How To Plan For Massive Debt

by Tim on July 13, 2011

Why on earth would anyone want to plan for massive debt?  I’d rather have no debt, but we live in a world where having debt is more common than owning a dog.  With that in mind, it is smart to plan for massive debt, which includes your home, school loans and even a car loan – although I would strongly suggest you reconsider going into massive debt for a car.

Right now, my wife and I are about to approach massive debt – I’m talking massive.  The number is $200,000 or more, and no it isn’t a house.  It’s medical school.  This August she starts med school and we’ll be paying close to $50,000 each year (x4 years) just for tuition.  While I know the future income potential makes this debt manageable, the idea of owing close to a quarter of a million dollars for school loans makes me a little uneasy at times thinking about it.

With school around the corner, we really had to sit down and talk about how we would manage this massive amount of debt.  Here’s what we came up with:

1. We Revisited The Budget

We already knew how to make a budget, so it didn’t take long to restructure our budget.  Since we’re losing an income, we needed to make sure the expenses could be covered with my income and that our savings would continue to grow.  We cut back a few things and prepared to live on my income for the next few years.

2. Make Projections with Today’s Dollars

This is key to managing massive debt.  While it would be easy to hope and pray that her income in the future would wipe our debt away quickly, it’s unwise to think like that.  This is especially true for students who borrow as much as they can and live well today with the expectations that their future income will cover the expenses they’re incurring today.  That’s completely backwards!

The best approach is to plan on paying down the debt with your current income.  Plan for the worst and hope for the best really does apply here.  If (and hopefully when) you make more money, you can really attack your debt – but you need to plan with today’s income, not tomorrow’s income.

3.  Have a Plan for the Extra Income

We set the budget based on my salary minus any bonuses or side income.  For any income that we make on the side, we’ll be putting it into a dedicated saving account that can pay down debt or cover additional school expenses.  We’re hoping to save an average of $400-$600 each month through miscellaneous jobs and extra income, and all that income will go right into that dedicated savings account.

4.  Don’t Inflate Your Lifestyle

I can’t emphasize enough how crucial this is.  Fill in the blank:  The more you make, the more you _______.  Most people will finish the sentence with ‘spend,’ which is the truth!  The principle is true for those buying a home or going to medical school.  It’s easy to fall into the trap of increasing your lifestyle because it starts with the small things.  I think we should all enjoy life, but learn to recognize when you’re spending starts to increase by comparing budget categories to previous years.  This is a great way to keep you from inflating your lifestyle.

What advice would you give someone who is about to go into massive debt?

Tim is a personal finance writer at Faith and Finance a Christian financial help blog that provides financial insights for individuals, businesses, and churches. Outside of finance, Tim enjoys spending time with his wife, playing the saxophone, reading economics books, and a good game of RISK or Catan. Find him on Twitter and Facebook and subscribe to the Faith and Finance RSS feed.

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