Leveraging The Graduated Student Loan When You Have Credit Card Debt

Student loan debt and credit card debt.  While separately tough to swallow, for many of us the two combine to form a Voltron sized burden — a burden that makes getting ahead seem like a pipe dream.

When I finally decided to create a budget, I found these two rows particularly concerning.   I decided that the set and forget method would no longer work for us, and found that the harsh reality was we were on track to be paying $792/month for 20 years to take care of our consolidated student loan obligations.  Plus we had minimum credit card payments totaling more than $620/month.

When I finally decided to face the music I looked hard at this combined mountain of debt, and the first striking thing I noticed was that my interest rate on the credit cards was a lot higher than the rate on our loans.  I decided to attack the credit cards first.  After scouring all of our budget items looking to squeeze extra money to pay down the credit card balances, I recalled once reading about different repayment plans for student loans.  By default, we were placed on the level repayment plan, but I had to wonder if there might be a better plan out there that would align with our current credit card annihilating goals.  So I logged into our account and found this promising table:

 

 

 

 

Notice that the initial monthly payment is significantly less for Graduated.  Indeed, the payment does graduate up incrementally every couple of years until it finally reaches its high point, but for someone who was on ground zero on their debt repayment plan, this was exactly what I needed.

By converting from a level repayment plan to a graduated repayment plan we immediately freed up $147/month (18.6%)

I immediately allocated that $147 towards paying down our credit card balances. Robbing Peter to pay Paul?  Yes, but Paul charges a much higher interest rate.  And I felt more than comfortable leveraging my student loan debt to pay down our credit card debt.  If you favor the debt avalanche method, then this may be right up your alley.

Specifically, if you meet the following criteria, then today might be your lucky day:

  • an outstanding balance on your federal student loan(s)
  • have credit card debt, or other high interest revolving debt, with an interest rate greater than that found with your student loan
  • you are still on the level repayment plan for your student loans

A note: I have found that there are varying definitions regarding exactly how graduate repayment plans work.  For example, some increment up every two years, some every four years.  It might be best to simply call you student loan administrator directly to find out how your own plan might work.  They can give you precise figures too.

Posted in Debt, Student Loans | Leave a comment

Learning From Your Childhood Spending Habits

I remember when I was a kid how much simpler the concept of money was.  With no expenses to speak of, it was easy to make decisions about where to allocate my earnings.  No credit cards, no credit lines, no liabilities, no food bills.  My accounting pattern was generally simple: when I earned money I initially saved it, then somewhere later in childhood spent it.  I didn’t have a bank account, but was fairly diligent about saving on my own and was able to successfully save up for several different items.  In lieu of the bank, I rather liked counting my money and literally watching a stack of cash accumulate.  Most of all, I liked being in control of my money.

Little did I know how much things would change when I got older.  Financially speaking, it feels like I was picked up in a tornado only to be spit back out in debt with my childhood accounting pattern smashed to bits.  The tornado for me was I went to school — off and on for 10 years, took out loans, opened credit cards, moved a couple of times, rented for 10 years, ate out a lot, picked up some bad (and costly) habits like smoking and drinking.  This was a lot to take on, both mentally and financially.  The concept of saving was lost on me and my financial focus was rattled.  And although I was living my life and succeeding on some level, my childhood accounting methods were out the window.  I was no longer in control of my money.

The strange thing about this so-called tornado is that I really didn’t feel like I was totally out of control.  For example, with credit cards I found contentment with making the minimum payment.  In all financial areas, I kept my head above water the whole time, held good jobs along the way, always paid rent on time, etc.  But I was a million miles from being able to save money; a million miles from being able to get ahead.

The thing I love about this thought process is the dramatic contrast of  the financial viewpoints and goals that I held as a child versus those I held as an adult.  The pureness and simplicity of the financial thoughts I had as a child were beautiful and I look back on them fondly.  The rugged financial trials and tribulations I experienced as a young adult (and continue to experience, although less ruggedly) were something else:  a perhaps necessary departure from the naive road I once walked as a child, that is most positively viewed as a learning experience.

Although it seems so obvious now as I contrast two vastly different parts of my financial experience, I find that there is a great lesson here.

