I have Six Figures of Income…and Debt

The question below on how to handle six figures ($354,000) of debt with an incoming check for $500,000 was answered by me on October 30th at Nerdwallet.com. Since last spring, I’ve been answering questions from real people at Nerdwallet’s Ask An Advisor platform. Those of us on the platform answer real questions from real people without knowing all the relevant information, only what they tell us. Other answers as well as mine can be found here.

Q: I will soon get a check for $500,000. I have $354,000 in student loans. Should I pay those off first?

A: (Dana Twight) Great that you are asking about how to handle this windfall. This is exactly the situation that financial planning is made for – balancing competing priorities and improving your short and longer term financial situation.

5 Points to Consider

1.Other debts: Do you have any other non-mortgage debts? If you do, they may very well have higher interest rates than your student loans. Consider paying those balances down first.

2. Emergency funds: Do you have an emergency fund-are you employed? In addition to the fund portfolio suggested by my colleague, I would consider setting aside a fund with six months income or expenses in it from this check. Or you could set aside the amount of one year’s health insurance premiums and deductibles. This could be the base of that fund-keep it in insured CD’s or accounts.

3. Insurance: This is also a great time to build an umbrella liability insurance policy into your annual budget. This type of policy covers you above other liability limits (say on a residence or a vehicle). Investopedia has a definition which mentions that it also includes libel, slander and invasion of privacy.

4. Tricks: Be careful about how you share this news with others. Resist the opportunity to open new credit accounts. Visit the opt-out website to opt out of new credit card offers https://www.optoutprescreen.com/?rf=t so that you don’t get oceans of new email or regular mail offers. Your financial institution may see your funds deposited and offer to help you invest them-stick to a fee-only planner and get hourly advice instead.

5. Treats: It’s ok to let yourself do something fun with a small part of the money, if you have waited for a vacation or a newer vehicle, or a really cool bike. Also treat yourself to fully funding your 2014 and 2015 retirement plan contributions, if you are still under retirement age.

Last but not least: Do you have your estate documents in order? A will, a durable power of attorney and health care directives as required for your state are a must. Take the time and the nominal percentage of this windfall to make sure that your documents match your intentions, now that you have more assets.

 

Best wishes for your success in your chosen field!

Advertisement

Is a Layoff in Your Future? 5 Steps to Take With Your Family

Gather the family around the campfire and prepare for the conversation of your life. Now is the time to let go of any family taboos around discussing money.  This is especially true if you have children living at home. You can adjust your talking points, depending on the ages of your children, but you need to be united on this.

I’ve been answering questions over at www.nerdwallet.com for the last three weeks. This post is from an article by me published in their Advisor Voices section last Friday.

Before we get to the 5 things, two suggestions for framing:

• Be truthful-mom or dad is going to lose her/his job and we have to prepare for that soon.
• Be reassuring – mom or dad will be getting a new job after that, and we need your help now to get there.

You could also set up the discussion and introduce some crucial concepts like this:

“In our family, we have needs and we have wants. Our needs include food for everyone (we won’t forget our pets!), a roof over our heads (explain the difference between rent and a mortgage to older kids, be more abstract with younger ones), paying for the heat, lights, phone service, child or after school care that allows parents to go to work outside the home, and transportation to get family members where they need to go. We will keep our health insurance so everyone can stay well and get their teeth cleaned.”

Wants will be different from family to family and be ready to give examples at the campfire. High-speed Internet may be a legitimate need for business purposes, but several ESPN channels are going to be in the want column, unless you’re a sportswriter. Adults and kids can make changes in different ways.

New family activity-making the dollar go further together.

As Benjamin Franklin might have said, the following three activities revolve around being healthy, wealthy and wise.  I’m adding two more intangibles: go actively towards the next destination, instead of away from what you’re doing now, and be sure to use your own roadmap.

