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Hello from the Galapagos! Where, apparently, I found it’s possible to get recognized by a reader in an island in the middle of nowhere, while waiting for boat, at 6 AM in the morning?! Mind blown.
Now, before we fly off to Quito to speak at Chautauqua Ecuador, I’m going to get this one last reader case out, before I get too distracted from all the epic-ness that is Chautauqua.
Are you ready? Here goes:
“Hi Firecracker,
Thanks for taking the time to read my case study. What I really want to ask doesn’t have much to do with my spending, but if I should accept a gift from my parents to pay off debt. I’ll start with some details.
I was married, and during the marriage, I racked up some credit card debt with my ex (it’s true no one cares about your money like you do) and still have some student loans to pay off. I’ve been working a side gig (as a bouncer) to make some extra money, and had worked both jobs while putting my ex through school during the marriage. I was able to work the 2nd job for some time, but its taking a toll. Staying up to close on weekend nights, not being able to hang out with friends and fucking with my sleep schedule isn’t helping, but its easy work that is convenient for me to do, I can take time off when I need, and keeps me out of trouble. I want to get the credit card debt paid off then rethink if I should be working weekends.
My parents recently offered to help pay off some of my debt, and mailed me a check for $2500 (I have told them several times that this is my own problem, and I want to work a 2nd job to pay the debts off faster). They don’t want me to work as a bouncer, especially after I finished college, and want me to go out and enjoy life more (I also have a feeling they think I won’t be able to meet a good girl while I’m working in a bar). I know this gift doesn’t hurt my parents, who are basically retired but still work part-time and are financially secure. I feel like I allowed myself to get into this debt and I should hustle to get it paid off. But when I math it up, I realize I can get out of this debt much faster if I take the money (its over 1/3 what I owe). I’m not sure what I should do, and I’m asking for your opinion for what you would do?
I guess I’ll also include my financial picture, for reference. I compete in powerlifting as a hobby, so my gym and food costs include the cost of competing, coaching, and supplements. I would like to target an early retirement date by 40, but looking at my current financial picture not sure if that will happen.
- Gross income fulltime job (chemist) – 55k plus bonus (up to 20%, depends on individual/company performance)
- Side income ~8k a year (varies depending on hours, $13/hr)
- Monthly Spending ($2,050)
- Rent – $900
- Internet – $50
- Energy Bill – $70
- Student Loans – $150
- Credit Card – $50
- Gas/Car – $60
- Phone – $40
- Gym Related – $180
- Food – $550
- Debt Interest Rates:
- Credit Card had been balance transferred, currently 0% through the end of the year @ $2900 balance
- Student Loans – 5.75%, $1625
- Student Loans – 5.35%, $2150
- Own a car, worth about $3000, tops
- Assets
- 54k in my 401k (4% match, 4% direct contribution)(funneled a lot in during divorce proceedings to keep from my ex).
- Approximately 6k in a employee stock purchase plan (employer matches 33% held for 3 years, limited)
- 1.2k in a stock index, with few hundred in a bond index
Thanks for what you and Wanderer do, it’s been helpful to have the case studies and your columns,
ConflictedOffspring”
Now, normally my snark would hit level 1000 right as I read the words “my parents offered to help me pay off some of my debt” because as you all know I absolutely HATE handouts and am a huge believer in that parents should let their kids fail to make them bad-asses. But CO, shockingly, ISN’T a snivelling, entitled brat like I thought he’d be, considering how he had to work 2 jobs while putting his ex through school, and is willing to hustle to get the debt paid off. So I’m going to be gentle. *puts away whip* *declaws nails*
Since the amount is not extravagant, his parents are financially secure, and he’s willing to bust his ass paying for the remaining part of his debt, I’d say he should treat it as an interest-free loan, and then pay them back later after he’s murdered his debt and saved up some money. Specifically I’d target the student debt with the ~5% interest rates first since he’s rather cleverly removed the interest rate on his credit card debt already by using a 0% balance transfer card. With, of course, the assumption that he can then re-balance transfer to another card in December and keep that interest rate at 0%. If he can’t and it jumps to 20% or something, then definitely the credit card should get paid off first.
Okay, so on to the second question, will you be able to meet your early retirement goal of retiring by 40? Let’s find out.
