Reader Profile: YM

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 YM. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I’m a single 23 year old male. A description of me won’t be complete without a description of my extended family and their financial situation. My parents are immigrants from the Philippines (they didn’t meet until they were both in the US) and I was born in the US. I’m an only child. My dad grew up on a farm and had five other siblings. One of his sisters now lives in Montana (she was basically a mail order bride). His other siblings are still in the Philippines. They each have multiple children and make nowhere near enough to support them (ARGH). My mom grew up in the city and has three other siblings. My mom’s side of the family is relatively self-supporting. Between my dad sending money over to his side for basic needs and my mom sending money to her side out of generosity, my parents send roughly 30% of their post-tax income to the Philippines every year, with zero rate of return (this practice finally started changing these past few months). I’ll explain more on that later.

During my upbringing, I would classify my family as lower-middle class. My mom was the breadwinner, consistently working 70+ hour weeks as a nurse. My dad stayed at home and raised me and made sure my mom could relax when she was off from work (my dad used to be a cargo ship captain, but decided to quit so he could focus on raising me). For those of you out there who know any Filipino-Americans, this is the pretty stereotypical setup: dad is a sailor, mom is a nurse. We lived paycheck to paycheck and that still wasn’t enough, so we accumulated over 25k in credit card debt.

My parents raised me believing that a good education would be the foundation of a brighter future. I took an early interest in math and science. I remember when I was in 5th grade my dad showed me the balance of our checkbook: $5. He also showed me all the credit card bills. Even when I was young, my parents were completely open with me about our financial situation. I learned to never ask for toys or vacations since I knew we couldn’t afford it. Knowing the dire financial situation my family was in ended up being a motivator for me – I knew that if I screwed around in life, there would be no one I could turn to for financial help. I joked with my parents that if they died, the only thing I’d inherit would be their debts and problems.

Returning to the subject of family in the Philippines: My dad had been supporting them financially for over 25 years. The oldest of my cousins recently finished college, but didn’t secure jobs, would get someone pregnant, or both. The younger cousins have poor grades. Grandpa recently died. My dad has said enough is enough and is cutting back aid. He and my mom are finally starting to actually have lives (eat at a restaurant every now and then, take a day off, use vacation time, etc). When my dad was young, he knew that he would have a bleak future if he stayed in the Philippines. This motivated him to pursue a nautical degree which would be his ticket out of the country. He went through a lot of hardships to pull it off, but it ended up working out. To be frank, the economy in the Philippines is pretty shitty, and if you want to make a life for yourself, you need to find a job overseas. None of my cousins have the same drive or determination that my dad did, nor did their financial situations motivate them in the way mine did. They’ve taken my dad’s generosity for granted. Hence, I have no remorse in not supporting them financially in the future.

I convinced my parents to sell our house in early 2008 for 200k, before the housing bubble burst. They made a decent profit and were able to pay off all the accumulated credit card debt. Unfortunately they didn’t follow part 2 of my advice, which was to rent for a few months while waiting for housing prices to come down. They ended up using a good chunk of their remaining profit as a down payment (25k) for another house (160k purchase price). They are currently at break-even on the LTV of the mortgage (97k principal remaining).

I ended up graduating in May 2012 with a degree in aerospace engineering from a highly ranked engineering school. It was a public university, but I was an out-of-state student, so my cost of attendance was around 15k for semesters when I was on campus. I took advantage of the co-op program (alternating semesters of full time work and full time school) so that I could gain work experience and also defray some of my education costs. I also did two study abroad semesters in China, which actually saved me money compared to taking classes at my university.

My co-op work rotations were with a major jet engine manufacturer. Because of my performance and the connections I made while working, I was able to secure a part-time role with the company the summer and fall of my senior year. During that time, I had expressed my interest in pursuing a full-time role with them after I graduated. Management and HR got the ball rolling, albeit slowly. When my boss found out I received a job offer from a rival company, the paperwork and interview process conveniently sped up. The really cool thing was that they offered me a permanent employee position starting in January. I had full employee status (with a prorated salary since I was only working 25 hours per week) before I had even received my degree yet. The job requisition normally lists a requirement of a bachelor’s degree and 3-5 years engineering experience.

