Author Topic: Reader Case Study: the Student Loans, the Stache, or both  (Read 3535 times)

Akscal

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Reader Case Study: the Student Loans, the Stache, or both
« on: December 17, 2013, 08:11:00 PM »
I am a 31 single Male who is interested in pursuing Early retirement through FI, and would like some help from my fellow mustachians in choosing the right course of action in terms of paying off debt vs investing, with the goal of Financial Independence in about 10 years

Here are my financial specifics:

Income: 9 K/month - after taxes

Current expenses:  4 K/month
Rent: 1150
Groceries: 200
Cell phone: 50
Cable vision: 60
Electricity: 50
Gas: 30
Dry cleaning: 100
Gasoline: 40
Car Insurance: 220/month 1,300/6 months (not so sure why it is so high, i need to work on this)
Disability Insurance: 250/month
Restaurants: 400 (yeah, I know I need to get back to the kitchen)
Haircut: 30
Student Loans: 400/month (only interest, minimal principal)
Renters insurance: 185/year
Umbrella insurance 310/year
Backdoor IRA: 500/month
Donations/Gifts fund: 200/month
Travel fund: 200/month


Expected ER expenses: 4K/month

Assets: (92K)
401k: 30,000
Roth IRA:36,000
Taxable Brokage: 23,000
Car: Honda Civic 2001: ~2,000 if I am lucky, its pretty beat up
Emergency fund: $1,000

Liabilities:
Student Loans: 65,000 @ 5.375% - down from 150K in the beginning of the year (thanks to draining savings and help from a signing bonus)

Specific Questions:
1) I would like advice on what I should do regarding my student loans and investing to build my stache. As far as I can tell I have three options. I can use my excess ~5000/month and:

a) Pay off my remaining student loan debt aggressively, it should take 1.5 years, but invest nothing except for my 401K and backdoor roth ira?
b) Pay the minimum on my student loans approximately 1,200/month (and pay it off in 5 years), and use the rest to build my stache?
c) Split the difference, and take 2.5 years to pay off my loans

2) Is there another option that I am thinking about that I should pursue?

Thanks. I really appreciate this community, and look forward to your responses.

« Last Edit: December 18, 2013, 05:08:26 AM by Akscal »

athomeintheworld

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Re: Reader Case Study: the Student Loans, the Stache, or both
« Reply #1 on: December 17, 2013, 10:09:53 PM »
Not sure if the 9k is gross or net, so not sure you gross income overall.  Student loan interest is not super low - I would probably pick option A.  If you can deduct the interest it helps a bit.

Even with putting all of your "extra" $ to the student loans, you will still be building up quite a bit of a stash with the 401k and IRA contributions.

You have quite a bit of insurance payments - disability, umbrella.  What kind of work do you do? Is this a necessary expense?

What's up with your car ins??  Unless you have a DUI etc this is totally ridiculous.  I pay 325 every 6 months for 2 vehicles...that are much newer (granted I am working on re-evaluating this myself!)

Your high income will get you where you want to be with just a little bit of work

Akscal

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Re: Reader Case Study: the Student Loans, the Stache, or both
« Reply #2 on: December 17, 2013, 10:34:03 PM »
Thanks for the input zsmom. The income is net income, after taxes, so I cannot deduct the interest. I am a physician in NYC which is why I have the disability insurance and umbrella insurance (not sure I need the umbrella insurance, my dad said it was a good idea).  My car insurance is so high I think because I am in NYC, and because I had one crazy speeding ticket  2 years ago, and I have 2 points on my lic (that I will have removed after taking a defensive driving course in 2014). No DUIs.

ljp555

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Re: Reader Case Study: the Student Loans, the Stache, or both
« Reply #3 on: December 17, 2013, 11:01:27 PM »
Not a clear right answer here, but personally I would max out tax-advantaged savings first, then put the rest towards student loans until they're paid off.

athomeintheworld

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Re: Reader Case Study: the Student Loans, the Stache, or both
« Reply #4 on: December 17, 2013, 11:05:19 PM »
I see.  That makes things come together more.  Great job getting out of school with 150k in loans.  You were super smart about planning or had some help.  Either way that's awesome.

Not sure if you are 1099 or W2.  If 1099 hopefully you have an LLC set up and get paid under a tax ID rather than your SSN.  This would likely save you some cash as well as give you the ability to write off quite a bit.

Maybe look into the umbrella insurance - what exactly are you trying to cover, etc.  Is this some sort of supplement to your medical malpractice? For the possibility of claims in excess of you $1mil/$3mil (or other) coverage?  You don't own property or rentals that would need consideration for additional coverage.