So without further ado, let’s MATH THIS SHIT UP!
| Summary | |
|---|---|
| Total Annual Income (before-tax) | $55,000/year |
| Side Income | $8000/year |
| Total Annual Expenses | $900+ $50 +$70+ $150 +$50+$60+$40+$180+$550 = $2050/month *12 = $24,600/year. |
| Total Debt | $2900 + $1625 + $2150 = $6675 |
| Total Assets | $54,000 + $6000 + $1200= $61,200 |
Since CO mentioned he’s from Milwaukee, WI in the rest of the e-mail (I didn’t include that part to anonymize his identity), if we plug in his before tax income of $63,000 before taxes, and given that he puts $2200/year (4% of 55K salary) towards his 401K , that gives us a net income of $46,767/year.
So this means he’s got a savings rate of 47%. Not bad at all! Since you’re putting 4% of your salary towards 401K, that means out of the $46,767, he has $44,567 left over for expenses.
After deducting $24,600/year for expenses, that leaves him with $19,967 in savings. So if he were to put that towards his debt, he’d be able to pay off $6675 in a little over 4 months!
If he took the money from his parents, he’d been able to pay off the remaining part of his debt in less than 2.5 months, but then paying his parents back would take another 1.5 months, so we’re back to around 4 months. So basically, taking the money in this case as an interest-free loan saves some money in interest (since you’re converting a part of your debt into interest-free debt), but it doesn’t change the amount of time it takes to murder your loans. With or without help, he’ll be able to murder that debt pretty quickly and drop those expenses down to $1850/month or $22,200/year, which would reduce his required retirement portfolio size by $60,000!
So what’s his time to retirement?
Well, once he pays off his debt, his savings automatically jumps from 47% to 53%, and with a net worth of $61,200, and at a conservative average return of 6% per year, he would be able to retire in:
| Year | Balance | Savings | Portfolio Growth | Total |
|---|---|---|---|---|
| 2017 | $61,200 | $24,567 | $3,672 | $89,439 |
| 2018 | $89,439 | $24,567 | $5,366 | $119,372 |
| 2019 | $119,372 | $24,567 | $7,162 | $151,101 |
| 2020 | $151,101 | $24,567 | $9,066 | $184,734 |
| 2021 | $184,734 | $24,567 | $11,084 | $220,385 |
| 2022 | $220,385 | $24,567 | $13,223 | $258,176 |
| 2023 | $258,176 | $24,567 | $15,490 | $298,233 |
| 2024 | $298,233 | $24,567 | $17,894 | $340,694 |
| 2025 | $340,694 | $24,567 | $20,441 | $385,703 |
| 2026 | $385,703 | $24,567 | $23,142 | $433,412 |
| 2027 | $433,412 | $24,567 | $26,004 | $483,984 |
| 2028 | $483,984 | $24,567 | $29,039 | $537,590 |
| 2029 | $537,590 | $24,567 | $32,255 | $594,412 |
13 years! But wait, we need to add in the 4 month he needs to pay off the debt. Which means he would be able to retire in 13.33 years.
So I would say in CO’s case, pay off that debt ASAP. Your savings rate is high enough and your debt is low enough that you could murder that sucker in a little over 4 months, even without your parent’s help. If you want to take their handout, go ahead. It helps a little bit, but the reason you’ll be able to get out is your kickass savings rate, not their check.
Will you be able to reach your retirement goal of 40? Well, that depends on how old CO is.
If you are 26 or younger, then he’s definitely hitting the “retire by 40” target.
Now, I know CO mentioned the bartending side gig is taking a toll on him so if he were to wait until he paid off his debt, then quit and bring his salary back down to $55K/year gross, how does that affect his TTR?
Well, that would bring down your after-tax salary to $41,941, which drops your savings rate to 47%, bringing up your TTR to:
| Year | Balance | Savings | Portfolio Growth | Total |
|---|---|---|---|---|
| 2017 | $61,200 | $19,741 | $3,672 | $84,613 |
| 2018 | $84,613 | $19,741 | $5,076 | $109,430 |
| 2019 | $109,430 | $19,741 | $6,565 | $135,737 |
| 2020 | $135,737 | $19,741 | $8,144 | $163,622 |
| 2021 | $163,622 | $19,741 | $9,817 | $193,181 |
| 2022 | $193,181 | $19,741 | $11,590 | $224,513 |
| 2023 | $224,513 | $19,741 | $13,470 | $257,724 |
| 2024 | $257,724 | $19,741 | $15,463 | $292,929 |
| 2025 | $292,929 | $19,741 | $17,575 | $330,246 |
| 2026 | $330,246 | $19,741 | $19,814 | $369,801 |
| 2027 | $369,801 | $19,741 | $22,188 | $411,731 |
| 2028 | $411,731 | $19,741 | $24,703 | $456,175 |
| 2029 | $456,175 | $19,741 | $27,370 | $503,287 |
| 2030 | $503,287 | $19,741 | $30,197 | $553,225 |
| 2031 | $553,225 | $19,741 | $33,193 | $606,160 |
15.3 years instead of 13.3 Not a huge set back, but it does push it back by 2 years.
