s think about it.
Travis: If you had the ability to maximize your 401K that would allow you to put aside about $19,000 starting in 2019. That’s the maximum contribution that you can make as an employee to a 401K plan that would give you about over 10 years about $190,000 of contributed money. That would probably grow with the market too. If you maximize your 401K every year that gets you about 25 to 30% percent of the way there towards financial independence. If you have about 25 to 30% of the way there you still have a long way to go.
Travis: Now what if that battery and put aside a couple thousand dollars a month in a brokerage account outside of retirement. In addition to what she’s doing for retirement that might give her to forty thousand of contributed money but maybe more like 350,000 to 400,000 of actual account balance at the end of the 10 years. So now she’s up to maybe 60 to 65% of the way there to the million that she needs to be financially independent.
Travis: What if this veterinarian increased her income? Perhaps she would become the practice owner. She doesn’t qualify for the typical practice loan where she gets conventional financing she looks to the small business administration to get a loan and she puts 10% down on a veterinary practice. Maybe the practice is a little bit smaller than the typical practice that’s bought out by the corporate partners out there. So she is able to buy a $500,000 vet practice over 10 year time she pays down this practice loan and then now she has a $500,000 asset plus whatever the appreciated value of that practices in 10 years.
Travis: So if she buys the practice over time and grows income that way she might be able to hit over a million dollars in 10 years and have enough to be financially independent. Now here’s the big catch. I showed you how the math works but what if you are a dentist a chiropractor a veterinarian lawyer a physician a natural path a doctor an acupuncturist an air traffic controller. Some of the random professions that have over six figures of student loan debt.
What if you owe double your income?
Travis: What if you are in a situation where you owe more than double your income? In that kind of a scenario, you need to think about going for loan forgiveness. When you go for loan forgiveness you’re doing 20 to 25 years you’re paying a percentage of your income about 10% let’s say. So some of your income gets eaten up by that and at the end, you owe taxes on that forgiving balance. So as a general rule if you have about let’s say you have $300,000 student loan debt and your household income is around $100,000 but maybe you file separately for taxes so you’re only paying on your income which is say $50,000. So in that case you have taxes of about $260,000 all at once in 2038. In general the very worst your tax forms probably going to be is approximately equal to what you actually owe. . It’s probably going to be less than that because of the way the student loan repayment math works. But if you prepare for the three hundred thousand you’ll be in good shape.
Travis: So if you have $500,000 due to loan debt plan on a $500,000 tax bomb you’ll probably be good. Now what does that mean for financial independence for not having to work? Remember that I said in this veterinarian that we’ve talked about with the $80,000 a year job spending $40,000 needs a million dollars to have financial independence to make work optional. If she had $400,000 in student loan debt then she probably needs conservatively maybe $300,000 for the tax bomb, but maybe say $400,000 In this case she would need about four hundred thousand dollars extra for her tax bomb to feel comfortable at the point where the loans are actually due at the end where the tax forms actually do at the very end of the 20 to 25 years which means in 10 years she would probably need about half of that because of investment returns. In other words, if she had $150,000 or $200,000 on top of that million then she could be financially independent because her student loan payments are always tied to her income.
Travis early years
Travis: So if she stops working or works a lot less or reduces her hours then she’s going to have an ability to walk away way earlier than she thought. Now, what does this mean in practice the financial independence movement of the fire movement is something that I got into a lot myself. So when I was twenty two years old I went to work for a big investment company. I went through a rotational type program and then I was a bond trader for a couple of years. That paid well I was able to have a savings rate that was probably like 70% of my take home pay.
Travis: I socked away a lot of money and my main thing in that point in my life was I wanted to have some adventure. So I quit my job at 25 and traveled around the world and didn’t really have any plans to go back to traditional corporate America. At that point which was kind of you know people thought I was crazy and it was simply because I found out about this financial independence movement where I had enough money saved up right and have to work for at least about 10 years. I wasn’t fully financially independent but I had enough to take risks in my life that were more exhilarating and thrilling and exciting.
