When it comes to achieving Financial Independence, there are often two overlooked and hidden roadblocks that fly under most financial radars. When left unattended and unnoticed they create setbacks, setbacks that are rarely felt, but are there working against the progress you are trying to make. I have knowing dealt with this for quite some time and I came to a crucial point where I decided to deal with it head on.
The two setbacks in the TOL home are…TAXES and INTEREST (on debt).
When you are still working at a job as you move towards financial independence, then you are more than likely one of the many working-class Americans who can be taxed pretty heavily. The TOL’s are no different. I have stated before that I do not truly believe in substantially funding retirement accounts. That system goes against early retirement. After all, how can you retire early when you are stashing money away that you cannot touch until you are 60 years of age?
As much as I dislike retirement accounts, I dislike paying taxes even more. I know that taxes are necessary to maintaining the infrastructure of our country, to pay for schools, to pay for our national defense, but since I’ve been working since I was 15 years old, I have more than paid my fair share of taxes. It’s time to save more of my paycheck.
The other side of the coin is interest on debt. This is something that I’ve struggled with since I was 18 years old when I got approved for my first credit card. We have done a superb job of reducing our debts in a very short amount of time. However, we were still bound by the chains of a car payment. We were losing almost a $100/month to interest – interest that is not tax deductible.
We purchase our cars in 2014. It was shortly after these purchases that our minds collectively changed and we adopted the FIRE mentality that we now possess. The final straw was looking at the breakdown of the last car payment we made – we paid more in interest than we made in passive income. Keep in mind some of this passive income will be taxed vs none of the interest expense being tax-deductible!
We had enough.
We decided to liquidate assets and use some of our cash to completely pay off one of our cars.
The car with the highest balance, at $13,000, will be the first to go. Though our other car carries a smaller balance, it also has a lower rate of 2%. We want the monster balance to go first leaving the smaller balance to tackle. This debt carries a 4% interest rate, the same rate of return that the New Life Portfolio is producing in dividends but far more than the cash is earning, which is 1% before taxes.
Though I really don’t want to liquidate the portfolio that we have been building for the past year and a half, our desire to be (consumer) debt free is far stronger. With paid off cars and no interest expense or debt nagging us, we can push forward even stronger than before with a crystal clear conscious.
With the freed up cash flow, I will moderately increase the contributions to my 401k/457b retirement accounts, which will reduce taxable income and reduce our year-end tax liability, while simultaneously storing money away for our future. The exact opposite is currently what we are doing – maintaining a higher taxable income while not putting enough into a tax-sheltered account, thereby increasing our year-end tax liability.
The ultimate goal of liquidating assets in the portfolio is to reduce the amount of money leaving our household in the form of INTEREST and TAXES.
While we will still have a mortgage payment we don’t really look at it as debt for several reasons.
- The main reason is we will always have a house payment even when the mortgage is paid off (think taxes and insurance, and what happens if you don’t pay your taxes, even if you own your house free of a mortgage).
- Another reason is our mortgage is very small at $90,000. Our mortgage payment is less than rent in a decent area. What that means is if we truly wanted to be debt free of ALL debts, we could sell our house and move into an apartment and pay more rent than we are paying in a mortgage. No thanks!
I do understand that selling these assets will create a taxable event. With that said, this is still a financially positive move. The way I see it, I am creating a “debt-free” event also. I will endure a brief one-time taxable event to expedite the day that my wife and I can wake up and say “We are debt free”!
What setbacks are keeping you from Financial Freedom and how are you tackling them head on?