So there you have it. On the surface when I read this email, I was girding for a pretty bad case study. Credit card debt, divorce, considering taking a handout from his parents. It ticks off all the “hoo boy, this is going to be bad” indicators. But when we actually math shit up, he’s not doing too bad at all. He might have made some mistakes, but the biggest thing he did right was he kept his expenses under control, didn’t buy a shitty overpriced house, and created a healthy savings rate. As a result he’ll be able to retire decades earlier than most of my friends at home who are shouldering million dollar mortgages. Good job CO!
What would you do? If you were CO, would you take money from your parents as a zero-interest loan to pay off your debts?
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Return of 6% a day ? Fix that FC or tell us where to invest to get that.
A question FC: I noticed that you always consider the annual cost of living fixed until and after you retire, however in my case I’ll want to travel the world and clearly my cost will go up once I retire (I don’t have much to cut as I don’t have a car nor anything else needed to work now).
That might be true also for many people. I just think that it can be a little dangerous to use that bare minimum amount needed as your retirement goal..If something unexpected happens you’d be screwed, wouldn’t you?
FC can only work with the information she is given so if the person doesn’t say “after retirement I’d like to travel the world on a $ XX,XXX budget” then she can only go by the cost of living numbers provided by the reader.
A lot can happen during TTR so these timelines aren’t set in stone anyway: inflation, rent spikes, lay offs or large periods of lost wages due to injury or illness, etc. so none of this is set in stone anyway. It isn’t up to FC to predict the future or read minds.
Right. Any 4% rule or TTR calculation is a guideline. Things change over time that can drastically alter each person’s financial projection. I can’t predict the future. The only thing I can do is give a snapshot of what the person’s doing now, and what trajectory they’re currently heading towards. It’s up to the person to learn the math and change their situation if they don’t like the answer.
Hm, something seems a bit off here. Why is he so worried about debt and working a side job when his savings rate is so high? As you point out, he can kill his debt in just a couple of months, there’s not much to worry about. Why are his parents so concerned? Why is he working as a bouncer (which seemingly pays terribly!) if he doesn’t need to?
If his costs and income are accurate, he’s doing absolutely fine and I don’t understand the unnecessary panic and side income. In a few months he’ll be debt free and his journey to FIRE can begin.
I agree something seems off, my suspicion is his monthly cost is higher than reported or he’s not including one-off costs like vacations. If I had $1500 left over every month I sure as heck wouldn’t have 6k open CC debt (even at 0% short term).
People get anxious about stuff they don’t understand. We get so many readers writing in with “I’m scared that I’m screwed. Am I screwed?” and they’re totally fine. On the flip side, there are way too many people who think “I’m fine. My house will save me.” And in reality they’re TOTALLY fucked and don’t know it.
I think he’s doing fabulous if he’s only got a debt of less than $7k after a divorce, and this is before we toss in the 401k, etc. I would only take the parent’s money if it keeps them happy, but put it in a savings account as an emergency fund.
Can he pay off the debt in a year without being a bouncer? If it’s the bouncer part of things that has the parents concerned, can he find another side hustle to replace being a bouncer? If the parent’s antennas are up re the bouncer job, I’d probably take things as a warning that their experience might know something I didn’t and I’d heed their advice.
Yeah I was surprised too. On paper he sounds like a train wreck, but when you math it out he’s totally kicking ass!
One key question… does the handout come with strings attached? If not, treat it as a loan, as Firecracker advised. If so, you really gotta weigh the pros and cons on this. For me, coming from a shitty family, it would not be worth it.
That’s what I was thinking too. I’ve turned down a lot of handouts and free things from my family including university and all expenses paid trips with them to avoid the drama and strings that were attached. But have also taken advantage of “string free” handouts to avoid the drama of insulting them and turning down their generosity – these “handouts” were more like gifts, I didn’t need a bailout or go asking for money, they were offered as a way to keep things fair between me and my siblings.
