I’m $800K in Debt…But It’s Fine…

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When should you be worried about debt?

Want to hear a confession…?

I’m currently over $800,000 in debt.

Yep, that’s the right amount of 0’s. It’s a little too close to a million dollars for comfort.

How did I even manage to accumulate that much debt?

Like most of our generation, it started with student loans. Followed by a mortgage. Then a loan for home renovations. Then a mortgage on an investment property. Oh, and I have deposits on rental properties that have to be paid back or cover expenses when renters move out. So it ends up looking like this:

But, here’s the thing…it’s totally fine. I’m not at all worried about my mountain of debt.

In this post, I’m going to give you an inside look at my personal finances. The good, the bad, and the scary.

We’ll look at reasons to be worried about debt and reasons not to be worried about debt. By the end, you might just feel better about your own debt!

Reasons to Be Worried About Debt

First, let’s talk about causes for concern. Here are 3 major reasons to worry about my level of debt.

1. You have to pay it back

Let’s start with the most obvious reason to be worried about debt. You have to pay that money back.

$800,000 is a lot of money to owe. And then I remember that my household’s employment income after-tax is only about $45,000/year while we’re living abroad. At that rate, this level of debt starts to sound downright irresponsible.

How much money goes toward these debts every month?

But I have some good news:

1) The home renovation loan is just due back before my mother-in-law retires. No monthly payments. And no interest. Just self-inflicted guilt whenever I think about it.

2) The rental deposits are due back to my renters (or used to cover damages) when the renters leave. Both leases are good through at least the end of the year, so we’re cool there.

3)I also have rental income from the two houses. Together, they bring in $5,750/month. So they more-than-cover the debt payments each month.

2. Growing interest

But the debt itself isn’t the bad part.

Those of you who’ve been following Savings and Sangria for a while know that the debt itself isn’t going to kill you. It’s the interest you’ll have to pay on top of the debt that gets you!

Interest is the amount of money you’re charged for the privilege of borrowing the money. When lenders lend you money, they’re taking a risk because there’s always a chance you won’t pay them back. So they charge interest. Interest is their financial reward for taking a risk on you.

Let’s look at how much my debt is costing me in interest this month:

Ouch. I’m paying almost $3K per month in interest alone. Over half of my monthly payments are just paying interest. Not even touching the balance of the loans I owe. Gross!

I actually hadn’t given that number too much thought before writing this post. I knew it was a lot, but daaannnggg…

3. What if…

Things are fine now. I can stay afloat perfectly comfortably with my current income levels.

But what if we have another recession? What if my primary income stream disappears? What if the housing market collapses? Then what do I do?

That’s a serious cause for concern.

Yikes, right?!

Holy frick, my debt sounds friggin apocalyptic after diving into the reasons for concern.

And Here’s Why I’m Not Worried About Debt

So, why am I not worried?

Well, I have 3 good reasons to be ok with my debt. And if these apply to you, you can probably relax and not worry too much about your debt either.

1. A Positive Net Worth

First, despite that mountain of debt, I actually have a positive net worth. A positive net worth just means I own more than I owe.

This is important because it means I could cash in my assets to pay off my debts if I needed or wanted to.

Let’s say I suddenly needed $20,000 for a life-saving medical procedure. And I don’t qualify for a low-interest loan because I don’t make much money right now. I have the option to sell off one of my assets to cover the cost of the surgery.

So how do you grow your net worth and make sure you always own more than you owe? By purchasing assets instead of liabilities.

What are assets?

In a nutshell, assets are things that typically grow in value over time: real estate, savings accounts, investment accounts, education in marketable skill sets, even some collectibles.

Compare assets to liabilities. Liabilities are things that decrease in value over time: cars, electronics, clothing, most of the things we buy, really.

Going into debt to buy liabilities is a bad idea. You want to avoid car loans and credit card debt if at all possible.

But leveraging debt to purchase assets is often a good idea. As long as you’re choosing your assets carefully and making smart investments, you’ll come out ahead.

So take on a student loan if it will get you closer to your career goals. Take on a mortgage (or 2!). Take on a business loan.

Just make sure you can comfortably handle the monthly payments.

My Asset List

In the interest of full disclosure, I’m offering a peek at my real-life asset values so you can see how they compare to the debts.

Not to hold myself up as an example to follow (because there’s plenty of room for improvement!), but there are a couple things here that are worth pointing out.

