Single parent in need of debt management/savings advice
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Anonymous
How is that condescending? It's a simple statement of fact. |
Anonymous
It is a valid question and one that should probably be revisited. At her age the maximum tax advantaged amount will not be enough if she plans to retire at 65. As a single earner she has to be more aggressive given the short time frame. If she does the max 17,500 until 65 it will not be enough (1.2-1.6M assuming 6-8% return), even if she does the additional 5500 catch up contributions starting at 50 (1.3-1.8M at the same 6-8%). She has the income to support additional investment, as well as the access to low interest on her existing debt. Let's say she takes 2k/month and puts that in the market. The multiplier for return through age 65 would be 7.988 at an 8% average return, 4.822 at 6% return, meaning that 24k/year invested would be 191k (8% return) or 115k (6%) at 65. If she waits until the loan is paid off (at 45) the multiplier drops to 5.03 (120k) at 8%, or 3.34 (81k) at 6%. That doesn't take into account the benefit to having more liquid assets. She can sell mutual funds if she is out of work for some reason while the loans can likely be put on hold or even pay the monthly out of savings in the interim. She can't use paid off debt to buy food or shelter. |
Anonymous
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So 8:23 and 9:00, this gets at the heart of my question. I love the idea of paying off my loan in 5-6 years. Love it. But at that interest rate, I know it isn't the option that results in the most dollars, given the est rate of return on the market. So in your scenario, if I have $3500 monthly left over after expenses (including 17.5K annually into 401K with match, and 5.5K in IRA), I would:
Put 2K monthly into the market. Put 1.5K monthly toward loan. At this rate, I'd pay off the $215,469 in 14 years, 9 mos (so I'd be approx age 54) with total interest paid: $48,947 (if I put 3.5K towards the loan it's paid off in 5 yrs/7 mos with total interest paid $17,929). And by your numbers, I'd have an additional 115-191K for retirement (vs. 81-120K if I paid off the loan at age 45). So, if we use median numbers for the market returns (153K in later loan payoff scenario vs 100.5K for earlier loan payoff scenario at 6-8%), there are two possibilities: Scenario #1: Pay off loan at age 54. Earn approx 153K in market, pay $48,947 in loan interest. Net gain: $104,053. Scenario #2: Pay off loan at age 45. Earn approx 100.5K in market, pay $17,929 in loan interest. Net gain: $82,571. Difference between scenario #1 and 2: $21,482. Is this math correct? Is later loan payoff worth it for a net gain of approx 21.5K? |
Anonymous
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Clearly you should prioritize tax-advantaged retirement savings.
Beyond that: Market returns are uncertain, and if you are planning to buy property with a mortgage in the short/medium term then I would suggest that the correct way to assess the opportunity cost of paying down your debt might be against the mortgage interest rate rather than average market return. After all, each penny you use to pay down your student loans is a penny less to use for a downpayment and reduce your mortgage. At your income you presumably don't get a tax break on your loan payments. So the cost is 2.875 of post-tax income. 15-yr mortgage rates are about 3.25-3.5 percent, and almost certainly edging up. But you will be able to pay with pre-tax dollars given the mortage interest deduction. So perhaps taking into account the tax deduction the interest rate you will pay on your mortage will be broadly similar to the amount you are paying on your student loans. In which case, if paying down your debt gives you more psychological satisfaction, you might be better off doing that? |
Anonymous
Right…and here's where the financial discussion is pretty over my head (mortgage rates, tax deductions, etc.). Just trying to figure out if my psychological satisfaction is worth 21K. 
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Anonymous
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One idea: you could move somewhere *close* to DC with a lower cost of living, like Baltimore or Richmond. Then dad could still see his kid more often than he would if you were in the midwest, but the difference in housing prices can be significant.
The others seem to have everything pretty well covered, but just wanted to wish you luck! I'm a single mom who owns a house here, and while it can be stressful at times (I make less than you so sometimes I feel house-poor), it is also nice to come home to a place that is mine . (well, about 35% mine and 65% the bank's. lol.) |
Anonymous
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Maybe move to a less expensive place just outside of DC and hire a live in nanny or perhaps nanny share with another parent.
I would focus on paying off the student loan because it is a *guaranteed* return for you (less interest paid) and it makes you better qualified to buy a house later. Investing in the market could reap you nice returns or you could actually wind up losing money - there is that risk. Do set some money aside for retirement and your daughter's education - you will not regret doing so. But get that loan off your back - just think how rich you'll feel when that loan is paid off and your income rises (with job experience). Good luck! |
Anonymous
+1 From one physician to another, you are doing great! Keep up the good work and don't let the few low-life DCUMers get you down! |
Anonymous
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OP, I'm the "pay off your debt, Dave Ramsey" girl and one of the things he says really resonates with me: that a "targeted focus" on one project at a time will be far more rewarding (because you will see results) and empower you to stick with it. It's like 10% facts, 90% a mental game - if you target your focus at your student loans and blast them out, it will be far more rewarding, and effective, than spreading it out - a little here, a little there. It may end up being a net loss of some money, but I think in the end you may make more and here's why: if you aren't seeing much progress, if you look at the loans stretching out over a decade, you may lose steam. You almost certainly will. You'll spend more here and there, you'll charge more on your credit card, etc. If you target your focus at one thing at a time (for me it would be student loans first, down payment second, then start saving for college and retirement) you will see your results right away and it will motivate you to work harder and save more. I honestly believe this.
