How to Thrive as a Family with Nearly $1 Million in Debt
“It is a truth universally acknowledged that student loans are the wooooorrrrssstttttttt” - Jane Austen
If you’ve been reading MFM for any time at all, you’ll know that I am extremely picky about allowing guest posts on here. As in, I have never had a guest post on here. What can I say? I value your attention, dear reader, and have worked hard to make sure you only ever get accurate, helpful and entertaining (albeit ridiculous) information — it’s hard to guarantee that result if I give up the blog reigns for just anybody.
But Mike’s not just anybody! He’s been a wonderful support system, blogger sounding board and all-around grade-A dude since I started this whole thing, even though our spouses (plural, spice?) think we’re weird for having internet friends we haven’t met in real life.
I even did my first guest post on his site, although I’m not sure “guest post” is right — more like “word vomit and cathartic storytelling.” Read it here.
At my (most awkward) request, Mike wrote a thorough overview of how his family is handling debt.
Spoiler alert: It’s a LOT.
But they have systems in place, and are on their way. I think this story is relevant and helpful even if you don’t have massive (or any) student loans or a high income — scale his approach to your income and your debt, and I betcha the underlying themes of discipline and balance will still prevail. He’s included many practical takeaways for you to consider on your own personal finance ~* journey*~.
Enjoy!
How to Thrive as a Family with Nearly $1 Million in Debt
“…But honey, can’t you imagine what our lives will be like when we’re done with these debt payments!?!?”
My question was followed with ’the look’, and right away I knew that I had made a critical error… I just didn’t know what that error was — yet.
So there I sat, waiting with a nervous anticipation that takes all the other thoughts in your mind and boots them out the door faster than the Kool-Aid Man bursting through some unsuspecting family’s kitchen wall (I mean — c’mon bro. Renovations aren’t cheap…).
Then she let me down easy. “Mike. 10 years is an incredibly long amount of time. That’s a third of the entire time you’ve been alive. Do you really want to wish away an entire decade in the dream of ‘one day’ … Or would you rather put a plan in place for the future while living our best life now?”
…Damn, she’s good…
My wife and I had been discussing family finances — once more — as we readied to take an ultimate leap of faith with each other. In a few weeks time, we’d be officially purchasing a business that we had been courting for 2 years.
But that business wasn’t cheap and frankly, we were pretty close to broke ourselves.
You see, we had the mortgage on our home, the new addition of upcoming loans for our business, and the dreaded albatross that Forbes says “Swamps” the millennial generation — student loans.
And once you’ve done the math and determined that our new “minimum” payments would total $8,322.77. Monthly…
Maybe you can begin to understand my willingness to grab a case of red wine and sip away a quick dime (10 years in prison terms).
Because in a vacuum and in that specific moment in time, that is exactly what that number felt like — a prison sentence.
However, we had this same exact feeling a cool nickel ago (5 years — c’mon guys, stay with me) when we began to learn what our total educations would cost. And ultimately how much student debt we’d need to take out.
Yep. Same “I want to go cry” feeling.
But back then, when we learned that our education loans could total anywhere between $200k - $500k we chose to do something about it…
We took steps to reduce our burden and work toward freeing our family from that debt sooner rather than later. We wanted $200k (or less) in total loans. Anything more would’ve been an abject failure and could’ve bankrupted our family.
So you’re right to think that when we saw this $8322.77 monthly ‘minimum’ number, I went right to the metaphorical closet, reached up on the top shelf, and dusted off our “how to crush student loans” playbook. Then I crossed off “student” and replaced it with “all” and we were ready to roll.
Here’s what we did then (and what we do now) to Thrive as a Family with Nearly $1 Million in Debt
Timeframe: the year leading up to and the first year of grad school
Reality hit hard when we started to see what dental school could cost a student…
Then, when we started taking stock of the outstanding loans remaining from undergrad — and the interest that had already accrued — a cold flop-sweat began. We had been making the cardinal mistake with loans up to this point in our life.
