When working with new clients planning for retirement, I always start with eliminating debt because retiring debt-free is of primary importance. After that, we work on shoring up emergency reserves and verifying that the client is saving enough to meet their projected retirement lifestyle. Once those basics of retirement are covered, we then focus on what we call “new opportunities.” These opportunities could be travel, a second home or building a portfolio for future unknown opportunities.
We want clients to be debt-free because retirement is not just about a portfolio’s rate of return. It’s about cash flow. Living debt-free creates a healthier lifestyle overall, but especially in retirement. Clients that are debt free tell us they have a lot less anxiety about market volatility and money in general.
Dave Ramsey has a saying, “Live like no one else today, so you can live like no one else tomorrow.” Living debt-free and retiring debt-free is a mindset that is very different from the accepted mainstream approach promoted today. All the noise out there at the moment suggests investing for double digit returns while carrying low-cost debt. This sounds great for the hedge fund manager, but it’s a pretty risky venture for an individual. There are times when debt make sense for an income generating property or for the ultra-high net worth or possibly for a second or third home. For everyone else, however, your primary lifestyle should be lived debt free, even free of 0% loans. In retirement, this only increases and includes your mortgage. You can read more on why we think you should go into retirement mortgage free in this blog. Living a payment free lifestyle allows you to be free to take that trip, help that family member, and build wealth. Living life free of payment slavery means there’s less going out and more staying in to grow.
To start working your way to the desirable debt-free club, you simply need to list out your debts in order from smallest to largest. Note the interest rate and minimum monthly payment. I see many clients sending extra money to each debt, but it’s more efficient to simply take all extra funds and apply them to one debt at a time. This gives you traction on eliminating a payment faster. Once you have that one payment eliminated, you take that payment plus your extra payments, add them together and apply them to the next lowest balance. This is called the debt snowball method. Another technique is the avalanche method where you pay off the highest interest rate first. I personally like the quick wins of the snowball, but the avalanche method could have you paying the smallest amount of interest overall.
Now, with no more payments going out, more money can flow into your retirement and brokerage accounts and really start to grow. Plus, with a debt-free lifestyle you get to be in control of your money and focus on the things you dream about doing like building a legacy for future generations, spending more on travel, or maybe just sitting at home in peace.