Working on financial independence movement with a spouse
Travis: So at that point where I traveled around the world I realized like you know this is not the life that I want necessarily forever I’d like to have a family I’d like to meet someone I’d like to maybe get married one day and have kids. So I met my now wife around that time and now we are working towards financial independence together. But she’s not exactly that interested in the financial independence movement. She cares a lot about being passionate in her job and working to help others because she’s a physician and she really loves what she does. So if that’s you don’t feel like the financial independence movement is not for you just because you don’t like the idea of walking away from your job you don’t have to. So the fire acronym financial independence retire early the retire early part is what gets the most heat because what that part means is people who retire from their jobs at like 30 or 40 years old or forty five or something like that and then the media is like well this person’s really selfish for quitting their job and not doing work and you know just swanning off around the world when they have family and friends that they are kind of ignoring or obligations that they’re ignoring or something like that. It doesn’t have to be retiring early from your job.
What exactly is financial independence?
Travis: What it does mean though is when you hit the financial independence point. Financial independence is just freedom from financial worry. Financial independence is having enough money where if your boss comes in and says hey we’re going to make you work until 8:00 p.m. instead of 6:00 p.m. because we just need those hours covered and we’re going to make you take on more patients we’re going to cut your lunch break smaller we’re going to eliminate your vacation time a little bit we’re going to make you do more work. That’s not really compensated that fairly then what you can do if you’re financially independent is say you know I’m just not going to do that. Thanks but no thanks. So one of the people I know that went down this road of student loans hit financial independence is the guys on the Choose FI podcast.
Travis: So one of them is a pharmacist and he paid down all of his student loan debt and then he realized that he could be financially independent. So he worked towards having enough saved to not have to work. And at some point, his boss gave him some kind of not too great requests and he just said you know this job doesn’t work for me anymore I’m done. So what I want to show you is that even if you have a ton of student loan debt it’s still possible to achieve financial security for your life.
Travis: Now let’s talk a little about how the financial independence movement. So say you want to be financially secure. Say the idea of retiring in your 30s or 40s is really exciting but you think that that’s just not possible. The student loan debt or maybe hitting a point where you no longer have to worry about money before your fiftieth birthday. Super exciting. In that case, you’ve got to have a high savings rate which means you’ve got to save more than twenty five percent of what your take home pay is with your pseudo loans. The first thing that I would want you to do is regardless if you’re going to pay down your loans or go for forgiveness I want you to think about your retirement savings.
Travis: I want you to take advantage of your pre-tax retirement accounts and maximize those. And then if you still have not you know you spent all the money that you’ve got to spend on retirement then you could also do a Roth IRA or you can do a backdoor Roth IRA and put away an additional five hundred dollars a year per person by the way. So you can do your $19,000 contribution to your 401K in 2019 and then I believe the Roth IRA contribution might even be going up too. But you could contribute about roughly $25,000 total to retirement savings.
Travis: After that if you’re going for forgiveness you’re going for more of the tax bomb approach you’re paying as little as you can on your student loans and you’re putting money into the brokerage account for the tax bomb if that’s you then what you would do there is with your broker count you would want to put more money than you actually have to put away for the taxes in that same brokerage account. So, for example, say that you need to put aside five dollars a month for your tax bomb. Then you would want to be putting aside more like a thousand dollars a month just to be safe but also to have extra money left or leftover so that you could spend it when you’re older.
Buying a home
Travis: So if you wanted to be financially independent then let’s have an as high of a savings rate as possible without missing into any of the fun stuff. So from my experience, most people live in a space that is larger, nicer, in a fancier neighborhood than they absolutely have to have. Also, another thing people do is a lot of people will go ahead and buy a property that is before what they actually need. They’ll deal buy ahead of time so, for example, you have a couple of kids you know you want to have a couple of kids and so you buy a home that’s a four bedroom three bath in a good school district that you buy it when the kids are still in preschool you buy it when the kids are maybe not even born yet. For example. So rather than do that what’s probably a little bit more efficient is to work your way up to what you actually need. So if you were married and you know you might only be needing one bedroom apartment right if you don’t have any dependents if you really have to have a two bedroom OK that’s fine.
Travis: You know I guess people want to visit you and you want to have space for family and friends visit things like that. So when you do have kids though try to resist the urge to buy the very top into the house that you want to buy. You know the TV industrial complex has people chomping at the bit to drop three times or three and a half times their combined income on a house because it’s basically manufactured.
