Debt, Lifestyle, Retirement

No More Harvard Debt and Extreme Debt Payoff Strategies

Debt Freedom

I just finished reading No More Harvard Debt and I’ll admit that it’s close to the perfect blog. Author Joe Mihalic writes with personality, gives extensive details of his finances, and keeps it short by ending the blog once its served its purpose. It’s even better watching his evolution from a free-spending, career-obsessed bro to a frugal, outsider reevaluating life in the fast lane. I hope that when I reexamine this blog in the future that I’ll see a similar trend in myself!

One aspect of his journey that fascinated me was the extreme actions he took to meet his goal. Faced with $90,000 in debt that he wanted to pay off in 10 months, he paid off half of it by cashing in his retirement accounts and selling off two vehicles, a motorcycle and an SUV. Another $10,000 came from basically killing off his social life for a year and reducing his monthly entertainment expenses by $1000.  He even cancelled his auto collision insurance to save money, taking that risk upon himself.

These are such drastic measures, and the goal so huge, that it brings to mind the old quote from Arizona Senator Barry Goldwater, that “Extremism in the defense of liberty is no vice.”  Can one say the same holds true for personal finances, that extremism in the defense of personal freedom from debt and work constraints is no vice?  While it’s obvious that one should cut down on wasteful entertainment expenses, and that extra vehicles should be sold off (and wipe out the insurance and driving costs with them), how much further should we be willing to go?

If we are truly serious about early retirement, about eliminating debt and reducing our expenses to a minimum, should our 401k’s and IRA’s truly be sacrosanct from that effort? What’s the point, after all, of putting money away into an account that you can’t touch until you’re nearly 60 years old when you plan on retiring 20+ years earlier?  If we have a decent sized retirement account and that money is enough to pay off most of our debts, and if that money is the difference between spending $40,000 year versus $20,000, then are we not obligated to take that road and buy our freedom?

Personally, I am sorely tempted to make some changes along this line.  Here are some options:

  1. Cash my retirement account and eliminate my debts. Life would be much easier if I didn’t have to pay a $10,000 a year towards debt and could pursue other career options.
  2. Keep the account but stop putting money into it. I can then bank that revenue stream into my debt and pay it off months earlier and let my current holdings ride for the next 30 years until I really needed them, if ever.
  3. Since my company matches my retirement contributions up to 6% of my pay, I’ll lose thousands of dollars of free money if I stop contributing. However, I could still keep putting money in and reaping the benefits until I’m ready to make a big game-changing move like paying off my house, that Great White Shark of expenses.

No matter which option I pick, it seems really foolish to put in the maximum allowed amount for a 401k of $18,000 a year as the retirement industry suggests.  I could put that money into buying a rental property that would cover all of my living expenses. I would have no need for a retirement account if I never spend my own money.

Then there is the auto collision insurance. I’ve been thinking about getting rid of my own off and on because I haven’t had an accident in 16 years and my car is an old 2006 Honda Civic with 110,000 miles on it.  Why spend hundreds of dollars on insurance to cover a car that’s only worth between $4,800-$6,000 according to Kelly Blue Book? If your car gets dinged, you almost always pay for it anyways because you don’t want the insurance companies to jack up your rates after filing a claim.  If you take a moderate hit, you keep on driving the car because it’s so old and no one’s exactly admiring it anyways. In case of a serious accident, the cost to repair the damage would be nearly equal to the value of the vehicle, in which case the insurance would totally be worth it…but you can’t count on a tornado or tree to conveniently destroy your shit when you need it to!

That said, I also live in Minnesota and every year there are a few days where snow and freezing rain make the roads incredibly treacherous.  We have days where there are literally a hundred cars out of commission on the side of the road throughout the Twin Cities and, but for the grace of God, mine could easily be one of them.  I can’t pursue this move like Joe did, though if I lived any farther south I would do it in a heartbeat.

Another extreme move that Milhac pursued was revamping his social life. Until he got out of debt he mostly gave up on hanging out with friends on the weekend and flying cross country to visit family for the holidays.  By doing so, he dropped his monthly entertainment budget from $1,500 to $500, which by itself is enough money in many parts of the country to put people’s lives on a new trajectory!  Even in high cost of living areas with a serious nightlife, places like New York City or Los Angeles, this would create enough margin to make life way more comfortable. Wouldn’t it be worth giving up social circles for a year if it meant a lifetime of friendly, stress-free gatherings?

In my own life, I am pretty frugal when it comes to entertainment but this has grown this last month after I started seeing a girl I met online (will it last? Hope so!).  While I’m sure she’s actually a pretty cheap date when it comes down to it, there aren’t too many good activities when its zero degrees outside and you’re in a new relationship.  Browsing for some suggestions online,  it seems like 2/3 of ideas involve summer adventures, ¼ involve doing sexy things that we’re not ready for yet, another ¼ involve sporting events that neither she or I are particular fans of. I’ll have to wait until spring and summer rolls around to really make the most of what the area has to offer.

To conclude, Milhalic’s example shows why it’s important for everyone to think about what they are truly willing to sacrifice to make their early retirement dreams a possibility, as the most extreme options all involve some degree of risk. If you cash in your retirement accounts, you risk paying more in taxes and not having that money in the future. If you get rid of certain forms of insurance, you take on the risk of paying for things should an accident occur. You can also make extreme lifestyle decisions that may hurt your personal relationships too. All of them are worth thinking about if you can keep in mind that short term pain will lead to a lifetime of gain.

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