What to do with the extra $$

[skittles]

invest it in electric orange high yielding savings

I hope this is not a serious post. The 1.1% current yield I am getting there is barely keeping up with the rate of inflation, if at all...so I'm probably losing money in that account.

[disneysteve]

I understand we are taking some amount of risk.

I think you may be taking more risk than you realize.

The chances of my wife graduating with a PA degree (Physician Assistant) and not having a job are extremely tiny

That may be true but trying to predict the job market for any field two years in advance is a bit of a crapshoot. Who knows what changes healthcare reform might cause?

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.

So when your household income dropped from 75K to 35K, what changes did you make in your spending to reflect the drastically lower income? Did you slash all unnecessary expenses or did you keep living pretty much as if you were still bringing in 75K?

We were renting an apartment for about $950, so we decided to buy a house for a little more

I don't consider going from $950 to $1,300/month to be "a little more" and it certainly isn't something I would have done knowing that our income was going to drop by more than 50% at the same time. Your opinion may vary, though.

After getting our homestead exemption, our mortgage should come down to a little over $1100/mo later this year- is that really so bad?

What is your take-home pay? I'm guessing somewhere around $2,400. That means your house payment is about 49% of your income. Yes, that is pretty bad. The recommendation is to have a house payment no more than 28% of income.

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

I agree with you there. I also don't believe in being totally debt-free before saving for retirement, especially if there is a company match. However, it is a whole other step to be essentially borrowing money to make those retirement contributions.

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?

For the record, I'm a physician, so I know all about living on loans for 4 years of med school. I tried my best to live frugally during that time and not borrow any more than I had to. I was concerned about the debt load and did what I could to keep it to the minimum. AND, I wasn't sitting on $55,000 in cash. If I had been, I never would have borrowed as much as I did. I would have used that cash to pay for my education and living expenses (or at least a big chunk of it).

Of course she plans to work after, why else would she be pursuing this career?

And what happens when you start a family? What if she decides she wasn't to stay home with the kids or only work part-time? What if health issues crop up? Are you building a debt-load and a lifestyle that you might not be able to afford unless everything goes exactly as planned?

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.

I agree. The Dave Ramsey method isn't needed by everyone. My wife and I had no trouble getting my loans paid off, getting our cars paid off and buying our home. Now, at 46, we have just a small mortgage and we are aggressively repaying that and expect to be totally debt-free in about 5-6 years. So I'm not totally disagreeing with you. I'm just not sure from what you've posted that you totally appreciate the level of risk you are taking on. Paying off debt reduces risk. If I had $142,000 in non-mortgage debt and a savings account holding $55,000, I can tell you what I'd be doing. Would that result in a lower investment portfolio balance down the line? Yep. But I'd be okay with that.

My student loans were mostly in the 3-4% range with a 25-year repayment plan. However, I realized that if I just made the minimum payments, I would have still been paying for my education when our daughter was in college. I just could not see doing that. So I prepaid my loans and was student debt free in 12 years. Did I miss out on potential investment gains along the way. Most likely. While paying 3-4% interest, I might have earned 7 or 9 or 11%. Of course, I might also have earned 2% or lost 4%. There was no way to know so I went with the sure thing and paid off the loans. I'm not at all sorry I made that decision. It would have really sucked to have poured that extra money into the stock market only to have the market crash and be out the money and still have the loans.

[disneysteve]

If we pay down the debt, and then one of us has trouble finding a job, we have far less money to draw from.

True, but you also decrease your monthly expenses. Pay off a debt with a $200 payment and you now need $200 less per month to make ends meet.

ROTH contributions can be withdrawn

Also true, but I, for one, consider retirement accounts untouchable. That is just my personal feeling on the matter. Once I put the money in the Roth, it isn't coming out until I'm sitting on the beach sipping martinis for a living. No early withdrawals. No 401k loans. Any money needed will need to come from other sources unless there is a truly catastrophic event in our lives.

[skittles]

I think you may be taking more risk than you realize.

I would beg to differ- I think precisely because I understand the risks, I don't want to lose the liquidity that the cash offers me. What are we concerned about- something happening in the future that would prevent me or my wife from bringing in the maximum potential income, right? So if we use the bulk of the cash to prepay/reduce the amount of debt, this does absolutely zilch to reduce the risk of this dreaded event from happening. What it does is leave us with a much smaller cushion, and we are still left with having significant debt to service each month.