1. Notice that the houses have greatly increased in value! It’s one of the reasons I love real estate so much. If you time your purchases right, you can grow your net worth quickly and easily. When the market’s down and everyone else is too scared to buy…that’s when you buy!
2. See that emergency fund? It’s there to cover my tush if (when!) life throws me a curve ball. Here’s your Quick Start Guide to building your own emergency fund.
3. And notice that I have a good chunk of change in my retirement accounts. That’s because I started saving for retirement at 19 or 20. The younger you start, the more you can take advantage of compound interest to magically grow your money!
4. Last thing: check out my dream fund. Every paycheck, a small percentage gets automatically transferred into my dream fund to save for awesome adventures like travel. This year will be Paris in May, Prague in October, then home to Rock Falls, Illinois for Christmas 🙂

2. Investments are out-earning interest rates on debts

Another reason I’m good with my debt: my investments are out-earning the interest rates of my debts. This means I’m actually better off investing more money than trying to pay down my debt faster.

It’s a classic personal finance question: should I use my disposable income to pay down debt or to invest? The answer largely depends on interest rates.

You remember our conversation about how much I owe just in interest this month right. That money is effectively being thrown away. Why on earth would I not try to pay off my loans faster and avoid that interest?!

Because I can make more money in the long run by investing money right now. That’s why.

My home loans are locked in at a super-low 3.88% and 4.25% respectively. And student loans are between 4% and 6.75%, also good-n-low!

Now, my index fund investments are currently returning about 11%. As long as the return for my investments is higher than the interest rate on my debts, I’m not paying down anything! My money is much better spent buying more shares of index funds.

But this won’t always be the case. Markets go up and they come down. The next time the stock market drops and the returns fall below 6.75%, I’ll start funneling my disposable income toward paying down the student loans instead of buying more assets.

3. A recession plan

Now, back to our what-if game. What if the economy tanks? Let’s say we hit another great recession. I lose my salary. My investment portfolio plummets, and so do my house values. What do I do then?

It’s ok. I have a recession plan.

First, I’m not going to panic. Markets rise and fall, and you just have to wait out the downturns.

As long as I can help it, I’m not going to sell off any funds if the market drops. You’ve heard, “buy low, sell high”, right? Buy assets when the prices are low and sell when the prices are high. If I sell when the market tanks, I’d be selling low. Which is a terrible idea.

So I plan to hold my assets through the downturn if at all possible. But it’s comforting to know that I have assets I can sell (even if that means taking a loss) if I hit desperate times and really need the money.

But I don’t think that will happen because of my second point: I have a recession-proof skill.

A recession-proof skill

Most industries hurt when the economy hits a recession. People buy less, retailers sell less, manufacturers produce less.

But there are certain industries that actually do better in a bad economy. If you can learn a skill that will be in demand in a down market, you’ll be just fine.

Here are a few examples:

• Accounting: When money is tight, businesses and individuals pay more attention to their finances and are more willing to hire accountants to maximize tax deductions and minimize expenses.
• Healthcare: People get sick and injured in both good economies and bad. Healthcare workers are always in demand.
• Auto repair and maintenance: No one wants to buy a new car in a bad economy if they can help it. They’re more likely to pay to keep their old car running until the economy improves.
• Property management: When people can’t afford to buy houses, or decide to sell for financial reasons, they rent instead. So the demand for rental property managers increases.

My skill is property tax appeals. When property values drop, property owners can appeal their tax bill to reduce their taxes. It can be a complicated process, so many owners hire property tax consultants to appeal their taxes.

That’s what I did during the last recession. And it’s the reason I was able to buy investments throughout the recession when prices were crazy low. It’s also why I’m pretty confident that I’ll be able to continue paying on my mountain of debt during future recessions.

If you want to become recession-proof, start learning and building your skills now so you’ll be ready when the next downturn hits.

What to Do if You’re Worried About Debt?

Here’s what to do if you’re worried about debt.

1. Pay off your credit cards

Credit card interest is notoriously high. It can be over 20%! I don’t know of an asset you can buy with your credit card that would give you high enough returns to justify the debt.

2. Pay down your car loan

Car loans are also pretty high. And most cars don’t grow in value, so they certainly aren’t an asset. As soon as your credit cards are paid off, take the amount of money you were paying on the cards and start putting that money toward your car payment every month.

We call this The Champagne Waterfall (but you may know it as a debt snowball!).

3. Start a saving and investment plan

Good personal finance doesn’t happen by accident. You need to plan it out, then you can set everything on autopilot. If you’re new to financial planning, check out How to Make Your Own Personal Financial Plan (the Easy Way!).

4. Recession-proof yourself

To be comfortable carrying a lot of smart debt, you need to be confident in your ability to survive a recession. Do you have any recession-proof skills? Maybe now’s the time to get one!

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