At one point in time not too long ago, my wife and I were crushed under a monumental mountain of debt. In a period of less than 3 years we eradicated almost $140,000 of this debt and, today, we are nearly debt free.
How did we accomplish such an amazing feat? Well, it took dedication, hard work, perseverance, and some good fortune. We had to make many sacrifices along the way, but we also didn’t starve ourselves and make life miserable. Instead, we struck a fine a balance between digging ourselves out of our burdensome debt load while still enjoying life. That approach is key!
The reason I am telling this story is not to brag about our accomplishments. Rather, it’s to share with others who may be afflicted by a similar situation. I know all too well the suffocating dread one feels when carrying debt especially when the amount owed is at astronomical amounts. It’s a crushing feeling that weights heavy on the soul and sucks the life right out of you. There is good news though. There is hope. There is a brighter future if you take control of the situation. Nothing will change, though, if you don’t aggressively take action.
If we can erase our debt – you can too!
Debt Situation: Mr. Utopia
I have always been wary of debt. My upbringing was fairly conservative when it came to finances. While my parents were by no means financial geniuses, they did stress the importance of saving and not over-extended oneself. Throughout my life, I have maintained that mentality. I’ve never carried a credit card balance. There’s been no personal loans or cash advances. In fact, aside from educational loans, the only debt I had ever incurred was for a car purchase (and a home mortgage – that’s a unique story though which you can read about here: foreclosure nightmare).
Speaking of educational loans, that’s how I accumulated a fairly significant amount of debt. I borrowed roughly $15k to fund my undergraduate studies. I graduated in 2003, consolidated in 2004, and made the minimum payments (that’s all I could afford) until 2005 when I put the loan in deferment because I went back to school. This time around I was pursuing my MBA. To me, an MBA was not worth it unless I was attending a nationally ranked school. Of course, the cost of doing so was rather exorbitant. My MBA was going to require over $60,000. The cost-benefit analysis indicated the long term payoff was worth it. To minimize the buildup of debt I took advantage of the tuition assistance program through my employer (I even switched jobs part way through to a company that had a more beneficial reimbursement policy). When all was said and done, I graduated in June 2008 with $27,000 borrowed. That’s not too shabby considering the overall program cost. However, I was now $42,386 in debt.
Debt Situation: Mrs. Utopia
The future Mrs. Utopia and I met and started dating in June 2006. She was also obtaining her Master’s degree in a science field and, once completed, planned to go after a Ph.D. In early 2007, as our relationship become more serious, she revealed to me that she had a considerable amount of student debt. My initial reaction was fairly calm. After all, student debt is pretty much the norm and I obviously had my own loans. However, I did a double take when I found out how much she had borrowed – just under $100,000! To make matters worse, approximately 85% of her loan balance were from private loans which carry a much higher interest rate than federal student loans. All of her private loans had variable rates and were all 9-10% at the time.
Needless to say, the bombshell she dropped on me that day became a dicey issue in our relationship. I’ll be writing more about the relationship ramifications in the future, but suffice it to say that, as difficult as it was at certain points, we did not let this destroy us. At that point in time in 2007, there wasn’t much we could do. She was still in school, so all of her loans were deferred and we didn’t have to start making the massive monthly payments yet. I did encourage her to and assist her with consolidating her numerous private loans into one single private loan in order to streamline everything and to lock in a “lower” interest rate. She was able to do so at a fixed rate of 8%.
Toward the end of 2007 as she was graduating with her Master’s, she decided not to continue on for the Ph.D. Doing so would have required another 2-3 years at a minimum and even more student loans. The opportunity cost was just too much. At the beginning of 2008, she found employment and was able to put her education to use. On the down side, after 7 years of post secondary school and $100k school loan debt, she was only earning about $35k base. After a 6 month grace period, her consolidated private loan entered repayment. The payment was $940/month. Her fed loan was $105/month.
Times Were Rough
We hit rock bottom in August 2008. We owed over $140,000 combined on our student loans. That alone was enough to make our future look bleak. To make matters worse, we were suffering through a foreclosure nightmare and my perfect credit score was about to be ruined. I was having health issues which required surgery the previous month. And, as if that weren’t enough, I was laid off on my birthday. You can’t make this stuff up folks. It doesn’t get much worse than that.
Digging Out – Phase I
How does that expression go? “When you’ve hit rock bottom, the only way to go is up.” That certainly proved true for us. The next several months were full of high anxiety and ridiculous amounts of stress. The economy was collapsing and we were just completely lost in all the misfortune that had beset us. Sometimes, though, good things come out of ominous events.
The layoff turned out to be a blessing in disguise. I was thoroughly worn out and utterly exhausted from the 3 long years of night school, working full time, the foreclosure/lawsuit mess, health issues, etc. I needed a break from everything. Furthermore, I had come to detest my job anyway and loathed going into work each day. However, I was obligated to stay because had I voluntarily departed I would have had to repay a large amount of my tuition reimbursement. Being forced to leave was a relief.
