What to do with the extra $$

**snshijuptr** · 01-03-2011, 01:27 PM

Are you okay with taking this much risk in your life? If one or both of you graduate and are unable to get a job, you are going to be facing a lot of inescapable debt. In addition, if you have kids and one or both of you decide to stay home or reduce your hours, you may not be looking at such a nice cash flow. What you are proposing to do will involve highly leveraging yourself. I would be very wary of ruining my future cash flow when major life changes (such as children, changing jobs, etc) are in the near future.

That warning aside, I usually consider investment growth as only 5% over the long term if I'm debating debt vs investment. In that case then, you might want to use your money to pay off any debt over 5% (or set it aside to pay off that debt when it starts to accrue interest).

I would NOT take out a loan to put in your retirement. Student loan service charges are very high. Add that with the interest you will pay and you will probably lose money on the deal.

**disneysteve** · 01-03-2011, 01:35 PM

Welcome.

You earn 35K. Your wife is a full-time student. Does she work? If not, how did you afford a $180,000 house? That would need an income of upwards of $60,000. How are you paying a $1,300 mortgage payment on a $35,000 income?

I think your whole picture is really out of whack. I'd suggest you pick up The Total Money Makeover by Dave Ramsey and both of you read it cover to cover. you have a significant amount of cash but are living on debt. That doesn't make any sense.

I would stop your 403b contribution immediately. What good is putting money away with one hand and then borrowing it with the other?

I would leave a couple thousand in savings (Dave Ramsey would say $1,000 but I'm okay with a little more if you want) and take the rest and pay off debt. You can start with the highest interest rate or you can start with the lowest balance. The first method is ultimately better but either way works.

Then, do everything you possibly can to avoid taking on any new debt. If any additional money does come in, use it to pay off debt. If you get 13K this year, great. Put it toward the debt.

Once you are out of debt, then build a 6-month EF and then restart the retirement savings.

**Hector** · 01-03-2011, 01:44 PM

This is very interesting.

You make $35k/year working part time. You didn’t mention your wife’s pay. May be she is planning to work after completing her studies.

Whats the point in having $55k in savings with this much debt? Seems like you are thinking that you guys have a lot of money, did you ever total all your debts?

I don’t have all information about you guys. But both of you are in school and you have mortgage! Also you felt need to buy 2009 accord and 2008 fit.

I think you are in need to some serious money makeover!

**snafu** · 01-03-2011, 05:29 PM

What was the total income earned in 1 yr on $55K in a High Yield Savings a/c?

**skittles** · 01-03-2011, 06:15 PM

Originally posted by snafu View Post

What was the total income earned in 1 yr on $55K in a High Yield Savings a/c?

I can't answer that, as this money has come from various places and has been sitting in the savings account for a very short time:

$23k came as gifts
$9.4k came from wife's high expense mutual funds being liquidated
$2.6k came from my brokerage account being liquidated, where I had started out with about $1.6k 4 years ago, so I made a small amount on that.
$20k balance was sitting in our checking accounts not doing anything productive....

Why do you ask?

**disneysteve** · 01-04-2011, 04:41 AM

Originally posted by skittles View Post

Why do you ask?

I'm sure snafu will be along to answer but I suspect the point was that you are sitting on 55K earning next to nothing while borrowing money that is costing you 5-7 times as much in interest. You would do far better to stop borrowing money and use the bulk of that 55K to pay down existing debt.

**skittles** · 01-04-2011, 08:23 AM

Thanks all for the responses.

@snshijuptr:

I understand we are taking some amount of risk. The chances of my wife graduating with a PA degree (Physician Assistant) and not having a job are extremely tiny, given what we know about the profession, the demand for PAs (and other primary healthcare providers) in the US and her hard working nature and intelligence. You might want to research the profession if you are truly not familiar with it.

