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In my about me page, I mentioned that my fiancé and I carried $65,000 student debt since 2011.
So, the good news is that we did it!
We paid off our $20,000 student debt in ONE shot!
Finally… the day we’ve been waiting for!
On Sunday, we logged online and paid off $20,000 in cash. Screw the goal of April 2018. We just went ahead and killed that sucker ASAP!
Now, we have to work on increasing our liquidity for 2018.
Shout out to Damn Millennial again for the encouragement!
What the hell were we thinking?
Now, you must be wondering what the heck took us so long just to pay off our student loans. You’re also probably wondering why on earth we would be willing to pay the minimum balance for seven years!
The answer: leverage.
I’ll admit that our view of “borrowing” student loans to invest was a bit out of whack compared to most others’ views. I mean, just pay the damn thing off, right?
Seven years ago, we were thinking:
“Yeahhhhhhh… but nah!”
The timeline of our lingering student debt
We were young and fearless.
And there’s no right or wrong answer to this. However, I know a majority of the PF community may not be fond of what we did either — acknowledged.
Anyway, at age 23/24, we took risks and wanted to leverage cheap money while we were still young. We were aware that things could go belly-up, but we had faith in the markets.
With that said, we started investing in both our TFSAs and RRSPs to take advantage of our investment horizon.
At that age, we thought:
“Meh… we still have a long horizon. If we lose, we have potential to earn it back. We may as well start splurging on stocks now. Why start later?”
Not to mention, we were also able to reduce our income using the loans’ interest expense. Hence lowering the effective interest rate at which we borrowed.
Overall, we were aware that market returns are never guaranteed and looking back, I think we had a pretty odd mindset.
More cautious today
Despite the rosiness of today’s markets, I think it’s about time we pull back a bit.
Gosh, looking at our most updated net worth, we’re at risk of losing everything should there be a perfect storm!
Tom’s post, Surviving The 2002 -2007 Bull Market Hangover (Part 2), encouraged me to think about how I’ll be able to survive the next bear market.
That’s why I took a step back and wrote a recent post called Fail-proof Ways To Pay Off Our Debt in 2018. In other words, our goal for 2018 is to lower our leverage and build some cash to reduce our risks.
Anddddddddd… that’s why we made our first move to kill the $20,000 student loans, which was also our highest interest debt.
For the past seven years, our single stock picks are up (like, what isn’t up??), and we invested most of our money in low-fee ETFs (exchange-traded funds) that track S&P 500, NASDAQ, financials, and US small caps. Read here to see some of our other holdings.
There was even a time where I was holding a leveraged ETF that tracks S&P 500 X2. That means that each percentage gain in the index would yield me double the return. But the reverse is also true, so it’s a double edge sword, guys!
Note that these ETFs’ fees are higher due to the leverage strategies used. So, it’s something I would stay away from today. Again, I don’t know what I was thinking back then…
We also converted some of our CAD to USD when it was closer to par so that we could buy more US holdings. As a result, we experienced both currency and market returns! Say wha???
Of course, thanks to quantitative easing (QE) during the Ben Bernanke days, we’ve been nothing but lucky with the inflated stock markets.
And more recently, we’ve also been lucky with the overall appreciation of USD against CAD.
HONESTLY, we had faith in the markets, but we didn’t expect it to rise that high and so fast!
I admit that ALL of this was purely dumb luck!
And… we also had some bad luck…
We made bad investment choices with two energy stocks by speculating in the short term. But we accepted the loss and moved on.
In hindsight, we were likely better off allocating this $10,000 investment into our student debt.
We lost at least 60% (~$6,000) of its value. And thank goodness we sold it because we would’ve lost over 80% of its value today.
But instead of viewing $6,000 as a loss, we view it as another form of investment. That is, we paid $6,000 to learn a real-life lesson.
From that lesson, we learned to:
– Minimize single stock picks
– Avoid speculation
– Automate some investments (DCA approach)
– Only buy single stocks that we can see ourselves holding forever
– Get over FOMO (fear of missing out) because there will always be future opportunities
From 2014 to 2017, we STILL didn’t pay off our student loans! WTH??
Fast forward few years, we STILL never thought about paying off our student loans. We could’ve, probably should’ve, but didn’t.
Instead, we continued to dump money into index funds and stocks. For goodness sake, we even bought a house and an investment property before paying off our student loans!
*shamefully hiding my face*
In addition to that, we were still somewhat mindlessly spending on stuff (a bit of a YOLO mindset). As the usual, we were throwing only 35% to 40% of our income into the markets.
So, we weren’t living above our means, and we were pretty frugal to a degree. We also thought that we were good at saving money because we would look for deals and price match.
But compared to the stories we started reading on the FIRE (financial freedom retire early) community, we realized that we weren’t as frugal as we thought. We also realized that we totally sucked at saving compared to these folks (see our next point). Shame on us!
We did not have a mindset of “FIRE” nor did we know what that was. At that time, we were just working, living, spending normally, and investing hoping we could be financially independent by maybe mid-40s?