And I have seen no one at all address my contention that in a sense, the ROTH is also something you can withdraw from in a pinch if needed. If not needed, then great, leave it be! There are plenty of lower risk investment options within a ROTH that, while not 100% guaranteed, still will earn a decent amount.

That may be true but trying to predict the job market for any field two years in advance is a bit of a crapshoot. Who knows what changes healthcare reform might cause?

Again, you should know that the profession is in no danger, being a physician yourself. What in healthcare reform could completely change the outlook? Certain job markets might be a crapshoot 2 years hence, but things like PAs, MDs, NPs....I think one would be paranoid to think something drastic is going to happen. If anything, the MDs would be the ones at risk, as they should be (but that is an entirely different debate!).

So when your household income dropped from 75K to 35K, what changes did you make in your spending to reflect the drastically lower income? Did you slash all unnecessary expenses or did you keep living pretty much as if you were still bringing in 75K?

We cut back on much of our unnecessary expenses, not that we had a lot to start with- cheaper cable, far fewer movies (and when we do go out to the movies, its for the $5 matinee shows), cheaper dinners out when we do go out to eat. We don't buy clothes regularly/jewelry/shoes/other frivolous items and never did. Only on an as needed basis.

I don't consider going from $950 to $1,300/month to be "a little more" and it certainly isn't something I would have done knowing that our income was going to drop by more than 50% at the same time. Your opinion may vary, though.

What is your take-home pay? I'm guessing somewhere around $2,400. That means your house payment is about 49% of your income. Yes, that is pretty bad. The recommendation is to have a house payment no more than 28% of income.

Mmm...not quite. As I said in my 2nd post- half the mortgage payment was coming from her loans for 4 month. In fact, I completely forgot something we had decided in our plans some while ago- $10k of the gift money had been assigned to pay for her share of the mortgage from this month till it is exhausted (roughly mid 2012), so as to reduce her amount of the debt by $10k. So I correct myself in that my plan now changes to have no money set aside as of now for a ROTH contribution for 2013. My share of the rent is $640 now (28.3%), $550 (22.09%) after homestead exemption. We'll also probably use part of any future gift this year to cover her share of the rent through till her graduation, thereby reducing her student loan debt by $13,740.

I agree with you there. I also don't believe in being totally debt-free before saving for retirement, especially if there is a company match. However, it is a whole other step to be essentially borrowing money to make those retirement contributions.

I believe my calculations showing why I shouldn't stop my 403b contributions strongly suggest that I continue contributing, wouldn't you say? What part of that math doesn't make sense? If your answer is that prepaying my own student loan debt would reduce risk, the trade-off is much riskier according to me- having significantly less money ($500k to $2 million or more as per my calculations) in retirement, when SS is anything but guaranteed 40 years from now? That is the real risk.

For the record, I'm a physician, so I know all about living on loans for 4 years of med school. I tried my best to live frugally during that time and not borrow any more than I had to. I was concerned about the debt load and did what I could to keep it to the minimum. AND, I wasn't sitting on $55,000 in cash. If I had been, I never would have borrowed as much as I did. I would have used that cash to pay for my education and living expenses (or at least a big chunk of it).


And what happens when you start a family? What if she decides she wasn't to stay home with the kids or only work part-time? What if health issues crop up? Are you building a debt-load and a lifestyle that you might not be able to afford unless everything goes exactly as planned?

The debt load is all federal student loans, and there are measures in place to allow someone to get through periods of financial hardship caused by unemployment or disability. We also understand that having her stay at home with the kids for any extended period is not going to be feasible due to financial constraints, and there are other family members that we can rely on to help during this period.

I agree. The Dave Ramsey method isn't needed by everyone. My wife and I had no trouble getting my loans paid off, getting our cars paid off and buying our home. Now, at 46, we have just a small mortgage and we are aggressively repaying that and expect to be totally debt-free in about 5-6 years. So I'm not totally disagreeing with you. I'm just not sure from what you've posted that you totally appreciate the level of risk you are taking on. Paying off debt reduces risk. If I had $142,000 in non-mortgage debt and a savings account holding $55,000, I can tell you what I'd be doing. Would that result in a lower investment portfolio balance down the line? Yep. But I'd be okay with that.

My initial answer in this post covers the issues you raised here.

I appreciate your response once again. Thanks.

[littleroc02us]

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.

