October 2008 – Nearly $200,000 in Debt!
$18,000 in credit card debt. A $10,000 loan to pay back in 3 years. $66,000 in student loan debt. A $100,000 house mortgage. We were 24 years old and starting our life together. No one warned us how quickly that life would become a life of debt.
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We didn’t start out with a lot of debt. In fact, neither of us had any debt 6 years prior when we first met in college (2002). Things soon changed.
We actually began accumulating the debt right when we started college, but didn’t feel the impact until we graduated. You see, college is expensive. And since we didn’t have money, we took out student loans. “Don’t worry”, they said, “you can defer your loans and after college you will get great jobs that will more than cover the loans and make them worth it”. Tom wanted to avoid student loan debt at all costs, and actually almost enlisted in the Marines instead of going to college because of it (I’m glad he didn’t). So each semester our loans just kept accumulating.
By the time we graduated from college, we had our $66,000 student loan debt and around $4,000 in credit card debt. We moved into an apartment together, both found jobs within 3 months. And so began our focus on paying down those credit cards and student loans…
Lesson #1: Don’t take out any more than you need to for college student loans. I learned that lesson the hard way. I will be paying back my almost $50,000 in student loan debt for a long, long time.
Lesson #2: Don’t fall for the “Get a Free Buffalo Bills T-Shirt When You Sign Up For This Credit Card” that Tom did when he first arrived at college. I’m sure we have paid the cost of that shirt 100 times over in interest since then.
So things were not too bad at that point. We had gotten into debt, but it was manageable and we would be able to start to pay it down. But then life interrupted…. It all started when Tom decided he couldn’t wait to marry me, and proposed in December 2006. We set a date for about 2 years out to give us time to plan & save. Then it just seemed like one thing after another came up.
- March of 2007– We bought a house (Tom hated paying rent).
- May 2007-We got a dog.
- June 2007-We had to buy a new (used) car.
- July 2007-We fell for a couple of home improvement salesmen and bought new windows and a new smoke alarm system.
- 2007 & 2008-We were invited to and a part of multiple weddings in multiple cities.
- August 2007 – Tom spent $7,500 on real estate investing training.
- December 2007-Perry Housing bought it’s first rental property.
- May 2008-We signed up for an alarm system (with monthly payment).
- September 2008-We got married and went on our honeymoon.
- October 2008-Sylvester Enterprises bought it’s first rental property.
- 2009-2012 Sylvester Enterprises bought 4 more houses and 1 commercial building.
- February 2012-Had our first child.
- November 2012-Opened Warsaw Wine & Spirits.
Lesson #3: Houses can be a good long-term investment, but they are typically more expensive than apartments. In addition to the mortgage, you then have to pay taxes, higher insurance and maintenance. There are also a lot of other costs that you don’t realize, such as tools for lawn maintenance.
Lesson #4: Be very skeptical of anyone that comes to your door to sell you something. As a rule, even if you are interested in what they are selling, always take 2 days to think it over and consult a friend. If we had done this, we would have avoided ~$25,000 in expenses (new windows, smoke alarms, security system). Remember that these people understand selling and are trained to make you say yes that day. If it is really a good deal, they should offer it 2 days later once you can think it over. If they won’t honor it later, ask yourself why not.
Lesson #5: Most “real estate training” that you hear about on the TV or radio is not worth it. If you really want to learn real estate investing, seek out someone who is actually doing what you want to do and pay them to teach you. You will spend A LOT less and get way better knowledge.
Lesson #6: In many cases it makes sense to pay off debt before starting a business. Really take time to run the numbers and see which one make sense for you.
Lesson #7: Babies are expensive, not only financially, but also in terms of time. We love Elena and I really love being able to stay home with her, but it has really made us focus on the most important things to do for our businesses.
Climbing Out of Debt
That is a long list and a lot of lessons for a short time. At some point, we knew something had to change. When we started Sylvester Enterprises in October of 2008, we came to the realization that we needed a plan. We had to have goals defined, a clear picture of where we were and a budget to keep us on track towards our goals. Tom sat down and created a basic budget sheet, showing all of our incoming & outgoing financials each week. Then he went one step further and created an electronic sheet for us to track all of our bank loans, student loans, credit cards, and misc. monthly expenses. Below is an example of the first spreadsheet that we used.
Along with our new budget, we also started to document our goals. Once or twice a year, we each sat down and thought about what we wanted in 6 months, 1 year, 5 years, etc. These could be personal goals (house improvements, family plans), financial goals (pay down debt, make large purchases) or business goals.
Lastly, we created a debt payoff plan, focused primarily on the credit card debt as it had the highest interest rates compared to our other debt. This was a detailed sheet listing in order each card, monthly payment you plan to make and how long it will be until it’s paid off. Once card #1 is paid off, card #2 is listed with an increased monthly payment (old card #1 payment plus card #2 payment), and so on and so forth. This sheet was the thing that changed our trajectory and really allowed us to know that our credit card debt was down. In a future post, we will dive into the two basic strategies for paying off credit card debt.
Over the years we have learned that it is almost impossible not to have some kind of debt, but there is a lot that people can do to avoid much of the unnecessary debt. Whether it’s a mortgage, student loans or credit cards, it is essential to know your financial status, have goals for your future and make educated decisions when it comes to taking on additional debt. We have paid off a lot of our debt, but do still have some of the longer term debt such as student loans and a mortgage. Starting a business (or multiple) unfortunately tends to delay paying off debt as all of our extra earnings went into getting each business started. On the positive side, the businesses generate additional income that ultimately allows us to pay that debt down faster. This was part of our long-term plan and we are steadfastly moving forward into being completely debt free!
Have you gotten into debt? What are some of your best tips for others to help them avoid future debt and payoff existing debt.