It’s a classic love story, with a twist: Boy meets girl. Boy and girl fall in love. Boy and girl buy house. Boy and girl find themselves nearly $60,000 in debt.
Thankfully, that’s not the end to this tale. What could have been a tragedy ended in triumph. Read on to learn how this couple joined forces and drove their debt into the ground in just eight months.
GOBankingRates sat down with Long Pham, a 34-year-old married father of two young children, to talk about how he and his wife dug themselves out of debt, maxed out their retirement savings and started a business all within a year.
He Was Living Debt Free
Before Pham met his wife, Jeannie, he was debt free and actively saving money. At just 17 years old, he joined the Army National Guard and started working full time. He attempted to go to school while working, but his education was delayed when he was deployed twice between 2004 and 2006. While his deployments interrupted his education, that time actually gave him the opportunity to save even more — he was making extra income and spending very little during his time overseas.
When he got out of the Army, Pham landed a job as a police dispatcher and used the GI Bill to finally finish his education. He had great benefits, a fully funded education and an established emergency fund. “Because I was deployed twice, once to Kuwait and once to Iraq, and worked full time after the military, I had saved up a lot of money,” he said. A lot of money is right — his emergency fund had grown to an impressive $26,000.
How They Got Into Debt
In 2010, Long and Jeannie got married and paid for the 300-person traditional Vietnamese wedding out of his emergency fund. They also used their savings to make a 10 percent down payment on the couple’s first home. Despite an exciting time full of fresh beginnings, Pham’s new life also came with new debt: his wife’s $5,600 car loan and two student loans totaling $52,500.
At the time, the $60,000 debt seemed manageable — Pham and his wife both had stable jobs and a combined income of just over $100,000. But they soon realized the expensive reality of owning a home. There were several unexpected costs that came along with their new home, including two major renovations. They also had never lived together beforehand and they brought almost nothing to equip their new home.
“Between an expensive master bathroom and family room renovation, furniture, and household items, we somehow became one of those couples who were living paycheck to paycheck — even though we had a very good income,” said Pham. “I know it’s surprising we were having a hard time making ends meet, but living in Southern California is expensive, and we weren’t prepared for the costs of owning a home.”
One Major Change Jump-Started Their Plan to Get Out of Debt
Despite feeling cash-strapped, the Phams still had some emergency savings set aside. But when Jeannie became pregnant with their first child, they knew it was time to make some serious financial changes. On January 10, 2012, the couple started on what was supposed to be a three-year debt-repayment timeline but they quickly decided to put their plan into overdrive. “We decided to push forward as fast as we could so we could start focusing on rebuilding our emergency savings fund and boost our retirement savings,” said Pham.
The couple had been aggressively contributing to their employer-sponsored 401(k) plans, so they lowered their contribution rates to 5%. They continued to max out their IRAs despite their debt because saving for retirement was a top priority for them. “We were lucky we both had an education and good jobs,” Pham said. “I don’t know what we would have done if we were making minimum wage.”
What They Did to Pay Off Debt Fast
In order to tackle the debt, the Phams became masters of Dave Ramsey’s debt snowball method. They tightened their belts, stopped shopping and cut back on eating out. They worked overtime, cut back on home improvement projects and put any extra money toward paying off their debt.
When asked whether they used a specific budgeting strategy, Pham surprisingly admitted they didn’t do anything particularly unique. He had always used Quicken, so he was already tracking his finances. It really came down to just not spending any extra money. “We both grew up poor,” he said. “I’m a first-generation American, and for 10 years, I lived in a shack attached to a garage. We already didn’t have cable or any extras — we were used to be being frugal.”
The Phams started paying off the $5,600 car loan while making minimum payments on all the other debt. “We posted payments on the vehicle loan until it was paid off,” Pham said. “Then we attacked the student loan that had a balance of $19,482.” Once the first two loans were paid off, they knocked out the $33,000 student loan. The Phams made their final debt payment on September 25, 2012, only eight months after starting on their journey.
Draining the Emergency Fund
Just how did they manage to pay down that much debt in such a short period of time? Instead of using what was left of their emergency fund to pay off all their debt, the Phams held onto the money until after their daughter was born. “I wanted to wait until the baby was born and my wife was done with maternity leave before making a big debt payment,” Pham said. “But once everyone was healthy and working, I sucked down my bank account balance and paid off our debt.”
Financial experts offer conflicting advice about whether or not it’s wise to use an emergency fund to pay off debt, but Pham explained his decision in terms of the cost of his debt: “I was paying more in interest on the debt than my money was earning in the bank,” he said. “It made perfect sense to use that money to pay off the debt. We subtracted one month from our emergency savings fund and made a huge lump sum payment towards the student loans that totaled $32,787.”
What Was the Hardest Part of Getting Out of Debt?
The couple’s journey might sound like a walk in the park, but Pham admits it wasn’t always easy. “The hardest part about getting started is feeling like you deserve more,” he said. “Every time you have a big life change or accomplishment, you think you deserve something. But what do you really deserve? What do you really want? Do you want to do what you love or do you want to be a slave to your job?”
Once he and his wife were finally debt free, Pham realized he could live his dream of starting his own marketing business. He had been blogging about his financial journey since 2011 and was ready to take his career in a new direction.
Personal Finance Tools That Pham Still Uses
“When I read ‘Your Money, Your Life,’ everything changed for me,” he said. “I now quantify money as a store of time. If something costs $50, I calculate how long it would take me to earn that $50. Debt is time spent instead of freedom.”
“Being debt free is a huge weight off my shoulders and it has given me the freedom to pursue my dreams,” he said. “I never could have quit my job and started my own business if I still carried that debt.”
Today the Phams continue to live a frugal lifestyle but they have eased up a bit. “We eat out a little more now but still max out our retirement accounts,” said Pham. “The only thing we really have to worry about is our mortgage and taxes.” He also still uses Quicken to track his spending. “I manually enter everything by hand,” he said. “It really helps me feel the hurt of how much money we spend.”