I couldn't disagree more, when you carry a large load of debt which Doctors typically do due to the field that their in, but it's those that chose to carry debt for a long period of time feeling that it's an entitlement or something. When you have to make monthly payments on anything whether it be a cable bill or a car payment, etc. you lose your greatest wealth building tool which is your income. I guess we just choose to live our lives differently, I personally chose to pay off all of my debt and maximize my retirement because I have so much disposable cash it's quite easy to do. My wife and I won't ever make nearly as much as say a doctors salary in our lifetime, but our networth will be more than enough to retire on someday. Because of my strategy I am at low risk... Even if my retirement fails 50% I'll still be o.k.

[disneysteve]

I couldn't disagree more, when you carry a large load of debt which Doctors typically do due to the field that their in, but it's those that chose to carry debt for a long period of time feeling that it's an entitlement or something.

I'm not sure people feel it is an entitlement but just that many people don't think of it as a big deal, just another bill to pay. The bigger problem is that many higher earning professionals get "doctoritis". They've scrimped and lived frugally for so many years that when the money starts flowing in, they go a bit nuts and want to get all of the stuff they've put off all those years - cars, homes, vacations, jewelry, electronics, etc.

What I did, with my wife's support of coure, was continued to live frugally after going into practice. We kept living like we were earning $50,000 even when we were earning $130,000. And we poured money into the loans. Instead of 25 years, we paid them off in 12 and it would have been 10 had I not changed jobs partway through that time. Once $102,000 in debt was gone, we were free to invest aggressively. Today, 50% of my wife's income goes into her 401k and about 25% of my income goes to savings. Yes, we missed out on those early years of investing but I have no doubt that we will be just fine when retirement comes along.

What I did is actually fairly uncommon. In fact, Medical Economics magazine, a financial journal for physicians, did a feature article on me and my family a number of years ago. It focused on our frugal lifestyle and aggressive savings and debt repayment.

So I don't necessarily think taking on the debt is a problem - that's one place I disagree with Dave Ramsey. What I think is a problem is people who take on the debt willy-nilly with no regard for the impact it will have on their lives and no solid plan to repay it in a reasonable period of time. In this particular case, as I said, I don't think sitting on 55K in cash while taking on more and more debt is a good idea. Maybe the math supports funding the company retirement plan to get that very generous 150% match, but beyond that, I'd be looking to use that cash to reduce the amount I needed to borrow for schooling.

[skittles]

When you have to make monthly payments on anything whether it be a cable bill or a car payment, etc. you lose your greatest wealth building tool which is your income.

I guess we will have to agree to disagree- the greatest wealth building tool at your disposal is not your income, but the power of compounding interest- which builds wealth EXPONENTIALLY. Time is the exponential part of the compound interest equation, and as I showed, even a couple of years lost at the beginning make a massive final difference. How is your income your greatest tool? What you choose to do with that income is what makes a difference.

Yes, we missed out on those early years of investing but I have no doubt that we will be just fine when retirement comes along.

What I did is actually fairly uncommon. In fact, Medical Economics magazine, a financial journal for physicians, did a feature article on me and my family a number of years ago. It focused on our frugal lifestyle and aggressive savings and debt repayment.

No doubt you will be just fine. I found and read that article- and hats off to you and your wife for erasing that amount of debt that quickly.

So I don't necessarily think taking on the debt is a problem - that's one place I disagree with Dave Ramsey. What I think is a problem is people who take on the debt willy-nilly with no regard for the impact it will have on their lives and no solid plan to repay it in a reasonable period of time. In this particular case, as I said, I don't think sitting on 55K in cash while taking on more and more debt is a good idea. Maybe the math supports funding the company retirement plan to get that very generous 150% match, but beyond that, I'd be looking to use that cash to reduce the amount I needed to borrow for schooling.

The great thing about math is that there is no 'maybe,' 2 + 2 always = 4. The math unequivocally supports funding the company retirement plan- to get the match AND to harness the power of compound interest down the road.

I think I also showed in my 2nd number crunching scenario why using most of our cash balance to reduce the amount needed to fund schooling also doesn't make any mathematical sense. I'm a little surprised no one has said anything about those calculations.

Also true, but I, for one, consider retirement accounts untouchable. That is just my personal feeling on the matter. Once I put the money in the Roth, it isn't coming out until I'm sitting on the beach sipping martinis for a living. No early withdrawals. No 401k loans. Any money needed will need to come from other sources unless there is a truly catastrophic event in our lives.