Also - don't see food on your budget other than restaurants - I assume you have some sort of grocery budget

bugbaby

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Re: Reader Case Study: the Student Loans, the Stache, or both
« Reply #5 on: December 18, 2013, 12:25:21 AM »

- Congrats on 1150 for rent in NYC. How & where, if you care to share?

- Given nothing for grocery, 400 for restaurants sounds less outrageous. i suppose you eat most meals at the hospital / office? But yes to the kitchen. I've found a slow cooker to be a worthy investment for one without deep culinary inspiration like myself. A toaster oven might go a long way as well. Just watch to resist the temptation of frozen junk meals that take up whole isles at the store.

- I'd max the 401k & IRA and find out if they have a 457b, also max it. Also consider FSA or HSA for any health things including glasses, co-pays, prescriptions, dental extras etc.

- CAR: seems like a money loser. Can you get rid of it and just use public transport & Zipcar as needed. Even with taxi once in a while you could still come out ahead vs paying the 220/mo.  Do you pay for parking? If you have to keep it, minimal liability insurance should suffice.

- As for your question: it may depend on your risk tolerance. I'd say 5.375 is high enough of a guaranteed rate of return to strongly consider just paying off. I'd do it.

Akscal

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Re: Reader Case Study: the Student Loans, the Stache, or both
« Reply #6 on: December 18, 2013, 05:38:29 AM »
Thanks ZsMom. I am an employee, so I get a W2, so I cant really write anything off.  I get malpractice from my job. I dont think I need the umbrella insurance my dad wanted me to get it in case someone tried to sue me outside of work. The only assets I have are my 401k, roth, brokerage account, and car, and the umbrella insurance would be able to protect me from anyone touching those, I dont know if I am misguided in that thinking.  I will look into thatI  added in the groceries, an oversight on my part, ~200/month.

Thanks babybug. I live in Crownheights, Brooklyn, it is becoming increasingly gentrified, aka higher rents, but I got my apt when rents were  a little cheaper. I looked for the least expensive, but decent 1 bedroom I could find at the time.  My landlord is super chill, she would be justified in raising rent, but she hasnt so far. I have an FSA from work, but go to the doctor so infrequently (once/year, twice if I get really sick) that I would be  more anxious about losing the money at the end of the year. I have been thinking about getting rid of the car a lot lately, I use it only like twice a week (to see the parents on weekends, and for work once a week when I have to travel to a distant job site). I walk or use public transport otherwise. I use street parking, and have to do the alt side parking thing which can be annoying. I only keep it because of the freedom it provides, I can go on a road trip or just drive someplace if I want to at a moments notice, I will look into zip car, it may be worth it to switch. I maxed out my 401k, and ira (via backdoor) this year, and plan to keep doing that. We dont have a 457b. I thought about a slow cooker, but I am super lazy, and dont want to buy another piece of equipment and not use it. I fell for the jucing thing, and dropped coin on that and never use it. I feel pangs of guilt everytime I look at it.

I guess it all boils down to risk tolerance. I have all my investments in 100% stock, and want to aggressively save, but hate having the student loan debt, it seems like there is no easy answer.

aj_yooper

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Re: Reader Case Study: the Student Loans, the Stache, or both
« Reply #7 on: December 18, 2013, 06:59:08 AM »
Congratulations on your quick pay down of your SL debt load.  I would put half towards the SL and invest the rest; both choices are reasonable and your debt burden is not huge.  To me, your car seems more like hassle than freedom.  I like how you have set things up for yourself.

fodder69

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Re: Reader Case Study: the Student Loans, the Stache, or both
« Reply #8 on: December 18, 2013, 07:23:03 AM »
Zipcar can be convenient, and your insurance is crazy high on that car. But it is cheap and paid off. Another thought might be to keep it somewhere that you can get to by public transit so you don't have the hassle. Call your insurance company and look at raising deductible and what not and shop around since that is way too much even for living in NY.

This came up in another thread and it really is close to a wash as to whether you pay down the debts or invest it. For your case I would pay it off aggressively. Your ROI on investments is going to be about the same, your job is about as stable as it gets since people will keep getting sick, and you have a decent emergency fund in your taxable account already in case you need some income. So keep hitting the 401K and Roth and put the rest towards getting that down.

I would also really look into the umbrella and disablity insurance. That is a lot of money a month and not entirely sure how much of that it would cover. Your IRAs should be protected anyway and you don't have a ton of other assets that would require a 500 a month policy at this point. So the umbrella should almost certainly go and I am not sure why your disability is so high but you may want to look at that one to see if you can reduce costs there.

athomeintheworld

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Re: Reader Case Study: the Student Loans, the Stache, or both
« Reply #9 on: December 18, 2013, 07:44:36 AM »
If you are an employee - check and see what disability options you may already have at work that you are unaware of.