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

Biweekly paycheck breakdown:

• Gross – 2407
• 401k – (192) equivalent to 8% of my gross, which maxes out the company match at 4%
• Health Insurance – (15)
• Dental – (3)
• Federal Income Tax – (375)
• Medicare – (35)
• Social Security – (100)
• Net Pay – 1684

Also get a $100 cost of living adjustment each month, so when all is said and done, I average $3760 take home pay each month.

Monthly expenses:

• Rent – 665
• Power and Water – 45
• Internet – 35
• Skritter (Chinese studying app) – 10
• Groceries – 150
• Eating Out/Entertainment – 200 includes occasional $5 breakfast or $8 lunch at work cafeteria when I’m too lazy to pack lunch
• Gas – 25
• Laundry – 20
• Haircut – 15
• Student Loan from aunt – 500
• Student loans in my name – 230 1st payment due end of December 2012
• Total – 1835

Assets:

• Checking – 5000
• 401k – 3300
• Stock trading account – 2300

Liabilities:

• Consolidated Federal Student loan @ 4.3% – 16500
• Institutional loan @ 3% – 3000
• Loan from my aunt – 56500
• Loan from my parents – 19000

I live in a modest 400 sq ft studio in an old apartment complex. My apartment is in a relatively convenient location: 7 miles to work, 7 miles to Chinatown, and 8 miles to downtown. Had no vehicle throughout college, so I got a used motorcycle after graduating so I could commute to work and get around. Paid 2300 cash for it. Has the benefit of cheap insurance: 200/yr instead of the 100/mo I’d be paying if I got a car, and it gets 75 mpg. I usually cook my own food and pack lunch, but inevitably I get lazy and splurge at the work cafeteria (they have some pretty good stuff) once or twice per week. Company covers my cell phone.

Long story short regarding the loan from my aunt: Her husband died in a car accident and the insurance money she collected was sitting in her bank account at a crummy interest rate. She offered to “loan” 50,000 principal to me by paying it directly to my student loan account thereby avoiding any gift taxes since the money never went into my hands. The 50k went towards federal PLUS loans that would have had an interest rate of 8% when the repayment period kicked in. I made the deal with my aunt to pay her back 60k over 10 years (for an effective 3.75% interest rate. A win-win since I pay 3.75% instead of 8% and she makes 3.75% interest instead of the 1-ish % the bank was offering)

The loan from my parents is equivalent to the money they paid up front to close out the rest of the PLUS loan balance. They aren’t requiring me to pay interest, and so far I have been chipping away at the total by helping them out with various transactions (covering plane tickets, hotels, car lease closing payment, etc).

What are your plans for the future (retire early, build your career, etc.)?

Ideally, I’d like to wipe out the 19.5k of student loans in my name before my 24th birthday in June 2013. However, that would require me to be extremely tight with my budget. I’m only in my early 20’s once, so I’m planning on taking advantage of some of my cash flow and using it to fund travel (visit friends in San Francisco, see the grand canyon, go to Turkey in spring next year…)  I’ve relegated myself to the more pragmatic target of paying off the 19.5k by year end of 2013. At that point, I’ll still owe 45k to my aunt and around 17k to my parents.

Career-wise, I plan to focus on building my technical and commercial skills as much as possible in the next few years. I’m lucky to have great mentors who I am learning a ton from. I’d like to stay in my current role for 2 or 3 more years, then transition to flight test. Ultimately, I want to take on roles with more responsibility (and more salary) and be permanently stationed in China. Regarding personal life, I need to find the right balance between “living life” and raising my net worth.

Witnessing people live the majority of their lives without having actually “lived” has left a major impact on me. For a while, I had a “life plan B” in place: The idea was that if I was 27 and wasn’t happy with my job or the prospects going forward, I could pull the eject button on my career, sell off all my stuff, and start travelling the world by teaching calculus or physics at various international schools, switching locales every few years. Unfortunately, due to limitations of my current salary, cost of living, and debt burden, I’d have to commit 100% to paying off my debt in the next 3 years in order to leave “plan B” viable. I’d essentially be throwing away my next 3 years because I wouldn’t be able to spend money on travel or fun during some of the prime years of my life. I haven’t given up on the thought though, but I likely won’t be able to opt for “plan B” until I’m 30.