I agree with you for the most part- the risk we are taking is that we will not need to touch that money in the ROTHs. But if there is a truly catastrophic event, I'd rather have access to that money than have used it up to reduce debt. The reward if we don't need to touch that money is demonstrated in my ROTH number crunching. It's a risk reward balance and I'm not convinced that the risks we are taking are too big.

The main issue for us is to balance 'reducing debt' with 'maximizing retirement savings.' Using most of our cash to reduce debt at the cost of retirement savings is completely unbalanced (again, refer to the number crunching). I think deciding to use a part of it to reduce our debt, by using it to help pay the mortgage, achieves better balance. I think it's more of a philosophical issue in some senses.

[disneysteve]

No doubt you will be just fine. I found and read that article- and hats off to you and your wife for erasing that amount of debt that quickly.

Thanks. It was fun to do that and reinforced our resolve to pay it off and always live below our means.

The math unequivocally supports funding the company retirement plan- to get the match AND to harness the power of compound interest down the road.

Agreed.

It's a risk reward balance and I'm not convinced that the risks we are taking are too big.

I think it's more of a philosophical issue in some senses.

I don't think the risk you are taking is too big and as the thread has progressed, I've gotten a better feeling that you have a good understanding of how much risk you are taking. It is a philosophical issue. Everyone's risk tolerance is different. As long as you know and understand the risks you are taking and are comfortable taking them, go right ahead. Would I do it differently? Very possibly. That doesn't make either way right or wrong.

[jpg7n16]

The great thing about math is that there is no 'maybe,' 2 + 2 always = 4. The math unequivocally supports funding the company retirement plan- to get the match AND to harness the power of compound interest down the road.

Well yes, 2 + 2 always = 4.

But a 20% chance of -7%, 20% chance of 0%, 20% chance of 7%, 20% chance of 14%, and 20% chance of 21% - does not always = 7%

Even though the expectation is 7%, the world of the unknown future is just that, unknown.


So yes, if everything works perfectly, you'll average 7-11% on your investments (maybe even more) and you'll rake in significantly more dough than other's advising you on this thread. For the record, that's what I'm hoping for in my own finances (I have a few school loans at 3% or so that I'm intentionally not paying off in order to invest)

But if the market remains flat or declines, or only averages 4% (of which you'll then be taxed - 403b) - then you'll earn considerably less.


Math can easily describe what happened, but cannot guarantee what will happen.

[sm808]

The great thing about math is that there is no 'maybe,' 2 + 2 always = 4.

While this may be true, the great thing about personal finance is that it's not always about the math. You have to take into account - probability, changes in markets and enviroments, the fact that NOTHING (no job, no ability to work, no diaster) is guarenteed. You speak alot about your plan for your wife, future family, etc., so I'm curious as to your wife's point of view on taking on this much risk in anticipating of things to come. While I see and agree to your point that you are taking on more reward for your risk, you seem to be missing the corollary. The "more risk more reward" theory is based on leverage. You are leveraging "borrowing" as much as you can (generalization, of course) to maximize your potential return. However, this amplification goes the other way as well. Worst case scenario - you lost your job, your wife couldn't find a job, you lose your house, whatever it is for you and your family, the financial "damage" is maximized because you used debt to finance it. Instead of going from savings to cover emergencies, using debt to fall back on over a regular basis is just amplifying the huge possible risk. This might work for someone who is single or has a huge cushion (you can safely use more leverage if you have a huge cushion in case you need it) but I think many people would view this as too risky for someone who wants to build a family in five years.

[skittles]

You have to take into account - probability, changes in markets and enviroments, the fact that NOTHING (no job, no ability to work, no diaster) is guarenteed.

You mention probability and guarantee- that has been factored in. The probability that she wont get a job based on her profile, the probability that the market for her career will change is very low.

You speak alot about your plan for your wife, future family, etc., so I'm curious as to your wife's point of view on taking on this much risk in anticipating of things to come.

This is completely 100% a joint decision after much talking and calculating.

While I see and agree to your point that you are taking on more reward for your risk, you seem to be missing the corollary. The "more risk more reward" theory is based on leverage. You are leveraging "borrowing" as much as you can (generalization, of course) to maximize your potential return. However, this amplification goes the other way as well. Worst case scenario - you lost your job, your wife couldn't find a job, you lose your house, whatever it is for you and your family, the financial "damage" is maximized because you used debt to finance it.

