[Editor's Note: This is a guest post from Timothy R. Ulbrich, Pharm.D., R.Ph, a regular reader who is starting his own financial blog for pharmacists. You can follow him on Twitter @FinancialRPh. We have no financial relationship.]
The journey to $350K in Debt
I was 17 years old and did not have a penny of debt. My parents had done an awesome job of teaching me the importance of work and managing that income in a responsible way divided between giving, saving and spending.
Eight years later, I had obtained my pharmacy degree, was married, had finished residency training, and had bought my first house. I was now over $350,000 in debt. I had borrowed money I had no business borrowing for things I didn't need to buy. It all seemed so normal and manageable. “I had it under control,” I thought. I was making a six-figure salary and never thought twice about taking out that much debt.
‘It wasn't even stupid debt,' I rationalized in my mind. No credit card debt. No fancy cars. No extravagant ‘toys.' A modest home under $200,000 that was well under what the bank told us we could afford. My wife and I seemed to be living a normal, reasonable and responsible life.
By societal standards, it was all ‘normal.' The problem is, we as a society have over $890 billion in credit card debt, over 1 trillion dollars in student loan debt and a population with a median retirement account balance
of $3,000 for all working-age households and $12,000 for those households near retirement. Using society as a measuring stick is probably not a good idea.
So the humbling moment had arrived. I was broke. I was making a six-figure salary but was broke. When everything was borrowed, I didn't in fact own anything.
The Moment of Truth
It was just over two years ago that the light bulb went on and the scales fell off my eyes. The first thought that came to mind was a humbling one. It was accepting the reality that I was broke. I was making a six-figure salary but, in fact, was broke, owning almost nothing I had. The second more uplifting thought was what would I do if I had no debt? What would that look like? What would that feel like?
It was during that moment that we decided we would begin to attack and attack and attack until we had paid off all of our debt. We got serious about putting together a budget and scraping up every dollar we could to throw at the debt. We grinded this out for some time. What was the result? It was paying off all of our debt with the exception of our balance on our mortgage in October 2015. We had taken $350,000 in debt and whittled it to down to less than $150 in mortgage debt. We had paid off $200,000 in debt in 7 years. I'm here to encourage you that it can be done. We did this through residency training, making 1 pharmacist salary with my wife staying home to raise our 3 boys. It can be done.
Budgeting To Get Out Of Debt
So, what was the breakdown of monthly expenses during the time we were focused with the most intensity on getting out of debt?
- 30% to non-mortgage debt. This was predominantly our student loans but also included a couple cars and a kitchen remodel along the way.
- 15% to our mortgage. One of the keys to getting out of debt and winning long term financially is to avoid having too much of your monthly income tied up in your housing expenses, whether that be rent or owning a home. In our case, having a mortgage payment at only 15% of our take-home pay allowed us to pay more towards the debt and now is allowing us to save more towards retirement.
- 10% to the local church. I’ll be honest that we didn’t start this way but in our journey to getting out of debt became convinced of the importance of giving to our local church.
- 10% to groceries and household items. This was by far the hardest budget item for us to predict and keep consistent from one month to the next.
- 5% for auto gas, insurance, tolls, etc. We live approximately 3 hours from both of our parents so we are on the road a lot!
- 5% to utilities.
- 25% was divided into very specific categories. We found that being as specific as possible allowed us to track the expenses and gave us the best chance of winning with our plan. Having too many broad categories would leave too much room to spend without enough accountability. This included categories such as our TV solution (Netflix and Sling TV), hair cuts, date nights, family entertainment, saving for vacation, clothing, personal spending, and gifts for family and each other to name a few.
On The Way To Financial Freedom
When we hit the submit button on last debt payment, the feeling was one of pure joy. No more car payments, student loan payments, or any other payments. We had previously been dedicating approximately $2,500 per month of our income to payments, and now we were free to use that to pay off the mortgage early, give, and save for retirement and college educations for our kids. What an incredible, freeing feeling!
So here we are now, without a penny of debt except the mortgage. Think through this with me for a minute. If we took the amount being paid towards debt ($2,500 per month on average) and took 40% of this, or $1,000 per month, and put it in a good investment earning approximately 10% growth per year (near the historical average of the S&P 500 Index) for 35 years, we would have almost $4 million at retirement. Wow! I would argue that is a pretty conservative estimate since a good mark for savings for retirement is 15% of your income. A pharmacist making $115,000 per year and putting away 15% of her income (approximately $1,400 per month) would have over $5 million dollars at retirement. That assumes she never gets a raise the rest of her life.
How about for physicians? According to the Bureau of Labor and Statistics, the average physician salary in 2012 was equal to or greater than $187,200. If we run the same assumptions as above (15% of income saved at 10% growth for 35 years), the result is almost $9 million. Make more than that? Run the savings calculator yourself. It is good.
If we play out my story further of freeing up $2,500 per month that was going to debt, we would still have $1,500 per month left after putting away the $1,000 for retirement. If we took $600 of that and invested $200 per month for each of our kids over the next 16 years for college, there would be approximately $86,000 per child ready for college. We still have $900 left to give, go on vacation, etc. Freeing.
[Editor's Note: I have to interject briefly at this point as I just had visions of trees growing to the sky. While Tim is mathematically correct that investing $12K per year at 10% for 35 years would give you a sizable nest egg, I find that estimate far from being a “conservative” one. This is what I call the “Bad News Of Retirement Planning.” It is simply that your money is probably not going to grow at 10% no matter how many times Dave Ramsey repeats it. Keep in mind the assumptions that must come true for this to actually play out over your career:
- You invest in nothing but risky high-returning assets such as stocks. No bonds allowed.
- You stay the course through 3 or 4 serious bear markets. You can't sell out, even once. No behavioral errors.
- Returns are distributed evenly. If you get all the good years early on when you don't have much invested, you're not going to get to the same place.
- You pay nothing in taxes or investment expenses.
- Inflation remains 0% over the next 35 years.
- The future resembles the past with regards to stock market returns.
You can decide for yourself how likely all of those assumptions are to come true. When running your own numbers, I highly recommend you use a number like 5% (and Bill Bernstein thinks that's optimistic.) My actual after-tax, after-expense, after-inflation returns over my entire investing career on a 75/25 portfolio are about 6%, and that's 6+ years into a bull market. At 5%, that $12K a year only gets you to just over $1 Million, $420,000 of which is money you saved. If you want to become wealthy, starting early and investing wisely are important, but you'd better plan to save like a maniac too. 80% of my first million was simply money I earned but did not spend.]
If you haven’t already, spend some time thinking about and writing down your long-term financial goals. It will make the day-to-day grind of paying off debt and saving for retirement that much better.
What do you think? How much debt did you graduate with? How long did it take you to pay it off? What was the key to doing so? What percentage of your income did you dedicate to debt pay-off? What do you assume your investment portfolio will grow at over the long run? Comment below!