  • As I child I was in control of my money, had little to no financial burdens
  • As an adult, I lost control, incurring numerous financial burdens
  • Financial burdens are sometimes necessary, but having too many can cause the scale to tip from being in control to being out of control
  • It is helpful to look at two extremes when trying to strike a balance.  Although childhood accounting methods could probably never be scaled up to work through adulthood, looking back on how I viewed money when I had no obstacles helped give me an idea of how to get back to a similar state of mind.

Big Changes Versus Little Ones

So you want to simplify things, eh?  Well there are big and little changes and everything in between.

Some big changes I made were:

Some smaller changes:

  • Whittled down our eating out habits to a handful of times per year (i.e. birthdays and special occasions)
  • Pulled the plug on cable
  • Moderate couponing
  • Stopped carrying cash
  • Started this blog :)
Posted in Budget, Debt | Leave a comment

Why We Prioritize Roth IRA Ahead Of 401k

IRA.  401k.  Boring topics?  Maybe.  Topics you should be familiar with?  I think so.  On a per working adult level, the government offers two separate programs which currently offer a way for working adults to save up to $21,500 per year* ($43,000/yr for married couples).  These retirement accounts share a common benefit in that each program offers shelter from capital gains tax as well as a mix of other tax benefits, depending on the program you choose.

Is this all new to you?  If so, I’d like direct you to this awesome Wiki page that gives and overview of  401k to IRA (both Roth and Traditional flavors for each).  It is an excellent starting point for diving into the details of each program.  If you are already familiar with IRA and 401k, then you are likely well aware of the consideration that must be taken into account when deciding how to allocate your money.  i.e. Is it best to max out 401k first, then IRA?  Or vice versa?

While I am sure a lot can be said to highlight the benefit of the Traditional IRA, I will be focusing on the Roth IRA in this post.  Similarly, likely a lot can be said for the Roth 401k, but I will be focusing on the traditional 401k in this post.

Roth IRA vs Traditional 401k

As your-roth-ira.com summarizes it, a leading thought when weighing Roth 401k vs IRA is this:

When it comes to weighing the benefits of a Roth IRA vs. 401k, your Current Tax Rate and your Expected Tax Rate In Retirement are two of the most important factors.

Generally speaking, if you expect to be in a higher tax bracket in retirement, you’ll save more with a Roth IRA, while if you expect to be in a lower tax bracket in retirement, you’ll save more with a 401k.

Sounds logical.  But will we be in a higher tax bracket when we retire than the one we’re in now when we do our taxes each year? I don’t know, really.  I think we’ll be in a similar tax bracket.  But I know that in retirement, we’ll also not be enjoying some of the tax savings that we do now.  For example, we presently enjoy 2 children worth of child tax credit, the maximum student loan tax deduction, a considerable home mortgage interest deduction since we’re currently in the third year of our mortgage schedule, and our payments are still very interest-heavy.

So what this means is that although I am in a certain tax bracket right now, that bracket doesn’t necessarily reveal the truth.  Quite frankly, we are technically in the 25% tax bracket.  But I can tell you that I (accurately) paid only 9% of my gross income to the feds last year after all of the tax credits/deductions were listed.  Even if I didn’t contribute to 401k last year, which admittedly lowered our taxable income, I would have owed <11% to the feds.

So clearly there is more to consider here than which tax bracket you are in, right?  I believe so, unless I am seriously missing something here.

Some Additional Perks To Our Roth IRA

  1. More fund choices with our Roth IRA at Vanguard than our 401k with Wells Fargo.  Lower fees too.
  2. We could, if we wanted to, buy stocks with Roth money.
  3. The Roth balance is more reliable in terms of forecasting for retirement.  It has already be subjected to all taxes (fed, state, social security).  When considering it, it is what it is.  It’s not going to be taxed anymore, unlike the 401k balance, which is subject to some future unknown tax percentage.
  4. Not really a perk, but I’ll mention because this point is not always obvious.  My wife works as a contractor.  So IRA is her only option.  Even if you’re married, and your husband or wife does not work, you can contribute towards their IRA.

Our Contribution Priorites

The title is kind of right.  We prioritize 401k, IRA, then more 401k.  Specifically,

  • First, we contribute the necessary amount to my 401k to receive full match.  In my case, 6% is required to receive full match.
  • Next, we max out each of our Roth IRAs.
  • Finally, we max out the remainder of my 401k.