 

Health: Know what you’re up against!  Is health insurance part of your severance agreement? Do you have severance? Tip: If your last day of work is early in the month, your group coverage usually extends through that month.  So a last day at work of May 1^st is better than April 30. Post-layoff choices could include COBRA, a group plan through your professional organization or union, a family policy from your state’s exchange (using the Affordable Care Act) or going without coverage. Going without health coverage could derail your family finances in a hurry if an emergency comes up. If a large layoff is rumored or several months out, immediately catch up on any work-related reimbursements for transportation, child care, parking or flexible spending accounts (FSA).

Tip: Make those routine appointments ASAP.

Wealth: Do you have at least nine months of income or expenses set aside? A year or even 15 months of expenses would be better, or a working spouse who can supply the income and benefits to cover you or your family as you move forward. List all loans, debts and upcoming fees and rank by amount and interest rates. Two schools of thought on retirement deferrals: Keep making the smallest contribution to get the company match—the thought being that it might be awhile before you can resume contributions; or cancel your salary deferral to boost your emergency fund or pay off debt. Paying off debt will need some serious family discussion. What makes you feel more secure—a larger rainy day fund or less debt?  Can you stop adding to any debts, and cut credit card use while you prepare? If so, move forward with that.

Tip: Automate all minimum payments so that your credit history is not harmed.

Wisdom: How well prepared are you to meet the intellectual and emotional challenges of being laid off and seeking new employment? Who will be on your kitchen cabinet, helping to advise you as you move forward? What about that LinkedIn profile? What about certifications, or continuing education? Can you use a tuition reimbursement benefit? Who will be part of your new work community? (Check out local co-working spaces for some ideas).

Tip: Create a family gratitude list, so you can keep in mind the non-material riches you already have.

Embracing the Hunt What are your strengths? Create a list of what your preferences are in a career, (often harder than the deal breakers) to leverage those in the next position. Do you have a side job that is begging to sit at the grown-ups table? A friend of mine is tired of teaching, but she is a talented quilt designer.  Perhaps that is her next career.

Tip: A good career counselor can save you lots of time.

Roadmap Draw your own! I cannot stress this enough. A map made for someone else is seductive.  But your brother-in-law’s map may not work for you.

As George Harrison sang, “If you don’t know where you are going, any road will get you there.”

Your next job has to come from what is best for you, so that when you are stuck at the side of the road, whether in Tacoma, Toronto, or Timbuktu, you have created a map to the best destination for you and your family.

Related Links

Boeing Managers say transfer of engineering jobs damaging talent and morale

 

Walden on Wheels # 2: Van Dwelling Grad Student

To save money, Ken Ilgunas lived in his van ( “an upholstered hermitage” ) while he attended Duke to get a Masters in Liberal Studies…and kept it a secret. Ken Ilgunas is the author of Walden on Wheels. My earlier post addressed the first half of Ilgunas’s story-how he got rid of his undergraduate loan debt.

“The Creepy Red Van”

He made several pledges to himself:

• First: “In order to live debt free in my van, I’d have to lie”. The first rule of van dwelling-is don’t mention the van dwelling.
• Second, he vowed not to accept any gifts, even though his mom offered to pay his rent so he didn’t have to live in the van.

“I didn’t think of a gift merely as a gift but as a debt with bow wrapped around it.”  “When we accept a gift, I thought, sometimes we don’t just acquire a debt but an identity.”

• Third, he continued his life as an ascetic by giving up meat, dairy and beer; and joining the campus gym (for exercise and showers) . [I say ascetic for his purposes-not everyone who gives up meat is an ascetic].

The burden of lying by omission to fellow students about where he lived and being worried about whether the campus police would kick him out of his permitted parking space took a distinct toll on Ilgunas’s social life. After two months like this, he had a  “surfeit of solitude”. When you read the book, you can see how he solved that problem.

In addition, he was living on $103/week, not counting tuition and other school fees. According to charts in the book, he spent $4.34/day average on food. For reference, the dollar amount for a person using SNAP (food stamps) is $31.50 per week or $4.50/day.

