2016 Financial Goals

2015 was an interesting year in terms of my personal finances. I managed to continue tracking every dollar spent and using my framework of a budget. I also managed not to carry over any credit card debt (meaning all balances were paid off each month, accruing zero interest). I increased my 401k contribution to 9% of gross pay, maintaining the 3.5% company match. So, three positives.

On the other hand…I spent a decent chunk of cash on two major events. First, in May, the girl and I got engaged! It was exciting and we are enjoying the wedding planning process, but the ring and the related wedding expenses has definitely put a damper in my savings. Then in August, we bought a house in Midtown. We split all expenses 50/50, so I paid half of the $12,500 down payment, half of the closing costs and half of the moving expenses. I had to move quite a bit of money around, and cash out my old traditional IRA that was funded with a cashed-out pension fund from a previous employer. Sure, I’ll take the tax hit (I had them withhold 28%) but I’ll avoid the 10% penalty since it was for a first time home purchase.

NOTE: not my actual house

NOTE: not my actual house

With that as the backdrop, here are my 2016 Financial Goals:

#1. NO. NEW. DEBT.
This is the most important one. Obviously last year I added a massive load of debt with the house mortgage. Additionally, we added some furniture at 0% that we will pay off this year based on our calculations. It is critically important to not add any more debt to what I’m already facing between my car loan, my student loans and the mortgage/furniture bill. In order to accomplish this, we must be vigilant about…

#2. No debt for the wedding
I’m confident in this one. We have set a budget for what we’re willing to spend and we have been diligent in funding that account. So far we have paid for all expenses (deposits, dress, suit, etc.) in cash, and have built up a bank to cover what is left. We will continue to build that up so that on the day of our wedding we won’t owe anyone anything.

#3. Pay off smallest student loan
Sure, it isn’t the biggest one I have, but my third loan has a balance of $1987.25 and an interest rate of 5%. It’s paid quarterly, which is annoying, so I’d like to just kill it off this year and not have to worry about it. This should be completely realistic.

#4. Increase emergency fund to $10k
I’m currently at $6900 so I’ve got $3100 to go. Most of the savings will happen in the back half of the year (wedding in April and honeymoon in June), but I’m confident it can happen.

#5. Stretch goal: Pay down highest interest rate student loan to <$10k
If we maintain #1 and #2, this could happen. It’s at $13,800 right now @6.8%, which definitely puts this as a high priority loan. Cutting out some entertainment and discretionary spending would help a lot.

My calculations say that doing this, along with maintaining minimum payments on my other loans, would put my personal (non-home) net worth back in the positive. It will also also me and the girl to have an awesome wedding day with our family and friends, and enjoy a great honeymoon on a tropical island.

Coming soon: personal and health goals for 2016

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In Today’s “Obviously!” Files…

Saw this on Facebook, and my first reaction was “No shit!” Mark Cuban, billionaire owner of the Dallas Mavericks and host of Shark Tank, was interviewed by Business Insider and asked about what he wished he knew about money when he was in his 20s. Here’s his response:

That credit cards are the worst investment that you can make. That the money I save on interest by not having debt is better than any return I could possibly get by investing that money in the stock market. I thought I would be a stock market genius. Until I wasn’t.

I should have paid off my cards every 30 days.

This seemed like the most obvious personal finance advice ever. And coming from a man like Mark Cuban, I expected something more profound. The importance of saving, various investment strategies, taking risks…each of these seemed more worthy of advice from him. But avoiding credit card debt? We don’t normally associate billionaires with credit card debt. Sure, they leverage themselves in real estate or other business ventures. After all, the man was a millionaire by the time he was 32, and a billionaire at 41. Hardly the type of person to lament too many lattes at Starbucks.

But then I thought about it, and it made more sense. First, credit card debt is absolutely crippling to one’s financial future. The average credit card debt load in the U.S. is over $15k. Obviously, if you owe that much you’re probably just paying the minimums. This article from Lifehacker does a good job of showing how long it takes to pay down debt this way. It is terrible. So maybe if Mark Cuban is warning people against it, they’ll listen.

Secondly, if you have a high amount of consumer debt, that eats up a good portion of your cash flow. You need to consider the opportunities that this debt prevents you from accepting. Maybe a friend has a solid business idea and is looking for investors. Maybe you want to get serious about contributing to your roth IRA. Maybe you’ve had a dream to quit your job and write full-time. If you’re carrying a heavy load of debt, this becomes extremely difficult. The combination of high interest rates and low minimum payments makes them a disaster. You can’t accept these opportunities with that debt hanging over your head.

I myself used to carry a LOT of credit card debt, and it took me several years to pay it all off. During that time, I had to forgo several opportunities. It killed me to think that not adhering to a budget and spending beyond my means was impacting my present and future happiness so much. I vowed to not carry that balance anymore. Like Mark, I sure wish I had listened to the advice of others and not gotten into that situation in the first place. Sure, the debt and payments are awful, but what it prevents you from doing is even worse.