Travis: What we’re supposed to be spending our money on mentally if you think about the house in America that that exists out there and a lot of places asylum and almost affordable to have a house anymore. It’s the American dream to have a home. But a lot of times it’s very very difficult to buy one and still make a good financial choice because homes and a lot of cases are not necessarily great financial investments at the very best they might increase in inflation long term at a national level. If you happen to buy a house in like Austin Texas or Seattle or Portland or California at the right time then you might be sitting on like 50% gains in your home price.
Travis: So you might think that buying a house is the best thing you could possibly do. But with rising interest rates and the new Trump tax bill with the interest that is no longer deductible of some hundred fifty thousand for a mortgage, this could face a lot of headwinds in the home markets that are around the country right now. That’s not a good thing. So if you want to be financially independent buy a house it’s no more than two times your joint income. Don’t spend more money than you have to own your home because that means you’re going to spend more money on maintenance on repairs on everything from lawn care to plumbers to everything that goes wrong with the house that you’re now responsible for also you’ll spend more money on property tax insurance etc. I’m not saying go and live in a shack. Please don’t hear that. I’m simply saying that if you’re making one $100,000 as a family rather than buy a $350,000 house which is what you’ll get approved for buy a $200,000 house. If you cannot find a $200,000 house that you like then rent instead of buy. It’s not a good investment to take out a 30-year mortgage and to buy a home in a high cost of living area. That’s just a recipe for working until you’re 65 to 70.
Travis: There’s nothing wrong with that. If that’s what you enjoy I know it’s still in play and we don’t make any judgments on your lifestyle. That’s not our job. Our job is to make sure that you have every option available to you to live the life that you want to live. So that’s the first step is. Control your housing expense. Now for your cars.
Buying a vehicle
Travis: So many people out there they like to drive brand new vehicles. They like to lease them. They buy them at the dealer for 0% APR or 1% APR and you think you’re getting a good deal. Well here’s how there’s trickery involved with that.
Travis: If I took a $1,000 couch and gave you zero percent financing but I marked it up to a $2,000 couch that a good deal is that a good interest rate? The answer is of course not. So if I own the financing arm especially then I could mark up an item way above the actual costs and production charge. Artificially low interest rate to make you think that you’re getting a good steal of a deal.
Travis: And then I kind of trap you in that cycle by having these high car payments which prevent you from ever building up an emergency fund that you would need to be able to pay cash for a vehicle which is the concerning part. Right. So for the second big thing that keeps people from being financially dependent is your vehicle choice. If you buy the five thousand dollar car in cash you’ll be well on your way to financial independence.
Travis: However if you lease the brand new model every couple years and pay three hundred dollars a month and you believe that’s a good decision then that’s actually lighting money and fire and blowing it up. It’s wasting money because you’re buying a depreciating asset and you could actually drive a vehicle. It’s paid off for probably five to 10 years and then still sell it for probably $2,000 at the end of it. So if you buy a $5,000 car it’s pretty much never going to get below $2,0000 dollars in value for a very long time. So you have a very minimal depreciation you just have the cost of ownership.
Travis: Well yeah you might have a slightly higher cost of ownership on a five thousand year car than a twenty dollar car but you’d be surprised. There’s also higher expenses involved with owning a newer car like higher insurance costs. And you know it seems whenever something seems to break to be quite honest with you it seems to a lot of cases cost more. Like when I had a 2004 Honda Civic when something broke it was like a manual switch that we just had to replace. I had a 2000 and something Chevy Equinox that had all the bells and whistles on it and when the mirror got smashed off that was around exam time and I was in college and these I think guys one of their fraternity houses took it and just knocked off a lot of people’s driver’s side windows are mirrors and so that was a $450 fix for a mirror. And I was that good golly you know maybe what I should do is just go literally buy a Wal-Mart mirror and use some duct tape and then I have the driver’s side mirror.
