As things settled down in the job arena, we kept to Plan B. Once we finished the emergency fund, we turned immediately to paying off all of our loans. We were going to attack each debt the “Dave Ramsey” way, smallest to largest regardless of the interest rate. We zoomed through our smallest debt (furniture, fridge, washer and dryer) knocking it out in a couple of months. Then, we turned to the next smallest debt: the student loans. We added up all our extra money, penciled out how quickly we couldpay off the student loans, and…16 months. All the wind deflated from my lungs.
So much for “knocking them out fast.” That fun part about momentum was officially dead, and all we could do now is muscle through. So, we started the long, long trudge through the student loan payments. Each month we made our required goal-sized debt payment, we would put a mark on our annual goal sheet with flourish. We would congratulate ourselves on our excellent commitment, then turn around to tighten our budget plan for the next month.
Why? Why torture ourselves like this? Because: Sailing.
At the end of a particularly trying workday, Andrew kicked off his work boots and plopped into his chair. Laptop in his lap, he read Bumfuzzle’s latest blog post. They had finished their circumnavigation at this point, finished a year of driving an old Porche around the United States, and decided to trick out a VW Bus and drive around the world. Andrew decided to shoot them an email, letting them know we are out there sucking inspiration from each blog post like a sticky child sucks the sugar juice from a popsicle.
Tap tap tap: “Dear Pat and Ali, …..
By the next day they had written back.
“Dear Andrew, …
We were so excited to get their email. It was like receiving a letter from a celebrity. “What does it say?” I asked, anticipating great wisdom.
Andrew groaned and read the crux of their email aloud. “You should just go now.”
Just go now. Ugh. There is nothing that haunted us more during the 2009-2011 timeframe than the phrase, “Just go now.” Andrew flopped down his laptop lid and declared it was time for our evening walk. At 10:00 p.m., our neighborhood is deserted. Lit by the orange glow of street lamps set every quarter block apart, we walk in the familiar dark-heat that is a Las Vegas summer evening.
To be fair, of all the people who said “just go now” Pat and Ali had some street-credibility to back up their proclamation. While they had plenty of money the day they decided to just go now, they lacked another important resource: any knowledge of sailing, whatsoever. They decided they wanted to go sailing. Tried one weekend class in Chicago, then went to Florida, bought a boat, started sailing through the Caribbean. They figured it out as they went.
“Are they right?” I asked. “If we are really serious about this sailing thing, why don’t we just go now? Can we just figure it out as we go along?”
“Aurgggh. I don’t know.” He says. “What are we missing? Is there any possible way we could do this now?”
We wracked our brains. Is there something we are missing? Is there some other way? Are we being unsophisticated somehow, paying off debt? Is there some way we could invest this, finagle that, and magically end up on the other side free of our obligations and with the resources to sail?
We brainstormed other ways. We really did.
Option #1: Hitchhike Around the World.
Many times, people crew for free on small sailboats in exchange for the opportunity to cruise in whichever direction the Captain decides to go. This is a lot like sailboat hitch-hiking. It still exists. In fact, we have been the recipient of many offers by young people requesting to crew on Sonrisa. But this didn’t solve our land-obligation problem. If we were debt-free-freebirds this might work, but for us we can’t just slough off and head to sea with no income plan. Rent the house for the balance of the mortgage? Can’t, balance is too high compared to fair market rent. Besides that, we still have the student loan balance. You can’t rent out a degree.
Option #2: Get jobs on boats.
Many other people can get jobs on enormous, beautiful, fancy Super-Yachts of the wealthy. Get a Captain’s License, drive a large tour boat for a while, be a charter captain for larger and larger boats, develop a resume, and eventually get hired to be a Captain of a Super-Yacht. These guys can get paid up to $100,000 per year or more, but it’s a career. It takes a long time, and in the meantime you are not getting paid anywhere near that much. We know how to sail, but do we want to be subject to a wealthy boat owner’s whim, wear uniforms in the tropics, cook meals while being thrown across the galley (however fancy) in sidelong waves? How long would we have to work in these careers until we could earn enough to even cover our debt loads working as crew on Super-Yachts? Yeah, no. It seemed like the debt continues to be a limiting factor. In addition, is this the experience we are looking for? No, we want to be the captain of our own ship. We want to challenge our own ability to sail where we want to go. It isn’t just about seeing the world, although it is partially that. It is also about challenging our own personal limitations.
Option #3: Figure out a way to make our work seasonal.