As for me, I am very fortunate to have a job that is mine as long as I want it, unless I screw up big time. Knowing that, I am very careful not to goof off. I would not give this job up till I get another job offer. I work in a research lab that is well funded and I guess only if my boss were to die unexpectedly (god-forbid) would I be out of a job. My boss knows of my plans and is supportive of me studying part-time, and allows my schedule to be flexible, even though this means I will leave one day. He benefits by having someone who is trained and knows the work, and not having to go through the process of hiring and training someone new.

@disneysteve:

My wife was also working till August 2010 as I mentioned in my OP. She quit when she started school, as they are highly discouraged from working while in school, since the curriculum is extremely rigorous (think med school). She was making about $40k at the time.

We were renting an apartment for about $950, so we decided to buy a house for a little more since we were going to be here for a while now. Despite that, it is still costing her much less for living expenses than her program estimates. If she were going to be pursuing this degree anyway, that cost would be there regardless of whether her share of the rent/mortgage is $500/mo or $600. After getting our homestead exemption, our mortgage should come down to a little over $1100/mo later this year- is that really so bad?

I guess I disagree with the Dave Ramsey philosophy of being completely debt free (pretty much) before saving for retirement.

I would stop your 403b contribution immediately. What good is putting money away with one hand and then borrowing it with the other?

The math doesn't support it, does it? Take a very simple example using my numbers:

Say when I am done with my degree, I end up with $20k in student loans. I will be 29 years old and say I work till 65- that's 36 more years to work. For calculations sake, I will assume I will have a job paying $35k with my current employer for the rest of my life (which if I so choose, I probably could do and be making ~$50-55k at the end). By your and DR's advice, I should NOT contribute to my retirement till this loan is paid off, and automatically lose out on the 150% match for my money. Assume I am putting aside 14% including match. If I put nothing, I still get 6% from my employer.

Normal loan repayment: 120 months, $5% interest rate, $212/mo and a total of $5455 paid in interest.

If I were to attack this debt by taking the 5% I was contributing to my 403b (can't include the 3% match, can I?), thats an extra $1750/year before taxes, assuming a tax rate of 15% that works out to ~$1500 cash in hand I can throw at the loan, or about $125 extra/mo. I end up paying a total of $3021 in interest and save a whopping $2434 in interest on the loan. This will take me just under 6 years, so I've also saved 4 years...

Meanwhile...

For 6 years, all that is going to my retirement account is my 6% employer contribution, or $2100. Assume I have a starting balance of $10000 in my 403b (just for arguments sake; I have more than that right now), an 8% rate of growth on average. For the next 30 years, I add back the 5%+3% match for a total of 14% = $4900. I end up with $926,598.

Instead, say I am perfectly able to pay the $212 monthly, which I hope to be, considering I was paying a little more than that on my first loan (detailed in OP), when I started working with a salary of about $29k, plus I'll have the $390/mo that I'm paying for the car freed up by then.

I put my 5%+3% match + 6% employer contribution = 14% all into the 403b. This time I have 36 years for it to grow at 8%, I end up with $1,149,826, a gain of $223,228. So for paying $2434 less in interest, I should lose out on a potential $223k in the future?

AND....If I manage a return of 9% annually, the difference would be $304,642, and @10% it would be $414,669, neither of which is unrealistic. And this doesn't even begin to include the amount that this extra chunk of change would earn me during retirement, potentially a total loss of well over $500k, if I followed this advice.

Either my math is way off or I am missing something? I'd like to hear your view.

As for us living on debt- would you say the same to a med student, almost all of whom live on debt for 4 years of medical school? Sometimes that is what you have to do, it's an investment in your future. It's not as if she's living on debt to pursue a masters in English literature!

@Hector:

I work full time, and go to school part-time, not the other way around. I guess I didn't make it clear enough in my original post that she stopped working when she started school. Of course she plans to work after, why else would she be pursuing this career?