Travis: My parents weren’t in love with that idea and so they made sure that I got the $450 mirror because it had the electronics in there to adjust it upward it down or left or right you know. And then the Honda Civic that I had that was adjustable by my hand. My Honda Civic it had the little roll down windows to it. You remember those means a lot of folks that are my age probably never even seen one of those except when they were kids. But they don’t break. You know you don’t have as many problems with them they’re a lot easier to fix. So I’m not saying go drive a dinosaur. I’m just saying that if you take a positive attitude towards driving an older vehicle instead of a oh shoot I would love to be driving the new model.
Travis: This is so embarrassing to be driving in 2011 then that’s going to enable you to increase your savings rate probably by 10% of your income. A lot of cases though housing the cars. What about other hacks to achieve financial independence.
Be smart grocery shopping
Travis: If you have a grocery bill that’s over $400 a month listen up you can shop at a place called all these that’s available and a lot of cities it’s run by a German company in the same company I think that has Trader Joe’s but don’t quote me on that. They will pretty much get you out of there for almost an unlimited amount of food for less than a $100 each time you go. So my wife and I like to go to all these and shop there and it’s amazing how cheap the groceries are compared to a place like Whole Foods. Don’t get me wrong we go to Whole Foods too but when we go to Whole Foods we try to go for specialty items. We go walk there and maybe get like a gallon of apple cider or something like that. Whereas with all these you know we can go and buy a bunch of meat chicken breasts turkey breasts vegetables frozen fruit. Really the works. And it always seems to somehow be super cheap because it’s just a very efficient store.
Travis: So if you’re gonna buy groceries buy in a smart way rather than just throwing another thing in the basket. I think that you should absolutely splurge on certain things you love. Like for me, it’s going to be kind of weird but I have this dollar coconut water that I love to buy whenever I go to grocery stores that have it. It’s not healthy it’s not necessarily a good use of money but it’s a buck and it just it’s a little fun thing that I do is a tradition that makes me happy. You know that dollar is it that makes me happy for even a short amount of time. That’s a pretty good investment contrast that dollar. Coconut water or maybe your three dollar latte or your six dollars Chipotle bowl or your $20 nice dinner out when you know kind of a modest expense place. Then look at that compared to that housing costs that we talked about. Housing costs will always destroy somebody who is frugal with their lattes but not with their housing.
Cut expenses when you can
Travis: I’ve never seen somebody that can drink so many lattes where they can justify cutting that out you know to save money to spend more money on the house and basically like the latte effective just “oh just cut out your Starbucks”. That doesn’t really make that big of an impact. No there is such a thing as death by a thousand cuts. If you have all kinds of leakage in your budget where you’re just throwing money on everything and you’ve got the cross fit membership you’ve got that membership. You got the New Yorker subscription The New York Times subscription the economists description the Wall Street Journal subscription right.
Travis: You probably have a ton of memberships that you’re not even really utilizing that much like think about your Spotify, your Netflix, your Hulu accounts, your cable a lot of times your internet packages. You know when is the last time you looked at how many things were being charged on your credit card and monthly recurring basis. The software as a service model that’s like SAS it’s kind of a business that a lot of people get into. It’s super profitable because a lot of times you just get people signed up for an automatic recurring monthly charge. And people are just so desensitized to it and it’s just a recurring revenue that’s like an annuity. And I just last the last and last and people don’t even realize they’re paying in a lot of cases. So that’s why your Spotify is your Netflix of the world that’s why they charge the monthly payment. And that’s why they started out charging a low monthly payment because they desensitize you to paying it.
Travis: And so when they raise the price from say $15 a month to $29 a month which they’ll do at some point then you’re used to paying that monthly fee and you’re like oh you know $15 versus $29 I think that doesn’t sound like that big increase. But then if you make that on an annual basis then actually that’s a pretty significant jump. So look at your memberships and your subscriptions and ask yourself which of these ones and my actually using it which ones should I cancel.
Travis: Now we’ve done housing we’ve done cars we’ve done food. What about other things in your life.
Travis: Clothes should be fairly straightforward. You can buy very cheap very high-quality clothes now. So I’d spend a lot of money on your clothes. And the idea that you will have them for a very long time or if you’re going to be really into fashion. You know my wife really loves fashion. She buys tons of stuff from Hazaras Yeah you know fast fashion kind of places that you can buy online and it’s fairly cheap. She has shifted more to the invested in my stuff strategy but I have to admit my favorite jeans are like $20 jeans like old navy or Walmart.
