- How Has Covid-19 Affected Your FIRE Journey? Part 6 - August 10, 2020
- The Power Of Forgiveness - August 3, 2020
- Reader Case: Lawyer in Pain - July 31, 2020
It’s Friday and you know what that means. Time for another reader case!
And guess what? This time it’s NOT going to be about renting versus owning. Shocking, right? But hey, I gotta take a break every now and then. I might pull a ranting muscle and then where will we be?
Now, the reason why this reader case caught my eye is because they’re dealing with an issue many Millennials face…so many, in fact, that collectively, Americans now own a combined $1.4 TRILLION in student debt, at an average of $30K per student. Yikes!
So how do we tackle this common Millennial problem? Let’s begin:
“Hi FIRECracker & Wanderer!
I am a huge fan of your website and love the fact that you guys are revealing the truth to investing and showing people that everyone can do it! You guys have become my new role models and here’s why.
Asides from wanting to get out of the rat race we call a 9-5, I want to see the world, experience different cultures, and share a meal with people from all different backgrounds. There’s so much more to life than work and you guys are able to explore that.
When I saw that’s what you guys are doing, instantly I became hooked to your God-sent advice. I’m 24, graduated from college in May 2015, and recently started traveling. I had never been outside of the country growing up because my family couldn’t afford it. There were 4 of us living in a 1 bedroom, 600 sq ft apartment. So yeah…
Anyways enough about that. I would be so eager and blessed if you guys could assess my current financial situation! You guys probably get so many emails so chances are you won’t respond but here goes nothing!
- Gross/net annual family income: $55,000/year
- Monthly spending: $2000/month
- Debt: Student Loans
- Outstanding balance: $25,553.65
- Minimum monthly payment: $296.17
- $4,936.12 @ 4.66% FIXED
- $1,881.66 @4.66% FIXED
- $5,010.83 @3.86% FIXED
- $1,927.72 @3.86% FIXED
- $4,080.18 @3.4% FIXED
- $2,188.98 @6.8% FIXED
- $3,119.95 @3.4% FIXED
- $2,311.76 @6.8% FIXED
- Fixed assets I own: 2004 Honda Accord (approximately worth: $5,000)
- Checking account: $3,387.47
- Savings account: $17,883.34
If you guys could find it in your hearts to assess my situation and offer tips/advice I would be forever grateful!
Thankful for you guys,
Now, don’t let all those debt numbers scare you. At first glance, it looks bad, but considering how BT is only 24, earning a decent salary right out of school, and already has a nice chunk of savings makes me feel good about their situation.
But feelings don’t help you pay off your debt, so let’s math this shit up!
|Assets:||$3387.47+ $17,883.34 = $21,270.81|
Right there you can see something odd about BT’s situation. BT makes a decent salary and doesn’t have extravagant expenses. But why does he have student debt….as well as savings?
He has THAT much debt killing ammo and he chooses NOT to use it? Why, BT, why?!
If you were paying some crazy low interest rate of less than 2%, this wouldn’t be a problem, but some of your debt has rates of 6.8%!
Now, I know the temptation is to keep savings around “just in case” so you feel safer if you were to lose your job, need emergency funds, etc. Or maybe some people want to feel the emotional high of “yes I have money!”
But in reality, you don’t.
Using the ammo to feel “secure” or “good about yourself” doesn’t make sense. This is because you are losing money faster from debt than the interest earned from your savings. Plus any interest earned with your savings is taxed at the marginal rate.
You have a fire-breathing debt monster that’s silently eating all your ammo! The longer you wait to shoot it the less ammo you have.
So instead of having debt AND savings at the same time, you should:
a) murder the Debt Monster
b) build an Emergency Shield that’ll cover you for 6 months
Don’t even think about investing until your debt is dead and your emergency shield is in place. Murder that debt monster before it devours all your ammo!
If BT feels his job is insecure and would sleep better at night with a 6-month Emergency Shield, then he can set aside 6*2000/month= $12,000 of his $21,270.81 savings for emergency funds, and then murder a big chunk of the debt with the remaining $9,270.81.
Which debt should he kill off first? The ones with the highest interest rate obviously.
With $9,270.81 worth of debt killing ammo, he could take out the 2,311.76 @6.8% FIXED, $2,188.98 @6.8% FIXED, and the 4,936.12 @ 4.66% FIXED. Which leaves him with only $12,000, which he could kill in less than a year, considering how he saves 56% of his pre-tax income. And since he’s only 24 and just started working, he has lots of time to invest for early retirement after his debt is paid off.
So my advice to BT is this. PAY off your debt! You have enough Debt Killing Ammo, so murder that be-yotch!
Option 1: Murder most of the Debt Monster RIGHT the HELL now. Declare victory, dance on its corpse.
Option 2: Murder the most expensive parts of it, then as it’s stumbling around wounded, finish it off within a year Mortal Kombat-style.
And then celebrate with a well-earned vacation! You deserve it after all that murdering!
After that, you’ll be in good shape to start building your portfolio so you can graduate from BeginnerTraveller to PermanentTraveller! YEAH BABY! The world is YOURS!
What you do guys think? Does it make sense to have savings at the SAME time as debt?
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