The unfortunate honor of hitting one million dollars in debt is unique.  It is normally difficult for an individual to amass such a burden of debt to repay in their lifetime.  Banks simply will not loan you that much money.   The increasing costs of higher education are pushing many young professionals to these debt levels and beyond as they finish their education.    With newly minted diplomas in hand costing hundreds of thousands of dollars,  they proceed to purchase their first homes costing hundreds of thousands more.    This scenario results in a young, highly-educated professional in their early 30’s thinking “I did everything they told me to, why are things so bad!”     Financially they are now worse off than if they were starting at zero.   The situation is magnified when they marry another young professional who has made the same choices.  

How I racked up $1,000,000 in Debt

Through a combination of scholarships and part-time jobs, I was able to finish my undergraduate education debt free.  I had zero educational debt,  zero auto loans, and zero credit card debt.   I was essentially starting the game of life at zero.  In medical school,  I took out my first student loans and a carried a small credit card balance that was paid down by the time I finished residency.  I finished my 9 years of postgraduate education/training with $118,000 in school loans and zero consumer debt.   Not too bad compared to many physicians but not starting from zero.

Big Ticket Items Blow Budgets

We didn’t rack up $1,000,000 in debt on $4/day lattes.    Small expenses can add up if taken to the extremes, or if you are operating on a really tight budget.   For most of us in the upper middle class, these simple pleasures are simply not large enough to make a meaningful impact on our budget even if you indulge in them every single day.

We racked up the $1,000,000 debt on the three big ticket items of the middle and upper class:
  • Education:   Student loans for my education ($118,000+) and now private school tuition for my children ($30,000+/year).
  • Transportation: Autos loans ($50,000+), insurance, maintenance and upkeep.
  • Housing:  We live in a high cost of living area.  We invested in neighborhood safety, a short commute to the hospital and a house with character. ($850,000+)

The costs of managing these three items dwarf any other line items in our budget.   While not every family will have maximally spent on all three categories,  an increasing number of middle-class families are finding very little left over once these three categories are addressed.   Making smart decisions on housing, education and transportation will make or break you financially for years.     There are always choices.   Although,  many of these choices do not fit with the narrative of ourselves that we have built.

Sunk costs and what to do with them

We have sunk costs in all of these major categories.    Dave Ramsey often recommends for people trying to get out of debt,  if it will take longer than 2 years to repay the debt to just sell the item and start over.

This is an excellent idea but in practice, it is very difficult to execute emotionally.   We have an emotional commitment to these purchases and to get ahead financially we need to address what these items say about ourselves.  Most purchases were made consciously or unconsciously to fit a story or an image of how we see ourselves.   When we liquidate, these items to help zero out our debt,  it can feel like you are changing who you are.   This is why it is so difficult for people to make this step, even when it would be the quickest, most efficient way to get back to zero.

Slow and Steady vs Liquidate and Start From Zero

When you have debt payments eating up 50%, 60%, even 75% of your disposable income, you increase your financial stress.  One way of managing this stress is to realize that you do have the option of pressing the reset button and starting from zero or as close to zero as you can get.   It is a very scary thought to get rid of your major possessions but it can also be very liberating.

I know that if I truly needed to,  I could sell my house and car to get my debt to zero.   Thousands of very successful individuals have completely restarted their lives, some multiple times over and I know that I can do the same.

With that piece of mind,  I am going to opt for Plan A of executing a debt snowball and paying down my smallest debt as aggressively as I can.    I will then roll those payments and any extra money into my remaining debt.


What would you do in this situation?

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