Travis: Wrangler Jeans and they don’t necessarily look super fancy but it enables me to have very comfortable pants that look OK and it’s not going to get me thrown out of any restaurants right and I’m able to wear those for a long time and it saves me a lot of money. So that’s how I kind of keep my clothing expense kind of low for other things in your life. You know try to go to the movies on the night where they give you a discount. When you go on vacation try to find that special deal on the airline miles that you can get if you travel have credit cards tried to fly a budget airline like we took while air to Paris and so our flights were like 700 hours round trip for two people.
Travis: It’s pretty amazing to Paris from the Midwest there are so many hacks to increase your savings rate now you’re going to lose 10 percent of your discretionary income your student loans if you’re going for a forgiveness strategy that is roughly equivalent to 7% of your pre-tax earnings. If you account for the deduction on average so you will lose that. Now if you’re trying to pay back your loans really fast, by all means, do so. Get rid of the debt as fast as you can. The only thing that I would say is try to put money into retirement accounts even while you’re paying down your debt because you can’t go back in time and get rid of your debt and put the money into the retirement accounts.
Travis: You didn’t put in while you’re trying to pay down your debt and if you have a deal on debt that you need to refinance get a two hundred to two thousand dollar cashback bonus by going to studentloanplanner.com/refi and you’ll get bonuses that range depending on the season but they’re anywhere from hundreds of dollars to even well over a thousand dollars for refinancing your pseudo loans and getting a lower interest rate which will get you out of debt sooner.
Student loan debt
Travis: So if you need to pay back your student loan debt please do. I’m not saying you shouldn’t go for forgiveness strategy. And that doesn’t suggest a forgiveness strategy is the right thing to do. I’m simply saying that OK 7% of your debt are if your income rather let’s just say that that’s eaten up based off of having still loan debt so you have ninety three percent leftover of your pre-tax salary to do something with. So say you lose 15%. Taxes might be 20%. So now you have about let’s just say 70 to 75% of your pre-tax salary available to you. 70 to 75% on average. To do things with if you can be very bare bones and live off of say 40 or 50 thousand a year if you are making over six figures which a lot of people are if you’re you know a physician or a dentist or something like that and especially if you have a spouse is also earning money then you can get financial independence very quickly. But the high savings rate, in fact, a lot of you that are going for the Public Service Loan Forgiveness program that do not have to deal with a tax bomb.
Travis: All you have to worry about is paying the 10 percent of your income payment and then your loans are forgiven so you can hit financial independence probably a lot easier in 10 years. And then the PSLF program kicks in and you no longer have to worry about your. Student loan debt. So a lot of you physicians out there could be financially independent coming out of residency. You maybe have $60,000 in salary and then you have your attending salary let’s say that’s two hundred fifty thousand. Well if you sock away 60% of that and you live like a resident for say four or five years after training you’ll have your PSLF kick in and you will put away a lot of money for investments. And so you might have several hundred thousand dollars at the end of PSLF maybe worth a couple more years and then you could be done with medicine forever if you were going to live like a teacher because you’d be financially independent because you’re one million dollars of assets throws off let’s say 4% a year of spendable income.
Travis: So that’s $40,000 is 4% of a million. So if you spend$40,00 a year then you could go into medicine and be done in 10 years. Now my wife will remind me that I do not go to math and she does not go to medical school this is her talking usually she’ll say like I did not go to medical school and then go to residency and then go to fellowship just hang up my cleats and say I’m done after a short working career that’s not what I wanted to do. That’s not why I got into medicine. And I understand that I’m not saying that you have to do that. I’m simply saying that imagine if she was financially dependent and she could go to her boss and say you know I want more vacation this year. Right.
Some people can’t so no to extra work
Travis: Or imagine if you could go to your boss and say you know I really want to work three days a week instead of five or hey you know what. I’m just not going to work on Saturdays. I had a lot of dental associates they get called in every other Saturday to do work and they’re only making $120,000 year because they’re in saturated areas with tons and tons of dentists and they don’t have the ability to say no because they need the money and they want to live there. And that higher cost of living area where they don’t need dentist is bad so a few more examples because I’m a big believer in examples.
