How to Get Out of Debt in the Military | Military Money Manual Podcast Episode 14

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Check out my new book The Military Money Manual: A Practical Guide to Financial Freedom where I lay out exactly how to achieve financial independence in the military. One of the first steps on the journey to FI is getting your debt under control and getting back to a positive net worth.

Whether you use the debt snowball, debt avalanche, or just get it done, getting out of debt is possible!

Jamie and Spencer explain how to get out of debt in this tactic filled episode.

Military Money Manual Podcast Episode 14 Links

Military Money Manual Podcast Episode 14 Transcript

[00:00:00] Spencer: Hello, and welcome to another episode of the Military Money Manual podcast. I'm Spencer, the founder of And I'm joined today as always by my good friend and co host Jamie. 

Jamie, I know you're super excited about today's episode. This is a topic that is very near and dear to your heart.

What are we talking about today?

[00:00:29] Jamie: Today, we are going to talk about getting out of debt. Like you said, I'm very excited about this. I'm very passionate about it. And I think there's a lot of good lessons that we'll go over today. Why it's important to understand what debt is and how to get out of it.

And the practical steps of how to make progress in turning your net worth from a large negative number into a positive number. We plan to do a little bit of a series on debt here. Today, we're going to focus more on more general concepts of getting out of debt. And then in a later episode, we're going to personalize it and share a little bit more of our stories that we've alluded to in the past.

But we're going to go into a little more detail on how we did that specifically.

[00:01:07] Spencer: Jamie, in its simplest form, what is debt?

[00:01:11] Jamie: Debt is really just using someone else's money to pay for some goods or services. It's borrowing money for something that you want or need but can't afford with actual money or any kind of financial status at the time.

It can be anything from spending too much on a credit card that you can't pay off to buying a house. Using a mortgage that is debt as well using a loan to buy a car, a home equity line of credit, student loans to pay for college or anything like that. Really, anything other than a mortgage, in my opinion, falls under the category of debt that I think you should pay off as soon as possible, especially if it's a high interest on that debt to quote your new book debt means that your money isn't really yours.

Something else, someone else gets a say in where your paycheck goes. And when you carry debt, every paycheck you receive first belongs to your lenders, and then you get the scraps, whatever's left over when you must pay your creditors, you delay investing in your own assets. And that really, that paragraph really summarizes to me why I think debt is something that you should care about and something that you should focus on making part of your past.

[00:02:24] Spencer: Yeah. I think the line about how your paycheck first belongs to your lenders, then you get the scraps right there is really to me. I wrote it but it's, but it is powerful and it's powerful. Exactly. Yeah. And it reminds you that. You're not, when you have debt, you're really not working for yourself.

You're working for the people who lend you that money. And maybe at the time you needed the money. And especially if you're going to buy an income producing asset, like a house or something like that, a house is a great example because it might not even be income producing, but you need to live somewhere.

And usually most people's housing prices today, depending on where you live, can be a half million to a million dollars. And people don't have that much cash lying around. So the system that we've set up in the United States where you can lock in a 30 year mortgage at an extremely low interest rate and make, and your payments basically for the rest of the time that you live in that house.

That's an incredible system that we've set up and actually no other country in the world really offers a 30 year fixed mortgage. Everybody else is variable rate which is a whole nother economics topic that I would love to get into sometime, but not today we're focusing on debt and getting out of debt.

And paying off your debts. One thing you mentioned in that little spiel there was on credit cards. We talk a lot about credit cards on this show and I think what's important for, and I had this conversation again with somebody at work recently where they were like, Oh my gosh, you have 29 credit cards and they're like, what did, what's your credit score?

Like how much credit card debt are you in? And it's painful, but I just have to, I like, I, sometimes I just pull up my accounts and I show them like. All my balances are zero. Like I do not have any credit card debt. I don't care. Okay. One of them had $2,000 on it. Cause that's how much I spent this month.

But if you treat a debit card or sorry, excuse me, if you treat a credit card like a debit card, then you really can't get into trouble. So if you have the money in your checking account before you, you purchase something on the credit card and then you immediately either pay it off. Or what I used to do is I had two checking accounts set up.

And one of them was called the bills account and anytime I made a purchase on a credit card, I would just siphon some money from my, my main joint checking account into the bills account. And then I knew when I went to pay the bill at the end of the month that I would have the money set aside.

So I think it's, like we've talked about in previous episodes, credit cards can be a great tool, especially if you're in the military and you get the credit card annual fees waived. And we've got plenty of episodes about that. But Never, ever, rack up any kind of credit card debt, treat it like a debit card and you really can't get into trouble.

Jamie, you just talked about, what is debt? Why do we, why are we so anti debt, you and me? And what is it about debt that really doesn't lead towards achieving financial independence?

[00:05:16] Jamie: The main thing that I want to stress to someone who doesn't think debt is that big of a deal is that the money that you get, your income, You can't tell it what to do in alignment with your priorities when it goes first to pay off your creditors.

When you're in debt, you can't choose what to do with your paycheck fully. And that stings. And it takes a little bit of time to fully let that sink in. It may not be until you're out of debt where you realize this is actually nice that I can choose what to do with my money. But let's say you have a car payment.

That's $500 per month. That means the first $500 out of your paycheck. Each month has to go to the Honda financial group or whatever bank you used for that car loan. Once you pay off your debt, that $500 or, and the rest of your paycheck can go towards whatever you want to do towards your financial independence goals.

If it's, saving up for a down payment on a house or saving up for a new car, or, trying to max out your Roth IRA or TSP, you get the ability to choose where your money goes. Unless you have to pay your creditors first and you have one car is bad. Two cars could be bad. You could have multiple credit cards.

And a lot of Americans have a lot of issues with that.

[00:06:29] Spencer: Yeah. One thing you said there was that your money isn't aligned with your goals. But what I think that a lot of people get in trouble with is, they see the new car that they want to buy. They don't have the cash on hand.

So they take out an auto loan and what essentially you're doing there is you're robbing from your future self to make your present self happy. And if, in the right circumstance, maybe an auto loan is the way to go. Because, if you're, especially if you're in the military, your paycheck is going to increase pretty much every year.