To be honest, we don’t know what was going on in our minds. We were just too focused on thinking about business ideas, and at the same time, pouring more money into the markets…
During the last quarter of 2016, we learned how to save more thanks to the FIRE community
Between ages 23 to 28, all we did was spend and invest. Living in a busy city like Toronto, it’s hard not to spend!
To be honest, although we were investing and trying to increase our salaries, we should’ve allocated some of our spending money towards student debt.
Again, we weren’t spending more than we make, nor did we have any credit card debt. We just enjoyed buying experience, treating friends and family, buying finer things, eating out, and hanging out with people. In other words, we just wanted to have fun!
Lesson learned — this “fun at the moment” costs you a $hit load of money in the future. Not to say you shouldn’t have fun (and yes, at the very least we were saving and investing), but I think we could’ve managed our money better.
Sadly, our net worth would’ve been better if we were a little smarter with our spending.
Overall, we learned from this mistake so we started saving smartly. And that means no more LV bags!
The sad part is a few of my handbags could have been my student loan payments…
Emergency Fund? What Emergency Fund??
In regards to an emergency fund, we barely had one. All we had was a few thousand dollars in each of our checking accounts (and maybe a protein tub of “emergency” money in nickels and dimes) because everything went into investing or spending.
In other words, most of our money was tied to the house and our investments. Sad, but true.
So, yeah… if we weren’t even thinking about an “emergency fund” then there’s no way we were thinking about paying off our student loans! But fortunately, we took action at the beginning of this year. As we started to build more cash in our accounts, the thought of paying off our student debt crossed our minds.
Man, it feels good that we just paid it off two days ago, haha!
Lesson learned — always have a sizable emergency fund in case $hit happens! As a result, we started building more emergency money for the year, and we’re still working at it.
Too much leverage?
In addition to homeownership, we mentioned that we also invested in an investment property. Overall, we wanted to test the water to see if real estate investing was a right fit for us.
With all that said, the idea of paying off our student debt just wasn’t our priority. At that time, we believed that the interest cost was worth the potential gains of real estate investing (yes, yes… a lot of risks involved).
It sounds crazy, right? Instead of paying off our student loans, we decided to take on more debt hoping to generate assets.
Overall, we got spoiled seeing the bulls run year after year — particularly in 2013 when the S&P 500 was up by a whopping 30%!
We also experienced a crazy housing market in Toronto where we saw double-digit increases each year up until April 2017.
Guys, after so many years of gains, when’s our next bear market??
Now we’re also seeing rate hikes everywhere. The US hiked three times this year while Canada hiked twice — another reason why we’re aiming to reduce our leverage ratio by 10% for next year.
Be prepared because more hawkish moves may come…
Soooooooooo, I think it’s about time that my fiance and I adjust our expectations. Having said that, we want to reduce our debt to asset ratio to ~38-40% and build more cash for 2018.
We don’t know how much cash we should save, but it’s something we’ll have to think about over the next few months.
Note, however, that we will continue to invest in the markets, but limited to only our automatic monthly contributions.
So far, we accomplished our first baby step, and that is paying off $20,000 of our student loans before 2018!
Again, thanks, Damn Millennial for the encouragement!
Overall, our lingering student loans brought us some luck, but it also taught us valuable life lessons that you don’t learn in school.
And here’s a recap of those lessons.
1) It’s okay to take risks, but be smart about it:
The younger you start, the more volatility you can withstand. But I admit that we were nuts for prioritizing investing over everything else, such as building a sizable emergency fund, and paying off some student debt when we had the option to.
Overall, you can have it all. You just need to find the right balance. But we went overboard with investing and got lucky that the markets didn’t tank.
So, it’s okay to take risks. Just have some cushion to fall back on by taking calculated risks.
2) Spend less:
Despite using student debt as a leverage, had we spent less, we could’ve allocated that money towards our student loans. Yes, I’m also talking to you, handbags!! (I admit that I still love ya though!)
Now we can see that spending too much has delayed our student loan payment. It also probably robbed a chunk of our future. I’m sure we would’ve been just as happy even if we reduced our spending by as little as 10%.
3) Understand your investments:
Instead of investing $10,000 into some speculative stocks and losing $6,000, we could’ve paid off part of our student loans.
But at the very least, we view this $6,000 as another form of investment. We paid this amount to learn NOT to speculate on short-term gains. And we also learned that we should only buy single stocks that we understand. Not to mention, this event encouraged us to look into dollar cost averaging as well.
So, was this experience worth $6,000??
4) Avoid FOMO (fear of missing out)
Our $6,000 lesson above taught us to avoid the fear of missing out. We jumped in without researching what the heck we were “investing” (ahem, I mean speculating) in.
There will always be plenty of opportunities, so don’t rush into anything!
5) Reduce our leverage:
We’re still firm believers of using leverage to your advantage, but with caution.
It has almost been a decade since the 2008 financial crisis. No one can predict what will happen, but it doesn’t hurt to start reducing our leverage and build more cash aside. In other words, the bulls were fun to hang out with, but I think it’s time for us to reduce our risks.
Over to you
I hope you guys learned something from our experience of delaying our student loans. Feel free to share any mistakes you’ve made in the past. It’s fun to hear and learn from your stories!