Reader Profile: AH

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.

Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.

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

Please tell us a bit about yourself.

My husband and I are 27 and 25 years old, respectively, and we are newly married (2 months ago). He is currently in his last semester of law school, and I’m an active-duty military officer in the medical profession. We currently live on the east coast in a relatively expensive area where I am stationed until summer of 2014.

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

I’m currently the sole income earner, and we just completed combining all of our financial accounts a month ago. We also established a living trust, but have not funded it yet.

Our monthly income is as follows:

• Taxable: 2875
• Non-taxable (basic allowance for housing and subsistence): 2475
• After maxing out my Roth TSP contribution, our take-home pay is 3525.

Our monthly budget is below. Please note that this budget was created 2 months ago, so we are still adjusting it as we have a better idea of our actual expenses together.

• Rent & utilities (room in shared house): 700
• Cell phone (family plan with in-laws): 50
• Groceries: 200
• Dining out: 100
• Gas, transportation, parking: 200
• Health/fitness (racing fees, bike maintenance, clothes): 75
• Fun: 75
• Education-related: 75
• Misc: 50

After the fixed regular budgeted expenses outlined above, the remaining part of the income goes into savings. All irregular expenses (plane tickets, computer/laptop, car repairs, etc.) are also recorded in our budget spreadsheet, but do not have a specific line in the budget. When savings exceed our emergency fund (set at 20K for extra cushion, but we have yet to rebalance and need to do so) by a certain amount (which is usually several thousand) or when the stock markets drop dramatically and prices fall, then I will use the extra savings to purchase investments (ETFs, index funds).

Our net worth is as follows:

• Cash (savings, checking): 38000
• CDs (all at Ally bank, set to mature in 2016-2017, 1.74%-2.4%): 48500
• Investments (index funds & ETFs at Vanguard): 90000
• Roth IRAs: 54000
• Roth TSP: 3000
• Traditional TSP: 45000

I was fortunate enough to fund my post-secondary education through scholarships, so I never had to take out loans. My husband has the following loans:

• Undergrad: 11600 left
• Law school: 130000, unsubsidized Direct Student Plus and Direct Stafford loans. 6.8%-7.9%.

My in-laws started to pay his loans while he was in law school. They stopped last fall because they were saving for my sister-in-law’s wedding (we decided to postpone/forgo our wedding celebration at this time due to the costs). We and my in-laws are in the midst of discussing whether they are in a financially able position to help pay off his remaining undergraduate loans. We are very grateful for their help and their decision would not have any influence on our good relationship with them.

What are the current financial issues you're facing (saving, paying off debt, etc.)?

We plan to max out our Roth IRAs & Roth TSP. I’d like to convert the amount in my traditional TSP into the Roth TSP when that option becomes available, especially while our taxable income is currently low. I will graduate from my current position and be promoted in mid-2014. At this time, our choices for the next duty station are located in the states of Washington, Texas, or Hawaii, and we will find out in December 2013. I anticipate that we will be at the next location for approximately 5-6 years. Our goals are as follows:

1. Pay off all of the student debt as soon as possible. The interest rates on the loans are higher than those on our savings accounts and CDs. The CDs are at Ally Bank, which charges 3 months of interest if the CDs are withdrawn prior to their maturation, so we are considering using them to pay down the loans. The conflict that we have is that we want to be in a position to purchase a home when we move in 2014, if we are able to find a suitable and affordable property. I was planning on using the savings (this was before I decided to get married) as a down payment, but the interest rates on the loans frustrate me. We think that we would be able to take out a VA loan with no/minimal down payment and no PMI, but have not really looked into it yet. Readers, what are your thoughts on how to balance our goal of eliminating the student loan debt with preparing to buy a home if the opportunity arises? The implications of student loan interest deductions and the traditional to Roth TSP conversion are also on our minds, but we are not sure of how to take into account all these considerations.

2. Regardless of whether we purchase any real estate, we know that our expenses will likely increase. We currently have one car, since I prefer not to drive and can use other transportation means. However, this may need to change next year when we move since I may not have the option of walking to work. We would purchase a second used car, if necessary. We do not feel the need to have life insurance at this time and do not plan on purchasing any until we combine our incomes to purchase real estate or another purchase that depends on either/both of our income(s).