Again, all that debt is federal student loans. In a bad scenario (underemployment or unemployment) there is modified repayment schedules, deferment and forbearance. In a worst case scenario (permanent disability or death) there is loan discharge. The only other debt is the mortgage, in which we already have 6.5% equity, and no one is telling us to prepay that debt.

Instead of going from savings to cover emergencies, using debt to fall back on over a regular basis is just amplifying the huge possible risk. This might work for someone who is single or has a huge cushion (you can safely use more leverage if you have a huge cushion in case you need it) but I think many people would view this as too risky for someone who wants to build a family in five years.

No one has been able to convince me why it is a better idea, upon weighing the risks, to give up the majority of my cushion by using it to reduce debt, than to have it on hand to draw upon from a ROTH in a bad scenario.

[littleroc02us]

I'm not sure people feel it is an entitlement but just that many people don't think of it as a big deal, just another bill to pay.

Entitlement probably isn't the best word, but I guess from reading the book "The Millionaire next Door" and having brother in laws who are doctors, they did a study on Doctors and found that they tend to spend like no other and keep debt around for a long time and have a very small networth in comparison to their salary. The formula they use is:

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

For example, if Mr. Anthony O. Duncan is forty-one years old, makes $143,000 a year, and has investments that return another $12,000, he would multiply $155,000 by forty-one. That equals $6,355,000. Dividing by ten, his net worth should be $635,500.

[littleroc02us]

I guess we will have to agree to disagree- the greatest wealth building tool at your disposal is not your income, but the power of compounding interest- which builds wealth EXPONENTIALLY. Time is the exponential part of the compound interest equation, and as I showed, even a couple of years lost at the beginning make a massive final difference. How is your income your greatest tool? What you choose to do with that income is what makes a difference.

The greatest wealth tool is your income, which if used to invest results hopefully in compound interest. Where your wrong is the reason I seperated the two, is that when I get paid I keep the money and I can choose to put it in a bank and minimal interest on it, but I can't lose it unless someone steals it or the Gov't won't insure me through FDIC. When you take your greatest wealth building tool and use it for investing/compound interest, there is a risk and no guarentee of return. You could score big, or lose it all.

[littleroc02us]

No one has been able to convince me why it is a better idea, upon weighing the risks, to give up the majority of my cushion by using it to reduce debt, than to have it on hand to draw upon from a ROTH in a bad scenario.

Personally I'm not here to convince you of anything, you will do as you wish and we will all make recommendations. Kind of like being a Doctor.

[skittles]

I thought it would be an interesting exercise for me (and anyone else interested) to revisit this post. 3.5 yrs later, I am fairly happy with the decisions we made given what we knew then and the risks we took.

Today we're both 30, still no kids and probably not for another 2-3 yrs.

Combined Annual Income ~today: $160k. This is based on my starting a new job in 2 weeks and is significantly higher than I had thought we'd be at this stage, since we've both been in our chosen professions less than 2 yrs. Split- she: $90k, me: $70k.

Assets:

Retirement accounts today: $100k (mix of 403b and ROTHs). We will be adding to it at roughly 20-25% of income/yr.
Emergency cash: $6k (this needs to be increased).
Real estate:

1. We still own the house we had bought in 2010 but we moved out and turned it into a rental in April. Currently renting for $1400/mo with mortgage payment at $1140 ($260/mo cash flow but I expect to only break even after taxes and maintenance). I think I could easily get $1500/mo for it next year, the mortgage will also go up a bit since I won't get homestead exemption. Depending on how the landlord experience goes and what the real estate market does next year, we may hold or sell in 2016. Current value ~$195k, mortgage balance $167k (~$28k equity).

2. We bought a smaller condo in April with a 20% down payment, where we live today, for $186.5k. Monthly cost (mortgage + condo fees): $1180. Market value ~$190k, mortgage balance: $148k (~$42k equity).

Debts:
Car payments: $0
Credit cards: $0
Student loans: I was fairly off on this, our loans ended up being more than I thought. Mine: $24.5k from 2nd 'degree' (I dropped out as planned), hers $118k. We are paying these off on (10yr repayment) schedule, and hopefully ahead of schedule.

Miscellaneous:

We each have a 30-yr term life insurance policy for $500k bought a couple of years ago.
I've been working from home for the last 1.5yrs, so no commuting costs. New job (and condo) are both on the train line so I still won't have commuting costs (highly subsidized train card).