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

College is getting really expensive really fast. Incomes are not rising anywhere near the same pace. Student debt severely restricts the choice of paths you can take coming out of school. If you can get a “top 10” education for the fraction of the price of a “top 3” education, I’d say take the “top 10” option. You’ll save yourself the misery of climbing out of a debt hole your first few years out of school.

Comments

[Luis]

YM-

Interesting profile. You've made good choices mostly, but what made you go with an out of state school? I'd say nay on the traveling the world idea. Wait until you have someone to travel the world with. Are you contributing to a Roth?

[JM]

Fascinating story. Thanks for sharing, YM.

[Old Limey]

YM:
You have made some excellent choices but I agree completely with Luis, that you shouldn't start spending a lot of money on foreign travel at this point in your life and career.

These aren't the "prime years of your life". In my opinion as a 78 year old aerospace engineer, now retired for 20 years, married for 56 years, that arrived here from England with a wife and $450 when I was 22 and now have a portfolio in the high 7 figures, 3 children, and 5 grandchildren. These are the years where you save hard, go about finding the love of your life, get married, maybe start a family, work hard, never turn down any overtime, and cement your career by showing your superiors how good you are, how hard working you are and striving hard for promotions.

The "prime years" of my life turned out to be between the mid 40's through the 50's. That's when I had moved up the ladder at work, was enjoying my work tremendously, and made some of the most exciting trips of my life. A few examples are "A trek in Peru, circumnavigating a large Andean mountain range and visiting Macchu Pichu" , "A trek in Nepal, climbing a 21,000ft trekker's peak", "A group climb of Mt. Rainier, Mt. Baker, and Glacier Peak in Washington State, a climb of Mt. Shasta with my son-in-law, and numerous backpack trips in the Sierra Nevada.

$2,300 in a stock trading account is a joke, commissions will eat it up.

The secret of investing is:
Understand the power of compounding.
Don't Lose Money - A 50% loss takes a 100% gain just to get even.
Avoid ever having a Losing Year.
Avoid buying stocks - you must have diversification.

[Mert]

Go for the trip. You will never forget it. There are many ways to travel frugally. Do what is important for you. This is why we do financial planning.

[Lance@MoneyLife&More]

Seems like you have a pretty good head on your shoulders. The debt stinks but it sounds like you have it well under control. Why so you have the urge to move to China? Nothing wrong with it I was just curious.

[retirebyforty]

Wow interesting story. We have a pretty similar background except my parents never had to send money back home like that.
For the next few years, you should focus on building your career and growing your earning. You should be able to get promotion and make more money since you are still a jr. engineer. Once you pay off your debts, you should have a lot more choices. Try to avoid lifestyle inflation as much as you can. I'm sure you can do it with your background. Good luck!

[Mert]

Let me add a few points. Travelling young is very different from travelling later in life. If you are open to new ideas and cultures, it changes you drastically.

I would also tell that travelling when you are young is an EXTREMELY good financial move. This is because of the lessons you retain from your trips.

For example, I made my decision to change the place I have lived in after travelling abroad. What I will save: from a couple of 100k to a couple of millions in my lifetime career.

I also learned that people can perfectly live in small apartments without any deprivation (even the very rich do this in Europe). What I will save: probably 100k for my first real estate, more for the later.

I found out that there is nothing more entertaining than good art (after seeing Central Europe).That will save me everyday since I prefer to entertain myself with art activities (from free CDs/DVDs and books in my library up to $100+ show tickets)instead of a $60k kitchen renovation, a new car every couple of years or a $500 shopping spree every week. I also learned not to work very hard but to work cleverly, and to select quality over quantity from my European friends.

I also found out that (at least for me) being in nature is the ultimate hobby (after visiting a very beautiful nordic country). You spend almost nothing when you are hiking and you have to eat healthy for performance, compared to other 'hobbies' like shopping, entertaining self in a state fair, etc.