This can be an exhausting topic, but nonetheless important.  Like almost all things financial, I find it best to keep an open mind.  For example, what works for us now might not work for us in two years, but I remain open to that change.  And I will happily welcome the ideas that create any such change.  Happy saving!

 

* $21,5oo/yr assumes the adult works at a place that offers a 401k program.  If the adult does not work at such a place, then they are eligible to save up to $5,000/yr via an IRA.

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What I Might Offer You

I created this blog as a place to share the credit card calculator tool that I made almost a year ago.  And to date, the original post featuring the calculator has received a whopping 2,109 unique visitors who spent an average of 2 and a half minutes on the page.  I am proud of this calculator.  Besides making my decision to use the debt avalanche method easier, I like to think that others made have found use for it as well.

My plan was to create more calculators.  And I did create a couple more, but I came to realize that they just weren’t the same as my first.  The first calculator was born out of out a certain curiosity that I have been unable to replicate.  But that’s ok, because my curiosity doesn’t end there.  I don’t feel the need to have to create calculators to scratch that itch.

Nonetheless, I remember the feeling I had when I was working on the calculator.  I probably spent 40 hours developing it, and by the time I sat down to write about it and actually share a finished product I also had a story to tell.  The calculator was unveiled, paired with a blog post that practically poured from my mind through my fingers onto the screen.  It was a very natural feeling that felt really good.  And while I wish I could post a thousand posts like that, I don’t expect that I will.

Despite the bittersweet reflection on my first post, I am highly optimistic about the future of this blog!  Here is a summary of what I have been been thinking when considering this blog:

  1. We have read and thought and talked a lot about our finances
  2. We now have a budget and save for retirement
  3. We have realistic financial goals
  4. We live within our means (we did not before)
  5. We have successfully cut expenses in a lot of areas
  6. There is no silver bullet that ensures financial wellness
  7. Like dieting, it is inspiring to listen to others’ trials and tribulations
  8. I love the idea of sharing my knowledge and experience with others
  9. I am not a writer, but I try
  10. Personal finances is a taboo subject for many
  11. This is now a hobby/passion of mine, just short of an obsession
  12. I like to talk about finances more than I do write about them, but I find high value in writing about them and I want to do it more
  13. I want to talk to more people about finances and inspire them to give a good hard look at their own financial wellness

In the distance, I see this blog featuring candid video interviews with people on the subject of money.  I am particularly fond of the idea of traveling around to talk to people about money — their personal trials and tribulations with it — and sharing that with the world.  Would that be constructive?  I think so.  In the meantime, I have to get ready for my 9 to 5.  I’ll write more later.

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In Front Of A Cash Register

Many of us go to the store to buy something on a regular basis.  It might be food, clothes, diapers, cigarettes, boos, gas, random things at Target or Walmart.  Stores typically have three things in common: they have cash registers, they have product, and they have product crowding the cash registers.  This crowded product is called upsells.  Cash registers are surrounded by upsells for a reason: to throw ten (maybe 100) last minute ideas at you before you pull out your wallet.  And while many of us have likely fallen victim to one of these impulse buys at one time of another, it may be useful to look at two real-life consumers help jog our own memories.  As is the case with my parents, our buying habits are so ingrained into our daily lives that it’s often hard to isolate them so that they may be subjected to the scrutinizing they so richly deserve.

Case Study

Here is an example starring my mom and my dad.  They each put themselves in front of cash registers on a regular basis, but they both have different motivating factors which put them there.

My Dad

My dad does the cigarette shopping.  He’s sixty one year old smoker and buys a pack of cigarettes nearly every day.  He’s not one to buy cartons — claims it allows him to smoke more.

The other day he was discussing some specific details about his finances which naturally created a window of opportunity for me to take a shot at his bad habit.  He was telling me how he received a small bonus at his retirement gig.  After congratulating him, I noted how he might be able to earn another self-imposed bonus by quitting smoking.  Besides the potential health benefits we always talk about, I helped him imagine the money he would save.  I jogged through the math: how many packs per day, how much per pack… you would save that much, I said.  Beyond that, I asked him what else he bought on these daily visits to the convenience store.  He admitted he regularly purchased other items such as coffee, donuts, and other snacks.  But he also admitted that there was in fact no rhyme or reason to the extras.  In fact, I suspected that they were technically upsells.