The 2008 Fit was bought for $7000 of our cash plus insurance payout, since our 1999 civic was totaled in a not at fault accident, and we got a good deal from someone who's mother was too old to drive her car- still a bad deal? The Accord was bought when our other car was a 98 corolla and we knew we had 1 year of combined work left before she started school to pay down the loan. Plus we knew she would need a reliable and safe car during school to take her to her rotations. We didn't want to risk having a 12+ year old car die on us then- makes sense? We don't intend to buy another car till one of these dies; perhaps you need to reserve judgment before knowing the whole story?

That said-

The Ramsey method is for people who cannot handle debt and have demonstrated that in the past. I feel confident we can handle debt responsibly and have done so in the past. Straight out of college, I bought my 1999 civic (in 2006) for $7800 and paid it off in 2 years earning about $30k, as well as paying about $220/month for my student loans till I became a part-time student again, along with making the minimum contributions to my 403b to get the match AND saving money on the side.

The ROTH contributions can be withdrawn at any time if needed in an emergency. Add to this the fact that federal loans are easier to repay than private with measures in place to deal with financial hardships, and the wife can always try and work for the govt if needed to have her loans forgiven. As far as I know, student loans are not passed on in case of death, and if something were to happen to her, I would not be saddled by them and vice versa. If something were to happen to me, my life insurance coverage would pay off all our student loans.

**skittles** · 01-04-2011, 09:02 AM

I also crunched the numbers for another scenario:

Scenario A: We put 5k each into ROTHs for us for 2010, 2011, 2012 and 2013. Total $40k, as is our current plan. Till age 65 from today, that is 38 years to grow.

Scenario B: Of the $55k, we keep $40k aside and use it to reduce her loan debt from $100k to $60k at time of graduation. At a rate of 5% interest on the loan, this brings our total interest paid on the loan down from $27,279 to $16,366, and we saved $10,913. We then start contributing to our ROTHs in 2014, which gives them 35 years total to grow.

Assuming each of us maxes out our ROTHS every year:

@ 8%:

A: $1,282,832
B: $925,034
Difference: $357,798

@9%

A: $1,672,515
B: $1,167,195
Difference: $505,320

@10%

A: $2,189,260
B: $1,477,860
Difference: $711,400

Now double these differences, since these calculations were done for each person- $5000 per year. Add the interest lost on the difference during retirement if scenario B is followed. We're looking at probably well over $2 million lost at and during retirement, to save $10,913 in interest over the course of ages 29-39.

Of course this doesn't count investing the extra money we will have per month due to the monthly repayment amount being smaller if the loan amount is smaller, but how are you telling me to ignore this power of compounding interest to save a fraction in the long run? These initial 3-4 years make a massive difference at the end!

**jpg7n16** · 01-04-2011, 09:26 AM

You seem very risk tolerant, and my ideas are right in line with yours for the most part.

Except I'd probably pay off any student loan at 6% or more, and then do your plan as is.

You can only deduct so much interest on student loans - and there is an income limit, and with the amount of debt and income you'll have, 6.8% will likely be a tax adjusted 6.8% - which is on the higher side. (Tax Topics - Topic 456 Student Loan Interest Deduction)

So why take risk and hope for 7-11% when you could guarantee 6-6.8% on a portion?

Then since you're clearly okay with the risk, I'd go with your plan almost as is.

Just so you know, your goals are different than several people on this thread. Yours are more of an interest rate maximization theory (like mine) - while others are cash flow maximization, or debt minimization, or credit score maximization, or some other --zation

So you'll see that in posts where people will say, "why keep that debt when you have the investments to pay it off??" Just remember that their goal/mindset is debt elimination and your's isn't.

Though even from our interest rate maximization side - it's better to pay off debt, than let it sit in cash. Exception being required amounts for an emergency fund.

**skittles** · 01-04-2011, 10:19 AM

Originally posted by jpg7n16 View Post

Just so you know, your goals are different than several people on this thread. Yours are more of an interest rate maximization theory (like mine) - while others are cash flow maximization, or debt minimization, or credit score maximization, or some other --zation

So you'll see that in posts where people will say, "why keep that debt when you have the investments to pay it off??" Just remember that their goal/mindset is debt elimination and your's isn't.