Six months at work, six months cruising in the off season? This suggestion is a good one, maybe. We racked our brains, but lacked the creativity, work experience, or chutzpah to come up with anything that would produce enough money to cover our monthly responsibilities. It was here we realized Hard Fact #7.
Hard Fact #7: The size and extent of your “needs” are inversely proportional to the size and extent of your freedom.
If you need $2,500 per month to pay for your preferred version of food, shelter, health, and exploration, you can cover that in far less work-time than if you need $10,000 per month. If you only need $2,500 per month to live the life you want, you have more freedom. If you need $10,000 per month to live the live you want, you have less freedom. We had to reduce our “nut” in order to expand our freedom.
None of the “Just Go Now” employment options paid enough to cover our debt load. So, we turned to brainstorming alternative ways to solve the debt problem. Is there a different way to rid yourself of debt besides the old fashioned way of just paying it off?
The short answer: No.
Long answer: Yes, but all those options are terrible options.
Option #1: Bankruptcy
The primary way people get rid of debt without just paying it off is filing for bankruptcy. Bankruptcy is like laying an atom bomb on your financial life. You file with the court and say: “We don’t have the resources to pay off this debt. We thought we could when we entered into the debt, but now we can’t.” The court looks at your situation and confirms what you can or can’t pay. Filing bankruptcy destroys your credit, and is intended to be a worst case scenario assistance for people who can’t pay their debts. It’s not really intended for people who would rather slough off and go sailing. What is more, at least at the time we were dealing with our financial plight, the law did not allow you to discharge student loans. So, if your major debt is a student loan, bankruptcy will not help you.
For us, bankruptcy made no sense at all and the court likely wouldn’t allow it, anyway.
Option #2: The Short Sale
People started “short selling" their underwater houses. They would make a deal with the bank to take the house back at its low value if the bank would forgive the remainder of the mortgage. The benefit to the bank is it didn’t have to go through the expensive foreclosure process to get a judgment that would never be paid. (You can’t squeeze blood from a turnip!) The benefit to the homeowner is that the homeowner would start over with a clean slate: no loan to pay off. They didn’t have a house anymore, either, but they were free to buy another house if they could convince a different lender to loan them money despite their newly wrecked credit. They would be able to buy their new house while it’s price was low, it would appreciate when the market recovered, and they would come out ahead. Problem solved.
For some, this process was an absolute necessity. They had lost their jobs and their ability to pay their loans, they needed to move locations for new jobs, family or other circumstances. For other people, the short sale was a financial strategy: they called it a “Strategic Default”.
But, as a lawyer handling foreclosure and loan default work, I knew too much. Sometimes a strategic default works as planned. Other times, though, if the bank thought you had money to spare it would not strike the deal. It would demand large payoffs, go through with the foreclosure, file a lawsuit for the difference between the value of the house and the balance of the loan. It would take years and years to determine a settlement, and through these years the “strategic defaulter’s” credit would be reduced to rubble. If they are a licensed professional (doctor, lawyer, CPA, etc.) sometimes they have to explain their decision to default on their house to professional licensing boards (like the bar), and sometimes it became a real pain in the neck. The risks around this idea did not seem to align with our desire for financial security.
Option #3: Invest
We heard a lot about investing. The theory being that we should invest our money in a high yield investment, then pay the debt off with the money gained.
This is the favorite option suggested to us by those who are “sophisticated" with their money. The theory is that it would be silly to pay off our relatively low interest student loans and mortgage. We should keep the money, put it to work by investing it in the stock market, “syndicated real estate,” a ponzi scheme, or some other money making venture. Make 10% on the money, while paying 6% on your loan. This means you come up smelling like roses with 4% more than you otherwise would have had, and you pay off your loan with the profits.
This is great, except it does not account for risk. What happens when your “investment” does not grow? Or worse (which is what was happening to us at the time) what happens when your “investment” shrinks? Then, you have no money to pay your debt. When the economy is retracting, it means there is very little growth. Earning interest on investments requires that investment to….grow.
This question gave me night sweats. Are we being simpletons? If we were more creative, more risk tolerant, or more clever, would we be able to come up with some investment solution? I started reading books and writings by the investment guys. I started reading about Warren Buffet.
What do you know? Warren Buffet, one of the most sophisticated and successful investors in the world, does not invest with debt. If he does not have the cash to make the purchase, he does not make the purchase. And with this, we put away the brainstorming, the self doubt, the worry about being “sophisticated” and settled down into the most simple financial plan ever created: Work hard. Spend less. Pay debt faster.