We had the loans but we had no idea where they were, how much they totaled, or what their interest rates had been.
We were flying blind and it cost us about $10k in interest.
Which is amazingly disheartening considering the total outstanding sum was under $50,000. But, if you give time and an 8% interest rate on big debt some wiggle room, you’ll be crying “Uncle!!!” in no time.
We knew that we had to take action…
Step 1 - Start learning how to handle debt
Give me a checkbook and I could balance it.
Credit cards? I paid ‘em off monthly and didn’t worry about ‘em.
Student loans…? They crushed me like a grape.
So I started by taking stock of what outstanding debt we had. What websites could we use to pay on the debt, what were their totals and interest rates, and what were their payment schedules (e.g. did they accrue interest while my wife was still in school)?
Around the same time, I started reading Dave Ramsey’s Total Money Makeover. And although I know the “Ramsey” name is taboo in many a personal finance circle, the man saved us tens, if not hundreds of thousands of dollars. I listened to Dave’s radio show, read his books, and used his platform as a launching point to begin understanding all the financial tools that had been foreign to me.
And with a new list of our debts (including relevant metrics) plus a new understanding of what to do with such a list, we sat down and made our modified ‘debt snowball/avalanche’ plan to attack the undergrad loans.
For us, that meant paying down about $100 each month just to keep the interest from accruing and to work on chipping away at that principal value. You see, we made about $35k as a family at that point and we had the prospect of dental school loans staring us dead in the face. BUT, even $100/month ended up making a big difference over the course of those 2 years.
Pro tip: We didn’t ’need’ to pay on any of those undergrad loans while my wife was still in school (grad or otherwise), because payment was not required while still in school. However, a few of those loans earned interest whether you were in school or not. So we chose to use our $100/month to pay on those loans earning interest until they were wiped out - then we began paying on the (larger) loans that hadn’t started earning interest yet. Make no mistake, our loans weren’t paid off at this point, but by taking this approach we could knock out some small-balance and high-interest loans.
Which was nice.
Step 2 - Begin to reduce debt burden by only accepting loans you absolutely need
Timeframe: dental school years 1-4
Those entering dental school in my wife’s class were presented with a spectrum of outcomes. Dental school could cost anywhere from “free” to about $500,000 in total. Here’s that spectrum visualized:
Rich aunt/uncle <———————————> Out of state tuition, room, and board
Our goal was to get as intimately close with our rich aunt and uncle as possible, without actually having them.
That meant me finding a job that paid more than $35k/year, so I started applying and taking interviews. And although we had just been through the largest economic disaster in recent U.S. history, I was able to land a job in 2010 (dental school year 1) making about $40k/year. I was lucky.
Then, in 2011, I was hired by my state to work as a forensic scientist. A job that I held for about 7.5 years (which I just recently walked away from) and ranged from $45k to about $70k/year in salary.
With an income in place, we used every frugal tip we had and vowed to take out only the loans we absolutely needed. Then, as a rule, we took out 10% less than that amount each semester
We made this possible by only taking out loans for tuition and not for living expenses, lab fees, books, or any other “category” her university decided was loan-worthy. For us, only the actual price of her classes was “loan-worthy”, and even then we weren’t thrilled about it.
That choice in combination with the fact that we were paying “in-state tuition” gave us a price tag of about $225,000 for my wife’s graduate education. Definitely not the $500k option but not quite the rich uncle either.
From there, we made a series of choices that took our total price tag for grad school down to about $200k.
We:
Lived in either studio or 1-bedroom apartments
Didn’t go out to eat much at all
Said no to many concert, dinner, etc. invites from friends
Learned how much we really love board games
Didn’t buy new cars
In summary, we tried to live as far below our means as possible, have responsible fun with friends and ourselves, and really explored what we could do as a young family on a budget. It wasn’t glamorous but we had a young marriage full of love and great times and we wouldn’t change those memories. But the combination of our budget and discipline were the tools which allowed us to achieve that level of frugality.