And if you, as long as you keep promoting you'll get, time and service pay increases, you'll get promotion increases, and maybe, you're a brand new Lieutenant, you're making $30,000 a year. And that within four or five years, you're going to be making six big years.

And so it's okay, possibly in that situation that you can borrow from your future self to give your present self transportation because you do need, especially on most military bases or in most military jobs, you do need an automobile to get from your, the place that you live to the place that you work.

So I think just recognizing that when you take on debt, you're essentially robbing from your future self future income that, you know, Rather than investing that money into an income producing asset. And generating future streams of revenue and income for your future self. 

[00:07:57] Jamie: So you're taking away choices and freedom from your future self is a great way to think of it.

[00:08:03] Spencer: Yeah. Yeah. And it, which is the exact opposite of financial independence because financial independence is saving and investing now so that your future self has more freedom and more choices. And it's having the discipline now so that in however long it's going to take, whether it's two years, five years, 10 years, 15 years, but eventually you'll have enough savings that you get to decide what you do with your time.

And you have the ultimate freedom and choice, which is not trading your time for money anymore. 

So Jamie, debt in America. I know we see lots of headlines. We hear lots of things in the news. How bad is it? Where are we at right now? Is there anything different in the military specifically in terms of debt behaviors?

[00:08:48] Jamie: I think the military members are targeted in some unique ways that maybe the average American doesn't get targeted with. Maybe some payday loans and high costs of moving and regular moves and things like that. But I think overall the military members probably face debt at the same rate or similar rate.

I don't have any empirical data on that, but it is very similar to the average American overall with a couple of unique caveats. And debt is a huge issue in America. There's a lot of talk in the media about student loan debts, but really that's just the tip of the iceberg of everything that is an issue with that 13 percent of Americans have student loan debt.

That's probably likely because not all Americans are that young, but so that's just a small percentage of student loans being an issue, but let's talk about student loans for a second. The average student loan payment in August of 2021 I'm sorry, the average borrower at graduation in August of 2021 graduated with $36,900 in student loan debt.

And that Debt has gone up drastically, way higher than inflation. And in fact, the amount of student loans that an average graduate has is outpaced inflation by 41%. So it's definitely an indicator that it's becoming more common and easier than ever to take out debt at a young age. We would never allow an 18 year old to take out a $300,000 mortgage, but for some reason it's okay for them to take out $300,000 in student loans with no income, no credit history, and no history of good financial common sense, basically. So that's a summary of student loans. I think, and then I'll jump in, go ahead, Spencer.

[00:10:26] Spencer: I was just going to say, for the, in the military, we've got the USAA career starter loan and the career kickoff loan. And both of those are extremely low interest rates and they can be a great opportunity, if you do have student loans from going to college, or if you have an auto loan from a car that you bought, it's a great opportunity to possibly refinance those loans into a cheaper loan.

But you really, you don't want to use that as a springboard into building bad debt habits as you head into adult life. You really want to use the. The USAA career starter loan or the Navy kickoff loan as an opportunity to set yourself up on the path towards financial independence. And if you're not using, if you're not using the loans for that, that goal, then you're really setting yourself up for failure.

And I think the saddest thing really is people who just get busy with work and they don't pay attention and they wake up 10 years after joining the military. Maybe they've thrown a little bit into their TSP. Maybe they have a Roth IRA but they still have an auto loan.

Maybe they still even have student loans and they're just not getting anywhere. They're just, they're just stagnating. And what's crazy is if you add up all of your paychecks, you add up all of the income that you've earned over the past five or 10 years, for for a senior officer or not senior officer, but for a major, let's say that could add up to over a million dollars possibly.

And if your net worth isn't some appreciable fraction of that, if you don't have $100,000, a quarter million, a half million set aside, then that can be really depressing. And, so I really encourage, especially the younger listeners of the podcast. If you're coming right out of college, go listen to our episodes on the career starter loan, go listen to our episodes on advice for new officers.

But, you can, you have an excellent opportunity to really set yourself up to achieve an early financial independence and not become those financial zombies that just follow the same habits over and over again. And they wake up five or 10 years later and they realize that they have nothing to show for all the income that they've received.

[00:12:31] Jamie: If you are one of the, maybe an ROTC student, or you came in via OTS and you do have student loans there, there's a lot of people that are in that same boat, but the same principles we're going to talk about through this episode apply to any kind of debt as well. But getting back to student loans in the class of 2021, the average payment was $433 a month in those student loans debt.

So if you're a brand new O-1, for example, that's about 10 percent of your pay per month. And if you add a car loan on top of it, which is about $500 as well, on average that's 20 percent of your pay right off the top. And the government isn't going to save you from this 99.9 percent of the time, you're going to have to dig yourself out of the hole.

Student loan forgiveness programs and doing 25 years of public service or whatever. They're not working. And they're not working for almost anyone. The percentage of people that are getting accepted is very minuscule. I mentioned car loans a second ago in February of 2021. The lending tree, which is a really popular website, said that $563 was the average car payment per month. And the average term of that was 70 months. So not only do you have $563 a month right off the top of your paycheck, you're locking yourself in for a 70 month term, which is that decision that we talked about earlier is robbing yourself of 70 months of future choices in your paycheck and your financial independence goal.

By age bracket, one of their stats that I found interesting is that 2020 millennials, which ranges from 24 to 39 had an average debt of $87,000, almost $87,500. And the average median income is Almost 80,000, in the first quarter of 2021. So if you just do the math and you're comparing how much debt people have on average compared to the average or median household income, you can see that it's a big problem because people don't have the means to pay off the debt that they're choosing to take out.

[00:14:26] Spencer: Yeah, I think it's so easy when you look at what your future income can be when you're in ROTC, or even when you're just enlisting, like coming straight out of high school, you've never made money before. And you can look at, look up online what an E-4, E-5 makes, but you have to remember that you're not going to be making that money until you've already been in for several years.

So when I was in college and I was signing promissory notes saying, Oh yeah, I'll pay back those $20,000. I'll pay back this $25,000 because I'll be making a hundred thousand dollars a year in four or five years. When you graduate. First of all, the military is notorious for not even getting your first paycheck for what 60 days after months after you get in, if you don't have cash set aside and maybe we need to have a whole episode on that, on what you need to, The financial shock that you need to prepare yourself for when you first PCS.