Though even from our interest rate maximization side - it's better to pay off debt, than let it sit in cash. Exception being required amounts for an emergency fund.

I am figuring that out- I should probably have made it clear in my OP what my goals were- probably retirement saving maximization...and overall financial planning.

I found it a little funny how I got some pretty poor advice- like stopping my 403b contributions, I guess on the assumption that I wanted to minimize my debt? But I don't see where I gave the impression in my OP that that was my goal?

**littleroc02us** · 01-04-2011, 10:52 AM

Originally posted by skittles View Post

Thanks all for the responses.

In all that you have said, you need to calculate for risk. With all the debt you have, and the more you plan on taking on and cash sitting in the bank, what if you lose you job, what if she gets hurt (God forbid) and cannot perform her job, what if she doesn't find a job? Your neck deep in debt and no way to pay for it. I would suggest slowing down and paying down your debt. Education, houses and cars are always available no matter what year it is. I see danger ahead if you don't slow down and get rid of debt.

**jpg7n16** · 01-04-2011, 11:07 AM

Originally posted by skittles View Post

I am figuring that out- I should probably have made it clear in my OP what my goals were- probably retirement saving maximization...and overall financial planning.

Well even still we have to temper our advice a bit. If you wanted to maximize retirement, but had a 14% or 24% credit card out there - we might need to try and change your mind on your goal.

And to a lot of people, being debt free is an essential part of their "financial planning" concept.

But if you're looking at your total financial plan:
- Do you have proper life insurance coverage to cover your share of the debts, and provide income?
- Do you have enough insurance in health/disability/auto/homeowners?
- Do you and your wife have updated wills?
- Have you updated beneficiarys on your policies and accounts?
- Are your investments in line with your time horizon for your goals?
- Do you have any children? Are you planning on college savings for them? Where does that fall in your list of personal goals?

I found it a little funny how I got some pretty poor advice- like stopping my 403b contributions, I guess on the assumption that I wanted to minimize my debt? But I don't see where I gave the impression in my OP that that was my goal?

Well it's actually very good advice - for a debt elimination strategy. Free up as much cash today (by not deferring your income) so that you have maximum dollars available to pay towards the debt.

As long as you understand that we'll all give you advice based on what we feel is most important - you'll be good to go

And it may be worth considering that some of these debt free crazies are onto something.

I could personally never really tell anyone to accelerate payment on a debt charging less than 4% - I'd rather see them invest it. But if their goal is debt elimination - in order for them to achieve their goal, I'd have to recommend paying it off. Why someone would want to quickly pay off a 0% loan is beyond me!

**snshijuptr** · 01-04-2011, 11:22 AM

Originally posted by jpg7n16 View Post

Except I'd probably pay off any student loan at 6% or more, and then do your plan as is.

I agree with jpg, but I would be more conservative and say any debt over 5% to reduce leveraging risk by increasing your profit margin.

Even if PA's are highly in demand right now, there are lots of reasons that your wife may or may not find a job right away (health, preference, changing economies, natural disaster, pregnancy, wanting to move). Many of these would also allow you to defer her loans, but not all of them.

I understand that you want to maximize your net worth over your lifetime, but you always have to ensure your short term cash flow first. Scenario: She graduates, you immediately have a baby (out of impatience? Ease? Necessity?), and you need to move for a better job. In order to service your loans and the increased expenses, how much will you need to be earning? I'm not willing to crunch the numbers for you, but I'm just bringing things up for you to consider.

One my top reasons to have a high net worth is to have flexibility in my life. Leveraging yourself increases your risk and lowers your flexibility. I just want to make sure that you have enough flexibility built into your financial plan.

**skittles** · 01-04-2011, 01:38 PM

Originally posted by littleroc02us View Post

In all that you have said, you need to calculate for risk. With all the debt you have, and the more you plan on taking on and cash sitting in the bank, what if you lose you job, what if she gets hurt (God forbid) and cannot perform her job, what if she doesn't find a job? Your neck deep in debt and no way to pay for it. I would suggest slowing down and paying down your debt. Education, houses and cars are always available no matter what year it is. I see danger ahead if you don't slow down and get rid of debt.