Travis: Let’s say you have a couple as three hundred thousand is still on and we’ll say to have about $50,000 of income each. We’ll say that only one of the spouses has the debt. So they file separately for income taxes and then their payments for the pay as you earn plan, for example, would be only $60,000 over 20 years.
Travis: Their tax bomb would be about $264,000. So how long would it take them to reach financial independence and could they reach financial independence? So we’ll say that they have that hundred thousand other income that grows at about inflation. We’ll say that their savings rate is 40% and that they would like to have seventy thousand a year spendable money in retirement. So at the point of the tax bomb in 2038 20 years from now if they had 40% of their after student loan payment money that their savings that’s roughly like thirty seven thousand a year or so after taking into account the student loan payment then their net worth would be about one point four million after paying the tax bomb and they could live off of about fifty-seven thousand dollars per year of income at that point. Now we’re not exactly adjusting for inflation here and doing all that.
Travis: This is really illustrative purposes but this is still really interesting to think about. This is even possible.
What would happen with a 50% savings rate?
Travis: So what if we changed the math around a little bit. What if we said instead of 40 percent savings rate we would have them do 50 percent savings rate. In that case, they’d have one point eight million instead of one point four and then they would be able to live off of seventy-five thousand a year in 2038. So they would hit their goal. So despite having three hundred thousand dollars as your loan debt the better decision for them would be to put the money into investments instead and grow their wealth and then they could be financially dependent 20 years after they started working. Well, a lot of people finish four-year type programs at twenty-six years old. Maybe that’s you because you went out of undergrad and went straight into the four-year program. Some people take a little bit of time off from undergrad and they go back. So a lot of people will start making real money after their training.
Travis: Around 30 let’s say if you took a few years off. So in 20 years beyond that then you’d be late 40s early 50s to be financially independent at that point is the perfect time because that’s when you will probably want to be able to help support your kids to go to college or to have more flexibility in your life about round when you retire. Because a lot of people let’s be frank a lot of us will not have an option of when to retire. We’re going to be forced into retirement because we won’t be able to do what we like anymore and that’s unfortunate but it’s true that a certain percentage of us maybe 10 or 20% will be forced into retirement because of health problems. So if you’re forced into retirement because of health problems you want to have been a very good saver so that you have the adequate resources to not feel strapped in retirement. So the additional savings from 40% to 50% savings rate makes a big difference.
Travis: It allows you to have more money socked away so that you can achieve the financial goals that you want to. Now at a certain point, the better solution is also to frankly just go earn more money because if you’re making $50,000 a year you’re going for loan forgiveness. So this is really an example of somebody let’s say this is like a teacher making 50 thousand married to let’s say a natural path or a chiropractor with $300,000 of student debt who is also making about $50,000. So this couple is a very typical couple they might not be able to increase their incomes very much. But let’s say that this is a different scenario. Let’s say that the couple has a different kind of debt. So we’ll say that they are an orthodontist and a pediatric dentist with both who both have loans and we’ll say that they have a million dollars of student loan debt combined.
Travis: And we’ll say that their income is $225,000 for the orthodontist. And we’ll say about $180,000 for the pediatric dentist so in this scenario, their tax bomb at the end would be about $750,0000 on their million dollars of student loan debt but their combined income at $225,000 plus $180,000 is about a little over $ 400,000. So if they had a 50% savings rate. Over. 20 years they would have an amazing absolutely amazing. Some at the end of those 20 years. So they save half of their income and they’re making $400,000. Then at the end of that 20 year period, they would have roughly $7.7 Million They could live off of $309,000 in income. And you would have to of course pay that giant tax bond payment. Right. So you would actually lose about $750,000 of that towards the tax bomb but you wouldn’t care because you’d be super financially independent. Right.
High savings rate and retiring early
Travis: What if they tried to retire earlier? What If they were comfortable with living off of say $60,000 a year? So in that case with a high savings rate with making so much money, they could have hit a point where they would have over 1.5 Million they need to live off of $60,000 because 1.5 Million times 4% is about $60,000 so that they would pass that in 2024. If we’re assuming they’re starting today putting all that savings away. So they still need an additional amount to set aside for the tax bomb so they might work until 2025 when they have a little over two million dollars roughly two million dollars. So the one point five would be allocated for their living and then the rest would be allocated towards the tax bomb. Now here’s a unique problem and a unique question how many high-income professionals that are making foreigners thousand dollars a year combined.