Finally, I saw that we have EVERYTHING here in North America(after visiting a caribbean country). Food, material goods, freedom, everything. Every time I remember that trip, I thank God and keep reminding myself the value of everything I have. You really take good care of what you have only when you know its value.

These couple of trips have cost me what? $15k maybe? Rate of return? Probably a couple of millions in a lifetime and a longer life, lived good. You can calculate the rate of return.

[Kelly@FinancialBailoutNews]

I know a number of young adults who's parents originate from the Philippines, and they are in the same boat. They have been sending money back to their extended family, while living paycheck to paycheck here in the U.S. While I think this is a noble thing to do, its not fair when the people receiving these gifts of money take them for granted and don't work as hard to further themselves and become successful. Maybe its the mindset of being in such an impoverished country, but for the sake of you and your parents happiness, I think ceasing payments to them is the best idea. And having experiences while your young is vital. Take advantage of your youth and travel like you want to, it seems highly likely that everything else will fall into place for you.

[Walden]

I agree with previous posters that you are starting out on the right track, but with $95k in loans to pay back (including almost $20k to your parents) I think you need to wait on expensive foreign travel. Your cousins in the Philippenes took advantage of your father's generosity, don't make the same choice. Pay off the family loans and then you're free to travel where/when you please.

[RichUncle EL]

Hey good story. First off your net take home pay 3700 and your expenses of 1835, leaves you with about 1900 surplus, what are you doing with this money? I think paying down your parents debt is first and foremost since they need the money now, and you are in a better position than they are. Also travel is great for someone your age but I would limit it to 1 experience a year due to the debt burden you currently have. Just budget for it.

[Noah]

I haven't had a chance to digest this entire profile yet, but one thing that hit me was the following:

"I joked with my parents that if they died, the only thing I’d inherit would be their debts and problems."

Is there any validity to this? My understanding is that the only way you would "inherit" a parent's debt is if they also had assets and you had to use those assets to pay off the debt, meaning that the estate is responsible for the debt. If a parent has no assets and only has debts, the creditors are out of luck and cannot come after a child to pay off the loan UNLESS the child co-signed.

Am I missing something obvious?

[CW]

Hi YM,

My 2 cents:
On debt repayment: You still have high debt especially from your family. I agree with RichUncle_EL on this. Settle your debt to your family since they helped you support your education.

On travelling:
Go for it, but budget for it and limit until you have paid off your debt.
One suggestion is if you can find a company which sends you abroad for project work, that would be a good opportunity since company pays for airfare and accommodation. I was lucky enough to find such company. I was able to travel around Europe, Asia and US on company expense. It was hard, hectic, but tons of fun.

On motorcycle:
I’m speaking from experience. Commuting by motorcycle is NOT WORTH IT. All it takes is just one accident to wipe out all your cost savings. I got into a motorcycle accident 3 years ago in a parking lot. The driver was not able to brake in time because he was texting while driving. Luckily the speed was slow, but I still ended up with a fractured leg and messed up my back. Since then, my back was never the same. Again, commuting by motorcycle is NOT WORTH IT. You would be risking your life, your career and the opportunity to travel the world just to save a few bucks from gas and insurance.

Regards,
CW

[LotharBot]

Just a heads up: "gift taxes" don't apply to loans, only to gifts.

If it was actually a "gift" rather than a "loan", I'm not sure paying off a student loan account qualifies under the "tuition... paid directly to an educational institution" exemption, since the lender is not itself an educational institution.

But there is a $13k per year exemption, and there's also a lifetime exemption in the multiple millions of dollars (tied to the estate tax exemption), so if she chose to gift you the $50k there still wouldn't be any tax due. (If you do find yourself in the situation where you might be using up the entire lifetime exemption, consult a professional!)

Reference at http://www.irs.gov/publications/p950/ar02.html#en_US_publink100099451

[Jim]

YM, thanks for sharing. At your age you're doing well with a good paying job in a good field. Plus you're spending a lot less then you earn which is great.

