Reader Profile: OR

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader OR. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I’m a 27-year-old man, and have been happily married for eight years.   My wife and I relocated from upstate NY to central NJ this past January when the company I work for decided I should move.  

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

We have no children, and both work full time.  After our annual raises take effect in January, our joint income will be just over 90k.  We both contribute to our 401(k) accounts up to our companies’ match limits. I kick in a bit more to reach an even 10%, plus 2% to purchase my company’s stock at a sweet 15% discount.  As that money vests, I will keep an eye on its total value and dump as necessary to preserve diversification in my portfolio.  My company also has a pension “kicker” of 2.5% that they throw in because they’re nice people.

Witness the power of company matching / pension / discounted stock:  that 12% I put in is instantly worth almost 20%...before any capital gains! BOOYAH!

We also have rollover IRA’s from our previous employment worth a total of about $16k. Both of those accounts and our 401(k)’s are invested in low-expense mutual/index funds.

Short and medium-term we don’t look quite so good.  We live in an expensive area. To illustrate: we're currently moving again because our landlord tried to raise the rent to $1,451…for a one bedroom.   Our apartment is now listed for prospective tenants on our landlord’s site…at $1,675.  Wow. We managed to find a crappier place for $1,242, which is still highway robbery for what it is.   

We have massive student loan debt – about $120K between us.  We both changed schools and majors too much. 

When the company we both worked for went out of business in 2010, we blew through our emergency fund in two months and then had to start charging everything to our credit card.  Consequently, by the time we both found work again, we had close to $10k in revolving debt.  The only silver lining there is that I have a wonderful card from before the recession; it’s a Citi MasterCard and it’s FIXED at 9.99% APR.  At present, we still have about $6k on that card and are trying to pay it down by throwing $1,000/month at it.

Our savings account just reached $2,000 recently for the first time since 2010. 

What are the current financial issues you're facing (saving, paying off debt, etc.)?
 
1. That thrice-accursed card.  With the crazy expenses around here and our student loan payments of nearly $900/month (and that’s with my $300 consolidation loan on deferment…), we’re still charging large unexpected expenses to that card, even as we fight to pay it down.  

2. That $1,200/month in student loan debt (once my consolidation loan comes off deferment in 2015) is nasty.

3. We are not saving as fast as we should, because we’re focusing on paying down the card.  Our savings plan at this point is just putting any windfalls (random checks, leftover weekly money, tax refund, etc) in there.
 
What are your plans for the future (retire early; build your career, etc.)?

I am currently in a professional MBA program at Rutgers which ends in May of 2014 (my company is paying for half of it).  The additional Federal loans I take on for my half will amount to much less than I expect to get out of the degree.

At that time, we will be moving again – hopefully somewhere with better living expenses and fewer people.   Not only are we fed up with the population density here in New Jersey; my job will certainly be moving us anyway for the next stage of my training.

We would love to save up and buy a house, and have a kid, but we’re stretched financially so it’s going to be a struggle to come up with the 20% down payment.  I am hesitant to put less than 20% down on my primary residence. If I ever dabble in real estate, I’ll look into different leverage options for those properties, but I really want to stay right-side-up in any non-income-generating property. 

It’s always been a dream of mine to retire early, but I fear that’s just pie in the sky.  Breaking into real estate investing (rental properties) seems to be the best way to make that happen, but unless I experience a dramatic salary jump from the MBA that isn’t likely. 

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?

Here are some pointers that would have saved me some bucks had I known them earlier:

1. Don’t have all your income coming from the same company.  If it goes bust, you’ll be screwed (diversification is as important to income as it is to investments).

2. Reliable transportation can be had for less than $10,000 if you negotiate aggressively for a two to five year old domestic certified used car.  I could easily write a whole post on financial strategies for buying a car, since I used to sell them for a living; however, I'll just say "trust me" for now. 

3. The golden rule: minimize your fixed expenses. 

I’ll leave you with a quote I heard on an otherwise awful radio program:  “Gold is the currency of kings. Silver is the currency of gentlemen. Barter is the currency of peasants. Debt is the currency of slaves.”   Obviously, I didn’t follow that advice (and still don’t…MBA…) but that doesn’t make it less true.

Comments

[Glen @ Monster Piggy Bank]

I really like this tip (Don’t have all your income coming from the same company) and unfortunately it applies to me...

My wife and I work in the same company and originally I really liked the idea as we could car pool and have lunch together etc. But with the economy the way it is job security is pretty much gone and we could both end up with zero income overnight.

[param]

besides not working in the same company, i think it is also important that spouses do not work in the same industry if possible. otherwise the typical cycles in any industry raises income (& thus expenses) to a high level & then both end up with a lifestyle they cannot maintain when the cycle turns downwards...

[Noah]

I'm glad to hear you guys are getting back on your feet after being unemployed.

