Eliminate your student loans, escape the debt trap and create wealth

John Cook
John Cook
Nov 10 · 8 min read

“I used to care what people thought about me until I tried to pay my bills with their opinions” — Unknown

It has been 90 days. No, i’m not talking about sobriety, the elimination of junk food, or how many days in a row i’ve meditated (all pretty cool goals). The 90 days i’m referencing is a financial disease which impacts 80% of Americans: student loan debt. It has been over 90 days since i’ve paid off over $170,000 of student loan debt and embarked on a journey of debt freedom and wealth creation.

In the middle of a pandemic, economic uncertainty, a sideways stock market, and rising unemployment, being debt free..not owing anyone anything..being able to use your income to invest/save/give is the saving grace that has kept my wife and I sane in an insane 2020. I’ve thought alot about how to best summarize my journey towards debt freedom and wealth creation into a series of “actionable” bullet points that one can apply in their day-to-day journey towards debt freedom. I am convinced that if an individual who is currently in any type of consumer debt were to apply these “actionable bullet points” into their lives, they would be on a path towards debt freedom in 12 to 24 months.

My rationale is that the framework of actions i’ve outlined is incredibly simple to understand. There’s no rocket science, the math is 2nd grade at best, and it’s not a checklist of nebulous “you can do it I believe in you” qualitative nonsense. The framework of actionable insights i’ve outlined is a comprehensive list of life style, economic, and financial adjustments that force you to focus on one goal at a time and move everything else to the back burner.

Simple to understand. Hard to follow.

If anything, this plan fails not because it is “simple to understand”, but rather because it’s “hard to follow”. It’s hard to follow because it clearly defies the norms and standards so prevalent in our modern relationship with money. “Good debt”, “car leases”, “make minimum payments and invest the difference”, “always take the 401k match”..it’s all lies. Lies perpetuated by financial institutions to keep poor people poor and the middle class from climbing the socioeconomic ladder. I encourage you to forgo this traditional advice pushed by mainstream America because mainstream America is broke. 8 out of 10 Americans can’t afford their next emergency. 1 out of 4 Americans have more in debt than in retirement. The average car payment is $508/month on a 72 month car note. The list goes on and on. Why would anyone want to take advice from this segment of the population?

The framework outlined below isn’t something that I necessarily created, I’m sure you’ve seen it echoed by others in one form or another. Rather, it’s a series of “financial life lessons” which have been bestowed onto me by a few ‘self-made millionaire’ mentors who have graciously entered my life to serve as my north star for wealth creation. And..it’s working..like crazy.

My hope in summarizing my lessons learned & advice given from wealthy mentors is to provide a clear path to debt freedom to those who are in any type of debt. There is a way out, a set of rules which outline the path freedom financially, mentally and spiritually. I am not saying that money buys happiness, but what I am saying is that when you have no money, money sure as hell solves alot of problems. Let this framework serve as your catalyst to eliminating your student loans, escaping the debt trap and creating wealth.

Rules for eliminating your student loans, escaping the debt trap and creating wealth

1. If you do not understand how interest is calculated on your student loans, you will never get out of debt.

When I was in $170,000 my student loan debt was accruing $27 of interest per day and $815 of interest per month. It was insane. Learn how to calculate your daily and monthly interest rate. I’ve outlined steps and examples in the two posts below:

2. There is a real opportunity cost associated with student loan interest deductions, and you need to know it.

Deducting student loan interest on your tax return is at best, bad math, and at worse, a terrible long term solution to wealth creation. The math never works, never. There is no scenario in which it is more advantageous to deduct loan interest on your tax return instead of paying it off. I’ve outlined the specific steps on calculating the potential tax savings vs amount paid in tax below:

3. The true cost of your car loan is over $5 million, and it’s also why you’re broke.

Avoid all car loans, leases and any type of automotive payment plan. If you took your car loan + monthly insurance premium (example: $608/month for 48 months) and instead invested it into an ETF or money market fund, by the time you retire you’d have almost $5.2 million dollars. This is straight line math and compound interest. When you run the numbers for your loan, you ALWAYS LOSE MONEY. Here’s the calculations, apply it to your car loan and see the insanity.

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4. The FICO score is not a measurement of wealth, it is a measurement of your ability to accumulate and pay off debt

Do you think you can live a life without credit cards? Make a conscious decision and leave the credit rat-race, your FICO score isn’t worth it. You’ve now seen the data, what really happens to your credit score when you close it. In 2018 I actually had around $105,000 of available credit, outlined below:

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By end of year 2018, I reduced my available lines of credit to zero. I closed all of my credit card accounts. I challenge you to embrace a life without credit card debt, a life of living within in your means, a life of spending less than what you make, and a life of freedom — by saying no to credit cards. Outlined below, are the steps and “what happens next”.

5. The government will not forgive your debt, so pay them as little as possible by refinancing

Although I am not an advocate for reducing minimum monthly payments on debt as a result of refinancing with an extended payoff window, there is value in refinancing high interest student loans into a consolidated single lender option. This is a risk/reward scenario and you will need to know how to calculate cost savings across various refi lenders before pulling trigger. Here’s an example of an analysis I performed when I was considering refinancing options. Read this guide if you’re unsure how to do it yourself

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6. The first step to wealth creation isn’t making more money, it’s controlling the money you make.

At its core, creating a personal budget is telling your money what to do, ideally before the start of the month. How many times have you asked yourself “Where the hell did my money go?”, or think to yourself ” I thought I had more money in my bank account”. Those statements used to run through my mind…often. I thought the answer to this problem was to make more money. I thought that by making more money I wouldn’t have to worry about where my money went, because I’d have plenty of it! I was wrong. I can’t tell you if money buys happiness, but I can tell you that money will make you more of what you already are. Do you spend alot of money? Terrible with managing a budget? Money will only magnify these challenges. Alternatively, if you’re great with money, an astute investor, or philanthropist, money will highlight these strengths. My conclusion is that more money alone will not fix poor spending habits. What fixed my spending habits and turned my income into a powerhouse was a personal budget.

Below is an example of a budget template that needs to be retrofitted for your financial life. The specific numbers aren’t important, nor are the categories. What’s important is that every dollar of income is allocated to a category, with an overweight to your debt.

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We’ve written quite a bit on budget fundamentals, rules for budgeting, and budget examples. For those who need a crash course on how to set up a zero-based budget, start here:

Conclusion:

I’ve come to realization that becoming wealthy is hard, but staying broke is also hard. We have an option to “choose our hard”, and 10 out of 10 times, we collectively choose the path of wealth, for ourselves, for our family and our generation. Need more help, not sure where to start? Start at step 1, you can do it. If you need more help, drop a note in the reply section or check out the Educated but Broke book on amazon. The book goes into much greater detail (over 120 pages) on how to eliminate debt, create create wealth, and escape the rat race. Either way… “choose your hard!

John
San Francisco, CA 2020

This story is published in Educated & Broke — a publication dedicated to helping you fight student loan and consumer debt by providing real-life, practical advice.

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Eliminate student loans, escape the debt trap and create wealth

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