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Yes – I call myself a personal finance blogger. AND… Yes – that mysterious crooked number with five zeros after it does represent a relatively recent picture of the debt we have amassed as a family.
(Photo by MKulp Photography)
This story is a bit different from the other personal finance bloggers you’ll read about. There’s no tale of a mansion we couldn’t afford that went under. Over-priced cars that cost us thousands. Lavish vacations paid for with tomorrow’s money (credit cards)… I guess I did lose about $15,000 during the market crash, but that doesn’t equate to nearly a million dollars in debt, right?? Correct. In fact, we’ve lived a relatively frugal lifestyle and we understand the process of coming up with new excuses every weekend as to why dinner out with friends wouldn’t be an option. We’ve argued with utility companies, shopped for the best rewards credit cards, and cut our grocery bill in half. So what went wrong…?
What if I told you that nothing ‘went wrong’ and that this was part of the plan all along. That amassing multiple hundreds of thousands of dollars in debt is the life and path we’ve chosen to allow our family to most efficiently build generational wealth that will hopefully change lives forever. Would you call me a crazy dreamer and this story fiction? Truth is that the story isn’t finished so you may not be wrong. I sure as hell hope you are, though.
How we got here
Debt #1 – Student loans (31.25%)
I was one of the luckiest young adults in the world because my parents were able (and willing) to pay for my 4-year education. There was some hope that scholarships would kick in at some point in my scholastic/athletic career, but because I had waited until the last minute to decide on a school, neither academic nor athletic scholarship offers remained. Because of this, I had agreed to be a preferred walk-on for Kent State University’s football team. Preferred walk-ons at Division I schools are typically ‘bubble’ athletes. We are guys that have offers to play at FCS, Division II, and III schools, but the Division 1 offer may or may not come. For me, the full scholarship offer to the D-1 school did not arrive. There was still hope for us, though. ‘Preferred walk-ons’ were invited to summer camp and offered a roster spot from day-1, but unlike our scholarship peers, we did not take part in training table (free food every night)… Oh, and we didn’t get the monthly stipend for living expenses or full tuition payment either… Minor details.
Back to me being extremely lucky. During my second year with the football program, I suffered a back injury that left me in an orthopedic surgeon’s office with him telling me that one wrong hit could paralyze me for life. That was all I or my parents needed to hear; and subsequently, that was also the time that my parent’s safety net kicked in (lucky). I did earn a Graduate Assistant position for my time as a student in the Master’s Degree program, so if you add my 7 years of collegiate education together, you’ll see the balance of $0.00 in student loan debt.
Monica, started with a similarly-awesome story as she had earned a full ride to The Ohio State University’s (OSU) undergraduate program out of high school (being the superb student she was) … $0.00 for all 4 years if life didn’t intervene. (Plans always go exactly how you expect them to, right…?) You can see where this one may be heading, though. There were some unique circumstances that eventually led to Monica changing universities. She landed at a little school called Kent State University (KSU) and as they say in the fairy tales: we met, fell in love, and the rest was history!
The one issue (that neither of us would change for anything) was that her full-ride scholarship did not transfer from OSU to KSU. Here, we add some living expenses to a couple years of tuition, and now our debt is starting to get somewhere. My incredible and intelligent wife had decided that dentistry was her passion around the time that we had met so as she prepared for the DAT (Dental Admission Test) and started taking interviews to the best dental schools, we sat down and took a hard look at our budget and our future. We decided in this moment (about 7 years ago) that we would do whatever needed to be done in order to reduce the loans required to pay for her 4 years in dental school.
Step 1 in that process was using a portion of our savings to pay off as much of the undergrad debt that we could –
we were able to reduce from $50k to about $40k by the time dental school started. We cut bills, became hermits, and continued ‘living the dream’ for our engagement and newlywed periods. My mother-in-law always used to say, “Oh, to be young and in love.” We were undoubtedly both of those things and no budget or frugal lifestyle was going to upset that. If anything, I’d say it brought us closer together.
Step 2 was to put our heads down during dental school and work as hard as we could to reduce the number of loans taken out to the smallest value possible.
During this time we used my $35k annual salary to live off of, pay what we could on the existing loans, and buy internet service so that I could look up bootleg Chipotle lime rice recipes so that we didn’t have to spend at the actual restaurant (my rice never turned out quite as good as the real thing… My life’s 1 regret).
All totaled up, we came out of the 6 years of undergrad/dental school combo with a solid 6-figure sum in debt (~$30k-ish came from the undergrad). I won’t presume how much you know about dental school tuition rates, but I’ll say that we know more than a few dentists that graduated with over $400,000 in student loans after dental school (we didn’t find ourselves in that situation). We considered our significantly reduced burden a blessing, took our lashings, and went on about our merry way.