While it wasn’t the advice I expected to hear from someone of his stature, it definitely makes perfect sense and is advice we should all consider.

Debt vs. Savings: The Payoff Conundrum

Should I pay off my debt with extra income, or save it?

There will come a time in every person’s financial journey where they are faced with a question: should I be paying down my debts, or saving my money? Sadly, there is no easy or correct answer; it depends entirely on your individual situation and risk tolerance. In general, personal finance wisdom tends to go as follows:

1. Save up a small emergency fund ($1k or so)
2. Pay down your debt, starting with the highest balance or interest rate first
3. Build up your emergency fund to 3-6 months of living expenses
4. Save enough in your 401k to capture 100% of your company match
5. Save $5500/year into a Roth IRA
6. Maximize your 401k up to the limit ($17,500/year)
7. Utilize taxable vehicles for investment

The wisdom in this is pretty sound: with debt comes interest. Paying down interest-bearing debt is a guaranteed return, so unless your savings return is greater than the debt interest rate, it’s better to pay down your debt first. Makes sense, but is this always the case? I would argue not necessarily. Right now, I’m in a position where all of my consumer debt is gone; I don’t owe anything on credit cards or a car loan. So do I use my excess money to pay down my student loans, or save it up to provide a bigger cushion?

In true MBA fashion, my answer is both. I’m going to use some of it to speed up my debt repayment, while also saving a large chunk of it. Let’s take a look at each portion of this.

Debt Repayment
My student loans are spread across three different providers, each with a different interest rate (6.8%, 5% and 4.25%). Conventional wisdom would tell me to use all my money to hammer down the 6.8% loan and snowball it until they’re all gone. However, as we’ll get to in a second, I have other needs for some of that money. I pay $462/month on my loans. At that rate, one will be paid off in eight years, another in 14 years, and the last one in seven. If I increase my total payment to $1k/month, putting the extra $538 on the biggest loan, all three loans would be totally paid off in three and a half years. Much better than 14+ years!

Savings
This is where my risk tolerance comes into play. I have a modest emergency fund ($5k) but that’s about it. I don’t have much else in my savings account (note: this does not apply to retirement savings; I put 8% of my salary into my 401k and my employer puts in an additional 3.5%, in addition to a pension fund where I’m fully vested), which makes me nervous. My car is nine years old and has 137k miles on it. I have a trip to NYC coming up for the marathon, and Christmas is coming up soon. Finally, I have plans to go to Ireland next year for my mom’s birthday, her dream trip. If I put the $538 to my student loans, I would be able to save, conservatively, about $15k/year. This would more than cover my two trips, Christmas, random stuff that comes up AND build my emergency fund up to $10k. And that’s just in year one. By the time my loans are paid off, I would have saved over $50k in total, not counting any raises, bonuses or tax refunds. I have a low risk tolerance, so I’d rather have cash in the bank.

My plan does not exactly match up with the ideal scenario. I’d end up paying more in interest than if I put all my excess on my loans. But, conventional wisdom forgets one thing: life is lived now. If I didn’t save up the cash for the trip, I wouldn’t get to run a marathon across NYC. I wouldn’t be able to join my mom in Ireland for her dream trip and have that experience with her. Luckily I’m in a position to do both of these things without impacting other parts of my financial life. If I had no savings, lots of credit card debts and didn’t have as much excess income, I certainly wouldn’t be approaching things this way. But I have the means, so I’m going to do it.

There you have it. To answer this question, you need to evaluate where you are financially and what your priorities are. I am making the financially less sound decision to save more than I’m paying down, but I’ve evaluated the options and feel this best suites where I am. Each person needs to evaluate for themselves and make a decision they can live with, that does not put them in a financially precarious situation.

How I got into $45k of debt

I hit a big milestone today (more on that later), but I thought I’d give you a quick recap of how I got in this boat in the first place…

I graduated undergrad in December 2004 with a maxed out credit card (balance: $1k). I moved home that month, but it took until May before I found full-time employment at a bank, making $30k a year to start. When I started working, I knew the smart thing would be to pay off that debt and then start saving before my student loans became due. Instead, I did what most people my age do: I bought a new car ($20k, financed at 8.55% over 72 months). I got a new credit card from my bank and proceeded to rack up charges on bar tabs, clothes and a family vacation to Florida. At this point, I had $20k of student loans, $20k owed on a car and a couple of grand on my credit card.

Over the next few years, I added another credit card (I sure FELT like a big boy when I got my first American Express card) and a personal line of credit. I took a trip to DC, a trip to Los Angeles by myself to look at graduate schools, spent well beyond my means without any sense of a budget. I managed to save around $2k into an account, but spent it all immediately. At the peak, I owed $25k on credit cards/lines of credit. Ouch. I knew it was wrong, I just didn’t do anything to stop it or fix the situation.

It was around 2008/2009, when I was thinking about going to graduate school to get my MBA, that I started thinking about getting out of debt and having a financial plan for the future. I had no savings, no retirement funds, a car (only two more years left of payments at the time I went to grad school), and about over $22k in personal debt – not even counting the $18k or so in student loans from undergrad. If I was going to survive, I had to budget and dig myself out of this hole. How would I ever afford tuition, let alone living expenses?