Here’s an anecdote that sums up our mindset from that time period:
Many things about dental school were a bit … ‘unique’ … we’ll say. One of which was the vending machine that sold practice teeth to the students.
The first time my wife came home and told me about this machine, I immediately flashed back to when I was a vendor at a ballpark. “Get ya incisors, here!! I’ve got canines, molars, and pre-molars here!!”
I had more fun with that than my wife would’ve liked, but hey — it was cheap entertainment.
So, anyhow.
My wife came home one day upset at the fact that she had made a mistake on a tooth in one of her lab classes. I listened intently and tried consoling. She really seemed upset about this messed up tooth.
And, per usual, as a guy, I misread the situation.
“Honey, it sounds like you know exactly what needs done next time so that you can crush the lab practical. That’s a great thing.”
Eye roll
“No, love. Now I have to pay an extra $1.50 to get a tooth out of that machine you love talking about.”
Our mindset was hyper-frugal and she was pissed about spending a non-accounted for $1.50 — that’s how we reduced our debt burden while she was in school.
Step 3 - Designing a loan-payoff philosophy that mirrored our goals and values
Timeframe: dental school year 4 and beyond
Now that dental school was soon to be completed, we were nearing the peak of our "accepting more debt” mountain (or so we thought). And much like when we needed to consolidate and attack all of the scattered undergrad loans - it was time to do the same with their grad school counterparts.
But this time, we took it a step further…
We had loans ranging from 5.6% - 8.2% interest rates and they came from 3 different sources (with 3 different websites). We chose to refinance all of our student loans with one servicer and by doing so, we locked in a 10-year fixed term loan with a 5.65% interest rate.
We refinanced in 2015.
Compared to the 5.6% - 8.2% we had been paying, the overall 5.65% rate seemed phenomenal. But when I looked at the fed-backed interest rates in the regular marketplace at the time (about 4%), I felt robbed.
My personal feelings about the larger student-loan crisis aside (but put your hand up if you disagree and think there’s ’nothing to see here’, and I’ll get Sister Wilma to stop by and crack you on the knuckles with her ruler because, c’mon), by refinancing all of the debt we had at that time to a 10-year fixed-rate loan, we were essentially saying a few things:
We’re able to pay these minimum payments now and expect to be able to do so in the future
At a maximum of 10 years we will no longer have student loan payments
If good fortunes should bestow us - we’re able to pay this loan off more aggressively in the future (there is no early payment penalty)
Did we want to pay student loans for 10 years?
No.
But we decided to invest in ourselves now with the hopes of earning the rewards later, and a 10-year fixed term loan on $250,000 was how we decided to do so.
We knew that these minimum monthly payments (about $2,000/month) would dramatically impact our monthly budget. But we consciously chose this path. And when it comes down to it, it’s simply taking that sum of money in our monthly budget from other categories and re-deploying those dollars to pay off debt.
If my wife hadn’t gone to dental school (and taken out those loans), we most likely wouldn’t have the option to shuffle around $2,000 in our monthly budget. That’s our silver lining.
This philosophy was the one we chose to adopt, because it worked best for us. Only you can decide if the same is true for you.
Step 4 - Manage the debt
Timeframe: Until the debt is dead
Spoiler alert: Shortly after dental school had come and gone, we decided to buy our home and buy a business that Simon Cowell would say, “We’ve taken and made it our own. Bravo!”.
Translation — the $250,000 total student loan debt that before had probably given me a 10% overall rise in blood pressure and kept me up constant nights is now our, “Oh! I can’t wait until we only owe $250,000 in debt!!” goal.
I’ll save you from the many details (most of which I’ve written about previously), and we’ll just leave it at this:
At our debt peak, we owed nearly a million dollars… Every single one of which, we were happy to take on.