(Photo credit: Wikipedia)

As listed in the book, his monthly expenses consisted of: car insurance $46, entertainment $33, vehicle costs/repairs $73, gas $23, misc. $65, food $132, cell phone $37.

Notice: no utility expenses, nothing on clothes, no long commute.

You might take a moment to jot down your own expenses and see if there is any place to cut without being as Spartan as Ilgunas. What I learned from the book is that many of us with  “first world problems”, live a relatively easy life. For those of us with larger debts, Ilgunas demonstrates the value of being absolutely focused on one’s priorities and ultimately learns another lesson as well:

“If I wanted to stay close to nature and my true needs, I would have to continue to live a bare-bones, simple uncluttered lifestyle.”

Without adopting a ‘bare-bones’ lifestyle, there is value in seeing how others accomplished their goals. J. D. Roth, the founder of the finance blog Get Rich Slowly wrote about getting rid of his $35,000 in debt in 2007. Whether you choose to stop using credit;  adopt a lite beer vs. microbrew budget; sell most  of your possessions ; leave the country; or live on only one income (if your family has more than one revenue stream), there are other people who have vanquished their debt. It is very hard, but you are not alone (unless you want to live in your own van).

Related articles

• Dorm, Shmorm: Meet the Guy Who Lived in a Van for Two Years During Grad School (business.time.com)
• Walden Pond in Concord, Massachusetts (atlasobscura.com)

Walden on Wheels #1 : Vanquishing the Debt

Wipe our Debt (Photo credit: Images_of_Money)

$32,000 in debt after 5 years of college. For a certain age group among us, that probably sounds laughable. Not that any debt is a laughing matter; but it could be so much worse. Why – I haven’t met anyone with a “Craftsman house-sized student loan debt” since this morning.

One year’s tuition, room and board borrowing can easily run between $26-$52,000 in the 21st century. The average student is graduating with $35,200 in debt in 2013.

The book Walden on Wheels, is one man’s story of debt freedom. I will divide the story into two posts-how he discharges his undergraduate debt and how the author pays for graduate school. I am not sure most of us could do what he did, as it involves three difficult accomplishments:

1. Delayed gratification
2. 99% less spending and embracing isolation to do it
3. Severe behavior modification

The hero of this story (author Ken Ilgunas), begins in a Puritanical place:

“I didn’t see work-at least my line of work as a virtuous undertaking. Rather I saw it as nothing but a penance for my sins, for the profligate decisions I had made as a clueless eighteen year old…To make the best out of a bad situation seemed like an act of resignation. Instead I embraced my bitterness and hatred and ungratefulness.”

In order to direct his dollars from a new job in Alaska (in Coldfoot), Ken adopts the idea that his debt is “a villain that needed to be vanquished”.

“I bought nothing and kept nothing in the bank. I squealed with pleasure when I tortured it [the debt] with payments, like  a sadist plucking legs from a captured mosquito.”

The Happiness Project, this book is not. Or is it? You tell me.

In various, low wage, isolated jobs, Ken goes about reducing his debt-the book chronicles his success job by job, while contrasting his situation with his good friend Josh, also in debt for his undergraduate education. Josh’s nut is $66,000 however.

Would you give up salon haircuts, all your “electronic gizmos”, new or ‘new to you’ clothes, shopping, the gym and isolate yourself at a minimum wage job in the middle of nowhere to meet your goals? PS he had free ‘room and board’. I think many of us wouldn’t be able to do this, but it is a mesmerizing tale. There might be a technique, or a mind-set, or a tale in this book that will inspire you!

Related articles

• Duke Grad Student Secretly Lived In A Van To Escape Loan Debt [PHOTOS] (businessinsider.com)
• Walden on Wheels (rebelwithoutadime.wordpress.com)
• Saving Money, Even When the ….Hits the Fan

Pro Athlete Financial Losses (and how you can do better)

Financial losses by professional athletes are in today’s news a couple of times a year, it seems. It’s both sad and frustrating to read about pitcher Curt Schilling and quarterback Mark Brunell, two former professional sports stars in the media for losing much of their sports-related earnings. Schilling, (a video game entrepreneur-38 Studios), told a Boston radio station recently that he may have “lost all the money he saved from playing baseball.” Brunell lost millions in commercial real estate and a “Whataburger”.

A Whataburger restaurant. (Photo credit: Wikipedia)

When one can lose $50,000,000 to $75,000,000 before age 50, that’s an extraordinary achievement. Most of us won’t make that much in a lifetime, even if we count the entire family. To put $50,000,000 in perspective, if you lived to age 82, it would mean that you had $1670 to spend every day of your life.

Mark Brunell (Photo credit: mlgkhc)

In reading the Seattle Weekly article about Mark Brunell, I learned of Ken Ruettgers, a former Green Bay Packer and his business of counseling players after the NFL.

On his finances page, Ruettgers has 5 “Reality Checks”, one of which is “get help”. Another one is “downsize.”

Those are useful reminders, rules and habits. However, the rule that these athletes both ignored was to pay yourself first. That bears repeating.

Pay yourself first.

When you get your first job, pay yourself right away, before you pay the bills. Your future is the most important bill. Don’t wait until the end of the month. If you can go through your entire working life living on 90% of what you earn, you have given yourself a terrific boost. This is ten percent of your take-home pay, mind you – in addition to any other employer contributed funds, pension benefits (ha) , bonuses etc.

Ten percent of Curt Schilling’s lifetime earnings in baseball is $11.4 million. At the conventional “safe withdrawal rate” of 4%-that is $38,000 income per month (before taxes).

Even if you don’t have the millions of a Schilling or a Brunell, you can follow the rule above.. If you can’t begin with ten percent contributions to savings, pick a lower number and promise yourself that you will increase it regularly. this is how you will do better than the millionaires. Remember:

• Pay yourself first
• Downsize
• Get help

(I’m sure that each of these athletes saved money along the way, but apparently those funds were not set aside in a way that would ensure their families’ financial security even if other business efforts failed.)

Related articles

• Curt Schilling And Why Athletes Make Such Poor Financial Decisions (forbes.com)
• Money Lessons from an ‘Ultimate Fighting Champ’

From the article above: “Financial advisers generally recommend allocating the lion’s share of your wealth to traditional asset classes such as stocks and bonds, and devoting only a small portion to real estate and alternative investments such as private equity. Yet athletes often do the reverse.”

Your Emergency Fund-Breathing Life Into It

I recently backed into a post. It was a 2 by 4 mounted at exactly the right height to merge with my car’s driver side tail light. I’ve never bashed out a tail light before, but there is always a first time. Is there ever a right time for this cost?     No.

Total cost to replace said tail light $250. How to pay    for  it-cash or credit? Here is the argument for credit .   There really isn’t one, unless I had no cash. Have you ever noticed how sometimes expenses exactly match up to your cash on hand? $250-paid in full. So the cash went directly to the car expense without stopping in my emergency fund.

One of the first questions that I ask my clients is how much is in your emergency fund? When I began working with clients in the 1980’s, the conventional wisdom was to have three months income as your emergency fund. When I began to teach, and answered the question wittily (I thought) :

“Three months income or expenses, whichever is greater”.

Then the number crept up to six months of income in the financial planning world. Suze Orman began to say eight months. In a recent column published by the Wall Street Journal, Rachel Louise Ensign made a good case for nine months. She explained that the “average duration of unemployment is nearly 40 weeks”. That is ten months!

If you have no emergency fund, not only can you not invest, but a simple car expense, apartment deposit, or unexpected dental bill can mess with your carefully laid out budget. What to do? Hopefully there are a few dollars that you can divert to an emergency savings account. Even $5/week is a good start. $20 times 12 is $240 that you didn’t have before. $40 times 12 is $480. How to generate that?