The $95k total in student loans is a considerable burden. You mention you've been chipping away at the loan to your parents. As long as you continue to put money towards that and make sure your parents aren't going with out, then I think thats OK. We don't know the details here, maybe you're giving them $1000 a month or something or maybe its $50 a month. With about $2000 monthly surplus (income - expenses) I think you ought to be dedicating a large % of that to paying back your parents.

You really shouldn't be worried about gift taxes or your parents dying with debt. If your parents have little assets then there will never be any gift tax to pay. If they die with debts then you won't be liable unless you co-signed.

[Old Limey]

@YM
One thing I forgot to mention about being an aerospace engineer is that in order to enjoy a long and fruitful career with frequent promotions right through to retirement you definitely need to eventually pursue an MS or an MBA degree. The former if you stay in the technical path and the latter if you switch into the managerial path. In my own case I hated the thought of having to give up the really interesting, challenging and satisfying technical work in order to manage a group of engineers doing the work that I enjoyed so I stayed in the technical area my whole career. We also had a few engineers with PhD's but they worked on their own doing research and publishing technical papers.

When I retired from my last company where I spent 32 years I had been managing a succession of state of the art R&D projects, paid for by the government and producing integrated computerized analysis codes that required input from each of the various analytical departments such as Structures, Aerodynamics, Thermodynamics, Mass Properties, Structural Dynamics etc. I enjoyed my 36 year career so much that I hated to retire but when the Cold War ended in 1991, government defense spending started drying up and my company offered a generous Golden Handshake program to take retirement in 9/1992, 6 months earlier than I had planned, so I took it gratefully and used it to pay off the balance on our home mortgage.

Incidentally my company paid all expenses for my MS degree at a private university and allowed part time day release to attend classes. My BS degree also cost me nothing at all because I obtained it while I was doing a 5 year apprenticeship in England with a famous aircraft manufacturer. I lived through the Good Old Days when student loans were unheard of.

[ro]

I do believe your thoughts about teaching overseas sounds great. Just to encounter new experiences and folks said the cost of living is so low you don't have to worry about making a living as here in U.S.

[Mark]

That 95K is just too much debt to have to be spending money on travel. It's more than your annual income. I do agree with Mert's points on international travel (that it shows people how much they can live without and still be happy). But since your parents are from a 3rd world country, you should already know that. I postponed travel until I was 28 because of student loan debts. But I knew I was never going to have kids, so I admit that made it easier to postpone. It's really unfortunate you have so much student loan debt. It's really way too much. Pay it down ASAP. It is a ball and chain around your neck and spreading it out over time makes things worse.

I also agree with the motorcycle. They are just not safe and that's all there is to it. If you're going to spend money, get yourself a decent economy car. I know, cars are a money pit, but your youth is blinding you to the risk of motorcycles.

[Mark]

P.S. I have a 59 year old friend who messed up his ankle/foot in a motorcycle accident when he was 26. (He is admittedly accident prone). Despite numerous surgeries, it has never been right since. He is in severe pain all the time. There are worse things than dying. I know, I know you're thinking "It won't happen to me". I'm sure my friend thought that, too.

[Mrs Hill]

YM, Great post. Im in the same boat as you. I, too, send money for basic needs like food and housing. It's hard to find jobs there and whatever they earn on the side can supplement what I am not able to cover. I, also, have this need to travel. I guess it's in our blood to venture out and see what the world has to offer. I used the 50/30/20 rule to give me that breathing room to be responsible and still be able to live my life with no guilt. I currently set aside 8% in 401K and increase it with every raise I get. I have most of my needs (mortgage, bills, food, insurance) covered by 50% of my income, 20% is a combo of rainy day fund/new car/Roth IRA contributions and the 30% left is for my Wants. I like to travel in off season to off set peak prices. I learned to balance my budget in about 6 months. It's important to stick to the budget. Everytime I decide to buy something, I ask what's the opportunity cost. What am I giving up for buying stuff? As long as I have 3 square meals, my clothes are clean and pressed and I am able to bathe everyday, everything else can wait :) It's true what they say, find a travel buddy. Mine happens to be my husband. Experiences are so much better when shared. I have been to so many places this way and I'm able to pay off debt in a timely manner, too. Good Luck and think very hard on what your priorities are. They are the ones that can guide you with your decisions.