The various loans were a constant series of us betting on ourselves, but I gotta be honest - if $250,000 gave me an elevated BP and some sleepless nights, this near $1 million just about gave me a stress induced heart attack.
It was a mental minefield and very rough for many months, but once I got my head on straight, I put a plan in place to best manage this sum of debt without going crazy. Here’s what I do:
Automate absolutely everything
I have every single monthly debt payment on an automated payment schedule that is spread throughout the month. Home mortgage on the first, business loan on the 5th, student loans on the 10th, …, you get the idea. This way, I never miss a payment and the $8,000+ sum doesn’t hit our bank accounts all at once.
Monitor accounts and payments on a daily basis
I wouldn’t call what I do in the morning a ‘routine’, but there’s one activity I knock out in the 2 minutes after I wake up before I leave the bed.
I run a quick status check of all our bank accounts first thing in the morning. I’m looking at total balances, recent transactions, and for suspicious activity. With multiple business accounts and cards, multiple personal accounts, and various folks having access to various cards and accounts, I have to stay current and up to date with everything in as ‘real time’ as possible. If this morning check runs clean, I can move on with my day. And if there’s reason to be alarmed, I can tackle it first thing when I get to the office.
Exercise and prioritize self care
Moving a bunch of zeroes around by itself doesn’t get the job done. I’ve found that budgeting, debt management, and frugality are all components of a bigger picture. And no matter what your goals are, you’re much more likely to accomplish them if you are constantly the best version of yourself in all areas of life. Health and mindset are paramount, in my opinion.
Build up a big ol’ emergency fund
This was counterintuitive to me when I first heard it but I went into our accountant’s office for a meeting a few years back and was on a roll. We’re going to pay off debt this, we’re going to “debt snowball” that. He let me go for about 10 minutes then he asked me a question:
“What happens when you pay off all your debt and then right when you’re debt free, your water heater breaks or one of the pieces of equipment at the office fails? You’ll go back into debt. You need to find a balance of saving and debt payoff in order to be in the best position possible. And I don’t care who you are, $500,000 vs $400,000 in debt really carries with it the same negative feeling. But when you’ve got $100k in the bank, my clients tend to sleep a little easier.”
The numbers may not mean anything to you, but I’d argue the philosophy holds true. How secure would you feel to have $1,000 saved up in an emergency fund with no real purpose in mind? How about $10,000? Don’t get too caught up in debt payoff that one small setback could cause catastrophic issues in your family’s financial situation. Besides, who wants to have to get in and out of their car via the passenger door anyhow…? ;)
Focus on what I can control
At the end of the day, no amount of worrying will reduce our overall debt burden at a faster rate. So I try to put that out of my mind.
RELATED READ: Here's How to Make the Most of Your Mental Bandwidth
The one variable which can have profound impact on paying down our debt though is the success of our business — and I care about that very much. That’s why I’m constantly focusing on ways to improve all aspects of our business, because those are metrics we can control.
For example, if we take care of members in our community through partnering with charitable events, not only is that the right thing to do, but it also has the potential to bring us more business. If we think up better ways to server a larger segment of our community, we’re helping them and helping us. And if we’re constantly trying to do better with the customers we have, then how can that be bad?
By focusing on what I can control, it takes my focus down from the clouds and keeps it on the path in front of me — where I can have an impact.
Conclusion: Personal finance and debt payoff philosophies are personal
No matter if you’re just trying to figure out where to start with handling your money, or if you’re making complicated and multidimensional money decisions based on years of experience, only you know what’s right for you.
There is no substitute for taking the time to do your research, investigate the information, and make an informed decision. I try hard to not just take what I read as gospel. Rather, work to understand the points made and why, and then use that point as yet another variable in my own large-scale decision making process.
We’ve covered many tools that you can use to attack your own student loan (or general debt) balance. So today, my question is — which ones are right for you? Please tell me how you’re attacking debt in the comments below and we’ll keep this discussion going!