This reader story comes from John Corcoran, an attorney, former Clinton White House writer and blogger at SmartBusinessRevolution.com, where he writes about how to use smart political strategies in business. You can download his free ebook, “10 Ways to Use Secret Political Strategies and Tactics to Grow Your Business.”
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There's a moment near the end of law school when your law school drops a bomb on you. Not a literal bomb. But when you see the envelope the bomb arrives in, you'll wish there was dynamite involved.
I'm talking about when you receive the final tally of all debt accumulated during the preceding three years of law school.
Inside my envelope was a letter that said I had accumulated $129,000 in debt in the preceding three years.
But that wasn't all. I had been on a tear, running up debt for the prior five years.
Between two trips to graduate school (both my wife and myself), a rental property, a condo, a wedding, a honeymoon, and a new car loan, we had run up $755,000 worth of debt. We were educated, but making dumb financial decisions.
The irony is my wife is actually very frugal on a day-to-day basis — and she's taught me to be frugal as well. We rarely eat out, buy groceries on sale, pack our lunches, and rarely get expensive lattes. But it was the big items that were sinking us. So, we decided we had to get our debt under control.
Evaluating the financial carnage
Our first step was to catalog what damage had been done. We started by adding up all of our debt, lines of credit, and mortgages. I felt like an insurance adjuster walking amongst the wreckage of a home that had been leveled by a natural disaster. Except this disaster was of our own making.
When we added it up, our debt was as follows:
- $298,000 — first mortgage on condo
- $100,000 – home equity line on condo (which included more law school debt, a kitchen remodel, and wedding & honeymoon debt)
- $200,000 – first and second mortgages on a rental property
- $129,000 – my law school debt
- $20,000 – my wife's graduate school debt
- $8,000 – hybrid car loan
TOTAL debt: $755,000
The total dollar figure was shocking, but not unexpected. And adding it all up helped us to move to the next step.
Tackling the highest priority debt
Our second step was to evaluate what debt we should pay down first. Around this time, I began reading as much personal finance advice as I could get my hands on. I began by reading Get Rich Slowly, I Will Teach You To Be Rich and other financial advice blogs, and soaked up advice from Dave Ramsey, Clark Howard and other financial gurus.
Unfortunately, we weren't able to pay down much of the debt right away, because the job market as I graduated from law school in 2007 was bleak. I worked for a few years for small law firms, which paid equally small salaries.
Here was the worst part: I hated it. I had always harbored a burning desire to work for myself, and working in a stifling and stuffy law firm environment was like throwing kerosene on that yearning. I was torn between a paycheck and a passion.
One of my jobs during this time was an hour and 15 minute commute from my home – one way. I took that job to get experience and for the paycheck but the commute was taking a toll on me, and our marriage. At this point, we knew we needed to prioritize our debt and tackle whatever we could:
- Rental property We had a small rental property in Sacramento, about two hours' drive from our house. Rents had gone down so we were absorbing a $300-400 loss each month. Plus, my wife hated being a landlord. It was a bad combination.
- Condo Our highest debt by far, we knew we knew we would need a larger home sooner or later.
- New car loan We were paying 4.5 percent interest on a Toyota Prius, which was our highest interest rate. The car actually saved my wife hundreds per month in gas. But we knew paying off this loan was most manageable.
- Graduate school debt My law school and my wife's graduate school debt added up to about $150,000, but the interest rates were low. We knew this was our lowest priority debt.
The problem for us was that most traditional financial advice wasn't helpful.
The most common advice aimed at people who are in debt is to “pay off credit card debt first.” That didn't really help us because we didn't have any credit card debt. We did have an equity line, which for a few years was treated by many (including us) like a credit card.
The second most common advice we heard is to pay off the high-interest debt first. Thanks to historically low interest rates at the time, almost all of our interest rates were very low. As a result, we weren't sure where to start.
When it rains, it pours
Then we got news that lit a fire under both of us. In early 2010, we found out that we were going to be parents for the first time. We were filled with excitement and plans for the future, but we were nervous about having a new mouth to feed.
Next, our tenants told us they would be moving out of our rental property. The real estate market was horrible at the time and the neighborhood surrounding our rental had more than its share of foreclosures and short sales.
If we sold the property, we might have trouble getting a price that could pay off the existing mortgages. Yet we knew if we found new tenants, it could be another couple years of losses before we would have the opportunity to try to sell again without tenants living in it.
We decided to bite the bullet and sell.