The student loans came with the most ridiculous interest rates (5.6-8.5%, with the majority on the higher end). Fortunately for us, we did refinance about a year ago for a 5.65 rate across the board on a 10-year fixed term. The favorable interest rate (comparatively) and aggressive time-frame both lend toward a relatively quick pay off of these loans. I’ll discuss more of our overall game plan below.
Debt #2 – Home (32.75%)
Through working odd-jobs in high-school and ‘regular’ seasonal and part-time gigs during college, I had saved about $10,000 and invested it all in the market (2005). This article details my ‘meteoric rise and impressive free-fall’ during the ’07-’08 crash that hit us all, but I’ll summarize it to say this sum of cash was for my (our) eventual first home. It just so happened that me losing $15,000 and gaining a tremendous education during the crash delayed that home purchase until 2015… Worth the wait.
Many of my personal blogger contemporaries will either advocate for renting or purchasing a much less expensive home that could be paid off in a shorter timeframe. They’ll cite the strict numbers game and talk dollars and cents about this and most other decisions. The 1-thing that separates us from the FIRE (Financial Independence Retire Early) crowd that I’ve learned so much from is that there are some aspects of life that we’d rather not go minimalist on. And here’s where our story starts to deviate a bit from that FIRE norm. While our home is not a $75,000 fixer-upper, it is neither a $1,000,000 monstrosity. We settled somewhere in the middle that puts our family’s first home in our ideal neighborhood within walking distance to parks, pools, Clara’s schools, the local YMCA, library (little further walk), and our local downtown.
It’s a neighborhood with block parties, neighborly waves, and a wide range of families (newlyweds to empty nesters). We love it. Sure, we could’ve moved down the street a few miles and saved a boat-load of money but we also could’ve moved in the other direction and set fire to the existing mortgage payment for a new and shiny payment twice its size. Our ‘starter house’ had been saved for over the course of a decade and the intention was to make a purchase that could leave us in this home for 5-50 years, depending on what life dealt us and what we wanted. 3 years in and we wouldn’t change that decision.
We purchased the house a year after Monica graduated dental school and a month after Clara was born, and as it is the debt we were most comfortable with having, our payment terms are the least aggressive. Also, my FIRE friends will probably ridicule me when they see this part. We took out a 7-year ARM (Adjustable Rate Mortgage) that completes in a total of 30 years. Our 7-year period is locked in at 4.15% and after the initial 7 year period is over the interest portion of our ARM becomes ‘adjustable’ according to market conditions. Our intention is to refinance this debt around year 6. More about this below.
Debt #3 – Business (36%)
This was the fork in the road moment where we had to decide the direction of our life for the next 10-ish years. Would we buckle down, pay off our debt as fast as reasonably possible, continue working our regular jobs, and re-evaluate at the end of that period… Or… Decide that an exorbitant amount of debt is something that we can be comfortable with in the short term to do the thing that would allow us each to scratch an itch individually, as well as one as a family (that’s 3 itches for those keeping track).
Itch 1 –
Monica had been a practicing dentist for 2 years in 2 different offices and environments. There were similarities and differences across those offices but one thing she realized after her 2 practicing years was that she has preferences for how she would like things to be done… And those preferences didn’t always align with those of the bosses she practiced under. Monica’s desire to own her practice shocked me when we had that first discussion because the constant mantra was that she would never be interested in taking on that level of responsibility. She wanted to practice the dentistry, provide the best possible care, then go home at the end of the day.
Itch 2 –
I was content with having to open my own gym, or restaurant, or whatever other half-baked ideas would pop into my head for the relevant 3-month period, so while Monica was going through dental school it was my job to get a job and make sure our family stayed as close to the black as we could. I had put my dreams of owning a business to the side and I was 100% cool with it. But… When Monica came to me one day and said, “Hey. I think I want to buy our own practice… And I want to do that soon.” There was a fire lit under me that burns to this day. Sure, I’ve been exhausted, stressed out, and feared of an impending cardiac condition at times, but I’ve loved owning our own business. It’s been my dream for as long as I can remember and now I get to do it with my best friend. Win-win.