3. We’d like to be prepared to help any of our aging parents in the future, if necessary. This is more likely to happen with my parents than his. My parents were a bit older when they immigrated to America and started a family. Furthermore, they bought a property at the height of the housing bubble in one of California’s worst-hit cities, and we all highly doubt that they will ever recoup the lost. My husband and I are close to both of our families, so if they needed us to provide any financial support, that would be a priority for us.

4. Lastly, being a mother was never on my to-do list. Although my husband initially wanted to be a father when we first started dating, he later decided that he would rather have our marriage. We realize that I/we may change my/our minds, and if that happens, we’d need to change our plans accordingly.

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

I’ve always enjoyed working, so I foresee myself transitioning into a part-time retirement when I’m ready. My military obligation is quite extensive, so I plan to advance my military career until I reach my eligible age to qualify for a pension in the current retirement system (age 47, unless I opt for additional training in the future) at the very least. We foresee that the constant moving required for my career will have a large impact (most likely negative) on my husband’s career.

Husband: I would like to work as an attorney for the majority of my career. However if we are financially stable enough, I would like to retire from the law and work as a junior high or high school teacher until I retire. The constant moving is something that may also impact my career choices since it will be hard to establish a long-term career. Purchasing rental properties is something that I have some interest in and would love to be able to do so in the future.

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

These have been mentioned multiple times, but these are the ones that have worked really well for us:

• Have an early talk about finances with your partner. Early in our relationship, we made sure that we discussed and agreed on the following areas of life: in-laws, religion, children, and finances. It seems that many divorces occur because of one or more of these aspects. As in any aspect of life, set yourselves up for success!
• Be practical. Consider job prospects when you are applying for graduate schools, especially if you need to take out student loans.
• Be a lifelong learner. Not only does this apply in personal finance, but also in many other aspects of life. Connect with your community and those around you by learning from others and teaching others. Aspire and inspire.

Any advice, suggestions, or feedback would be greatly appreciated. Thank you, FMF and FMF readers!

Comments

[elb]

Moving around can be difficult for a beginning lawyer, although it's a pretty mobile profession. You're spot on there, but it's not an insurmountable difficulty. Try to specialize in something portable like federal tax or securities or M&A, rather than local litigation or real estate matters, which are less transferable.

As a corporate lawyer who used to be a high and middle school teacher, don't believe the hype re: being a teacher, it is much harder than being a lawyer and you will have less energy at that point in life. It is really not a transitional, pre-full retirement gig, and if you treat it that way your students will destroy you.

Wouldn't do a thing until student loans are gone, they make RE purchases very difficult.

[Adam]

I am very impressed at the net worth accumulated for such a young couple. I am also astounded that you have so much tied up in CD's! It's either an emergency fund, and belongs in cash, or it's an investment, and belongs in an investment vehicle that will actually GROW versus shrink (after inflation).

[Paul]

Interesting profile. You're doing pretty good! How did you save up such tremendous income on such a low salary?

[Jake]

You have to remember that if your husband wants to practice as an attorney, he will have to take (and pass) the bar in any state that you move to. Most times, this is a 3 to 6 month process to study for it AND they only offer the exam twice per year. At larger firms, he may have the opportunity to study for it while employed but generally this will be a self directed process. Make sure you have $ set aside for classes for this.

Regarding the loan questions, it comes down to either the "math" answer (move any $ invested at a lower rate over to pay off loans at a higher rate (considering tax deductions) while making sure you have a sufficient emergency fund at all times) or the "psychological" answer (pay down the student loan debt as soon as possible regardless of any gain in rate).

Even if you could consolidate, your rate will basically be the average of all of the loans interest rates (~7.3%)and your payment will be in the 800 dollar range per month. That could put some stress on cash flow.

IF it were me (I am an attorney about 5 years ahead of where you guys are at) I would (1) have your husband decide what he wants to do for the next 5 - 6 years at the new location; (2) he needs to get a job BEFORE you repay any loans and (3) decide what you both want to do after the 5 - 6 years.

I was in a situation where I had to take the bar in 3 separate states because we were moving. The legal job market is as dismal as it has ever been. He could always think outside the box and try something else for 5 years and not practice. Lots of law students do that.

Best of luck and thank you for your service.

