2813: Debt Freedom Is Great But Payment Freedom Is Better by Chris on Financial Independence

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[00:00:58] [SPEAKER_00]: This is Optimal Finance Daily. Debt freedom is great, but payment freedom is better. By Chris of Keepthrifty.com. And I'm your host and personal finance enthusiast, Diana Merriam. Let's get right to today's post and start optimizing your life.

[00:01:20] [SPEAKER_00]: Debt freedom is great, but payment freedom is better. By Chris of Keepthrifty.com.

[00:01:28] [SPEAKER_00]: When we started this blog, we were debt-free other than our mortgage, which stood at $110,000.

[00:01:36] [SPEAKER_00]: A big part of our focus early on was achieving debt freedom. We viewed it as an intermediate step to financial independence and eagerly awaited the freeing feeling we'd have once we didn't owe anything to anyone.

[00:01:50] [SPEAKER_00]: Last summer, we sold our house and moved into an apartment. We used the proceeds to pay off our mortgage and fund our one-year mini-retirement, which just recently turned into two years.

[00:02:03] [SPEAKER_00]: With this move, we'd achieved the thing we'd been thinking about since the day we bought our house, nearly 10 years earlier.

[00:02:10] [SPEAKER_00]: We were 100% debt-free. We'd imagined the world of debt freedom to be a magical, carefree place.

[00:02:19] [SPEAKER_00]: So we waited for the feeling of joy, excitement, relief, and freedom to come.

[00:02:24] [SPEAKER_00]: Only that feeling never came.

[00:02:27] [SPEAKER_00]: There's still a line item.

[00:02:30] [SPEAKER_00]: We weren't paying interest, but the fact that we no longer owed any to anyone just didn't do that much for us.

[00:02:37] [SPEAKER_00]: It didn't take long to figure out why our newfound debt freedom wasn't a life-changing event.

[00:02:43] [SPEAKER_00]: When we compared our monthly budget for life in our house to our budget in an apartment, not much had changed.

[00:02:50] [SPEAKER_00]: We went from making a $936.55 a month mortgage payment, not counting the prepayments we were making on top, to making a $975 a month rent payment.

[00:03:04] [SPEAKER_00]: If you factor in property taxes and maintenance, our housing costs went down quite a bit, but we were still paying something.

[00:03:12] [SPEAKER_00]: And for the foreseeable future, that won't change.

[00:03:15] [SPEAKER_00]: The thing about our debt freedom that we had been so excited about wasn't about the end of paying interest.

[00:03:21] [SPEAKER_00]: It was about the end of paying for housing.

[00:03:24] [SPEAKER_00]: The magic of payment freedom.

[00:03:27] [SPEAKER_00]: Debt-free is a pretty ambiguous term.

[00:03:31] [SPEAKER_00]: It doesn't give insight into the amount of expense you have tied up in monthly obligations.

[00:03:37] [SPEAKER_00]: As an example, you could be debt-free, but still pay $2,500 a month in rent,

[00:03:42] [SPEAKER_00]: and still have $1,000 a month in car lease payments.

[00:03:46] [SPEAKER_00]: If I knew that I had those line items in my budget for the rest of my life,

[00:03:51] [SPEAKER_00]: I'd be wearing a really big frowny face all the time.

[00:03:54] [SPEAKER_00]: So if debt freedom wasn't the panacea, what are we really looking forward to?

[00:04:00] [SPEAKER_00]: The real excitement we had for paying off our mortgage was about eliminating a monthly expense.

[00:04:06] [SPEAKER_00]: Sure, we'd have to continue to pay our property tax and maintenance at various times throughout the year,

[00:04:11] [SPEAKER_00]: but having months where our shelter bill showed up as zero sounded magical.

[00:04:16] [SPEAKER_00]: As Jamie and I reflected on this, we realized what we were really after needed a new name,

[00:04:22] [SPEAKER_00]: payment freedom.

[00:04:24] [SPEAKER_00]: Payment freedom is the freedom you feel from the complete elimination of a line item in your budget.

[00:04:30] [SPEAKER_00]: No longer does that item drag down your ability to save month to month,

[00:04:35] [SPEAKER_00]: and no longer do you have to save up to fund that line item in retirement.

[00:04:40] [SPEAKER_00]: Pathways to payment freedom.

[00:04:43] [SPEAKER_00]: Sometimes debt freedom and payment freedom come at the same time,

[00:04:47] [SPEAKER_00]: like when you finish paying off a student loan or make the last payment on a mortgage or car that you still own.

[00:04:53] [SPEAKER_00]: But paying off a loan isn't the only pathway to payment freedom.

[00:04:56] [SPEAKER_00]: You can get there by eliminating the expense altogether.

[00:05:00] [SPEAKER_00]: As an example, consider cutting the cord.

[00:05:03] [SPEAKER_00]: You'll not only eliminate your $50 per month cable bill,

[00:05:07] [SPEAKER_00]: but you'll also reduce your retirement savings target by $15,000.

[00:05:12] [SPEAKER_00]: Another way to achieve payment freedom is to find a sustainable passive source of funds

[00:05:17] [SPEAKER_00]: to cover the expense altogether.

[00:05:20] [SPEAKER_00]: Examples include,

[00:05:21] [SPEAKER_00]: If you have a rental property that generates $1,000 a month in profit,

[00:05:25] [SPEAKER_00]: you could consider that property as the pathway to grocery payment freedom for $1,000 a month grocery bill.

