Details

Reaching financial independence (the goal of this tier) doesn’t mean you have to pay off all your debt. But if you have interest-bearing debt, it is costing you whatever you pay in interest. If you have no-interest or unofficial debt, it will weigh on your mind if nothing else. While it’s worth considering opportunity costs with other investment options (your next step), tackling your final pieces of outstanding debt as you strive for financial independence is a solid goal. 

Low-interest Debt

• Any debt below 4% interest will generally be considered “low-interest.” When determining if you should pay this off faster than required, it’s important to consider what else you could do with that money. For example, by investing in a broad market index (like the S&P 500), over longer periods of time you’re likely to make substantially more money than you would save in interest payments. (See the Payoff vs. Invest Calculation example in the next task.)According to data compiled by Goldman Sachs, the average S&P 500 return for any 10 year period is 13.6%. And this article from The Balance highlights that the worst rolling 10 year period ever saw an average annualized return of -3% (the best 10 year period was 20%). While a negative return isn’t good, by definition the “worst” period doesn’t happen very often. And if you stretch out the investing period to 15 years, the worst period was a positive return of 3.7% (the best 15 year period showed a 20% annualized return) and for a 20 year rolling perid the worst was a positive 6.4% annualized return (and the best 20 year return was 18%).Therefore, if you have a longer time horizon and are willing to ride the ups and downs of a broader stock market index like the S&P 500, your investing returns would likely be more than your debt interest payments. Put simply, from a purely financial perspective it may be better to invest your money than pay off low-interest debt as quickly as you can.From a psychological perspective however, there’s nothing wrong with eliminating debt more quickly. This is particularly true if it gives you a sense of security and you like the guaranteed savings of paying your debt down faster.

Medical Debt

Medical debt typically has no interest or very low interest. If you have acquired medical debt, you can often negotiate directly with the provider to create a payment plan to pay this debt off over a set time period. In some cases, you may even be able to reduce the total amount you owe.

Family or Friend Debt

If you have any debt owed to family or friends, whether it’s interest-bearing or not, at this stage in your financial journey it’s time to focus on paying it off. It’s simply not worth hurting your relationships by extending the payback period any more than you absolutely need to.

Specifically, we recommend taking the following steps:

• • Get in Touch: Reach out and say you’re ready to pay them back. If you can’t do it in a lump sum, let them know what you think you can afford and on what schedule. Ask them if they expect any interest in return for their previous generosity.
  • Put it in Writing: If you’re making a lump sum payment, send an email (or something more official if you prefer) indicating you have paid them back, the date you did so, and any other details regarding the purpose of the original loan.If you are planning to pay them back over time, write down the following:
    • The regular amount to pay
    • The frequency of payment
    • The expected final payment date
    • The shared location where completed payments can be referenced (e.g. an email thread, a shared spreadsheet etc.)
    • The link to the loan calculator you used to calculate interest (if applicable)
      
  • Celebrate Together: Ideally, you will have an agreement in place that both parties are comfortable with and when you make that final payment, you’ll both feel a sense of finality and can celebrate together.