I asked him if he thought that he would actually go and get those other items at the same frequency if he did not smoke.  And he thought he would not, although admitting that he did enjoy a coffee once in a while.  And that proved it: they were upsells.  Only one thing was for sure whenever my dad set out to the store each day, and that was that he would buy a pack of smokes.

Yeah, my dad is a smoker.  And that’s a habit — which is technically an acquired pattern of behavior that often occurs automatically.  But he also puts himself in front of a cash register every day which is also a habit.  Although in his case his cash register habit was born out of his smoking habit.  His habit continues to be the sole reason why he finds himself in front of a cash register nearly 365 days/year.  His buying more than he set out to buy percentage remains high and unpredictable.

My Mom

My mom does the food shopping.  She’s a similarly-aged non-smoker who does one big food shopping trip on Sundays with occasional mid-week trips.

My mom.  Well my mom puts her self in front of a register less often and really does so with a more worthwhile purpose.  In this picture, I view her cash register encounters as minimal, born solely out of necessity.

In fact, she spends cash at the store — a fixed, budgeted amount of cash.  She prepares for the outing by scouring the ads and clipping coupons.  She arrives at the store with a list that is in line with her budget.  Her buying more than she set out to buy percentage is near 0.

Now You

How often do you find yourself in front of a cash register?  How often do you spend a little bit more than you set out to spend in the first place?  It has often been said to minimize trips to the store in order to save on gas.  But perhaps there’s more to that wisdom.  In fact, if you do find that you regularly buy more than you set out to buy in the first place, there is more to that wisdom.

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Do You Consider Your Primary Home an Investment?

When we began looking for our first house, we noticed that the soon-to-be acquisition was deemed as an investment to some.  For example, our FHA counselor, our realtor, countless web pages — they all referred to the purchasing of our first home as an investment.  And this all sounded well and good, but we really  just wanted to own a home.  We had rented for ten years and were sick of paying rent.  With two young children, the oldest ready to start kindergarten, we were ready to settle down and buy a place.  We were in the market to do just this — we weren’t necessarily looking to invest.

But what was meant by the folks who told us it was also an investment?

By investment, did they that it would be a place into which we could pay money with the expectation of profit, as Wikipedia states?  If so, this didn’t really make sense to us because we actually plan to live in our house until we cease to exist.  Given this plan, the expectation for profit is nonexistent.  Maybe for our children, if they decided to sell the house after we passed, but certainly not for us.

On one hand, we thought that the idea of a primary home as an investment was aligned with the same thought pattern that helped create the housing bubble of 2005-2009.  After all, during the 2000s home prices soared at a staggering rate.  Naturally, a certain consideration of this impressive rate could have given rise to the idea that homes are investment vehicles.  An example of is examplified in the following statement:

“This house is $200,000 today, but will likely be worth upwards of $225,000 this time next year”

We’ve heard and read many examples like this.  And at first, this kind of statement is impressive, but it begs the question: what does this mean to a homebuyer who plans to own their home for longer than one year?  What does this point mean to someone who plans to own their home until they die?

Not a whole lot, really.

Even though a buying a home might not be an investment in the traditional profit making sense, I have come to fondly consider our home an investment in other senses.  Namely, I think our home is

  • An efficient way to pay our lifetime shelter expenses. Assuming you have to pay for shelter, you can either rent or buy.  The default view on this awesome NYT rent vs buying interactive piece says that buying is better than renting after 6 years. YMMV, but this visual basically sums up what I mean
  • A potential nest egg that can be cashed out in our later years. Worst case scenario we can liquidate our house to finance our very later years, in the event we need assisted living care.  i.e. the last five years of life, maybe?  We calculated that the current value of our home would be able to fully cover our current expenses for 5 years.  Note: we’ve kept mortgage as part of our expenses for this calculation.
  • An emotional investment; having a permanent place to call home. Priceless for many including us.  The house is part of our family.

Overall, I consider the notion of a primary home as an investment slightly misleading.  In our case we certainly do not view it as an investment in the traditional sense.  I can’t help but wonder if anyone else has had similar experiences or thoughts regarding the notion of a home as an investment?