Travis: How many of those people are comfortable living off of $60,000 a year. The reality is not very many because if you’re making that much money you probably have friends that make a similar amount of money too. And that means it’s keeping up with the Joneses. You want to do the private schools the fancy trips you want to enjoy the fruits of your labor so you got to eat. That’s OK. There’s nothing wrong with that. I’m simply saying that you have a lot more options than you think. So if $60,000 is too of retirement and you’d rather have one hundred thousand then you have a hundred thousand dollars to deal with financial independence you’d have to have about 2.5 million if you put away 50% of your income at this income level then you would hit financial independence in a little under 10 years. And if you did the full 10 years you’d have enough for the tax bomb and for living on a $100,000 a year. So this is what the high savings rate and to be frank.
Travis: You know you’re losing 7% APR after the deduction for your student loans. So it’s 10% it is your discretionary income. So that’s your adjusted gross income on your tax return minus a deduction for your family size. So you would have this couple hundred thousand dollars a year of savings you probably have to live off of like 50 or 60 thousand to achieve this 50% savings rate because you’d have very high taxes too. But if you are smart with your money if you buy a practice like a dental practice then you could shield a lot of that from taxes and grow your wealth that way. So I simply want you to know that a lot of things are possible. So if you’re a teacher you’re probably really good at saving because you don’t necessarily have that much that you need to spend money on because you’re used to living on a $50,000 a year salary.
Travis: So in your case as a teacher you can actually hit financial dependents too and not have to work unless you wanted to because you could simply have your 20 or $30,0000 that you live off of the amount that you need to put money away for. So you could put aside 25 times thirty thousand you know that would say roughly $750,000 and if you had seven or fifty thousand if you have a $50,000 income you probably are at a very low tax bracket and you frankly could pick up some extra shifts or some extra work. You know a lot of the teachers that we talked to they’re doing PSLF but they’re also picking up shifts on the summer doing other kinds of jobs to make some extra money in some cases we even have people with degrees that are advanced professional degrees.
Travis: They decided they just wanted to be a teacher because it just didn’t enjoy the field anymore and they still have the big debt that Public Service Loan Forgiveness is a program that you can use in any, not for profit or government employer. So they are in an extreme case. I even heard of somebody doing emergency relief work as a veterinarian during the summers while they’re doing teaching during the school year. I had heard of people doing side work as a practitioner of whatever their degree is and while they’re also being a teacher Public Service Loan Forgiveness.
Our student loan consult service
Travis: So no matter if you have$50,000 of loans you need to pay this down very quickly or you have $500,000 of loans that need to go for loan forgiveness. You can achieve this amazing point in your life where you don’t have to work unless you absolutely want to. So there are some resources here that I want to share with you if this is interesting to you. The first is you know our student loan consulting service is really designed around achieving whatever it is you want to achieve in your life and show you how to get there with your student loan debt and managing it the right way. So if you’re like wow this is amazing. I really want to find out how.
Travis: What are the next steps and how I can do this even though I have a ton of student loan debt that’s as big as a mortgage then book a plan with studentloanplanner.com/c/book. It’s like $300 to $600 depending on the debt that you have. And you’ll talk to one of our CFP or CFA professionals that are going to help you understand what to do with your loans and if you want more ideas on how to get that help and what that help looks like. You can go to studentloanplanner.com/help and get an idea of what our service is like and what it entails. Once included and things like that. Now if you are interested in this you probably want to read more Web sites and listen to more podcasts than just this one.
Great financial independence podcasts
Travis: This podcast is just targeted towards people who have a lot of student loan debt. So I’m approaching it from your vantage point on your evening financial troubles that are not necessarily addressed in other podcasts that are targeted at a broader audience. So if you’re listening to podcasts I would suggest the Choose FI podcast it’s one of my favorite. I was on that show actually. I think it’s episode 78. You can just type in Travis Hornsby choose five and listen to that episodes by one of the better ones that I’ve done. There’s another podcast too called the fire drill podcast. It’s a couple of friends of mine Jay and Gwen is what they go by and they’re really interesting people just one of them’s a tech worker one of them’s a former corporate America kind of employee both taking on different takes on financial independence and what that looks like. There is the bigger pockets money show which is also a really good podcast especially if you like real estate in terms of other Web sites to check out Mrmoneymustache.com is the one that allowed me to realize that I could not work unless I wanted to.