So I really encourage people, when you mentioned those two figures, how close they are to the median debt to the median income, I think it's really not surprising to me that people basically borrow up to what their annual salary is. And it's very difficult because that annual salary tha median household income of $80,000 a year.

You've, once you've, paid the rent, paid for the groceries, paid for the two cars, paid for the gas, you have very little money left over in that. Standard American budget to extract any additional income to pay off your debt. Essentially, you're just servicing it and just trying to make it to the next paycheck.

[00:15:58] Jamie: So Spencer, we talked a little bit about debt pitfalls for military members. What are some things that you've seen or that you've helped people work through that are unique to military members of where we tend to see debt among our peers appear more.

[00:16:15] Spencer: I think the one, the biggest one, like I just mentioned, one of the biggest ones is the PCS debt or the TDY debt.

And the PCS debt especially can be insidious because there's just so many little expenses associated with moving. And yeah, the government's supposed to pick up the tab, but a lot of times you're not going to get reimbursed. You file the paperwork, it gets rejected, you file again, you lose a receipt, you have to fill out a lost receipt form, finance sits on it for 60 days, and before you know it, it's almost six months after you moved.

And guess what? Those credit card bills are due. That's one of the, one of the major pitfalls right there. And then TDY debt, we'll send guys to training pipelines and they'll be out there for three months and their credit, their, their government credit card will get shut off because they'll have max it out.

Or we'll deploy people to, places, this is, hashtag air force problems, but we'll put them up in a hotel that costs a hundred dollars a day. And right there they'll max out their credit cards. It's easy, especially for the younger airmen or soldiers who don't make a lot of money and might not have been trained or developed the habits yet to make these good financial decisions.

It's really easy for them to fall into a lot of these, a lot of these debt traps. So some of the ones that we met, what we mentioned earlier, big purchases when you first joined the military. You see it, the Lieutenant mobile, you see the airmen driving what is it?

F-150 Raptor pickup truck. That's lifted. And you're just like, come on, dude. Like I know that thing costs twice your annual salary, like the payments alone. You must be 90 percent of your pay and must be going to pay that thing off. And you're never going to pay it off because you got 72 months of payments ahead of you.

[00:17:49] Jamie: There's a program they have at the military star card that the exchange offers where I think if you spend it on uniforms, this was a thing that was very popular and heavily marketed. I don't know if you felt this as well. You could spend like up to $500 on uniform, clothing and sales items with no interest for a certain number of months or whatever.

So you may even have to take out debt or be tempted to take out debt to buy your uniforms when you first join the military. Cause it's, there's so many expenses if you're not prepared for them, like you said, but that's, it's crazy that it comes down to that sometimes.

[00:18:23] Spencer: Yeah, I think that's just crazy.

My dad mentioned one time, he was like, Do you think the New York Yankees have to pay for their uniforms? Like, why would you have to pay for your own, like your uniforms in the military? No sports team, professional sports. And I said maybe I don't actually, I don't know.

Maybe the New York Yankees do have to pay for their uniforms, but they're making a hundred million dollars a year. So they probably don't care very much.

[00:18:44] Jamie: Pay me a hundred million a year and I'll gladly keep paying for my own.

[00:18:47] Spencer: Yeah, definitely. I'll even buy my flight suits myself. All right.

Yeah, big purchases. Cars always come up in the military, it's not just a military thing, it's civilian thing as well, credit card debt, especially, around a PCS or if you're in a training pipeline, you're going TDY emergency trips home. And, there's a lot of funds out there available for people to take emergency trips. For instance, there's a couple of programs that offer free tickets to airmen, soldiers, sailors, and Marines stationed overseas. I'm trying to, I can't think of any of them off the top of my head, but you can just Google, free plane ticket home for the military.

And I think Jack Daniels possibly sponsors one. And yeah, and they're just, they're programs that people donate money and they'll cover $1,000 worth of your ticket to and it's especially for those who don't have families stationed with them. But that's a great way to save money right there.

And then, other things that I've seen in the military is, everybody's living on base. You all kind of work with each other, but you all know how much everybody else makes or you could look it up. And I think there is a lot of keeping up with the joneses.

Purchases people make because they just, that's what everybody else is doing. They want to fit in.

[00:20:03] Jamie: Yeah. You could even have I'm a non commissioned officer now. I can't drive like a hooptie car. So there's a, almost a perception that at certain ranks or grades that you need to appear a certain way that you're, you need to dress or act, or you need this kind of equipment, or this really fancy iPad will be the perfect thing when you become a senior NCO or whatever the situation may be. So it's not just keeping up with the neighbors. It could also be some kind of stigma at work.

If you're the only one that doesn't have a fancy smartphone or fancy computer in the staff meeting or something, you could feel some pressure from that as well.

[00:20:39] Spencer: Yeah. I think one of the most egregious things is you see the, I say egregious, you see a new airman with the brand new iPhone 13 X pro or whatever they're calling it these days.

I'm not an iPhone guy as we've addressed before. Oh, really? We never mentioned that green text message mafia right here. But, that could be nearly an entire month's salary right there, and for a new lieutenant, that would have been, I think I was making  $2,400 a month after taxes when I first joined the military.

So that would have been half a month's pay. And I did buy an iPhone back then but I think they were $600 bucks. So it was a lot cheaper in 2011, but I got rid of it. I went back to Android. And then. Yeah, I think it's, it's not just, it's not just a new guy problem. I'd like to rag on the airmen who buy the big trucks or the new, the Mustangs at 36 percent interest.

But, you'll see senior NCOs, you'll see majors or captains who just pinned on. And it's again, like if that's your lifestyle and you can afford it, go for it. But if you're going into debt to fund that lifestyle, I think you have to. Again, if you're thinking it through and you decide this is what I want to do who am I to say don't do it, but if financial independence is one of your financial goals, and I think it should be, I think it's the, it's literally the ultimate financial, like every, like getting out of debt.

