We are one million dollars in debt.
Even though we have (generally) gone about amassing this debt in a very strategic and purposeful way, the number is still a bit shocking to us. Many people have told us that this level of debt would keep them awake at night worried and stressing. We will be talking a lot more about debt and its goodness/badness in future posts. In this post, we're going to be laying out exactly what all of our debts are.
We may make it look easy, but it is actually a hard thing to admit the entire world that we are $1 million dollars in debt. Not because we believe it is shameful or something that should be hidden, but because we know that we are all taught to believe that debt is shameful.
It’s hard to live your truth when the world is telling you that your truth is not only different but wrong.
LIVING OUR BEST LIVES ON THE WAY TO FINANCIAL INDEPENDENCE
But if there is one thing that we believe in here at OBH, it’s the importance of living YOUR best life. That means doing what you need to do to craft a life that works for you and your family. In the same way that no two lives are the same, no two financial journeys are the same.
In our case, though we are $1 million dollars in debt, we are also on a financial path that will lead us to have $1 million saved in nine years. Even more amazing is that during that time we will also be able to to meet our other personal and financial goals, like traveling more and paying for our eldest child to go to college debt-free when she graduates from high school three years from now.
We love the life we have built and are excited about the path that we are on. And we are able to have it because of—not in spite of—debt.
We will be talking more about how we manage the risk associated with debt and use it to improve our financial well being in the long run in a blog post later this week. But first, let’s take a look at what that $1 million dollars in debt looks like.
THE HOUSE DEBT— $540,000
In 2015, we moved from Philadelphia to Washington, D.C. because Joseph’s job relocated him. It was the summer before Alexis was heading into eighth grade and I was two months pregnant with baby Reeves.
This was the 13th time I had moved in Alexis’s life. She would be starting her third middle school in as many years. So we made the decision that wherever we ended up, we’d be staying there until Alexis graduated from high school.
It was time for us to put down roots.
This was one of those fork in the road moments where different circumstances might have led to a different outcome. For example, if Alexis had been just a few years younger, we may have considered renting for a year or two and then buying even if it meant should would have to move schools.
We knew that we had a strong preference for Alexis to go to public school. It made more sense to pay a higher home price for a school in a good district than to pay private school tuition that we would never see again.
Knowing that we were committed to being in the area for the next six years, we came up with a list of things we wanted from a house as well as our max price. We determined our max price by limiting our purchase to what we could afford on a single income.
Having last owned property in Texas, a much lower cost of living area, we were in for some sticker shock. We were hoping to buy a house for three or four hundred thousand but that only bought us small town homes in bad school districts. Even bumping our price up to $600,000 left us with few options.
Ultimately, we bought a house that was cosmetically okay but that was in serious need of all of a lot of unsexy maintenance work. By doing so we saved $70,000 on the purchase price,but it meant we would have huge outlays over the first few years as we worked to get the bones of our new house healthy again.
THE 401K LOAN – $13,000
When we realized that buying a house in our new city was going to cost several hundreds of thousands more than we had planned, we realized we didn’t have enough to cover the substantially larger down payment.
At that point we began to reconsider purchasing altogether. We knew that if we rented for a year that we would be able to come up with the extra funds. We had been renting in Philadelphia so we weren’t completely opposed to it. Though I really had been looking forward to bringing our baby home to a nursery, since I wasn’t able to do that with Alexis.
That’s when we discovered that there weren’t any apartment complexes in the school zone that we had our eye on. Not one. There were a handful of single family homes for rent, all asking over $3,000 a month.
There was no way we were going to fork over that kind of cash if we could afford it. That meant it was time for us to start getting creative if we were going to come up with the money we needed.
We decided to take out a 401k loan to make up the difference.
At that time our 401ks had around $115,000. We were comfortable doing this for two reasons. First, we knew that it would not compromise our ability to retire comfortably thanks to our relatively high savings rate. Second, because the money would be invested into our home we saw it as a restructuring of our assets.
