Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs).
This year, we have four participants who will share their financial reports, exposing the results of their financial choices. Each participant is paired with one of our Certified Financial Planners. The experts will provide insight and guidance that will help our participants take their finances to the next level by the end of 2014. Learn about this year’s participants and experts.
Laura has a B.S. in Engineering, and a state Professional Engineering licensure. She earns $63,200 per year. Leon has a law degree and has passed the bar in three different states. He earns $60,000 a year. They have $44,000 in student debt. They max out contributions to tax-advantaged retirement accounts and hope to begin aggressively paying down debt. Laura and Leon hope that they can get a plan together to better use their financial resources, eliminate student loan debt, and save up to buy a house. They are 28 years old and have no children, but they plan to start a family sometime.
After reading Laura and Leon’s comments, you can read commentary from Roger Wohlner, CFP. Roger Wohlner appears courtesy of The Chicago Financial Planner.
Laura and Leon’s Net Worth Statement
Laura and Leon’s Income Statement
Comments and analysis from Laura
2013 was a monster of a year for us. We sold our house after being on the market for about four months. Leon was granted a promotion and permanent position after passing his second bar exam. I spent about half the year preparing for and then taking the Professional Engineering Exam. I only recently learned I passed, so it’s too soon to know how this will affect our financials.
The biggest change though has come from deciding it was time to get serious about our finances and start educating myself. I scoured through blogs, books, TV, radio — anything I could find.
Here’s a quick summary of what were some of the most important things I’ve learned and how we’re moving forward:
We have to make retirement a priority. The more we save now, the greater the chance our money has to grow and the less we’ll have to save down the line. Furthermore, you can’t make up for lost time. I started working professionally in 2008 but felt unsure about how to save for retirement, so I didn’t do it. As a result, I missed out on some really strong years of growth and left an abundance of tax advantages on the table. In an effort to make up for lost time, we maxed out our 2012 and 2013 Roth IRAs and contributed enough to get the maximum employer contributions for our 401(k)s. This is a pattern we hope to continue through 2014.
Student loans have special rules. In general, it is okay to continue to carry this debt if as long as the interest rate is low and you invest the difference. In our case, the consolidated interest rate is 6.55%, which just barely tips it in the favor of paying down the loan versus long term investment. Also, unlike our old mortgage, we have the option to pay ahead and push out our next payment due date. This means that if we need major cash flow in a pinch, we could always stop paying for a few months and be no worse off in terms of fees and interest.
When you couple this with the fact that student loans cannot be discharged in bankruptcy and would adversely affect us when we eventually try to buy a house, I see no reason not to hit these loans as aggressively as possible. Our goal in 2013 was to pay $1,000 per month toward the debt, but we were able to pay closer to $1,500 per month on average. In 2014, we’re hoping to step this up and pay at least $2,000 per month.
We should not buy a house until we are truly financially prepared for it. The worst thing we could do would be to saddle ourselves with more debt than we can safely pay each month. Our goal is to save enough to put a full 20% down payment on a 15-year mortgaged house while leaving enough for emergencies. There is no specific dollar amount each month for achieving this. Any amount added to this will come from money that is left over at the end of each month. Once the student loans are fully paid off, the money that was going toward that will switch to building up a down payment. For now, the money added to this fund will have to come out of reduced expenses in other areas like our grocery bill.
Other than these big items, our goals are a hodge-podge of items to make our money more efficient, like carefully planning our meals, occasionally biking to work, taking on a side job, and organizing and selling excess household objects. If I could generally achieve one or two of these extra items I would be pleased.
Feedback from Roger Wohlner, CFP
First of all the two of you should be congratulated on what appears to be a frugal post-college lifestyle. I’m not sure where you live, but your rent and related expense certainly seem reasonable relative to your income.
Laura’s comments about making retirement savings a priority are right on in my opinion. At 28 with no kids you have the luxury of time and you are smart to take advantage of that. Here are a few of my thoughts, shared with the understanding that I don’t know some of the details of your situation:
At the very least you are wise to contribute enough to get the full match in your respective employer’s 401(k) plans. The match is essentially “free money” and is silly to pass up.
Beyond that whether to fund a Roth IRA or contribute more to your 401(k) depends upon several factors:
- The quality of the 401(k) plan: Does it offer a solid, low cost menu of investments? Are the fees and expenses low?
- Does either of the plans offer a Roth option? If so, you can actually contribute more under the Roth umbrella to a 401(k) than is allowed for an IRA.
- What are the Roth IRAs invested in? Do you have access to low fee accounts in terms of fees and trading costs for stocks and ETFs? Do the accounts allow access to a wide array of no-load, no-transaction fee mutual funds?
- If you are working with a financial advisor is he/she paid based upon the investments sold? If you are doing this yourself do you feel comfortable managing your own portfolios?
At 6.55% it does make sense to aggressively pay down these loans, especially while you have two incomes and no kids. It seems like you are doing a good job of balancing this against saving for retirement.
I also applaud your approach to buying a home. While a home can be a good long-term investment as well a great place to raise a family, there is no reason to strap your selves financially to own a home at this juncture.
Overall it looks like the two of you are getting a great start on your financial future.
Feedback from Luke Landes
It’s clear you and Leon are taking a smart and considered approach to your finances.
Sometimes the comparison between the student loan interest rate and the anticipated rate of return of an investment isn’t the only consideration when deciding whether to accelerate your student loan paydown. This wouldn’t change your conclusion to eliminate the student loans as quickly as possible. The long-term return of the stock market comes with some risk. Yes, student loans are risky to hold as well for some of the reasons you mention, but your equivalent rate of return won’t waver like the stock market given your consistent payments.
I’d like to hear more about your goals other than buying a house once you’re ready. When you prepared your bio, your combined income was $120,000 a year, and with the P.E. certification, I expect you’ll be able to command a higher salary when you choose to. Taking a look at your income statement, the opportunities I see are in the groceries/household category, although it’s unclear what that includes — if it’s mostly food, you can cut that back. But you have great cash flow, so I wouldn’t worry too much about cutting back expenses. The best opportunities for you are probably a new position and side jobs — but only if they’re worth your time.
It’ll be fun to watch your progress this year; I expect we’ll see good things.
Updated February 1, 2014 and originally published January 31, 2014.