From a purely financial perspective, you are right that saving and investing will make you more. But I think that the reasons outlined above should make you think about the targeted focus approach. Good luck to you, again! |
Anonymous
The difference is not 21k, but 250k (at 8%, 96k at 6%). The 153k referenced above is the earnings for the 24k invested in year 1, it doesn't account for the other 4 years, 7 months. In your scenario 1 you invest 24k each year for 5 years 7 months and pay 18k/year toward the loan for 14 years, 9 months. (we won't worry about the investments after the 5yr7mo point, as those would be theoretically the same in either situation). So investing 134k (24k in years 1-5, 14k in year 6) would give you 902k at 65 at 8% (567k at 6%). It would cost you 31k in interest for a net of 871k at 65. In scenario 2 you pay 42k/year for 5 years 7 months to the loan, then you would have an additional 18k to invest each year that you would have had to pay toward your loan under scenario 1. This 165k invested (7500 in year 6, 18k in years 7-15) at age 44-53 would give you 639k at 65 at 8% (458k at 6%), with an interest cost on the loan of 19k for a net of 620k (439 at 6%). Putting 2k/month into the market now instead of the loan gives a difference of 250k at 8%, 96k at 6%. So the question is whether the emotional benefit of having it paid off 9 years earlier is worth 250k to you at 65, or working an extra 5 years. If you are still saving the same amount at 65 (42k/year), considering you will have to invest more conservatively, it would take you 5 years to save that 250k. |
Anonymous
Thanks for correcting my math. 250K, huh? That's a huge difference. I do tend to think like 12:01 (Dave Ramsey girl) however, in that a more focused goal helps cultivate discipline, but I suspect this is also a mindset one chooses. |
Anonymous
| OP here…one last question. Just reading the "DC vs VA 529 forum"…looks like some folks don't use the DC 529 plan because the fees are high (they use Utah? Huh.) Anyway some of you have advised to signif lower my contrib to DD's 529 ($120/yr to match dad's) but the $$ I put in her 529 is tax advantaged…company has a dependent day care account that allows me to set aside up to 5K annually pre-tax to cover child care expenses. I've been setting aside the whole 5K and transferring to 529. What if I lowered that amount to 4K/yr and put in 529 for the maximum tax break? Then it's a pre-tax contribution that further lowers my taxable income after the return (would end up being $333/mo vs $120/mo). |
Anonymous
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15:55 back. The Dave Ramsey advice is good for people without discipline who put themselves in a financial hole due to spending money they didn't have and don't have the ability to stop spending on their own.
You went back to school (medical school) later in life, did the residency, fellowship, and are raising a child on your own. You did not mention any consumer debt. None of these things suggest a lack of control or discipline, in fact they suggest the opposite, as does your interaction with others who disagree with you here. You don't have a spending problem, just a large student loan which has allowed you the benefit of a very nice income. Personally, I would pay the minimum on the loan while saving/investing the rest, but emotionally you might feel comfortably doing something else. I think 2k invested and 1500 to your loan is a sensible compromise. An extra 800 cushion in your budget is pretty good (9600/year). To talk about goals - If you continue to put in the 401k max (including extra 5500 at age 50) and you put the 2k/month into the market from now until 65, you should have around 4M at 65 (again, assuming an 8% return - 1.8 in 401k, 2.2 in investment account). That's enough to give you 120-160k/year to live on without touch the principal. I keep a spreadsheet tracking how well we are doing, updating it 1st of every month, tracking account balances and our actual contributions (what we have saved vs what the market has provided). I have goals for each year as far as how much we save and invest. Run the numbers yourself, or if you aren't comfortable doing it or you need something more concrete, go to a financial planner and get them to draw up a plan you can use and walk you through how compounding works. I believe that if you set a goal for yourself, understanding the logic and purpose behind it, you will accomplish it. If your 215k debt was from buying shoes, handbags, and a room full of memorabilia my advice would be different....well, actually, I wouldn't be giving any, I would just read, shake my head, and move on. Best of luck! |
Anonymous
| I would not assume an 8 percent return, or even 6 percent return. The risk-free rate is currently 3 percent, so something like 5 percent is a safer bet for a balanced portfolio. |
Anonymous
You should definitely max out the dependent care fsa, since you can use that to pay your nanny. While you may be using the amount of the reimbursement for the 529 the tax advantage is from the nanny expenses you had to submit for reimbursement. The tax advantage of the 529 is that most states give you a deduction for the amount of your contribution, so in VA it is like getting a 5.75% instant return. The VA plan is good if you live in VA or you anticipate your kid going to school in va (reasonably low fees and several vanguard options). I am not familiar with the dc plan options. But definitely continue maxing the dependent FSA, just use it to reimburse you for paying the nanny. |