Before anyone can give any practical advice, it would be very helpful to see a monthly breakdown of your income/spending. The profile only speaks of your job situation and not about your spending. We only know you currently spend about $1K/monthly on your loans and $1400 on rent. Where is the other $2-3K going?

[Kurt @ Money Counselor]

If I were you I'd scale back the retirement account contributions and focus on 1) building a proper emergency fund, and 2) paying off all credit cards and any other high-interest debt. Once that's done, you'll have more free cash flow to fully fund retirement accounts and save for other goals.

Good luck!

[Mike Hunt]

OR,

I would add that it is probably ok to have all your net worth in a single company at a young age- provided you see good signs that the company is growing, doing well, etc...

High volatility could bring more rewards and if things go South you are still early enough in your career to make things right. When you are later in your career then you really need to manage risk.

When I was 27 I had joined a Start-up as a Director- had a ton of stock options and a great six figure salary. The company went bust 10 months later but it was still worth it in the long run of my career thus far and is basically only a footnote now.

-Mike

[John S @ Frugal Rules]

Great pointers, especially #1. I am learning that more and more myself and I think will become the norm as we progress as a society. The current economic conditions are bringing about more and more people into running their own businesses and looking for multiple streams of income.

[Walden]

I hear you on not having both spouses work for the same company! My husband and I were both laid off from the company we worked for within a year of eachother. It wasn't easy, but we did meet "on the job" so it was worth it in the end!

You seem to be doing a great job paying down debt while still investing for your future. Would it be possible for your wife to get a part-time job, or maybe move in with a roommate for just a year to get that credit card paid off?

Good luck! I'd love to see a post on how to buy a car from you!

[Old Limey]

Your $120K of student loans is unfortunately a large millstone hanging around your neck. Sadly it isn't all your fault. I read the other day that the cost of a college education has typically increased by a factor of 50 over the last 30 years.

Back in 1978 I advised my daughter to enroll in the engineering program at our local California State University. She took my advice and was doing very well in her Mathematics and other non engineering programs but she hit a wall when it came to understanding basic engineering principles and decided to switch her major to Marketing with a minor in Math. She offered to pay her own tuition and I took her up on the offer. She went on to earn her degree and ended up passing some courses in advanced mathematics that I had not taken while getting my MS in engineering.

She was able to pay her own way through to the end by means of several jobs such as working at a car wash, and doing house cleaning and baby sitting, with still enough money left over to join a sorority and take care of her personal expenses. After graduation she went to work for a propery management company and was in charge of a high rise office building and doing very well. Then she met a wealthy attorney, got married, and had a family, and at her husband's insistence never went back into the workforce.

[jim]

You might qualify for income based repayment given your student debt total and income level.

[Noah]

@Old Limey

The ease of which loans are handed out to students with little assurance that they will ever have a good enough job to pay them back is frightening. I have several friends with over $250K in student loans. My belief is that this is the next big bubble to pop and crash. Colleges have little incentive to not raise tuition rates 10-15% yearly when students will continue to put it on the "student loan credit card". This is not sustainable in the long run when incomes are stagnant.

[Lance at Money Life and More]

I am working on diversifying my income and completely agree with you. Hopefully your job will pay off even more after the MBA but sometimes it takes switching jobs to get the full value of it.

[Steve]

My parents worked together for 40 years. I think it made both their marriage and working lives better because of it.

Just like when there is sole earner, I think it just means you need to have a much much bigger emergency fund (anything you can reasonably reach just in case of disaster, even like Roth IRA investments), which of course few 25 yos have, but doesnt have to take long.

[Brooklyn Money]

I agree w/ the comment above about diverting retirement savings for now. You are in an emergency situation -- you have high interest debt, loans in deferment and you can't pay your ongoing expenses w/ your current cash flow. Also agree w/ getting roommates to lower rent. If you and your wife shared a room in a house with others in New Brunswick, I bet you could get it down to 1K or less.

[jim]

Noah, I agree there are problems with student loans and college costs. But average student loan debt is similar to the cost of a new car so the debt load its not really the nightmare people make it out to be. Less than 0.5% of undergrads have > $100k debt so those are extreme rare situations. People with >$200k are almost always professionals like doctors or lawyers who ought to be able to afford it. Its not a 'big bubble' in the sense that the real estate bubble was a bubble.. mortgage debt is over 10 times that of student loan debt and most student loans are backed directly by the fed government with various programs to help people who can't pay.