It's not a goal. Maybe it's a sub goal, but on the stepping stone, a stepping stone, right? It's on the path to financial independence. And then, and actually, once you're on that path to financial independence, there are a few instances where you can use debt smartly and we'll address that a little bit later because right now we're just talking about how to get out of debt.

But do you have any stories about anybody you've worked with credit card debt or absurd loans?

[00:22:35] Jamie: The worst I had was one time I had a senior NCO E-7 level who. Had $10,000 of credit card debt starting out their PCS and then added another 10 when we met later in the year. And I asked how their progress of getting out of debt was going.

It ended up basically doubling and they had accumulated $20,000 in credit card debt at the E 7 level. So like you said, it's not just a new guy problem. And you can't always tell. It's not Oh, that guy is obviously out of shape with this financial journey. You can tell that his uniform is getting a little tight around the waist.

You have no way to know. And so that's why I think it's important to be open to providing feedback, providing guidance and mentorship. And if both parties are open to discussing it, we can learn from each other because you're not going to learn it from any kind of formal program. You're not going to learn this at basic training or OTS or OCS.

You really just have to seek out the lessons for yourself like Spencer did back in the day of just start reading books, every book in the library about personal finance is how Spencer got started on his journey to where here now he's hosting a podcast about a really good podcast, by the way, about Personal finance

[00:23:54] Spencer: Yeah. Yeah, that's right. And I had actually had a conversation. It wasn't about debt at work yesterday, but it was about investing. It was about the TSP. And the guy was contributing 17 percent of his paycheck into the TSP, which is great. He's not BRS, so he doesn't have to worry about the 5 percent match, but 100 percent of his funds were going into the G fund.

Now, somehow he had, that hadn't always been the case. He must have been because he had some in like a life cycle fund and then some in the other five funds. But I just sat him down and I just talked him through. I was like, okay, this is the strategy you're pursuing right now. I think you could really increase your gains because you're going to be investing this money for the next 30 or 40 years.

And I think you can really increase your gains by moving into a life cycle fund. And then as you increase your investment knowledge, then maybe you can set your own asset allocation. Then, I was able to have that conversation because we started talking about finances while we were on the TDY together.

He made the joke like cause I, I actually didn't bring it up. I always, and this is one of my tactics for spreading the gospel of financial independence is I never bring up investing and I never bring up money when I'm on, when I'm on a TDY or when I'm at work, I let other people bring it up.

If they bring it up, I will happily have the conversation, but I think way too, and this is a PSA for all you officers out there, way too many people. We'll share, Oh, I'm on, this is my investment strategy, or I've got seven houses and we're buying another one and it's and they always want to talk about what they're doing.

But if you really want to help somebody, you have to listen to them and you have to meet them where they're at and don't dumb it down for them. Don't talk down to them. But you're gonna reach way, you're gonna, you're gonna help way more people if you let people come to you and, during initial feedback that I have with the people I supervise, one of the things that I always bring up is I have a little money talk.

It's very generic, we just talk and, but I ask them how much you put into your TSP and they don't have to answer. It's not required. But I just, I want to make sure that I broach the subject and I leave the door open if they ever want to come back and continue to have a conversation.

And so if you're listening to this podcast and you want to help somebody out that you work with, I think bringing it up in a very non judgmental, non threatening way, and then just offering to have the conversation. But then that's it, just let them make the first move.

[00:26:24] Jamie: And when the topic does come up, it's important to understand too, that everyone's strategy is different.

So I can't compare what Spencer's goals are and the way that he's meeting his goals or working towards his goals with my goals and the way that I'm working towards my goals. So Spencer's putting 90 percent of his paycheck towards Bitcoin because that's what fits his financial independence journey, which he's not, and we would not endorse that.

And either of us would, I can't say, Oh, that's the right thing to do for me. Because my goal, my family, my situation, my starting point, all those factors are just different. So you can't take or force, you can't take someone else's view and just. Blanket apply that template to your finances nor should you pressure like Spencer was saying someone to do everything exactly like you're doing That won't go well probably

[00:27:14] Spencer: Yeah, that's right.

So jamie we talked a little bit about what types of debt do military service members try to, or tend to fall into some of the big debt trends in America, people racking up very large debt amounts, why we think that's bad, what debt, what is debt when you come down to it I think a lot of people recognize that they're in debt, and they have to make these monthly payments, but a lot of people don't realize you don't have to do this, like there are alternatives.

Rather than accumulating debt and living your lifestyle such that you have to use debt. So what are, and once you pay off that debt and you get to decide what you do with every paycheck, that is extremely powerful and we'll talk about that a little bit later in the episode, but what are some strategies people use to get out of debt?

[00:28:03] Jamie: One of the more common things I want to warn people about first of all, is that debt consolidation or some gimmick you might see on late night infomercials is not your issue. It's. More income, less spending, or a combination of both of those is what you need. If you're married, first of all, I want to be clear that you have to be on the same page as your spouse.

That is one of the most important things about personal finance journey and getting out of debt. If you can't get buy-in from them, it's going to be much harder and more difficult. You guys need to be on the same page, share your why with them. If you're the one initiating the conversation about, Hey, I want to start paying off our debt and get out of debt, share the why.

What's the vision? What's the 10 year plan? I want to be sitting on the beach with you in Fiji in 10 years. And right now we can't afford that. And so I would like to get us out of debt so we can start saving more so that we can. Pay for our kids' college in cash. So they don't start out with student loans, whatever your, why is it natural for one of you to one of you or your spouse to be a spender and one to be more of a saver, just talk about that with each other.

You may do monthly or weekly or annual kind of financial checkups or budget committee meetings, some people will call them but you can't, you cannot do it alone. If you're married, in my opinion, but in general, you have two tools that are the most popular ways to get out of debt.

Dave Ramsey is the debt guy in America and has literally had millions of people follow his way to get out of debt, but he uses the analogy of a shovel and a hole. The whole is how much debt you're in and the shovel is your income. Sometimes you may need a bigger shovel. You may need a second source of income or something.

Or maybe the spouse goes back to work or you take a side hustle to get more income and get a bigger shovel. It's not always about cutting costs. Increasing your income will also help you get out of debt. 