Posted in Investing, Mortgage, Real Estate | Leave a comment

Unexpected Income Versus Expected Income

If you found a hundred dollar bill, what would you do with it?

Would you spend it differently if you received it as a tip, a bonus, or a gift?

Would you spend it wisely or frivolously?

If you were given ten one hundred dollar bills, would you follow a similar spending/saving pattern with it?

If you unexpectedly inherited one hundred thousand dollars today, what would you do with that?

The answer to these questions — what you would do with unexpected income — do they match how you spend your expected income?

If they do not match, why is that?  Why would you treat unexpected income any differently than expected income?  If you weren’t immediately sure what you would do with found money, is that cause for concern?

 

Posted in Budget, Investing, Motivation, Philosophy | Leave a comment

Cash: King of a Reckless Spender

I have spent tens (if not hundreds) of thousands of dollars of cash over the years.

The first couple of years I worked full-time, I used to cash my paycheck.  No deposit.  Just plain cash.  Walked out of the bank with a nice fat envelope.

I don’t have a heck of a lot to show for the things on which I spent the cash.

Though I used to fancy carrying cash, I no longer do it.

I very rarely have cash on me.  And when I do, it is put there for a specific reason and I end up holding it for a very short time.

It was hard to quit carrying cash but I knew it was a weak point for me.  It was a hard habit to break.

But I love not carrying it now.  I feel so free.

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The Downside of Retiring Healthy

A few weeks ago, I was having a wonderful discussion with my wife about how in addition to improving our financial health, we’ve also stepped up our physical health game.  We agreed that there might very well be some correlation between physical health and financial health.  This has certainly been our experience — for instance, in contrast, we recalled concurrency between when we were in our worst physical shape and when we were in our worst financial shape.  On this day, however, we were basking in the glow of an unprecedented new parallel level of optimal health — both financially and physically speaking.

The realization got me thinking about how financially beneficial it might be that we were also following a healthy path physically speaking.  In particular, I began to think about how we might enjoy lower health care costs in both pre- and post-retirement life.  As the Center for Retirement Research at Boston College (yes, you read that right: there is an actual Center for Retirement Research) so aptly puts it:

(If) current good health is a predictor of low health care costs over one’s remaining lifetime, healthy households could set aside less for health care expenditures than the unhealthy…

This mirrored our logic.  And because I wanted to write about this topic, you can imagine how happy I was to find CRR’s report titled DOES STAYING HEALTHY REDUCE YOUR  LIFETIME HEALTH CARE COSTS?. The answer to this question was exactly what I was looking for.

But while this question matched what I was looking for, the answer did not.  Put frankly, here is the somewhat hard to accept — although logical — conclusion:

  1. People in good health can expect to live significantly longer. At age 80, people in healthy households have a remaining life expectancy that is 29 percent longer than people in unhealthy households, and, therefore, are at risk of incurring health care costs over more years.
  2. Many of those currently free of any chronic disease will succumb to one or more such diseases.  For example, our simulated individuals who are free of any chronic diseases at age 80 can expect to spend one-third of their remaining life suffering from one or more such diseases.
  3. People in healthy households face an even higher lifetime risk of requiring nursing home care than those who are not healthy, reflecting their greater risk of surviving to advanced old age, when the risk of requiring such care is highest.

Overall, healthy couples can expect to pay 18% more on post-retirement healthcare than unhealthy couples.  Given the study, and the explanation of this counter-intuitive finding it all kind of makes sense.  But nonetheless kind of a bummer.

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Power of Compounding

Just perusing the CNN Money 101 series and in lesson 1 came across this wonderful example:

To put the power of compounding on your side, you have to start early. Suppose there are two siblings who both invest in Individual Retirement Accounts earning 8% a year.

The sister starts at age 20, and for the next 10 years she stuffs $3,000 a year into her IRA. At age 30, though, she stops and never adds another penny.

Her brother waits until age 30 to get started, but then dutifully salts away $3,000 a year for the rest of his life. Which sibling do you think will be better off?

In this case, the early bird will always be ahead. The sister reaches age 65 with more than $642,000, while her brother will have a little under $518,000 – about 20% less.

Even though the focus is on time, it powerfully illustrates the notion of growing your money.  As far as I see it there is only one way I will have greater than 1 millions dollars.  And it follows a similar path to this.

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