The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Alexandersaur on December 21, 2012, 08:11:13 AM
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...today I woke up punching myself in the face (in true mustachian manner)
I had previously coasted through my life giving no thought to topics such as frugality. My parents, bless them, were not the most fiscally responsible people and did little to teach me about finances. I am in the second half of my last year in graduate school and ponying up to the challenge of getting myself out of student loan debt. Knowing as little as I do, I started browsing around and arrived quite promptly to the MMM blog. I literally felt my pulse quicken as I started reading and learning. I started at the beginning and have made it about halfway through the blog entries so far, and my entire outlook on my life situation has changed. When you read below, you will see how blind I have been to my own good fortune.
Now, I am still extremely wet-behind-the-ears so to speak, and would like some advice from the kind hearted people in this community. It is an incredibly powerful and motivating feeling to look at my own situation and see such potential, and I would like to maximize it. What do you guys think?
Age: 24 years
Salary Income: ~30k/year. I work abroad and will receive a 12k bonus. Of course, its taxed to hell BUT due to spending my entire work year abroad I qualify for a seriously sweet tax return. In addition, I am currently a graduate assistant which means I take a cut in my paycheck compared to my coworkers but in return get a "free" master's degree.
Other/future Income: I will (hopefully) be graduating in June, so my graduate assistant pay cut will be removed, in addition to a yearly raise, and a raise from having a masters. In addition, I will be qualified to sit a test for a license. (My field is Applied Behavioral Analysis) I stand a very good chance of being promoted to a leadership position. I am a teacher and my client is a very wealthy family. Part of my job is to travel with them which means, aside from free travelling, an extra $1000 cash each trip. I'd say we travel a good 4-5x per year. (this is my second year with the family)
Student Debt: My loans are currently being deferred as I am still in school. However, I was surprised to discover after graduating that I owe about $63,000. Apparently my parents had been taking out loans left and right without even keeping track of where from let alone how much. /sigh. A bit of research has shown me that I will qualify for a $17,500 loan forgiveness program for qualified teachers of special needs students after another year in the field.
Living expenses: I don't pay for rent, cable, laundry, or any utilities. I have excellent health coverage, without even having to pay copays. I have a free gym membership, and I eat the majority of my meals at work for free. I do not have a car; I am driven to work and outside of work I can take a taxi from one side of town to the other for about 10 dirhams or about $2.70. My cell phone bill is 49 dirhams/month which is about $13.00. I keep a Netflix account open for my sister in the states for about $9.00/month. (even though Netflix is censored in this country, ack!)
Despite living what I am ashamed to admit has been a rather exorbitant lifestyle of eating out, shopping, drinking, etc, I still have about 22k sitting around in my bank account from last year doing nothing. (currently punching myself in the face as I type)
But I think the really exciting prospect for me is that my significant other is in the exact same situation as I am with regard to living expenses and income, but he has no student debt at all. I am sure we could comfortably get by, just doing what we are currently doing. But I want to be more in control. I am trying to find out if my employer matching contributions on a retirement fund. For that matter, I am also trying to look up the difference between a 401(k) (or in my case, a 403(b)?) and a Roth IRA. And also this whole Vanguard business. It is a lot all at once for my little mind to handle, but my stubble is quivering and I want to one day have a beautiful, flowing money moustache.
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Hey Alexandersaur, Welcome to the MMM community.
I am glad you have realized what you want and are in the process of making a plan. When my wife and I were graduated we had about 70K in loans. It took us about three years to get that total down to 5K (I couldn't pay if off it was only 1.875 interest) I think based on your numbers you should be able to knock out your student debt in 1.5-2 years. If you have any specific questions feel free to ask.
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Thanks for the welcome :-)
1.5 to 2 years is about one-fifth of the amount of time i was anticipating! Given my currently low cost of living, do you think I should throw everything I've got at the loan up front and leave only a small budget and emergency fund until its gone? Or should I set up a loan repayment budget to pay it down, and use the rest of the leftover money each week to start building this mysterious Vanguard account that I am building the courage to open?
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Given my currently low cost of living, do you think I should throw everything I've got at the loan up front and leave only a small budget and emergency fund until its gone?
From what I understand of your situation, I would be building a serious emergency fund. How secure is your employment, exactly? Suppose, just for an example, your currently-wealthy employer gets busted for insider trading, his/her accounts are frozen, and you're stuck in a foreign country with little money?
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Seconded that a big emergency fund is a good idea in your situation - if your employment changes, you'll be facing the cost of a plane ticket back to your home country plus a period of unemployment plus all the establishment costs of renting an apartment, buying furniture, etc. But you probably don't need any more than the 22k you already have lying around.
It would help to know the interest rates on your loans. If your loans have very low interest rates, it may be prudent to pay them off slowly while investing your extra cash, while very high interest rates mean that you should throw all your money at the loans right away because it is a debt emergency and your hair is on fire.
Do look into the 401(k)/403(b) and Roth IRA options available to you. The former would be through your employer, the latter would be something you'd set up with Vanguard on your own. I believe that there are some restrictions on contributing foreign-earned income into an IRA, so you'll need to research that.
Good luck!
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It is always a tough choice to make between emergency fund, loan and investment since everyone is having a different situation. However, I will ask myself some question before the decision.
1. How likely will I lose my job?
2. If I lose my job, how long it will take to find another job? This will determine how many months of living expense I will be keeping in my bank account.
3. What are the other resources I can tap on if my job searching extends beyond my estimation?
4. What is the interest rate on my loan compare to the return rate from investment? Remember paying off loan also have the benefit of reduce your monthly expense. For my case, paying off loan seems to be a better deal.
Hope the above questions can helps you in your decision making.
Good luck!
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I tend to plan for the worst, and hope for the best. I play it conservative with my livelihood risk. So for me it would be:
1. Emergency fund of enough to make it back to the states + 3-6 months living expenses after that. I would assume you might consider staying with family in that case in the short term but you'll be more welcome if you can contribute so keep enough to pay for everything (rent, food, utilities). Furniture and so on is a luxury in an emergency. Even if you get your own place in an emergency somewhere to sleep is all you need. An air mattress or sleeping bag is acceptable in this case. In an emergency you be as badass as you have to.
2. Pay off the loan with whatever is left. A loan is a payment you have to make that you get nothing for today. The sooner it is gone the sooner you have the freedom to not worry about it. The only exception to this is if you can get some sort of 401k match or something that is basically them paying you more for just saving some of what you already earning. No reason to say no to a raise like that that helps you a lot long term. But also since you say you woke up depressed about the loan get rid of that unneeded source of anxiety.
3. After this is when I would switch from conservative to aggressive and invest. I go stock heavy because I am in it for the long haul and my investments are nothing I need today or tomorrow or even next year.
Again this is just my take. I like the freedom to control my life. I am debt free today so all my money goes to things I have some level of control over. Either it is something optional like netflix or something not optional like eating but I still can choose what I eat and where I get it, etc. Loans feel like something out of my control. I have to pay it. Others will have different opinions. Weigh your options, see what makes the most sense for you.
As far as 403b/401k they are the same thing except for 403b is for not for profits and 401k is for profits. If you aren't running the business nothing to worry about. In short you contribute money before income taxes are taken out and get a tax break now. Withdrawals are taxed as ordinary income. A Roth IRA (or Roth 401k/403b for that matter) is after tax dollars. So you pay income taxes now. But you pay no income taxes on withdrawal. A Roth IRA has a low yearly limit (5500 for 2013) and a 401k/403b has a much higher limit (17500 for 2013). Were I in your shoes I would pay off the loan then when I had money to invest max out the Roth first, then pay what I could into the 401k/403b. Anything left put in a taxable account to invest.
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Student Debt: My loans are currently being deferred as I am still in school. However, I was surprised to discover after graduating that I owe about $63,000. Apparently my parents had been taking out loans left and right without even keeping track of where from let alone how much. /sigh.
It's weird that they were able to take out loans without you being able to keep track of how much or where from. :P
If you haven't already, consolidate those loans.
A bit of research has shown me that I will qualify for a $17,500 loan forgiveness program for qualified teachers of special needs students after another year in the field.
You might look into this more. The 17.5k loan forgiveness program I'm familiar with requires five years of consecutive service in math, science, or special ed in an federally designated school. AFAIK, all of these schools are domestic and/or tribal.
I basically agree with rugorak's advice. Check off steps (1), (2), and (3). I would suggest opening an account with whatever investment management company (Vanguard, Fidelity, etc.) you ultimately want to invest with, and putting your emergency fund into a money-market or bond-heavy fund. Then when you're properly ready to invest, it will be simple for you to buy into other funds.
It sounds like you are in a very good position to pay off this debt. Sure, it sucks that your net worth is negative right now, but your rate of savings is huge. You haven't given in to the temptations of lifestyle inflation. If you can keep it up, then in two or three years you'll be at zero. Four or five more years after that you'll have a solid stack of fuck-you money saved, and will be well on your way to financial independence.