The first thing I would want you to do is take any non mortgage debt and write it all down, whether you make a spreadsheet, Google docs write it down on a piece of notebook paper like grandpa, whatever method you want, just take an inventory of all your debt, make it thorough and complete.

Look at the bank, the institution, the credit card company and the current balance and list them all on a sheet. I think when you total up those items and compare it to your monthly payment also lists your monthly payment each month. So total balance and monthly payment you'll be amazed at what the numbers reveal and how little of a choice you're having with the income coming in.

You may have never looked at it like this before. And if you don't have a budget or a written spending plan, now's a great time to do that. And sometimes when you list out all your expenses, when you add up the Spotify, the Hulu, the HBO, the Netflix, the. NFL pass, all those memberships, the gym that you never go to but you're too embarrassed to go in and cancel your cell phone bill.

It can really add up. So that's the first step to get out of debt, no matter which kind of model you choose is to write it all down. Some other famous strategies that kind of play into that are the debt snowball or the debt avalanche. 

Spencer, can you talk a little bit about those two methods and which, maybe which one you prefer or pros and cons of each one?

[00:31:11] Spencer: Yeah, sure. Essentially. Essentially. They're the same. And the main trick to both of them is let's say that you have five loans that you need to pay off. And they're from $1,000 we'll say. And so that's shoot, I can't do math in my head, but I think that's about $9,000. No, it's gotta be more than that.

It's gotta be $15,000. There we go. So you've got these, you got $15,000 of student loans. And you or whatever kind of loans. And once you pay one of them off. You keep your payment the same. So let's say the minimum payment was $100 a month on each of them. So it's $500 a month. As soon as you pay one off, you don't drop down to just making the minimum payments on all the other loans.

You keep your minimum payments the same. So that's the psychological trick that both of these methods use the debt snowball. And the debt avalanche. I don't know why snow became the theme of paying off debt, but it did, and the debt snowball was made famous by Dave Ramsey. So what he argues is, and it totally checks out, that debt is not a numbers issue, it's not a spreadsheet issue, it's not a math issue.

If it was, you would have never gone into debt. It's a psychological issue. And you need to take a psychological approach to knocking off your, to knocking away your debt. And so what he advocates for is you target your smallest amount first. So in the case that I gave where you have sorry, that would be $13,000 a day.

Wouldn't it? Let's see. One plus two is three. Three is four. No, it is 15. I didn't write down the numbers. It's $15,000. Okay. I can do math in public. And so in that, in the example that I'm struggling to give right now you would target the $1,000 loan first, and you would ignore the interest rates. And once you had paid off that $1,000 loan, whatever the payment you were making that loan is, you would roll it in and start targeting the $2,000.

And then when that was paid off, you moved on to the 3, the 4, and the 5. Okay, so that's the debt snowball. The debt avalanche, very similar, except the only difference is, let's say that the $5,000 loan had a 10 percent interest rate and the $1,000 loan had a 1 percent interest rate, you would target the 10 percent interest rate loan first.

So you would target your highest interest rate loan first. Why would you do this? Because that's the mathematical answer is you want to: Every time you can pay down debt that has a higher interest rate, you'll end up with more money in the end. But again, Dave Ramsey doesn't advocate that way because it's again, it's not math that got you into this problem.

It's a behavior. It's a behavior. It's psychology. Honestly, I combined the two. I had a debt that was, let's see, it must have been 6 percent because I probably used SCRA. So I targeted that first and once that was paid off, then all my debts after that were one of them was 3%. One of them was 1.8%. One of them was I can't remember 2.8 percent or something about that. They were all under 3%. And so at that point it was like inflation's 1 to 2%, 3%. I'm splitting hairs at this point. So then I pivoted from the debt avalanche to a debt snowball method where I just attacked the smallest interest rate debt first and then excuse me, the smallest amount debt first and then once that was paid off again, I just kept rolling the payments and attacking the next smallest debt and you'd get that psychological victory of knocking it out and we like to talk about. Moving the needle, like doing actions that move the needle. And there's this Tim Ferriss likes to talk about the Pareto principle, who was a, I think he was an Italian geneticist or something, but he focused on, the point is you focus 80 percent of your results come from 20 percent of your efforts.

So if you focus on the 80 percent solution, basically just pick a method, just do something and just start attacking it. One thing, Jamie that you talked about back, do something. Yeah, exactly. We've been making it for a few months. It has been, but we're totally making it a thing. One thing that you mentioned, Jamie, was writing down your debts.

I think you just didn't get into debt because you're bad at math, you got into debt because you have these learned behaviors or these psychological tricks that basically, or, you, you're not realizing that you're robbing from your future self to make your present self happy.

I think writing it down can be one of the hardest things, because once you're an ostrich with your head in the sand, and once you, you pull your head out of that sand, and I don't think ostriches have fingers, so they can't write. But once you write down the debts, that's probably the hardest part right there.

It's just admitting that you have a problem. It's like alcoholics anonymous. Like the hardest part is not following the 12 step program. It's walking through the door and admitting that you have a problem. And. a Lot of people don't want to admit they have a problem. And especially like you were talking about you, when you have a married couple, there's probably one person in the family, that's the spender or the Spencer in this case.

And then there's the other person who's the saver and that might, or you might both be savers or you might both be spenders. But I think there's a lot of, there's a lot of, people bring in the learned behaviors that they took in from their family, that they took in from their school.

And they apply those to their adult life. And if they never learn anything different, if they never hear anything different, and that's, a lot of the reason why I wrote this book, Military Money Manual specifically for military service members, because I wanted, I, there's not a book out there that specifically addresses and targets military service members and speaks in a language that, that they'll recognize and understand.

So that's my long spiel of two strategies, debt snowball, debt avalanche. What do you got Jamie?

[00:37:05] Jamie: Yeah. One key takeaway there is either system you pick a system and it's going to work. The difference, the math behind the interest rate isn't really going to. Matter a whole lot. It's not going to move the needle.

Like you mentioned, that math is not going to make a drastic difference in your longterm net worth and financial independence journey. What will make a difference is if you pick a system and start doing something and moving in the direction towards getting out of debt. And it will also move the needle backwards if you choose not to do anything and you continue living in debt and accepting that.