The bank that laid me off actually paid me for 2 months to not come into work! After those months were over, I then received a 3 month severance package. The problem at the time, though, was I had no idea when I would find employment again and with the economy crash getting worse every second the severance package was of little comfort. I caught an extremely fortunate break in early November. I received a call back about a job I had applied to via a Fortune 50 company’s site a few weeks prior. The manager scheduled a phone interview for the next day and then had me do a 2nd phone interview later that day with his senior analyst. I thought both discussions went well and was hopeful that I’d hear something back soon for an in-person interview. The manager ended up calling back the very next evening and offered me the job on the spot! I was dumbfounded. All of a sudden I was employed at Fortune 50 company and ended up with a raise to boot.
A few months after starting the new job, I turned my attention to our loan situation. While my girlfriend’s private loans carried the higher interest rates and should have been tackled first, I decided to address my debt instead simply because, at the time, I wasn’t certain of our future together (and I don’t say that to imply we were on the rocks; I just mean we weren’t married yet so I needed take care of my direct obligations first). With my severance pay and a little bit of savings I already had, I was able to pay off all $27,000 of my MBA debt.
A few months later, after saving big chunks of my new paychecks and combining with what little I had in my savings account, I was able to pay off my consolidated undergrad loan of $15,386. I was now personally 100% debt free!
Digging Out – Phase II
Continuing the trend of positive momentum, future Mrs. Utopia found a new job in early 2009 at about the same time I was paying off my debt. The new opportunity was an university lab research position and was a considerable step up from the work she had been doing for the past year. Along with a better working environment she has received a bump in pay. Granted, her income was still below what one would hope to earn after amassing so much student debt. That said, the job switch did make the combined $1,050 minimum monthly loan payments a bit more feasible.
Fast forward about a year to April 2010 and we still have over $100k on my soon-to-be wife’s loans (I had proposed to her in December!). We were in the planning stages for our wedding which was set for October. As I’m sure many can attest to, we quickly found out just how absurdly expensive weddings can get and those discussions brought our overall financial situation back to the forefront. To be sure, neither of us had forgotten about the massive debt remaining, but there was an element of “out of sight, out of mind.” Knowing full well that if we didn’t aggressively attack her private loan (which was around $93k by then due to capitalized interest from when it was previously in deferment) then we’d be handcuffed for what could be the majority of the rest of our lives. In particular, we both wanted to start a family and there’s no way we could have afforded to raise children under those circumstances.
So, here is the plan I drew up. It was quite simple in concept but challenging in actuality:
- The two of us buckle down and live on my salary alone. We pay all expenses out of my income.
- Every cent of her monthly paycheck goes to debt payments.
The intent was obvious. Each month we would be paying the principal down a considerable amount. According to my rough calculations, this approach would take 4 years (until May 2014) to accomplish complete payoff. That seemed like forever back then, but, in a way, we really didn’t have a choice.
Guess what? We obliterated my projections. The final payment was made on January 5, 2012 taking less than 2 years!! Here’s how we accomplished this:
- Dedication: We stuck to our regularly scheduled payment plan. We didn’t veer or allow ourselves to get off track for any reason.
- Frugality: We minimized our expenses as best as we could without going overboard. In other words, we lived frugally without depriving ourselves.
- Maximized Opportunities: We used every bit of unexpected income to make additional payments. Taken individually, these were small contributions but they certainly added up overall:
- my year-end bonuses (which were pretty meager, but enough to help)
- holiday gift money received (from family)
- tax refunds
- Took Advantage of Past Success: Back in 2004, I invested a little over $3k in the Vanguard Energy Fund (VGENX). The value had nearly tripled and, as difficult as it was emotionally to sell a prized investment in order to pay down debt, I went ahead and did so.
- Took a Risk: As the loan principal balance was dwindling down, we took a calculated risk and used our emergency funds to make one last large payoff payment. We literally had about $100 cash to our name after the final payoff.
- Good Fortune: Perhaps a better way to classify would be to say “a lack of bad fortune.” Thankfully, there were no major catastrophes or set backs (ie, expensive car repairs, medical emergencies, etc.) to derail our progress.
Debt Situation: Present Day
The only remaining student debt we have is Mrs. Utopia’s federal loans. As of July 2013, the current balance is approximately $8,500. In addition, we have an auto loan with a remaining principal balance of just under $18,000.
Conclusion: Living Debt Free
We’re obviously not quite there, but once we pay off the last bit of remaining debt, our goal is to be debt free for as long as we remain alive. About the only debt I might consider taking on is a mortgage to purchase a house (although it would have to be in the right circumstances especially after my prior home ownership debacle). For everything else, we either have the funds to spend or we wait until we do. From now on, I am going to have the power of compound interest working for me – not against! No more will the confines of debt emotionally ravage us.
If you are inspired or encouraged by my story, please share via the comments section below or by contacting me.
In the future, I’ll be sharing more about our experiences with debt including deeper analysis, helpful advice, and interesting tidbits. If you’d like to receive those articles, then please subscribe or follow along: