Single parent in need of debt management/savings advice

[Anonymous]

Please name an investment with a guaranteed 8% return.

[Anonymous]

Anonymous wrote: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.

You don't invest in a risk free portfolio at 39. At 60-65, sure, but not at 39. The 15 year, 20 year, and 25 year annualized returns from 1970 to now show a median of 12%. If the money if left in for the long run and you don't get emotional or try and time the market the return should be there based on historical results. There is a risk, of course, but there is never a reward without risk. If she stick to index and etfs and leaves the money in the market for the long haul 6-8 is not unreasonable. If the market returns 3% or less over the next 25 years then either none of us will ever retire or we are in a global crushing depression and we will be murdering people for drinking water.

Http://en.wikipedia.org/wiki/S&P_500

[Anonymous]

OP here…once again wanted to say thanks. The sum of this thread represents better financial advice than I've gotten from two separate financial counselors…one of whom sold me a whole life policy when I was 35 and childless (just an example of my previous bonehead financial decisions).

15:55, I like your approach and your idea of a monthly spreadsheet, but I'm leery of seeing a 3rd guy and getting burned or worse, doing what I've done in the past (nodding my head and valiantly trying to understand but leaving having not understood a thing). A proposal for you: Ever done any personal financial counseling? I was a concierge physician for a few years out of med school and did some in-person and online counseling for private clients, regarding specific health issues or general wellness, with referrals as needed. Interested in a service for service trade? A wacky idea, I know, but thought I'd throw it out there. Let me know how I can contact you offline if interested. If not, thanks for the thoughts here; same to all helpful PP's!

[Anonymous]

Anonymous wrote:I realize the issue my have been put to bed, but I would like to suggest rethinking the strategy of throwing all your money at the loan balance. While I understand the emotional significance of getting out from under the debt, I believe your age comes into play here. At 39 you don't have very many years left to be aggressive in the market. I would really plow as much money into retirement and investment (including 529 if you are planning to pay for your child's college - since the window for that is similar and will have to adjust to a more risk averse portfolio in 15 years, if not before).

If you pay off the loan now you can't get that money back and you won't be able to get a personal loan for that interest rate. If you save/invest that money you can always go back and pay off the loan if you need to for some reason. In the past 17 years there have only been three where the average annual return (from that year to now) has been less than 5%. The blended average of those 17 years is 9%, I think research suggest 8% average over time.

Paying off the loan early may make you feel better emotionally, but it is not the most prudent use of the money and will keep you working a few additional years to get to the same financial point. It is your money, your life, but as a single earner the loss of those years of aggressive compounding will be substantial.

I agree with this. Actually, I still would overpay the loan, but not by as much as your most recent budget projects - I'd keep the same total between loan repayment and extra retirement savings, but do a 50-50 split of that total between the two, or maybe 60-40, tilted towards retirement. Plan on paying off your loan in 10 years, instead of 5, and still load up the savings. I have made some less-than-optimal long-term financial decisions in the pursuit of becoming debt free, so I get the inclination, but PP is right - you are behing the curve re retirement, and you owe it to yourself to put as much as you can into retirement as soon as possible to allow it the opportunity to grow. Plus, since you're already maxing out your tax advantaged plans, you can always use that savings in 5 years to knock out your loan, if that's what's best for you then. Splitting it up gives you more flexibility.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I realize the issue my have been put to bed, but I would like to suggest rethinking the strategy of throwing all your money at the loan balance. While I understand the emotional significance of getting out from under the debt, I believe your age comes into play here. At 39 you don't have very many years left to be aggressive in the market. I would really plow as much money into retirement and investment (including 529 if you are planning to pay for your child's college - since the window for that is similar and will have to adjust to a more risk averse portfolio in 15 years, if not before).

If you pay off the loan now you can't get that money back and you won't be able to get a personal loan for that interest rate. If you save/invest that money you can always go back and pay off the loan if you need to for some reason. In the past 17 years there have only been three where the average annual return (from that year to now) has been less than 5%. The blended average of those 17 years is 9%, I think research suggest 8% average over time.

Paying off the loan early may make you feel better emotionally, but it is not the most prudent use of the money and will keep you working a few additional years to get to the same financial point. It is your money, your life, but as a single earner the loss of those years of aggressive compounding will be substantial.

I agree with this. Actually, I still would overpay the loan, but not by as much as your most recent budget projects - I'd keep the same total between loan repayment and extra retirement savings, but do a 50-50 split of that total between the two, or maybe 60-40, tilted towards retirement. Plan on paying off your loan in 10 years, instead of 5, and still load up the savings. I have made some less-than-optimal long-term financial decisions in the pursuit of becoming debt free, so I get the inclination, but PP is right - you are behing the curve re retirement, and you owe it to yourself to put as much as you can into retirement as soon as possible to allow it the opportunity to grow. Plus, since you're already maxing out your tax advantaged plans, you can always use that savings in 5 years to knock out your loan, if that's what's best for you then. Splitting it up gives you more flexibility.

I agree. Every month put some away, every month knock down that debt.

[Anonymous]

Anonymous wrote: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!

While this may be good advice for people who are in financial trouble, and/or have lots of different debts, it has limited use outside of that scenario.** And OP most certainly is not in that group of people. She's not in trouble - she is in excellent financial shape, but wants to tweak her approach. She has one very large debt, but a "targeted focus" on that will have consequences elsewhere that, in my view, outweigh the benefit of getting rid of the debt in 5 years.

**This is my big problem with Ramsey and his more religious alcolyte, Michelle Singletary - the one-size fits all approach lacks nuance, and is ill suited foir many circumstances. "Eliminate DEBT ASAP" may be a good rule of thumb, but it refuses to take extenuating circumstances into account. OP, you don't preform surgery on EVERYONE patient you see, or take an X-Ray of EVERY chest, do you? Of course not, and it's silly to pretend that myopic approach works in other walks of life.

[Anonymous]

Anonymous wrote: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).

OP I am curious about what you're doing with your dependent care account - it sounds like you are putting the money aside and then transferring it to a 529? How is that allowed? Under my plan, you only get reimbursed after you submit receipts for care expenses.

[Anonymous]

OP back…your medicine analogy is a good one 9:20. When I'm teaching senior residents, I always give them the white/black/grey speech. I.e., you'll see some patients who are a slam dunk admit: 65 yo male with hypertension, active smoker, abnormal EKG. Or, the slam dunk discharge: 25 year old woman with paronychia (soft tissue infection around a fingernail, often from a manicure); drain and go home.
The difficult cases are the the patients who are in-between:

The 40 yo guy with a normal EKG but a decent story for chest pain and an early family history of coronary dz. The well-controlled diabetic 80 yo who skipped a meal, took her insulin, and dropped her sugar. She responds well to IV/oral glucose/a meal but then you call the daughter 2 states over who says mom lives alone and maybe has a touch of dementia? She's not sure?

Those are the cases where practice styles differ and you can make arguments to handle their care a few different ways. My friends who have paid off their school debt advocate that approach, but less myopic people outside of medicine argue for a more balanced approach that leans toward retirement (esp given my late start).

Ultimately, I'm leaning toward a 60/40 split favoring retirement with a loan pay-off goal of 10 years (a compromise between my desire to be done in 5 years but current estimated payoff date of 21+).

So when I blow out the candles on my 50th birthday cake, I can wish for something other than debt forgiveness, bc it'll be done!

50th birthday. Yeesh. Now I'm depressed again.

[Anonymous]

Anonymous wrote:

Anonymous wrote: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).

OP I am curious about what you're doing with your dependent care account - it sounds like you are putting the money aside and then transferring it to a 529? How is that allowed? Under my plan, you only get reimbursed after you submit receipts for care expenses.

I have the money withheld monthly to total an annual sum of 5K; I wait until just the end of the year to submit receipts, receive the reimbursement, and dump it into 529 just before year's end. In Jan of following year, I start over.

[Anonymous]

Anonymous wrote:

Anonymous wrote: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.

You don't invest in a risk free portfolio at 39. At 60-65, sure, but not at 39. The 15 year, 20 year, and 25 year annualized returns from 1970 to now show a median of 12%. If the money if left in for the long run and you don't get emotional or try and time the market the return should be there based on historical results. There is a risk, of course, but there is never a reward without risk. If she stick to index and etfs and leaves the money in the market for the long haul 6-8 is not unreasonable. If the market returns 3% or less over the next 25 years then either none of us will ever retire or we are in a global crushing depression and we will be murdering people for drinking water.

Http://en.wikipedia.org/wiki/S&P_500

I didn't say OP should invest in a risk-free portfolio. but a balanced portfolio includes a significant element of government bonds, and that is what long-term bonds pay now.

Remember how everyone used to say that a fall in house prices across the US had never happened, and was extremely unlikely? 1970 to now was a somewhat unusual period for the global economy. Deregulation, deunionization, and the arrival of 1 billion east asians into the global workforce meant that the returns to capital increased greatly at the expense of returns to labor. I would not extrapolate based on this period. If you took the period 1850-1900, you would find that 3-4 percent returns would not be unusual.

We are comparing an uncertain return against a guaranteed return of 2.875 percent in paying down the debt. Personally, if it were me, I would do some of both - pay down the debt while investing cautiously in the stock market/bonds. But borrowing (or even maintaining) debt to pour money into the stock market is really blurring the line between investing and gambling.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote: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.

You don't invest in a risk free portfolio at 39. At 60-65, sure, but not at 39. The 15 year, 20 year, and 25 year annualized returns from 1970 to now show a median of 12%. If the money if left in for the long run and you don't get emotional or try and time the market the return should be there based on historical results. There is a risk, of course, but there is never a reward without risk. If she stick to index and etfs and leaves the money in the market for the long haul 6-8 is not unreasonable. If the market returns 3% or less over the next 25 years then either none of us will ever retire or we are in a global crushing depression and we will be murdering people for drinking water.

Http://en.wikipedia.org/wiki/S&P_500

I didn't say OP should invest in a risk-free portfolio. but a balanced portfolio includes a significant element of government bonds, and that is what long-term bonds pay now.

Remember how everyone used to say that a fall in house prices across the US had never happened, and was extremely unlikely? 1970 to now was a somewhat unusual period for the global economy. Deregulation, deunionization, and the arrival of 1 billion east asians into the global workforce meant that the returns to capital increased greatly at the expense of returns to labor. I would not extrapolate based on this period. If you took the period 1850-1900, you would find that 3-4 percent returns would not be unusual.

We are comparing an uncertain return against a guaranteed return of 2.875 percent in paying down the debt. Personally, if it were me, I would do some of both - pay down the debt while investing cautiously in the stock market/bonds. But borrowing (or even maintaining) debt to pour money into the stock market is really blurring the line between investing and gambling.

VWELX is balanced (2/3 stock, 1/3 bonds) and has returned 8.29% since 1929. 6-8 is not unreasonable, you could get CDs at 5% 5 years ago and probably will be able to again in a few years. Interest rates are at ridiculous lows, may as well take advantage of it.

The returns may have been low in 1850-1900 (no idea, i'll take your word for it), but I don't anticipate another US civil war where we spend all our blood and treasure burning the rest of our country to the ground and killing our countrymen. If another civil war does happen here 3-4% market returns will be the least of my worries, but even at 4% it still makes sense to put money in the market over paying the loan.