Financial independence blogs
Travis: There is other ones too if you’re a professional like physician on fire is a very popular one. The person who owns that site is a good friend of mine and I think that his site is really an excellent resource for anybody that’s interested in financial independence.
Travis: There’s I’m just gonna rapid fire mentioned a few. You can look up Mad Fientist if you like spreadsheets Frugal Woods if you like moving to the middle of nowhere in the Northeast and building a log cabin in the woods Early Retirement Extreme. If you want to live on $80,000 a year in an RV in the middle of the woods and have the most extreme frugal lifestyle you’ve ever dreamed of which is I think a little bit too hardcore for really anybody including me.
Travis: What is the simple way to manage your own money and not have to pay a professional to trust that they’re going to do it for you. Root of Good is another good one, Go Curry Cracker. With Go Curry Cracker, I think the guy in the relationship was a Microsoft worker. I forget what the what is what his wife’s profession was but they’re good people and they travel all around the world and go to like Taiwan they go to Asia they go to Latin America they’re you know in the US sometimes in Europe they’re all over the place and they do it with like 2 year old too. So if you have kids even to learn how to be financially dependent that’s a pretty cool one.
Travis: 1500 Hundred Days, Our Next Life, is couple that just retired recently, early retirement now, millennial revolution, millennial boss, and also millennial revolution I should say is really hilarious especially if you have any friends that are in Canada because they viciously attacked the cult of home ownership is what they call it which is kind of interesting. And if you want to check out some forums there is the choose FI Facebook group.
Travis: There’s Mr. Money Mustache forum. There’s also a Reddit that’s dedicated to financial independence. So I would check that out too if you’re interested in learning about financial independence and just the idea of not having to be worried about working anymore. It’s really amazing freedom when you realize you don’t need to rely on your paycheck to live anymore financially. It’s really cool.
Financial independence books
Travis: A few books that you could check out the richest man in Babylon talks about some more philosophical things. Your Money or Your Life. We mentioned that the Millionaire Next Door is great if you want to realize the people who are actually rich or not at all the Hollywood and professional athlete types that the media kind of tends to focus on. It’s a lot of times that person who owns a mobile home dealing business that wears blue jeans to work. That’s your typical millionaire. It’s really kind of interesting. A Random Walk Down Wall Street. If you want to learn about investing and why it’s very difficult for even people that are super smart to pick stocks and know how to make more money than the traditional index funds the simple path to wealth is a great book about index funds and learning how to manage those a couple other ones here. That would be coming out.
Travis: So I actually have a book. It’s not a very good book. But 25 is a new 65 if you want to see how crazy I was back in the day. It’s on Amazon for $0.99. So you know you won’t break the bank either but the most important thing to realize is there are so many resources out there it’s never been easier to get so many hacks on life from everything from health care expenses, to travel expenses, to how to cover your student loan payments. It’s just amazing out there.
Travis: I hope this episode’s been fun had some kind of life-changing ideas in here that you might not thought about before. And I want you to get a Student Loan. Plan.
Travis: I think that would be in your best interest to do that unless it’s you’re an obvious refinancing case so reach out to [email protected] If you have any comments or ideas or want to talk about what’s going on in your life and to see if we might be able to help you. Please feel free to email us and reach out. Know that financial independence is not just a dream. It can be a reality might take a little while you might have to sacrifice some things along the way to get there but it could be one of the most rewarding decisions you ever make because if you’re not in your calling right now or you want the option to have a calling that you fulfill later in life that is not what you’re meant to do right now. Then you want to try to be financially secure. It’s very important to think big picture on this. To think about how do you best use the limited time you have on this earth to have the maximum impact or whatever is most important to you. So I hope you’ve enjoyed this episode. If you want to hear anything please reach out to me please share your this podcast with friends. And until next time get a plan for your student loans and don’t stick your head in the sand.