Thankfully, my GMAT score and a few other factors led to me getting a full scholarship that also covered an international trip. I managed to escape from grad school with only $22k in student loans. Not bad, considering it was Wake Forest Schools of Business and the annual cost of attendance was north of $60k a year. I consider that a huge break. I was able to find very cheap housing, paying $400/month in rent for a bedroom in a house. I was very careful with entertainment and other expenses. No Caribbean beach vacations for me; I took service trips that were partially subsidized by the program. My scholarship even paid for a two week trip to China and Hong Kong. It was awesome.

Upon graduating, I had an offer to move to Memphis making about double my salary when I left the bank. I was careful in getting a reasonably-priced apartment and didn’t spend too much on furniture or anything else. In July 2011, I paid off my car (and still drive it today). In 2012, I paid off my bank credit card; by 2013 I had paid off my AmEx Blue card. All that was left was my personal line of credit, which had been around $9k at it’s worst.

Today, I paid off the last of that line of credit. I have no credit card debt, no car loans. All that’s left is my student loans and some serious saving. It’s taken a long time, but I am very, very proud of the progress I’ve made.

If 32 year old me could go back and tell 22 year old me to quit being an idiot, save my money and don’t spend it on stupid crap, I would. Some things were frivolous at the time and I wouldn’t take them back (the trips come to mind). I would, however, have figured out a way to pay for them in cash instead of instant gratification on the cards. But plenty of the other stuff was just dumb and pointless. Did I gain much by going to the bar six straight nights and spending a bunch of money to feel bad the next day? Probably not.

I’ve learned alot over the past 10 years and I’ve dug myself out of a grand total of $45k in debt. And while I still have $37k in student loans to go, I’m on a solid plan with decent savings that helps keep me OUT of further debt.

Auto vs. Manual: Personal Finance Showdown

finance

When it comes to handling personal finances, there are two kinds of people: those who take care of it manually, and those who automate everything. Manual people tend to be more controlling, constantly checking balances and physically transferring money from account to account. Automated people are a bit more laid back; once they set it up, they forget about it. One requires constant attention, the other only sparing check-ins. Me? I’m a mix of the two.

On Lifehacker today, I came across this article asking whether you should automate your finances or not. The article does a good job of explaining the pros and cons of automating your finances: less effort, no need to remember to pay a bill, and instilling better financial habits are just a few of them. For example, if you set up an automated transfer between your checking account and savings account, you can pay yourself right when you get your paycheck and not need to worry about saving it at the end of the month. It’s automatically taken out of your account, so you don’t even see it.

But should you automate ALL of your finances? I’d say not necessarily. One thing to consider is your free cash flow each month. Do you have enough cash in your checking account to pay for all your monthly expenditures? If not, then you shouldn’t automate. Think about it like this…let’s assume your paycheck is for $2k net, paid out twice a month. You get paycheck #1, and have to pay out your rent, utilities, credit card bill and car note. If these things total $2500, then automating your finances could lead to overdrafts and fees. You want to make sure you have enough cash in your account to cover everything.

I would argue that certain things can be automated, while others shouldn’t be. Monthly expenses that don’t change can be automated, provided you are comfortable with your cash flow. Rent is a good example; I have my rent set to be paid out of my account on the 1st of every month. The amount doesn’t change, so I can be confident. Savings is another one; the concept of paying yourself first works very well with automation. As I said above, set up an automatic transfer between your checking and savings, and you’ll never even see the money. If you can’t see it, you can’t spend it. I have my payments to my emergency fund taken out via automatic transfer.

I am a firm believer that credit card payments should NOT be automated. Nor should cell phone or cable bills. The reason is that these things can change from month-to-month, and they also tend to have a great deal of issues. Cell phone bills are notorious for having random charges, usually from a thing called cramming. And cable bills seem to ALWAYS have random charges on them, requiring a call to take care of. If you automate these payments, you may not see them until after you have paid them (if at all). I think credit card payments are the best example. I charge everything to my Chase Sapphire Preferred card, and I pay it off twice a month (it’s a psychological thing, I hate seeing high balances so I pay it off more frequently). If you automate your payment, you won’t see any errors on your bill. But more importantly, I think you miss out on looking at your balance and seeing where your money is going. Automation removes you from that gut check. You may not realize that you spent $800 at the bars, or $500 on clothes last month.

One particular area that I think automation is a good thing is retirement savings. Obviously 401k plans and other employer-sponsored plans are good examples of this. So is the emergency fund. If you set up an automatic transfer to a Roth IRA or a brokerage account, it makes saving for the long term much easier. If you wait until you need to do it manually, you may not do it at all. Or worse, you end up spending it all before you get a chance to save it!

So that’s my automation plan. Constant expenses and savings get automated, while fluctuating bills are paid manually (albeit online). What about you? How much are your finances automated?