For my personal story not to give away too much of future episode, but our first debt that we paid off. When we combined finances after getting married, my wife had a Macy's card with an overdue balance of $107 on it. So the debt snowball was very easy to get a moral or like an emotional victory with paying off $107.

So once you order it, if you're doing debt snowball with the smallest or largest, look at it and like, how quick can I pay off $107? Not the minimum payment of $25. How quick can I pay off $107, close the account and be done with that debt? And then you can start stacking them and you get the momentum and that's where the debt snowball comes in.

If you want to choose the debt avalanche, go for it. It's completely fine. I like Spencer said, combined a little bit as well. I did more of the debt snowball, but if there was one that was really close and there was a drastic difference in interest, I would flip them. But for the most part, I went off of balance.

[00:38:32] Spencer: I was just going to say, the one other one I heard recently, which I like the name of a lot and it gets away from the snow metaphor, but it's the debt tsunami and what it's very similar to the debt snowball. But what they added and again, the trick here is you, once you pay one off, you keep your payments the same and you keep rolling the payments into the next debt.

And that's the trick in both programs is, you can make these minimum payments. So as soon as one is paid off and you stop accumulating debt, you stop the bleeding. I think that's really important to mention too. Yes. When you're on this journey towards financial independence and you're starting from a negative number.

That's fine. Just don't make that negative number any bigger. But the debt tsunami and actually your Macy's card is a great example of this. They targeted the debt that had the greatest psychological impact first and for the, and the person who's writing about this online they actually had a gambling debt.

And so they had broken that habit and they no longer had a gambling problem or maybe I'm not sure. Maybe it's like being an alcoholic where you're always recovering, but they attacked that gambling debt first. They paid that off. And then they were able to move on to the other debt.

Even though it wasn't the smallest, it wasn't the highest interest rate, whatever, that was the debt that, for them, allowed them to say, okay, like I'm a different person. I have a different behavior now, and I'm not someone who has gambling debts anymore. 

Just a couple other things about the two strategies there. I think there's a lot of goodness. And Dave Ramsey I read The Total Money Makeover when I was a young lieutenant. It was one of the books that I checked out of the library when I went on my kind of personal finance binge. I used him to really start my financial independence journey and a lot of, in The Military Money Manual, I talk about the different strategies that you can use to, to pay off your debt.

One of the things that I mentioned in the book is avoiding high interest rate debts. And stopping the bleeding and not taking on any more consumer debt. And with the, with the service member, civil relief act, if you've accumulated any debt before you enter active duty, you can get those debts reduced down to 6%.

That is a benefit that Congress has enacted and any lender has to abide by it. So that is an opportunity right there for you to get your, to get your debts reduced down to 6%, which, for a lot of people, can be a great opportunity to start getting ahead.

Some of the other things that I mentioned in the book, rapidly paying off your debt. I think it's a great strategy. You can use the strategies that we previously just talked about, the debt snowball, the debt avalanche, the debt tsunami. And then also, having that emergency fund set aside so that you can, if you do have an emergency come up, you don't have to go into debt to bail yourself out of it essentially.

[00:41:29] Jamie: When you total up your debt and let's say your monthly payment, you have one that's $433, one that's $564 and all it totals up each month, you're paying say $1,200 in debt payments. Once you're out of debt, guess what you do with the $1,200. You put it towards your financial independence, you save an emergency fund, and then you start investing, whether it's, for college retirement or a combination of those buying a house, you put that money to work and you maybe give yourself a little bit of freedom.

So maybe you take $200 and increase your expenses and then you invest a thousand a month. So it's really all about going all in to get out of debt so that you have freedom afterwards. We talked, you mentioned the SCRA and MLA and a lot of those topics come up on your website. Is that a cure all?

Is that the fix for debt is to apply for SCRA benefits?

[00:42:21] Spencer: It's definitely not a cure all. But it is definitely a great tool that Congress has handed to you to begin your journey towards financial independence. If you have credit card debt that's hanging over your head from what you accumulated in high school or college or a student loan, that's higher than 6%.

When you enter active duty, contact your lenders, tell them you're applying for SCRA benefits and they, as long as your documentation is in order with your active duty orders, they have to lower that interest rate to 6 percent or less. Some companies went above and beyond for a while there American Express had loans; they dropped the interest rate to 0%. They don't do that anymore. But then, they have to drop it to 6 percent or less. So I think it's definitely an awesome tool and an awesome opportunity for you to reduce your monthly payments, your minimum monthly payments. But if you were making the payments when it was, an 18 percent debt, keep the payments the same, but now you're applying those extra payments to the principal and you're going to pay off the debt that much faster.

So definitely apply for your SCRA and MLA benefits on any debt accounts that you have, but don't think of that as the cure all you have to pay off these debts. Eventually you have to get out of debt on your journey to financial independence. 

[00:43:41] Jamie: And the biggest thing you mentioned earlier is that if the behavior doesn't change, if you don't stop the leak, you'll never be able to catch up.

If more dirt is coming into the hole and you're just trying to shovel and shovel, but you, there's still a leak getting in. You're never going to be able to get out of there. So you have to change the behavior, these gimmicks or debt consolidation, they may fit for some people, but it's not going to be the thing that really makes the difference for you.

Spencer, I think, maybe our listeners can pick it up to people that know us. I probably have a little bit of a more conservative or tougher stance on debt with just my personal mindset, but is there ever a time where you would say it makes sense or is good debt, quote unquote, good debt?

Is that a thing?

[00:44:22] Spencer: I think it definitely can be a thing. For myself personally, Once I broke the behavior that caused me to get into between my wife and I, $100,000 in student loan debts which the behavior was graduating, but once, once I recognize that, okay, like I can follow a budget, I can save and invest.

And especially when we were on this during the financial independence and we hit a 50 percent savings rate, I realized that, okay, I have built up enough of a financial muscle. I have built up the behavior in such a way that if I need to take on a little bit of debt, because I'm investing so much, I just don't have the cash sitting around, then that's fine.

Especially when interest rates are extremely low. So in. 2014, December of 2014, so that's almost, shoot, what, seven years ago I borrowed money to buy a car. I sound like I'm making a confession right now, but it's true. I forgive you. Thank you. I will say. I still love you and you're still my friend.

