Wednesday, February 18, 2015

Our Debt Accumulation Journey (part 1)

Getting into debt is incredibly easy, but paying off debt is not. This is especially the case in a society where being in debt is so common it is generally assumed that any large purchase will be financed. I wanted to begin to put down some of the details around how we found ourselves in debt and then some of the ways we have paid off debts.

We began our married life with two older, but paid for cars, a small amount in savings, and $15,000 in student loans (all mine). We were both recent college graduates and started working our first 'real' jobs shortly after we were married. We felt like we had plenty of money and even saved up several thousand dollars for me to get laser eye surgery in just a couple of months.

My job was downtown and I took the train into work each day, and soon found myself using public transit so frequently that we sold my car and went to being a one car family. We didn't need the money, we just didn't feel the need to keep a car we were only driving 10 miles a week or so. As luck would have it, right after we sold my car, my wife's car was totaled in an accident. We had been thinking about getting a newer vehicle already and this seemed like the perfect opportunity. We hadn't planned for this to happen, and hadn't really built up any substantial savings (we only got a little over $2,000 for my car and about the same for my wife's car),  so we chose to borrow $20k to purchase a used car. We felt that we were being completely reasonable, since the payments of only about $400 a month were less than 10% of our combined take-home income and we were still living as a one-car household.

Naturally, we also felt that this was the best time for us to purchase a house. We had both seen prices climb and were worried that if we didn't buy soon, we would miss out on a lot of price appreciation and be priced out of the market. We were 'pre-qualified' for something ridiculous like $450,000 with only about a $5,000 down payment. So again, we felt that we were being conservative and safe by setting our limit at $250,000 and eventually purchasing a home for $225,000, borrowing $220,000 on a 5/1 ARM. At the time this seemed like the best thing since the interest rate was lower than fixed rate mortgages at 6.75% and we didn't plan on being in the home any longer than 5 years since I had ambitions of moving out of state to attend graduate school.

I love owning a home, and as big do-it-yourselfers, we always find plenty of projects to do. In the first 8 months in this house, I remember we swapped out all the doors, updated the baseboards, swapped out light fixtures, added built-in bookshelves, painted nearly every wall in the house, and did some landscaping. We even found time to do tile at a family members house. In addition to projects, we ran into all of the expenses first-time homebuyers experience but often don't anticipate like lawn care and maintenance tools, and furniture and decorations for a larger living space than we had ever before had. Financially, we were able to pay for all of these things as they came up and did not accumulate any additional debt, but we were only making minimum payments on the debt we did have.

Things really got interesting for us that summer when my wife and I both felt the strong impression that we needed to start looking at graduate school sooner than we had originally planned. We had only owned our home for about 8 months and hadn't really paid down any debt substantially. Even though I had known that I wanted to get an MBA, I hadn't put much thought into saving up for it since it seemed so far away. Tuition was going to be nearly $100k and the school I had my heart set on (the alma mater of a former professor and mentor of mine) was across the country.

At this point, our debts were about $220,000 on the house, $18,000 on the car and $14,000 remaining in student loans for total debts of around $252,000. Next I'll discuss what happened when we started looking seriously at grad schools and what this meant for our debt.

No comments:

Post a Comment