The correct response to this sort of debt is, “AAAAAUUUUUUGGGHHHH!!!! THERE IS A CLOUD OF KILLER BEES COVERING EVERY SQUARE INCH OF MY BODY AND STINGING ME CONSTANTLY!!!! I NEED TO STOP IT BEFORE I AM KILLED!!!”
–Mr. Money Mustache
For some reason, I didn’t mind accumulating a few hundred thousands of dollars of student loan and mortgage debt within ten years of medical school. Being a little naive, I figured I could just turn on the savings and retire that debt as soon as I wanted. I had no reason to think otherwise. All my life I had been told that debt was safe, if it was the right kind of debt. As long as I wasn’t carrying around 5 figure credit card balances, I was to be commended for doing an excellent job managing my debt. I was never a free spender and was very diligent with my budget working my way through college. When I entered medical school, I was told, borrow as much as you can, focus on your studies. You won’t have any trouble paying it back.
When we crossed that $1,000,000 mark, the warning bells went off in my head. The exact date escapes me, but I do know that it was early 2016. I finally realized I had committed myself to paying someone else a whole lot of money over the next 30 years. Dreams of a well-dressed banker standing next to me with his hand out as I cashed my paycheck each month began to creep in. I started to think about how much I would like to have someone pay me a million dollars over the next 30 years.
With those images in my head, I quickly realized I am on the wrong side of this equation, and I had to fix it immediately.
There is no doubt about it; I dug myself into a huge financial hole and now comes the challenge of digging myself out. What is there to do? No sense complaining about it now, I owned up to the mistakes and decided to take ACTION to fix it.
I look at this mistake as the tuition for the most expensive education I have received yet.
Step 1: No New Debt
The first item of business is to stop the bleeding. No new debt. No new debt means every credit application that comes in the mail and every opportunity to open a new store credit card to receive 20% off your first purchase, they all go straight to the shredder. If you have trouble with credit card debt right now, eliminating this is going to be your number one priority since it is one of the worst forms of debt to carry. If you managed to get $1,000,000 in debt these days, chances are credit card debt isn’t your problem. You have to have your financial house in order for banks to lend you this amount of money. With a high income, you can overcome poor personal finances for a while paying your credit cards off each month.
It’s Not the Credit Card Debt
For a financially sophisticated household, debt starts to creep up in all types of products masquerading as savings. Companies will emphasize the interest rate and the amount of money saved by opening this credit account. Don’t be fooled. For high-income professionals, the zero-percent arbitrage game is not worth your time and effort. Companies know that time is your most valuable resource, and chances are in 18 months you will not remember when your rates reset. Our busy schedules and poor personal finances are why companies continue to offer these “discounts” to “qualified buyers.”
We went Cold Turkey
No new debt means no new car loans, no financing a new dishwasher on an exclusive store credit card to replace the one that just broke. If I can’t pay cash for it, it doesn’t happen. If the transmission on the car breaks, fix it. The repairs will be less costly than buying a whole new car. If you don’t have enough savings to pay for the routine emergency that comes us each month, then start here by building that emergency fund. Don’t use a possible car repair as an excuse to spend $30,000 on a new car just because repairs will be under warranty. See Mr. Money Mustache’s post on the costs of car ownership. Above all else, don’t buy a timeshare if you are already in debt.
Eliminating all new debt is a challenge for us just as it is for most families. Despite our high income, I choose to spend enough money on my children’s education to buy a brand new luxury car each year.
Action Step #1:
Get rid of all credit card spending except for emergencies and move to a debit card system. Eliminating credit cards will help prevent you from overspending.
- If you use the credit card rewards responsibly, continue to make sure you pay your cards in full each month.
- If you pay your bills in full each month and have zero credit card debt, pay off any low balance purchases you financed just to get a special promotional rate.
Once you have stopped adding new debt, go to Step 2.
Step 2: Make a List of Your Monthly Debt Payments
I began the process a few months back by organizing of all our monthly expenses. For those of you who have your financial house in order, this is personal finances 101. I have off and on tracked my spending since college, but I can speak from experience; some high-functioning people don’t take the time to do this step. If you haven’t taken the time, do it. You will be glad you did.
Start with Big Items Like Mortgage Debt and Student Loan Payments
You don’t have to start with a total budget. Following every dollar can be too painstakingly time consuming for some high-income families. Keep your efforts high yield and focus on your big ticket items first. Make a list of all your debts due each month. Write it down, use a spreadsheet, It doesn’t’ matter how you do it, just do it. I find that paper feels better for me, so I start with paper and then put it all in a spreadsheet a few months later. The essential part that you may not be doing is to break down your payments into the principal and the interest you paid that month.
Break Down Your Payments into Principle and Interest Paid
Here is my list of all my debts broken down into principal and interest. The item that is the wake-up call is the $3000 / month in interest. That is $3000 that I have to pay just to stay where I am. When I am doing my budget, that $3000/month would almost pay for a nice chunk of the private school tuition for my children. Or it could be enough to fly the whole family somewhere for a vacation each month. To appreciate this expense you need to compare what you are paying in interest to what it could be buying you. When you realize how much you are paying each month for the privilege of borrowing and financing purchases, paying cash for things begins to look a whole lot more attractive.
Action Step #2:
Make a list of all your debts and come up the total you need to pay each month. Be sure to break down your payments into principal and interest to get an understanding of how much more money your could have each month in your budget to spend on your family. Sign up here to get a free template with all these steps organized for you.
Step 3: Create Your Minimal Viable Budget.
Cut Your Recurring Expenses
Once you have your minimum debt payments, sit down with your credit card statements and go through all the charges for the last three months and eliminate the ALL the subscriptions. Cancel your cable, cancel the paper and get rid of your home phone. If you need a home phone, then switch to a VOIP provider. The gym membership, cancel it. You hardly go to the gym. Find a pair of running shoes that could use a little more wear on them. If we see we need something in a few months, we will add it back, but the goal here was to cut everything to the bone.
Make a List of Your Essential Bills
The next thing we did was make a list of our minimal viable budget. What are the bills we have to pay not to end up on the street?. What do we need to keep the lights on? The debt payments on that $1,000,000 in debt are numbers 1-5 on that list. Savings for private school tuition for our children was second. The rest of the items were deemed discretionary. That means that food, clothing, coffee, various school nick-nacks and anything from Amazon were considered discretionary. We moved all these expenses to a single credit card and a separate bank account that gets paid off in full each month. If there isn’t any money in the account, then we will be eating beans and rice.
Lay the Foundation for your Processes
This process is going to be different for everyone. One person’s minimum is going to be other individuals maximum. Your budget process is going to depend on your peer group. The easiest way to do this is using the free financial dashboard from Personal Capital to track your expenses. We used to use Mint but found that Personal Capital handled our investments much better, so we switched. We purposely put all our expenses on a credit/debit card that gets paid off each month so that I don’t have to enter the cash transactions manually.
Our top budget items are:
- Debt Payments (Mortgage, HELOC, PLC, 0% CC, School Loans, Auto Loan)
- Insurance (Homeowners, Auto, Disability, Life)
Action Step #3:
Pick a tool and set up a budget with the least amount of money your could live with. Sign up for Personal Capital to track your spending here. If you go with an online solution, there is some work involved with setting up the categories and your minimal viable budget the first time. I prefer Personal Capital due to their investment tools which are some of the best free investment instruments in the business. Like anything worth doing, take the time to do it right now, set up your system and you will be good. You are laying the foundation for your momentum later.
If setting up a new online tool is too much of a headache, the old pen and paper method still works. Just start and build your momentum.
Step 4: Deploy your Savings
Deploy Your Savings
After coming up with a minimal budget for your family, you likely have some excess cash flow that you can channel into debt repayment. If you created your minimal viable budget and the money coming in doesn’t make the payments, it’s time to make drastic changes.
Focus on the Outcomes
I like to keep things simple and focus on outcomes. In this instance, our plan needs to be simple enough to stick with it month after month. Our program also needs to be flexible enough to withstand the bumps that come up in the budget each month.
Be very careful at this stage. It is easy to quickly lose sight of the forest for the trees when it comes to devising financial plans. You can spend hours coming up with the optimal plan that saves you the most money on interest expenses, but if a single bump in the road throws the plan off track, it is not going to do you much good.
Things come up; that’s life. Build a little slack into your plan, and you will increase your ability to maintain it to completion.
Action Step #4:
Develop a repayment plan that works for you. There are three main factors to consider: How fast I want to repay it. Do I want to minimize the amount of interest I have to pay or do I want small quick wins? I outlined our strategy here:
Step 5: Visually Track Your Progress
Part of buiIding momentum is tracking your progress. You need to establish a positive feedback loop that shows small consistent steps towards your goal. When paying down massive debt loads over an extended period of time, this is a critical step for keeping yourself on track. Building momentum is part of the reason I have chosen the “Snowball Method” to help build the momentum needed to sustain this over ten years.
Celebrate Small Wins
Also, I have become a big fan of journaling, which is one of the reasons I started this blog. By writing a post each month on my progress, I am tracking my success and building community reinforcement.
Other tricks include using wall calendars and crossing off the months as you make your payments each month or even the fundraising goal thermometers that you see everywhere.
Summary of Your Next Actions
If you are committed to eliminating your student loan and mortgage debt here are your action steps:
Stop accumulating new debt.
Make a list of all your debt payments broken down into principal and interest payments.
Figure out the absolute least amount of money you can spend each month and then build in some wiggle room.
Create a repayment plan that works for you.
Track your progress and celebrate small wins.
What do you think? Is this too aggressive of a timeline? Would you take a different approach with a massive debt vs. smaller debts?
Warnings & Examples
A Wise Man Learns from the Mistakes of Others: Be Wise and Sign Up