I will say five Dave Ramseys and, and I don't know what else crossed myself five times, but it was, so I was in Tacoma, Washington, and I was stationed in Tacoma, Washington, and the used car market was insane. It's like it is in 2021, where you can buy, if you had a used car that you bought a year or two ago, you can probably sell it for more now than you did than you bought it for.

And so I did my research on the used car market. I was in the market for a Toyota or a Mazda, like it's just a used Japanese car and I just couldn't find a used Mazda that costs less than $18,000 when I could get a brand new one for $20,000 out the door taxes, fees, everything included.

It was like $20,800, but we'll just say $20,000 to make it simple. And. I was able to. I can't remember how much I had to put down, maybe 10%, $2,000 or something, but the initial loan that I got walking out the door and actually I got the car for even cheaper because I financed with a dealership at 5%.

I walked out the door. I called And I was able to get a refinance on a loan for 1.8% and at the time I still had $10,000. I had just come back from a deployment. I had $10,000 in my SDP making 10 percent a year. So that's one of the most extreme examples right there where essentially I could have pulled the $10,000 out of my SDP to pay off the car, but the car's not an income generating asset. It's actually a depreciating asset. It loses money every year. And on the one hand, the bank will give me, in this case, USAA, will give me an auto loan for 1.8 percent a year, and I can leave my $10,000 invested in the SDP and earn a guaranteed 10 percent a year. So even if you're bad at math, that's, shoot, 8.2 percent right there. 

Whoa, why are you pecking me? 8.2 percent arbitrage, right? So it's, when you have that kind of unique opportunity. Now, I would certainly not advise, borrowing money to invest in something riskier like the stock market. For the right person, maybe margin, if you're farther along on your financial independence journey.

But I am not afraid to use debt as a tool. But like any tool, right? You can, a hammer, right? You can drive a nail in, you can also hit your thumb and hurt yourself. So you can use it to build a house or you can hurt yourself. So if you've built the good habits, you're on the, you're well on your way to financial independence, my next car, it's going to be a Tesla.

And guess what? I'm probably going to finance it because interest rates are extremely low. And I'd rather leave that money working for me in the stock market. Then to sell shares, pay taxes on it, and then. And then put all my cash into a car when the bank will give me a loan for one or 2%.

In The Military Money Manual, the book, I argue that the only smart debt is an asset back debt, like a mortgage. And, but right there, that's using debt as a tool as well, because let's say you had half a million dollars invested in the stock market and you buy a half million dollar house.

You, I wouldn't call you a fool for selling all the stock to buy the house, but why not just borrow from the bank at 2 percent lock in a 30 year mortgage and leave the $500,000 in there. That's going to double every 10 years. Now, again, that's not guaranteed. But, based on stock market trends, it's probably going to grow or at least pay 2 percent in dividends for the next, however many years the United States economy continues to exist.

So I, and one other thing I'll mention about smart use of debts is just look at, look at the billionaires, right? Look at Elon Musk, look at Warren Buffett. Warren doesn't spend that much, but Jeff Bezos, Elon Musk, what do they do? They. They have these multi hundred billion dollar stock portfolios and they use margin loans and they borrow against the value of their stock to fund their lifestyle.

And so they're not paying. It's not. And this is exactly what we're arguing about in Congress at the moment is taxing that kind of behavior. But they're not generating any income. They have no income tax because their shares remain unsold. And they're just borrowing against it. And sure, one day they'll have to sell the shares to pay off those debts.

But when interest rates are one or 2%, there's no reason to. So I think I'm definitely not as conservative as Jamie on this. I definitely think that debt can be a good tool. I think it has to come later in your financial independence journey, right? So you wouldn't tell someone who's going into the gym to start with 315 pound deadlifts, you would tell them to start with maybe 10, 10 pounds on each side.

You would tell them to, let's work on your form first. Let's work on your behaviors. Start showing up every other day in the gym and building that confidence and building those routines and those habits. That's what you need to start with first on the journey to financial independence.

You don't need to start with that. And I think that's one of my big takeaways for today. Using it wisely, but once you've developed the behaviors to use it.

[00:50:43] Jamie: Yeah, absolutely. I can agree with that of that it, I could see a purpose for it when you have a higher net worth and you're further in your journey, like you said, if you have a negative net worth or a very low net worth, or you're just, you just got out of debt, just be careful with it because it can be a tool that you can fall back. You can relapse and become an addict again to use your analogy earlier. But one of the big things I want to tell you from today is remember you can do it. Find the why behind your journey of why you want to get out of debt and stay out of debt. Find the groups that encourage you if you're on Facebook or YouTube or follow the People on Instagram that are going to encourage you on your journey, find some good podcasts.

There's lots of them out there. Lots of things you can do. And there's, there are constantly people excited about getting out of debt and we hope that soon you'll be one of them as well. 

So now Spencer, I'm going to give my kind of three questions and three action items. And then I'll pass it to you afterwards to see if you have any different key takeaways or things homework, if you will, for the listeners.

So first three questions, I'd like you to ask yourself after talking about debt today. Am I in debt? Some people may be in denial and say, I have no debt, but they actually have a car loan, for example. So you may have had a misunderstanding of what debt is. So just first of all, analyze that. Am I in debt?

Do I have something that I thought was okay? That is actually debt and that I should look at eliminating. What is my mindset on debt? 

Number two, and am I too tolerant of it? 

And number three, for the third question, if you're not in debt, what am I doing to protect myself from turning back to debt in the future?

And Allowing myself to go down that path of risky financial behaviors. 

And then the three action items that I would have for you this week is if number one, if you are in debt, list out all your debts. Like Spencer mentioned earlier, that can be very difficult to do. Once you do that, you're going to realize how much of a problem it is for some of you guys listening to the podcast.

Number two, develop a plan for paying them off rapidly. Once you see that you're going to want to make progress. And so we talked about some strategies today and some pros and cons of each. But again, the big thing is pick something, do something and start moving the needle to a positive net worth. And number three action for this week, your homework assignment.

If you're married, talk to your spouse. It has to be a team effort. If one of you is all in on this and the other one is not, it's going to make things very difficult. Talk to your spouse, get on the same page, share your why, and we're cheering for you.