In theory, we will get that $15,000 back when we sell the house. (Fingers cross on that one because there are no guarantees.) But meanwhile we are putting the money back into our 401k accounts over time by making monthly payments to ourselves.
THE HOME IMPROVEMENT LOANS – $21,000
Who doesn’t love Chip and Joanna from Fixer Upper? I’m a fan, though our decision to buy a fixer upper had nothing to do with the show. We bought our house knowing that it needed a lot of work. The mechanicals were largely original to the house. The fireplace was inoperable. The windows were original and many were rotting.
We had our work cut out for us.
Our first year in the house we replaced the HVAC for a whopping $14,000. That included running a gas line to our house, swapping out the 30 year-old oil furnace a new energy efficient one, and replacing the A/C unit and water heater. We got a 0% interest loan through our bank thanks to great credit and the low interest rate environment.
Year two, we replaced all of the windows. It cost us $12,000. The financing was at 3% for 18 months. We intended to pay it off in less than a year. Thanks to a larger than usual tax refund, it only took us two months. But I am including it here because it was part of our debt load not too long ago.
THE STUDENT LOAN DEBT – $420,000
Joseph and I are both attorneys. We funded our law school tuition and living expenses using student loans. Our loans are massive but they are not burdensome because they are federal loans. Federal loans come with very comfortable repayment options. We talk all about our student loan repayment plans before in other posts so check those out for more details.
THE CAR DEBT—$14,000
When we moved to Philly we went down to a single vehicle. That worked perfectly there because we lived close to the city center with easy access to public transportation. Alexis would often hop on the train after school and meet us in the city for dinner after work.
City life was over once we moved to the D.C. suburbs. Joseph and I now had substantial commutes and were heading in two different directions for work. We needed another car.
Normally we prefer to purchase cars that are 2-3 years old so we don’t take the depreciation hit. This time, we chose to purchase a new Honda Fit. Buying used would have saved us $2-3k but for a car with 20k+ miles. Since we hope to give this car to Alexis and expect it to last her 10 years, we opted for new.
We purchased the car from a dealership but had financing set up through our bank. We pay 2.75% interest on our car loan, which is less than what the dealer was able to offer us.
THE CREDIT CARD DEBT – $16,000
This one is the big one. As in, the one that we didn’t plan for. This is the debt that taught us how important it is to reevaluate your budget periodically—and particularly when something changes in your life.
In our case, we had a baby and started to pay for child care without reevaluating our budget. And I started a new job that had me traveling all over the East Coast. A job that I absolutely hated.
We went from having zero credit card debt to having $16,000 in just 10 months. Which, not coincidentally, is exactly how much we spent on day care in those same 10 months.
No excuses here, but when I say that the misery that I felt from my job negatively affected our entire lives, I am not exaggerating. I didn’t care about budgeting or eating healthily. I went for the easy happiness boosters—eating out and shopping. And Joseph, ever willing to do whatever it takes to make me happy, indulged me. I gained 20 pounds and our debt ballooned too.
Ultimately I realized that the pity hole I was digging for myself (and my family) was unhealthy and so I began to focus on finding joy where I could while I applied for every job in sight.
Eventually I found a job I love but had to take a massive pay cut. Still, we’ve been determined to get rid of the credit card debt this year even with our reduced income. Meanwhile, we are paying 0% interest on that debt until June 2018.
CHARTING A PATH FORWARDS TO FINANCIAL INDEPENDENCE
So there you have it. The most recent chapter of our debt story. It reflects the reality of experiencing four major life milestones at once: starting a career after college, having a baby, buying a house, and preparing financially for a child to head off to college.
A million dollars worth of debt is a lot. It’s a big number with a lot of zeros. But it’s only one part of our financial story. Thankfully we are able to manage and even pay off this debt while also meeting our savings goals. There’s no way we could do all of this without a sound financial plan.
Every month we make a new video recapping our progress towards financial independence that month. Check out the playlist below and head on over to YouTube to subscribe and come alone with us on the journey.