[Andrew]

Thank you for sharing your story. I'm 29, so I enjoy reading the Reader Profiles for those who are closer to my age. I hate to challenge your net worth, but I feel as though there is insufficient data or maybe I just missed something entirely. I tally nearly $280k in cash and investments. How is that possible at that income level for the amount of time of you've been working? Did you inherit money? Was some of it a wedding gift?

Thanks again!

[Kay]

It sounds like your goals are mostly "stay put" goals (Real estate, attorneying, teaching) yet your reality is, you'll change stations frequently enough that putting down too many roots might be difficult - including for any kids you may eventually decide to have.

Additionally, if you're going to be moving every 5 years, purchasing and maintaining rental properties might be a little difficult, especially since you're looking at cross-country moves. I probably wouldn't even bother purchasing your own home with that level of mobility, and instead put your money into investments that match your lifestyle mobility... then when you DO retire and put down roots so to speak, THEN buy a house for cash with your savings.

[Sarah]

You don't mention whether your husband already has a job lined up. If not, you should prepare for the possibility of early un- or underemployment. The market is incredibly challenging for young lawyers right now, and the highest-paying jobs tend (a) to be located in major cities and (b) not too forgiving of frequent moves. Your husband will probably also have to take another bar when you move, which is a time-consuming and expensive process.

Meanwhile, the monthly payments on the student debt are going to be scary high (have you calculated it yet? unlike a cc, an installment loan will have a fixed monthly payment for the life of the loan) once the grace period expires. You're not going to have a lot of flexibility in terms of your husband's job until those loans are gone. I would prioritize that over a house, especially given that you anticipate only being at your next duty station 5-6 years, which means you won't have all that much time to recoup the initial costs.

It's a complicated balancing act, since you don't want to empty your coffers to accelerate repayment and then get hit with some emergency (such as unemployment for your husband). Nor do you want to neglect retirement savings at your age. I'd say: pay extra towards student loans if you can take it out of your monthly spending, until your husband is settled in to his job in your next duty station. Then increase payments correspondingly, and plan for a point in the relatively near future where you've paid enough that you can use savings to finish it off without leaving yourself without a safety net.

I just paid off my loans (bigger than yours combined) after 6 years out (3.5 in private practice, 2.5 in government). It can be done! Good luck.

[Old Limey]

The attorneys that I know all make a lot of money, love their career and have been in their profession many years. Your military career with frequent moves over the next 20 years is a real problem for a young would be attorney. Young attorneys need to stay put, build up a clientele and gain lots of experience in the state in which they practice. Hopefully you discussed all the ramifications of this issue before you decided to get married. This is why I am surprised that you are asking complete strangers for advice, 2 months into a marriage. This doesn't show much wisdom or forethought.

[Walden]

I'm not really qualified to even have an opinion on most of these issues, so I'll just say thank you for your service to our country, and congrats on your recent marriage! It sounds like you have a great start on saving/building net worth and a good head on your shoulders!

[Steve]

Law has been pretty tough on graduates lately for those not from a T14 school. But coming from a 'failed' lawyer, finding something you like to do, working hard at it, and having a saving mentality (which you must have given those assets at that age), financial success can still be had.

[Chadnudj]

As mentioned above, not sure if your husband has a job lined up yet or not...but one option he may want to consider (given that you're in the military) is the JAG Corps. Great training, great benefits, it'd probably be easier to coordinate in terms of moves for both of you, no need to take multiple bar exams while you're both still in the military (JAG lawyers pass the bar of one state, then can practice anywhere the military sends them while in the JAG Corps; once they leave, they presumably have to be admitted to the state in which they set up), and there are programs for student loan forgiveness (which, when factored in, might mean he makes MORE money as a JAG attorney than in private practice).

Plus, the JAG Corps is hiring....while the private law firm market is not hiring (or, at least, is not hiring to the same degree it once was).

Otherwise, your finances look like they're in pretty good shape!

[AH]

Thank you for all of the useful feedback!

Andrew, you're right. The numbers are rather puzzling when looking at our current income, so I'll try my best to explain my story. I say "my story" because the net worth, save from a couple thousand dollars, were accumulated by me.