[Rick Francis]

OR,
It sounds like you have done a good job at finding new jobs and you are working on improving your income potential through the MBA. I can tell you hate that you had to use $10K of revolving debt- that isn’t that bad given both of you were unemployed at the same time. I suspect you did a great job of cutting costs, and found work very quickly given the economy.
>We would love to save up and buy a house, and have a kid, but we’re stretched financially so it’s going >to be a struggle to come up with the 20% down payment.
I would consider these goals separately-as you really don’t need to own a home to have kids. Babies don’t need a huge amount of room- but they are a LOT of work, and can be very expensive (delivery costs, day care, wife’s lost wages, food, clothing etc.). Kids can grow up just fine in a rented home or apartment. Kids don’t really notice their surrounding neighborhood when they are very young and until they start school at 5 or 6 the quality of the school district won’t matter either.
As for having a kid- at 27 you should still have some time but I wouldn’t put that off too long. It gets harder to keep up with a toddler as you get older. My daughter was 3 when I was 40 and it was a lot harder for me than my son who was 3 when I was 35. Also the health risks for pregnant women increase in the mid 30es.
Since you are still moving around I wouldn’t buy a home- the transaction costs are huge and you don’t want to incur that expense if you expect to move in a few years. The student loan may be a factor too- even with a 20% down payment that debt may cause you to pay a higher rate or not get approved.
>We are not saving as fast as we should, because we’re focusing on paying down the card.
Keep in mind paying off debt improves your net worth just as much as investing- but it has a known return and no risk of loss. If you have high interest CC debt it will easily beat the returns you would get from most any investment, and certainly from any fixed interest investment today. What are the rates on the loans?
Should you ease up on retirement savings to pay off debt? You have great matching benefits but if you can get the same benefits by increase your investments later then that isn’t important. If the CC debt is 9% or higher I would probably pay off the debt as it is a sure thing.

-Rick Francis

[Noah]

Jim

You are correct about extreme cases. Living in CA I know quite a few people with at least $50K debt but of course that is all anecdotal (and I live in the part of the country where people spend money for a hobby). What is (slightly is the rate of increase in the overall student loan balance of the country. I've read in several places that it has increased from ~$100million in 1990 to ~$1trillion in 2012. Of course this is probably a drop in the overall budget, but it will no doubt wreak some havoc in the future when those my age have to delay major purchases because of the debt.

[Noah]

I mean to say "slighly alarming" above. I wish there was a way to edit posts...

[jim]

Noah,
I assume that the number in 1990 was actually $100B not $100M. In 1989 the average debt was about $5000 and around 9% of families had debt. Still going from $100B to $1T is a large increase and we can't sustain that forever. But part of that is due to more people having debt due to more people going to college. Debt per student go up 10 fold. Debt per student went up more like 5 fold but now twice as many people have the debt. Inflation would account for a doubling in the debt amount.

IN general I agree the rate of increase is more alarming.

Unfortunately I think this is more of a problem for students who drop out or get less demand degrees. I think thats the bigger problem, too many students dropping out and getting degrees for which there aren't jobs.

[mysticaltyger]

O.R. does have some major financial challenges...but I like that he is facing them squarely and making tough choices (i.e. finding a crappier but cheaper apartment). Scaling back on the 401K contributions might be a good idea, but only to the point where you're getting the maximum match...It doesn't sound like it would free up that much more to put toward the student loans and savings accounts, so it's a tough trade off either way.

I also agree with others that this post could have been a little more detailed.

[OR (the OP!)]

Hey all! Thanks for the insight. In response to a couple of comments:

The long-term savings numbers are sound, because the total tax rate that would apply to that money is much higher than the interest on my debt, and the 401(k) is tax deferred.

It bears mention that my wife also contributes to her 401(k); enough to benefit from company matching.

I didn't want to be too boring with details, but here's the full breakdown:

Rent: $1,242
Credit Card Paydown: $1,000
Student Loans: $866
Cash ($180/wk): $780
Insurance: $199
Car1: $169
Car2: $157
Electric: $77
Water/Sewer/Trash: $38
Phone + Internet: $75

The above are exact, except for variable items (which are averaged based on previous year) and phone/internet, for which I have not yet gotten a bill for my new service ($59.99 + bunch of bogus fees & taxes...probably close to $75).

The cash is an average (to account for 4 vs 5-wk months) - $180/wk in cash is for groceries, toiletries, gas, and entertainment.

Any money left over gets swept onto the credit card, in addition to the $1000.

[Adam]

"we’re still charging large unexpected expenses to that card, even as we fight to pay it down."

Sounds like that credit card may be too easy of an option. Consider cutting it up until you get to the point where you can pay it off every month. If you cant do that at least make it more painful to use...leave it home. In the attic or the basement- behind a bunch of boxes. Slide it under your oven where you cant reach it. Anything to help put barriers between you and an all too easy option.

Wait on any real estate investing until you have cleared up your debt. If you cant afford 20% down in your area consider investing elsewhere and renting your primary residence. There are plenty of places in the country where 20% down on a $120k house cash flows immediately. The Real Estate Radio Guys podcast from 11/3/12 is helpful for learning how to evaluate real estate as an investment.