At the lowest point in our financial lives, when we sat down and counted all the balances we carried on credit cards, the education loans and the car loan, we were in debt by around $42,500! Both me and the better half had finished our Master’s degree. I had decided to continue with a Ph.D. and the better half had decided to start working. The impact of our debt really hit us, when we noticed that even though the better half’s paycheck was now a lot fatter than our combined student income earlier, there was still nothing left to take home, after paying off the minimum on all cards, the car payment and sending home the money for our loans! That was a rude awakening. We had spent our entire life thinking that when we start working, we would live like kings. But we were so broke all the time, it was beyond disgusting. We decided to tighten the belt buckle, suck it in and get rid of the debt. We spent over two years chipping away at it, and the day our debt went to zero, was one of the happiest days of our lives. (A rough outline of the steps we followed is posted here.)
And I kept thinking, it didn’t matter how we landed ourselves in that situation. As long as we realized it, and got out, we were fine. But, today while I was generally browsing, I came across Stephanie’s blog. For the first time, I got a glimpse of how we landed ourselves in all that debt in the first place. I couldn’t help but wonder, were we really irresponsible or were we just plain ignorant?
In the article mentioned above, Stephanie reviews the well-known technique for getting rid of debt by paying off the highest interest loan first. But she thinks that her student loans which have low interest and her car loan which has no interest (from a relative), do not fit in the equation. It was exactly this line of thinking that got us into trouble! The payment on our education loans did not start until we finished studying. Also, some of the amount we owed was a loan from parents and we did not have to hurry to pay back. So we completely ignored those loans. The first chance we had to save up some money, we bought a used car. Since we paid cash for it, we didn’t have any car payments. But it completely broke our bank. We hadn’t planned for future expenditure, and slowly started putting books and anything-beyond-the-everyday expenditure on credit cards. As we got comfortable doing this, our “lifestyle” started getting better and we just kept piling it on credit cards. At one point between the two of us we had 10 cards with balances in the range of $500 – $4000 on each card! All along, the thought was that we would graduate soon, start working and would pay it all back. We never really worried about out how long it might take to clean up the mess we were creating! When I decided to continue school and the better half had to move for the job, we bought another car. We thought we were being smart and responsible by buying the previous year’s model and not paying the extra $4K that the current year’s model cost. We didn’t quite stop to think that buying the car on finance would add yet another payment to the long list of things we had to pay off “when we started working”.
Both of us have always been quite mature for our age. Both of us are from different levels of the middle-class. We never had too much money, but at the same time we never really went hungry. We both had worked for a couple of years and saved enough money to pay for our airfare to get our asses into the US for our graduate studies. Both of us had appropriated our education loans on our own – either from the bank or from relatives, and we intended to pay back every penny according to the terms of the loan. We had saved enough money to pay for our first car before we bought it. So, what went wrong?
I think it might have been the easy access to credit in the United States. Add to that the mass media advertisements and the tempting promotions that propagate the myth that “Its OK to buy today and pay back tomorrow. It’s the American way of life!” And finally, the total ignorance of how the compounding interest on the credit works! So yes, it was the ignorance that really landed us in trouble. But we are not completely off the hook in terms of being irresponsible, yet. When we entered a new culture, a different way of life, was it not our responsibility to look out for the traps? Was it not our responsibility to learn all we could about how credit worked before accepting every pre-approved invitation that offered us credit? Should we not have been weary when money flowed in so darned easily?
So with pangs of shame, I have to admit that while it was ignorance that really landed us in trouble, it was the irresponsibility that let us continue the mistakes. But, it is good to know that there are others out there who seem to have started out the same as we did, but are well aware of their situation and have a handle on how to get out, as it is made clear from Stephanie’s comments on her blog post that started all these musings. Good luck, Stephanie and everyone else young and in debt, but already have plans to get out!