Regarding our net worth, none is due to any inheritance, gifts, or lottery winnings. I started working at age 15 and have always had a job. I was fortunate to earn enough scholarships to cover all non-tuition costs during college. I completed my undergraduate degree at a prestigious school in the San Francisco Bay Area, where my tuition was covered by a ROTC scholarship. I worked throughout my college years and used the income to invest and fund my Roth IRA. Because my college is located in an affluent area and my studies were in the sciences, I was fortunate enough to be able to choose my tutoring clients/students and be well-paid for it. When I took a 5th year to complete my Master's degree, I took the extra time I had (due to no longer having undergraduate ROTC commitments) to start house-sitting and pet-sitting. Combined with tutoring, being a TA (reduced my graduate student tuition bill which I had to pay for myself), and some other part-time jobs/hobbies, I was able to pay my tuition with no loans and invested the rest with Vanguard. This time period was shortly after the bubble burst, so the investments have grown substantially.

I was very lucky to have had the opportunities and timing that I have had, especially the education delay that the military granted me when I wanted to complete my Master's degree. I was also very, very fortunate and grateful to have had immigrant parents who, regardless of their low income and earning potential, saved enough to buy a house to raise our family in. They are my role models and taught me that money is better well spent on improving ourselves (i.e. education, safety, health) rather than on material goods.

My husband is currently still searching for a job, so that is a concern on our minds. Given the market for new attorneys in recent years, we anticipated his difficulty in the job search, so we plan to continue our current budget (based on my income only). We planned to apply any income that he (hopefully) earns towards the loans.

A little background into our decision to marry: we had dated for 10 years (including long-distance and 2 years of living together) before we decided to get married. We made the decision to marry when we did because 1) we knew that we wanted to be married to each other, 2) he would be added to my health insurance which costs less and is more comprehensive, 3) some financial benefits, such as a small boost in the housing allowance and his participation in the Roth IRA, and 4) we wanted him to have access to the benefits of a military spouse/dependent, including moving with me next year. We both understand the negative consequences that my military career will have on the growth of his career and have extensively discussed this for years, especially because I knew that I was headed towards a military career when I was accepted into graduate school almost 4 years ago. This was one of my concerns of getting married because he will be making many sacrifices, not only personally, but also professionally. Once I realized that he understood the sacrifices (especially seeing it in the lives of other military spouses/families) and we were both OK with putting my career first (which is consistent with our personalities and personal priorities), we got married.

[BH]

How high can you grow your income? Does your husband attend a first tier law school and is he in the top of his class? Is he motivated to succeed? If so, he probably has a higher income potential than you. Equity partners in a Top 100 firm make 7 figures. But it's hard to make partner anywhere if you don't say put. Just a thought.

[Luis]

You didn't state your medical profession and which branch of the military you are in? If something were to happen to you on duty.... is there disability built in for military officers or do you need to apply for your own? I would definitely not buy a home if you are moving so much. You will miss your home too much each time you move. Also, renting is not as bad as many people think. Property taxes, interest and maintenance gobble up a lot of expected gains in homeownership.

I would sell the 90k in investments and pay off your student loan ASAP. With your low monthly expenses you two might make it on one income lowering the pressure on your husband to find work in a constantly moving lifestyle.

Education, safety, health, family values, hard work, savers, and not materialistic....sounds like the qualities of a would be marriage with kids?!? That's what having children is all about and then some.....filling your hearts and keeping you safe and protected when you are older. Can you say stay-at-home-dad? Just sayin'! :)

[Shane]

Why don't you take your savings (in the net worth) and pay off the loans right now? You said the loans are charging higher interest than savings is getting. Seems like an easy decision there...

[Joe]

You're doing great. Chadnudj makes a great point about JAG Corps.

I would make only the minimum payment on the student loans. It's only a matter of time before this (or something similar is passed) H.R. 4170 (112th): Student Loan Forgiveness Act of 2012. http://www.govtrack.us/congress/bills/112/hr4170

[Nick @ ayoungpro.com]

Thanks for sharing your story. You guys are doing awesome! Damn those student loans though. :)

[JH]

As others have alluded to, the real question here is your husband's career prospects. If he goes to a T-14 law school, he should have plenty of options. If not, given the state of the legal profession he's going to have a hard road getting started.

And some unsolicited advice from a former lawyer at one of the most "prestigious" law firms - I might suggest that your husband explore jobs outside of the legal industry. I took a six-figure pay cut when I left law and have never for a second regretted it. Being a lawyer these days is a rough life. At least at my law firm, everyone was miserable and it was shocking to watch how many marriages broke up as a direct or indirect result of the hours and stress. It's a crappy way to live.