DH = Dear Husband
Debt #1 was $8,600. Debt #2 was $12,800. Debt #3 is in a different league: $80,800. In fact, it’s right on the line past which Ramsey, in his book The Total Money Makeover, says, “hold the payoff on that size debt until later.” (Ramsey p. 131) In his plan for becoming debt-free, which we are following, there is a point at which savings begin; first, an emergency fund, big enough to see you through three to six months without an income; secondly, a steady savings of fifteen percent of gross income to build up wealth/prepare for retirement. During this second stage of saving, large debts like the mortgage, which for us is Debt #4, are paid off. But more on that later.
For Debt #3, there is a bit of a numbers game involved in determining whether we should start taking it on now or later. Ramsey advises to wait if your business debt is larger than half your home mortgage. Our business debt has been hovering around half of our home mortgage for quite a while. At this time last year, it was slightly less than half. Now, it’s slightly more – but only because we haven’t been paying it off as we’ve focused on debts #1 and #2 while our mortgage has continued to decrease.
Furthermore, we have to consider our ages (49 and 53) and how close we are to retirement (as early as 6 years). If we are to retire debt-free, it’s more important now for us to emphasize debt repayment than savings. I do have a very good pension plan, so our prospects for retirement are not dire – so long as we’re debt-free. All things considered, we’re going to start tackling Debt #3 now.
The Story Behind Debt #3
DH decided that he would no longer pursue a career in the hi-tech sector after he’d lost heart from a roller coaster ride of employment in three consecutive companies, each of which failed within a five year period in the early 2000s. (See post “Debt #2: The Story . . .”) Between the time he made that decision and the time he purchased the franchise that he has been operating for over three years now, he spent six years in a state of underemployment, trying to forge a new direction. Within those wilderness years, he honed in on an area of interest that used his skills, but found that he couldn’t make a regular business or a substantial income from it.
We took frequent long walks together through those years, and I remember the walk during which he first mentioned a franchise chain for the very business he was struggling to create. It offered guidance and training; a formula for marketing and pricing; a prioritization of equipment to purchase; and most importantly, a network of people doing the same thing. That was during my long-standing allergy to matters of household finances, and for me, it was a no-brainer: “Go for it!” For DH it was less certain. We were already in scary debt, and the purchase of the franchise would add to it significantly. But he was cornered, and he did recognize an answer to his business needs in this franchise.
Could we have managed better? I think that in order to look at “what we should have done”, I have to go way back. We should have paid off the mortgage on our first home before moving to a bigger one. We should have saved up an emergency fund when we were both gainfully employed – I in my part-time teaching position and DH in his lucrative hi-tech position. If we had done that, then we would have been in a paid-off home when the hi-tech bust came. We would have had a fund to supplement DH’s low income through the wilderness years, and perhaps a significant deposit to put towards the franchise purchase.
Two sides to the “big house” issue
But here’s the kicker: It’s actually a great thing that we had a big house. DH runs his franchise out of our home, and there is no way he could have done so out of our first house. He would have had to rent office space which is extremely expensive. So in the end, I can’t say “what we should have done.” I suppose it’s good enough to know what we need to do now.
DH’s business is going well, and it’s like manna from heaven. Over three years later, we continue to feel the exquisite blessing of hope that was birthed in that long walk when we first discussed the franchise. We don’t take his gainful employment for granted as we did when we were younger. And it’s OK that the paraphernalia of his business spills out of his office and into the living room, dining room, and basement. It’s OK that our family life has had to absorb a regular heralding of customers by the doorbell or the business phone. It’s OK that at certain times of the year, like now, he has to work more hours than we ever would have thought possible. It’s so much better than the aimless wandering we did for longer than we could stand.
What we’ve got going for us . . . and what we’re up against
In terms of paying off the mammoth business debt, a few things stand in our favour: First of all, the snowball effect is starting to happen. We were paying roughly $80 per month just on interest for debts #1 and #2. Now, that money will be added to whatever we can pay off Debt #3 each month. And as Debt #3 lowers, the $200 monthly interest that we are now paying will also decrease and allow more and more to be paid against the principal. Secondly, taxes on business income are 50% lower than taxes on personal income, so there will be more after-tax money to put against this debt. Thirdly, there will be significant windfall opportunities as DH has a better-than-average month or takes on an unexpected and well-paid bit of business. My hope is that we will have Debt #3 paid off in eighteen months, but I’m fully aware that it could take a lot longer.
A couple of things stand against us. First of all, our fourteen-year-old van can’t hold out forever, and we know that at any time, we might have to put debt repayment on hold so that we can buy a used vehicle. (We’re committed to doing so with cash.) Secondly, our fifteen-year-old roof is due to be replaced. So again, we might have to put debt reduction on hold to finance a new roof.
But we’ve got the experience of the first six months of our journey out of debt behind us. We’ve been toughened by the challenges we’ve faced so far, and we’ve been encouraged by our progress. Our repayment of Debt #3 will unfold one way or another. Let’s see how.