1. Take your lunch to work
2. Brew coffee or tea at home
3. Walk to work one day a week instead of driving or taking the bus (not possible for everyone – I know)
4. Investigate a carpool to cut gas expenses in half each month-save $50 or more this way
5. Switch a monthly prescription to a generic instead or order by mail
6. Extend the time between haircuts
7. Get your movies from the library or the Internet-cancel Netflix!
8. Stop paying for downloaded music (I get mine from the public library)
9. Switch brands on a regular grocery item
10. Quit smoking ( Someone I know saved $150/month with this one)
11. Do I even need to mention the cable bill? Tip: ask for Limited Basic…

And here is the vital next step-hide that money somewhere where it can’t be spent! In an envelope, an online savings account or ask your HR department to send it directly to your savings account each payday. They’ll be happy you asked!

Right now, as you are building this up, the most important step is to create the habit of saving. Maybe the dollars only stay in the account for 2 weeks at first. But you have to do this part to get to the part where you can worry about how to get some interest on it. After you get to $500, go to $1000. And so on. Think of the account this way. Funds deposited there keep you from paying 13-22% on a credit card or installment balance.

If you are participating in your firm’s 401(k) plan and earning the company match, but have no emergency fund, consider backing the 401(k) deferral off 1% until you set up an emergency fund.

When the inevitable happens and you need a new tire, a replacement for the cell phone dropped in the bathtub, or to fix the stove, that’s ok. That is what the money is there for. Take a deep breath, go back to step number one and replace the funds ASAP.

You can’t save three, six or ten months of income for an emergency without putting down that first $5 bill.

The front side of a US $5 Hawaii Emergency Note (Photo credit: Wikipedia)

Student Loan Debt … Debt Sentence?

In the Wisconsin public university system, the average student graduated with 5 times the student loan debt in 2011 than they had in 1982.

The amount went from $5,000 to $27,000 in just under 20 years. Let’s check that number against inflation. Between 1982 and 2011, the buying power of $5000 more than doubled to $11,654.87. Let’s review:

• Wages increased 2.4x
• Consumer Price Index: increased 2.3x
• College Costs: increased 5x

We all have heard that higher education inflation is higher than “regular inflation”. For example, in 2009, the price of higher [public] education increased by an average 6.5%, despite a 2.1% decline in the Consumer Price Index (CPI) during the same time.

In 1981, I graduated from a different UW (University of Washington in Seattle) with that same amount of debt-$5000. At the UW today, the average student debt load is $23,000, $4000 under the other UW.

University of Washington Campus & Vicinity (Photo credit: AvgeekJoe)

What happens after the end of the “formal education”? You might have a job, you might be a boomerang child and move back home with your family, or you might get an “internship” that pays $10 an hour for a job that used to be given to a college graduate. That graduate may have made $20,000 in 1982. Last year, a college graduate or a worker of any age needed to make $46,619 to equal that 1982 buying power.

I know people who have $15,000, $25,000 and $50,000 in student loans. Even if they have “good jobs”, as opposed to a paid internship [formerly a permanent a job with benefits], it is hard to pay your bills.

Here’s a website for everyone to check out as their kids graduate from college this spring.  http://www.thecalculator.org/ This one is for Washington State only and illustrates how much they need to make to cover expenses in every Washington county. For information on other state self-sufficiency calculators, please click here.

For an interactive graph on student debt in the entire US, check out this chart at truthdig.org.

Please be careful as you check the cost of higher education for yourself and family members. Bankruptcy is not an option for student loan debt (or medical expenses).  Trick question:

1. Who will loan you money to retire?

I’m not saying don’t do it, but really dig into the post-graduate numbers to see how much your graduate will need to earn to cover their debts. Ideally, they are by your side as you engage in this process!

Related articles

• Student Loan Bankruptcy Fears Drive Congress to Rethink Law – WSJ.com (policyabcs.wordpress.com)
• Class Notes: Law School, Student Loans and More Education News (newsfeed.time.com)