[00:53:16] Spencer: I think those are all great, Jamie. I'm just going to add three other things that are actually going to be a little bit different. But I think one of the, one of the most important things to recognize about getting out of debt is that it's a marathon, it's not a sprint. I've never run a marathon. I've run a half marathon and I'll tell you what, it sucked. It was a, and it was a very long race, but it was over eventually.

And if you start with this, the zeal and this drive, and I think Dave Ramsey that calls it, gazelle like intensity, right? The gazelles are always running away from the lions and if they don't, they get eaten. And if you bring that intensity and focus to this I just want you to recognize that it is a journey and it is a long path.

For myself personally, it took us. Let's see, 2010, five years to pay off $100,000 worth of debt. So it's a long time. That's 60 months. That's not a short amount of time. And so what I want you to do while you're on this journey, everything Jamie said is great, but I also want to get, I want you to give yourself some breathing room.

I want you to relax when you can and if you receive any windfalls throughout the journey, I want you to, if, especially if you have a spouse, sit down and talk about it. If you get in, it could be something as simple as a tax refund. A lot of people are getting the child credit now, they're getting that every month.

So right there, there's some potential income to throw at to throw out this project of paying down your debt. But maybe you take 10 percent of it and go out to dinner or you go out on a date or you do that activity that you've been putting off because you've been so diligent about paying off your money.

I think we don't know how long we have on this earth. And so I think it's very important to live, live in the moment and to really, relax throughout the process. And if it is a struggle, if you're, if your payments are so high that that it's, it really is a struggle to make the payments, then.

All I can tell you is that either, you need to either look at your expenses, look at increasing, reducing your expenses, increasing your income. And if you do have a little bit of wiggle room and you are still struggling maybe, cut down the amount that you're throwing towards your Towards your debt while you're paying it off.

And maybe, or maybe you just take a break, just for a month you make the minimum payments. You don't make any extra payments and you take that additional money that you free up and you treat yourself to something. But it's important to recognize that it is a long process. And when you have, mileposts and goals along the way celebrate those wins when you get there.

[00:56:11] Jamie: Yeah, for sure. Really good point. Spencer, thanks for counterbalancing my aggressive tendencies about debt. One thing I didn't mention yet that I just want to make sure we talk about is another thing that kind of borrows from Dave Ramsey is he talks about the four walls. So if you're behind, if you're drowning in debt and literally don't have enough to make your minimum payments right now.

One thing that's very important to recognize is what to put, what little money you do have, what to cover. Okay. So if you are paying off your cell phone bill before you're putting groceries, In the fridge and giving your kids the necessary clothes, they need to go to school or the clothing. You need to get a job.

Then your priorities are backwards. So if you're way behind and you can only pay for a couple of things, cover your food, make sure your family is fed. Never get behind. You don't need to starve. If you have anything to do. Pay, if you have anything to give, put it towards food, put it towards your rent.

You don't want to get kicked out of your house. Put it towards your electricity and your utility bills. Winter's coming up. So your house needs to be warm. Amex will get over it. Your Macy's card can go delinquent. Your credit will take a hit. Like it doesn't matter. You got to take care of your family.

Sometimes transportation or a reasonable transportation is not Tesla debt, but, whether it's bus fare or a reliable car or getting your car up to the point where you can drive it again. And then reasonable clothing, which I already mentioned, but if those four walls are covered, everything else can be worked out in the future.

So don't let Amex get paid before your rent gets paid. And don't let Macy's get paid before your kids get food.

[00:57:45] Spencer: Yeah. Excellent point, Jamie. And if you are in that situation and you're in the military, there are resources available to you. So there's the Falcon loans I think that's like $2,000 from the Air Force Aid Society.

There's also the Army Aid Society, the Navy and Marines have similar programs as well. So there are lots of programs out there. Talk to your first first first sergeant. I'm not sure what the Navy term is, sorry, there is a there's a chief, there is someone in your unit, in your squadron in your company that has access to the resources to help you and can, get you over to the military family life support center and can help you develop a budget talk to your creditors, maybe consolidate loans.

There's lots of options out there available for you. So if that is the position that you're in there are tremendous resources out there for you. What a lot of what we talked about today is for that middle ground, that, that person who they've got their, their food, their rent, all that stuff, Jamie talked about, they've got all that covered and they still have additional income, but they have, they still have debt that they're working on.

And if you're in that kind of middle ground, that's what this podcast is about. And if you have debt, Hey, we're interested in hearing from you. If you have a great story about getting out of debt or you're in debt right now, and you just want us to take a look at your numbers again, remember like it's the math is the math.

We don't have any magic tricks, but send me an email And we'd love to hear your success stories, your horror stories, credit cards that you forgot about that went delinquent and they were on your wife's account. And now her social security credit took a hit hypothetically.

Of course, hypothetically, of course. Yep. And then if you're enjoying the podcast, please five stars on apple. If you listen there, yeah. Or subscribe and follow to us on Apple podcasts or Spotify. And then share us, send us to someone who you think could benefit from the lessons that we're imparting here.

And like I was talking about previously or earlier, if there's someone in your unit that you want to have a conversation with, or you want to make yourself available, to having these conversations, sending them a podcast like this that specifically talks about getting out of debt in the military might be that in to, to open up the door to having those those converse, those meaningful conversations that result in someone's life changing.

Yeah, that's a good point.

[01:00:07] Jamie: We've seen a lot of growth on the podcast. And we would just want to thank you guys for listening to that. We have. The number of downloads and listens that we have is really awesome. Go ahead.

[01:00:18] Spencer: I was just gonna say we, as soon as this episode releases, we should have over 3,000 total downloads, which is just insane considering we really only started posting a couple months ago, right?

[01:00:29] Jamie: And then can you share a little bit about the percentage of where we rank of downloads? Yeah.

[01:00:35] Spencer: I think that's crazy. So a couple of our recent episodes, I think you have to hit over 281 downloads per in the first week of an episode to be in the top 10 percent of podcasts. And we've hit that consistently with the last couple of our podcasts.

The message is getting out there obviously we're getting shared and we have some awesome subscribers out there. So thank you guys.

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