[00:05:32] [SPEAKER_00]: Your retirement investments of $120,000 would generate $4,800 a year using the 4% safe withdrawal rate.

[00:05:41] [SPEAKER_00]: That's $400 per month of expenses that your retirement investments cover.

[00:05:46] [SPEAKER_00]: Financial independence as 100% payment freedom.

[00:05:50] [SPEAKER_00]: In the end, the reason we were excited about debt freedom wasn't because it was debt.

[00:05:56] [SPEAKER_00]: It was because we were increasing our percentage of payment freedom.

[00:06:00] [SPEAKER_00]: Looking at it from this perspective,

[00:06:02] [SPEAKER_00]: you can view financial independence as achieving 100% payment freedom.

[00:06:07] [SPEAKER_00]: Payment freedom calculators let you see what percentage payment freedom

[00:06:11] [SPEAKER_00]: coverage you have based on passive income sources and safe money generated from retirement assets.

[00:06:17] [SPEAKER_00]: By plugging in the numbers,

[00:06:19] [SPEAKER_00]: you'll see how much of your retirement expenses you've got covered.

[00:06:22] [SPEAKER_00]: The awesome part here is that you can easily see the factors you can change to improve your percentage.

[00:06:28] [SPEAKER_00]: So you can increase your investments by contributing more,

[00:06:32] [SPEAKER_00]: or you can reduce your expected expenses by paying off debt and keeping the asset if there is one,

[00:06:38] [SPEAKER_00]: eliminating unnecessary expenses,

[00:06:41] [SPEAKER_00]: and optimizing your spending on the things you can't eliminate, like food.

[00:06:45] [SPEAKER_00]: Improve your expected investment return rate by choosing investments with lower fees,

[00:06:51] [SPEAKER_00]: such as index funds,

[00:06:52] [SPEAKER_00]: and increase your safe withdrawal rate by keeping backup plans in mind, like a part-time job.

[00:06:58] [SPEAKER_00]: Our progress.

[00:07:00] [SPEAKER_00]: Currently, our hypothetical payment freedom coverage is 16.1%.

[00:07:05] [SPEAKER_00]: We plan to get back into home ownership and pay off our mortgage quickly.

[00:07:09] [SPEAKER_00]: So we should see a big jump in our progress once we get there.

[00:07:13] [SPEAKER_00]: In addition, we'll keep contributing to our retirement accounts,

[00:07:17] [SPEAKER_00]: chipping away at our percentage over time.

[00:07:19] [SPEAKER_00]: Along the way, we'll continue to examine our expenses to see what we can eliminate.

[00:07:24] [SPEAKER_00]: Every little bit counts in getting us to that magical 100% mark.

[00:07:33] [SPEAKER_00]: You just listened to the post titled,

[00:07:35] [SPEAKER_00]: Debt freedom is great, but payment freedom is better.

[00:07:38] [SPEAKER_00]: By Chris of Keepthrifty.com.

[00:07:41] [SPEAKER_00]: And I'll be right back with my commentary.

[00:07:44] [SPEAKER_00]: I think we can all recognize that it's going to cost money simply to exist, right?

[00:07:50] [SPEAKER_00]: We're going to have basic expenses for things like housing and food that will never go away.

[00:07:55] [SPEAKER_00]: Even if you have a paid off house, you're still going to pay property taxes,

[00:07:59] [SPEAKER_00]: which will continue to rise, maintenance costs, and insurance.

[00:08:04] [SPEAKER_00]: Similarly, even on my paid off car, I still pay for gas and oil changes.

[00:08:08] [SPEAKER_00]: But I had a different experience than what Chris describes here.

[00:08:12] [SPEAKER_00]: When I got out of 30 grand of debt in 11 months, I was completely elated.

[00:08:17] [SPEAKER_00]: I think it's because I eliminated the kind of debt that actually removed the line item,

[00:08:23] [SPEAKER_00]: namely credit card and student loan debt.

[00:08:25] [SPEAKER_00]: But I think we can learn to get satisfaction from optimizing the expenses in the areas of housing,

[00:08:31] [SPEAKER_00]: transportation, and food, even if we can't eliminate them completely.

[00:08:35] [SPEAKER_00]: It's a good feeling to know that you're being creative and resourceful about getting your needs met,

[00:08:41] [SPEAKER_00]: and you're getting as much value as possible when you do spend your hard-earned dollars.

[00:08:47] [SPEAKER_00]: Optimizing expenses is just a nice way of saying reducing expenses,

[00:08:52] [SPEAKER_00]: which for many people brings up thoughts of deprivation.

[00:08:55] [SPEAKER_00]: I would encourage you to experiment with reducing your expenses

[00:08:59] [SPEAKER_00]: during a time when you have a good, steady income.

[00:09:03] [SPEAKER_00]: Internally imposed restriction can feel like a fun experiment if you let it.

[00:09:08] [SPEAKER_00]: But if it's externally imposed due to a job loss or health scare,

[00:09:12] [SPEAKER_00]: it's not going to be as fun.

[00:09:14] [SPEAKER_00]: That should do it for another edition of Optimal Finance Daily.

[00:09:18] [SPEAKER_00]: Have a great rest of your day, and I'll see you on the Wednesday show tomorrow,

[00:09:22] [SPEAKER_00]: where your optimal life awaits.

[00:09:23] [SPEAKER_00]: END