Yes, I do understand the risks we are taking, and I did refer to them at the end of my post # 8. Not sure if you read my posts in their entirety, I know they are quite lengthy. As I said, the chance of me losing my job are very small, not to say it is impossible. But its small enough that it makes it a risk worth taking according to us.

Also, the chance of my wife NOT getting a job are also very small, based on her attending a top program, her strong performances, demand for PAs etc etc. Again, it is a risk we are willing to take. If she becomes permanently disabled, federal loans can be discharged. There is also deferment and forbearance in case of economic hardship, which I hope we never need to use.

If we pay down the debt, and then one of us has trouble finding a job, we have far less money to draw from. Again, ROTH contributions can be withdrawn, if the chance of one of us losing our job is 5%, then I am not willing to give up that money to reduce our debt right now to cover this risk. And it's not really covering it at all....one of us could be unemployed and have $15k or less- $1k as some suggested, to draw on instead of $50k...The risk is still there.

Originally posted by jpg7n16 View Post

Well even still we have to temper our advice a bit. If you wanted to maximize retirement, but had a 14% or 24% credit card out there - we might need to try and change your mind on your goal. Agreed....but that's not our situation.

And to a lot of people, being debt free is an essential part of their "financial planning" concept.

But if you're looking at your total financial plan:
- Do you have proper life insurance coverage to cover your share of the debts, and provide income? Not quite, enough to cover debts and provide about 3 years worth of income that I would have earned, the wife doesn't have any- this is something we need to work on for sure.
- Do you have enough insurance in health/disability/auto/homeowners? Yes
- Do you and your wife have updated wills? No, but we don't have kids and are the beneficiaries on all policies and accounts for each other.
- Have you updated beneficiarys on your policies and accounts? See above
- Are your investments in line with your time horizon for your goals? I think so, but that was my main goal in coming to to present my situation
- Do you have any children? Are you planning on college savings for them? Where does that fall in your list of personal goals? Not for another 5-6 years, and the plan will certainly be to save for them once that happens, but again, not at the cost of our retirement right now.

Well it's actually very good advice - for a debt elimination strategy. You are absolutely correct, that qualifier needs to be there.

As long as you understand that we'll all give you advice based on what we feel is most important - you'll be good to go

And it may be worth considering that some of these debt free crazies are onto something.

Originally posted by snshijuptr View Post

I agree with jpg, but I would be more conservative and say any debt over 5% to reduce leveraging risk by increasing your profit margin.

Even if PA's are highly in demand right now, there are lots of reasons that your wife may or may not find a job right away (health, preference, changing economies, natural disaster, pregnancy, wanting to move). Many of these would also allow you to defer her loans, but not all of them.

I understand that you want to maximize your net worth over your lifetime, but you always have to ensure your short term cash flow first. Scenario: She graduates, you immediately have a baby (out of impatience? Ease? Necessity?), and you need to move for a better job. In order to service your loans and the increased expenses, how much will you need to be earning? I'm not willing to crunch the numbers for you, but I'm just bringing things up for you to consider.

One my top reasons to have a high net worth is to have flexibility in my life. Leveraging yourself increases your risk and lowers your flexibility. I just want to make sure that you have enough flexibility built into your financial plan.

I appreciate your concern....Of course, anything can happen- like you said, natural disaster, pregnancy etc etc...but we have weighed the risks and feel like they are risks worth taking at this stage in our lives. Pregnancy at time of graduation would only happen by mistake, nothing else, we are clear on that!

Agree with you re. flexibility: doesn't having the $40k in ROTHs to draw on tax and penalty free if needed in an emergency actually give me MORE flexibility than not having that $40k at all due to having used it to pay down debt? Again, this is in a worst case scenario, and if things go broadly as planned, that money can remain in the ROTHs and keep growing. What am I missing here?

What to do with the extra $$