First, we had to spend $3,000-$4,000 to fix up the property and prepare it for sale. Many newly pregnant women dream of spending days and nights decorating the new baby's nursery. Instead, my wife and I spent days and nights at Home Depot and fixing up our vacant rental. We did most of the work ourselves to save money. My wife was a good sport, probably because being pregnant got her out of most of the heavy labor.
Then we caught a lucky break: buyers were actually attracted to our property because it was one of the few non-short sales in the neighborhood, meaning they knew they could close without needing to wait for bank approval. As a result, the property sold rather quickly. We had enough from the sale proceeds to pay off the mortgages and pocket a small amount. The investment in fixing the house up had paid off.
Three months later our son was born. Mom was happy he wasn't born a landlord.
Starting a new business on my son's first birthday
About a year later, our son was just about to turn 1 year old and I was itching to quit my job and go to work for myself. We still had plenty of debt, but had managed to whittle it down to around $560,000 by selling the rental, which freed up funds to pay down more debt.
Again, the financial advice seemed to fail us. Conventional wisdom would have been to refinance our condo mortgage, but our interest rates were already historically low. Plus, it was the square footage and communal living that bothered us the most.
I considered getting a job on the side, but knew that wasn't a realistic possibility, especially with a young son at home I wanted to see.
Around this time, we visited a financial adviser to get some advice. How we got this financial adviser is a funny story. My wife went on biddingforgood.com and found a financial adviser who was auctioning off a series of meetings with him for his son's preschool.
We had no affiliation with the preschool but we bid on and won the package anyway. (Bidding for Good is a great way to buy services at a discount and to support good causes.) Valued at $1,000, we got three meetings for a flat $100. I thought it was the ultimate cheapskate's achievement to get $1,000 worth of financial advice for one-tenth of the cost.
Advice from the financial adviser
The adviser said I shouldn't start my own firm until we had $100,000 in savings. It was probably good advice — but I knew it would take me years to save that amount, and I couldn't wait that long.
I decided to proceed cautiously toward starting my own firm, but not before I took a number of steps:
- I tracked the revenue I brought in. I closely watched what clients and revenue I brought in to the firm, because I knew I could at least count on that revenue if the clients came with me.
- I researched low-cost overhead options. I spent time researching low-cost or no-cost software, hardware, and technology for my new business.
- I learned to fend for myself. I made sure I knew how to do everything myself so I didn't need to pay for a high-priced assistant.
After about six months of doing this research, I knew I was bringing in enough money to quit my job. I quit in September 2011 — right around my son's first birthday.
Fortunately I was busy right from the get-go, and most of the clients I worked with at my prior firm decided to come over with me. As a result, we were able to pay off the car loan.
Expanding family = need more space
After I got established with my new business and was starting to accumulate some savings, our next big hurdle was to sell our condo. After nine years in the cramped two-bedroom, one-bath condo, we were ready for a change. The only problem was the condo association had recently been through a recall election, which killed a lot of interest in the unit.
We decided to roll the dice anyway. Before we made the final decision, however, we did more research:
- Interviewing real estate agents. We interviewed numerous real estate agents to find an agent who was a good fit for us and familiar with the neighborhood.
- Researching comps. We poured over recent sales to find comparable properties' final sale price to estimate how much we could expect to receive in proceeds from the sale.
- Interviewing painters, stagers & other professionals. We interviewed many professionals whose services we expected we would need.
- Putting excess furniture and clothing in storage. Over nine years we had accumulated a lot of stuff. We sold off or stored a lot of these items.
- Finding a rental. The condo was too small to live in while we were selling it, especially with our toddler son. So we found a reasonably priced rental.
After we moved out, the workers moved in. All told, we spent more than $10,000 on paint, repairs and improvements. That was a bitter pill to swallow, but we knew if we hadn't spent the money we could have waited six months or longer to sell it.
Interest was slow at first, but after about three or four months, we found an all-cash buyer. Our agent definitely earned her commission, as the homeowners association's liabilities were a barrier too high for many potential buyers.
It felt strange going from being a landlord for many years to being a tenant again, but the satisfaction of paying off all that debt was definitely worthwhile.
After we closed escrow on the condo, we had eliminated about 80 percent of the debt from our high of $755,000. We still have law school and graduate school debt, which fortunately is the lowest interest rate of all our debt. So we're not there, yet. But it feels like we've made great progress, and that's half the battle.
Best of all, our son loves having more space to run around in, and enjoys playing on a new play structure in our new backyard. And you can't put a price on that.