This post is part of 30 Ways in 30 days to Redesign Your Life and Travel the World. This series seeks to give you the practical, real world steps you need to take to get from wherever you are, to exactly where you want to be– traveling the world and living the lifestyle you want.
As I was preparing this series, a surprisingly large number of people emailed me with their stories of extreme personal debt. The question is always the same: what should I do, it’s essentially hopeless, I don’t want to stay but I can’t afford to go? On the surface, it’s easy to blame the borrower, but not always. But what if you’re debt was for a noble cause? A business plan that didn’t work out. Medical expenses you couldn’t avoid. Or a $100,000 graduate-level education? Should you be stuck for the next 5, 10 years working a job you don’t like, putting you’re life on hold?
I think the sternest of advisers would say: “Travel? Ha! You have to pay off your debt first!”
If I was to advise against paying it off first, someone would say: “Oh Please. What are they are they going to do, file bankruptcy and pass on their bad judgments to consumers who actually pay their bills?”
I know this because last year I wrote a post called, 8 Things I Wish I Knew When I Was 22, wherein I suggested that young people fresh out of college could defer their student loans in order to travel for a year or more (among other things). Of the 150+ comments it received, there was a number of people who practically spat on such an idea. Have fun now! Pay it off later! Irresponsible! How dare I even suggest it.
The truth is, if I was indeed 22 again, I would do just that. I’d defer my loans ($12,000 of them at the time, not much I know) and travel as long and as hard as I could. If I had $100,000 in loans, I’d probably do the same thing. But that’s just me. It’s knowing that I would be able to make six figures if I wanted after I returned and the hindsight to know that I would have missed less in those first few years of work than I would gain traveling.
It comes down to a judgment call. Obviously it’s best to pay off your debt first. But with extreme debt – $100,000 or more, even the most frugal saver could take up to five years to get caught up.
Formulating Your Own Personal Gut Check
I won’t presume to tell anyone what’s best, that’s up to you to figure out. Despite all the varying advice out there, there really is no right way. Will you tell the guy who left his massive debt behind, scrounged up $5,000 to start a business in Central America and ended up paying everything off faster than if he had stayed– that he was wrong? Or will you look the other way at the post-doc who wanted to follow her passion and ended up living overseas, working her dream job, but unable to afford a house, to get married, or to have kids, when the time came?
1. You have to know what you’re dealing with. If you don’t already, you should know what your total debt is and what it costs you per month. So that $100,000 law school degree is a monthly payment of $1200, but $500 of that is interest. The second part is as important as the first. You need to calculate what it costs you to travel.
2. What will this cost you? If you’re planning to travel, say for one year, then the cost to you is your interest ($500 from the case above) per month. In this case, that’s $6,000 for one year. That’s how much more debt you’ll have in a year if you defer payment.
3. Is this too much? You don’t need a fancy table to tell you. If you see the number $6,000 and you say, “ah well that puts it into perspective, I can deal with that”– then you have your answer. If you see $6,000 and you say, “heck no, travel for one measly year is definitely not worth a $6,000 increase in debt”– then you too have your answer.
How to Pay Off Debt
First, get professional help, if you can. I used the methods below when I was cleaning up my credit report post college recklessness and as I paid off my debt before travel (that’s right, we took a year to pay off everything, including some old expenses from a short-lived business before we started traveling).
1. Get your credit reports from all three bureaus.
2. Call everyone you owe money to, tell them you are struggling to pay and see if you can make some arrangement. (Just do it!)
3. If your credit report is a big fat mess, sit down and write a letter and contest everything on your report. Debts are bundled and sold. You could be getting dinged from one $100 doctor’s fee you never knew about, not once but three times. From the doctor, from the collection agency he sold it to when you didn’t pay, and finally from the next collection agency who bought your debt from the first.
4. Start paying everything with the lowest monthly rates you get get from your creditors, so that you avoid no payment fees or more dings to your credit. If you have extra, pay down the smallest balances first.
5. Saving money comes last. Even if you invest your savings, chances are you won’t out earn the interest on your debt. Pay everything off and then save.
6. Work the pyramid. I don’t know where I first heard about this method, but every debt-guru seems to use it these days. Pay as much as you can across your debt. When a bill gets paid off, apply that amount to the next smallest bill. Keep working through your debt until you’ve paid everything off.
Options for the Debt Weary
So yes, paying everything off is ideal, but in the back of your mind, you just know that you are not going to do it. That’s okay, it’s not the end off the world to be in debt. Sure it sucks and sure it’s better and cheaper to pay it off first, but it’s not a zero-sum game. It’s not pay it off or die. Here are some interim steps you can take if travel is priority now:
1. Just pay the interest. Assuming you are living within your means now, (if not now is the time to start), then planning to pay just the interest on your debt will allow you to travel without putting you further behind. (From our example above, that would mean saving or earning an extra $6,000 during your year of travel).
2. Try to negotiate lower rates for what you can and pay off some of your debt. For instance, one reader wrote to me and mentioned her $130,000 student loans, but she also had $12,000 in credit card debt. For her, maybe it makes sense to eliminate the high interest credit card debt before traveling, but leaving her student loans in deferment.
3. If your deal is high student loans, you may be able to alleviate some of your responsibility and still travel at the same time (depending on the type– are they Stafford or Perkins loans? Are they private loans?). I would check with your alumni office for programs, but you might also consider the Peace Corps and other volunteer positions abroad that help pay down debt and let you see another country.
4. If you have a large mortgage, it’s better to sell at a loss, than to go into foreclosure. If you are in the process of foreclosing, you might want to demand to see the original loan documents. This has worked for many homeowners to delay or stall completely the foreclosure process as it’s required by law that they have the original signed documents in order to collect on your loan. With the way home mortgages were packaged, sold, bundled into securities and resold, there’s a fair chance that you’re current mortgage company bought your loan as a part of a large bucket of loans and the paper work has long been lost.
If I Didn’t Say This Before…
The best thing to do is to become debt free. Sure there are options, but it’s postponing the inevitable. If you can, pay it down.