Itch 3 –
We have subscribed to the “work hard and sacrifice now so that future us and future generations will be well off and not have to worry about money” philosophy since we started dating way back when. Of course, we could live that philosophy and eventually, when we hit the rainbow’s end, we could live that dream. Buying our own business, while it does have the potential to bankrupt our family, also has the ability to accelerate our path to building generational wealth at an exponential rate. We’ve chosen to bet on ourselves. To work hard enough and plan smart enough so that we and our team are in the best possible position to live that dream. Stay tuned…
This loan was by far the most difficult to earn. Partially because of the business we purchased but in many parts due to the other two debts (and their amounts and payment schedules) listed above. We ended up having to bankroll a significant portion of the comprehensive purchase process (about 6.25%) and when you’re dealing with a total debt like we’re talking about, that 6.25% hit us pretty hard. Because of our having to front significant cash, our total business debt was slightly reduced and thus our total interest paid also came down significantly. As it stands now, the business is on a 10-year fixed loan at about 5.65%. This monthly payment is the largest, but it also is more significantly tied to the financial health of our business rather than that of our personal bank accounts. As the business grows, this debt service reduces in severity…
Our plan of attack to knock out upper 6-figure debt
At this point, to pay ‘minimum’ payments on our debts is not a failure. 2 are on 10-year fixed terms while the home loan has a slightly different structure. But now the questions we’re left with are:
1) Are we able to produce cash above the monthly minimum payments to reduce the overall period of indebtedness?
Right now – no. However, we have been planning (and paying) for a required move of our dental office that is set to take place in April 2018. Once that is complete, I have the confidence to say that we’ll have at least some surplus to throw at these debts. (There are infinitely more variable to discuss in this equation but for now, just trust me on this one. I’ll dive into the other details in later posts)
2) How to best use extra cash while paying off our debts?
First off, we will be re-instituting the ‘pay ourselves first’ plan by increasing our retirement – and other – savings rates (more about this to come). With the surplus remaining, our primary opponent will be the business debt. Here, we have the largest exposure and primary key to unlocking all of our future financial plans. Regardless of what happens to the dental market, this loan will come due. Month after month. If our practice took a downturn and we defaulted on this loan, the other two would collapse with it. Not on day 1 but definitely in time. Monica could most likely find another job as an associate dentist, but there is no chance that salary would account for both the student loans and the business debt (that we would no longer be operating…). This is about the best of the possible worst case scenarios. Another thing to remember about the business debt is that regardless of what happens to either of us, it’s very unlikely this debt would be forgiven. Either pay or go bust, there’s no in between.
Looking at the business debt from the other rosier side shows me that if we could pay this debt off earliest (~5 or 6 years), not only do we greatly reduce our exposure but we also significantly increase the cash on hand each month. With this extra surplus, we could either put it back into the business or use it to pay off debts #1 and #2… Or we could do a combination of both. In any case, our options look much better and the anxiety level should decrease.
Debt #2 on the chopping block will be the student loans.
Sure, we hate this debt just as much as any other but this one comes with a slightly less weighted anchor. You have the already aggressive payment plan, the fact that Monica could find a different job to fairly easily cover this monthly cost, and if we can sustain the regular ‘minimum’ payments until the business debt is eliminated – finishing off the student loans should be a walk in the park at that point.
If the worst should happen and we default on the student loans, Monica’s license could be suspended and she may not be able to practice until certain hurdles would be cleared. ABSOLUTELY, we want to avoid that scenario at all costs, but there are some potential avenues to still keep the business open and operating at that point so that we could still have some cash flow. It would be a blow, for sure, but maybe not the death blow that defaulting on the practice would be.
Debt #3 then remains the house
The obvious downside here is the ARM mentioned above. What will the rates look like in 4 years? I’m not certain but likely they’ll be higher than they were when we took the loan out. In the current scenario, we would be paying the most interest on the house. But, if the above plan falls into place, we would refinance the house in year 6 to a more aggressive payment schedule (either a 10 or 15 year fixed loan). Thus, if we have the business paid off in year 6, the student loans in year 8, we could pay the new minimum on the re-financed home loan and have it wiped out in year 19-ish. If we got aggressive with it and put the remaining sum (that had been paid toward the business and student loans), we could pay the house off by year 12, easy.
This plan paints our financial abilities in an extremely favorable light. At this point, it all rests on how the business performs. If we do well, we’ll do well. If not, we’ll need to get pretty creative. If the bank repo’s my computer, I won’t be here to write about it but in all other cases, stay tuned for the unfolding story. I’m anxious to see how our priorities adjust in time. What emphasis will we place on savings vs. paying off the remaining debt??? Only God knows at this point. What I do know is that I need to finish this article so that I can get talking with our business marketing team!
Thanks for reading!
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I’m glad you’re here. Thanks again and talk soon!