I’ve had “help” offered to me out of “fairness” too, but it’s still not worth it to me.
Yeah totally. It really depends on each family, but for me I don’t like owing anyone anything. I feel it gives them a level of control over me. Which is why I suggested making it an interest free loan.
Some future entries in lwwym will include these things, just a couple of like hacks to get you on track.
Food – 550.00 start cooking at home, skip the double lates but if you reach a budget goal say $400 for the month, reward yourself with a lunch at Tim Hortons.
Entertainment budget – you are a bouncer yes? How much of your pay do you spend in the same bar or others. Eating out, etc. Curb your expense here by spending free time in a gym instead, running or hiking.
Transportation Expense – gas/car $60 ? On gas yes, but what about insurance and maintenance. I pay 900 a year for one of my cars, and about 60 a month for gas/oil etc. So that is more like 135 /month. Get a bicycle, and at least ride part way to your work, consider public transport until at least your debt is paid.
Rent – $900 Wow, not bad, but have you considered co-habitation. Tough it out with a room in a shared house etc, again at least until all the debt is paid. I forced my family to live in a shared house for 4 years, and saved for a down payment on the house I have now. But now is not the time to get into Real Estate. (and thats another subject….)
Job – don’t settle for less, you have a skill set, market it, keep upgrading, training etc. You shouldn’t need to supplement your income from another job, you need free time to do other things, or you will burn out. Remember stress kills. The best investment you can make is to invest in yourself.
Take the money from Parents, but set up an automatic payment from your account, so you can justify the loan, make it small say 50/month. You have discovered low interest credit cards (1% up front) MBNA has one for 12 months right now, use it to pay down the higher credit, and make automatic payments for 12 months to kill the debt.
The key to FI is discipline, and it sounds like your learning this, good for you.
cheers
take the money, share the living space to save some bucks and have some company.
I don’t really see a need to take the money. He seems to be doing really good for himself. His debt levels are low; he is able to be debt free within the year if your math checks out (he’ll if I’m going to be able to ever run numbers)
Are we all missing something here? Or is the Reader doing way better financially than he realizes? I think he is just more desperate to quit that side job than he’s telling us and is wondering it’s right to accept this golden ticket out now (if your job is bad enough, an extra month or two on the job can really be THAT bad).
Sincerely,
ARB–Angry Retail Banker
Yeah, I think you’re spot on. His situation FEELS bad, but it’s actually not too bad. I’ve seen people’s finances absolutely WRECKED by a divorce, and he’s actually managed to come out pretty clean.
CO here.
I’m probably overcompensating, as when I was married my paychecks were deposited in a joint account, which my ex kept the balance close to 0 and ended up with some cc debt (which I took to keep her out of my 401k). Had a lot of one off expenses (court costs, shipping of belongings, and moving) that made me nercous.
Yes, bouncing pays that poorly (I started at minimum wage 6 years ago). My parents, and a lot of friends, have expressed concerns over my sleep deprevation and lack of free time. I’ve also been punched in the face over a dozen times. This is a moot point as I found out the bar is closing at the end of the month and I won’t be bouncing after.
A few things changed since FC got the info, I got a roomare to cut expenses and also am working on some side work through my company that pays much better. Also, I should be able to get a much higher salary at my day job during my next review.
Faaaabulous! Both of those things should really help cause they boost your savings from both ends.
And you gotta have a tremendous respect for someone who’s willing to work a job that gets him literally punched in the face in order to murder his debt. Even Mr. Money Mustache would be proud.
Working on Friday and Saturday nights has double the benefits even if the job only pays minimum wage. First is the pay but second is you don’t spend a ton of cash (and wake up with a hangover). I had a volunteer gig on Friday nights for a few years and ended up saving like $600 a month plus I was up at 8am on Saturdays.
Wow, that’s some nice hustling, CareersAfterSchool!
Your friend could try after school tutoring or online teaching seeing they have a science background …. better than bouncing? 🙂 …. I like your blog style … I am a newbie rookie blogger too …. 2nd week … (the below is my practice blog before I do another on international living ) ….. if your friend goes overseas to work … there are lot of freelance ops for those wanting to work overseas … it is actually maybe even easier in some ways …. not to mention online teaching is also one op for those who like that kinda of stuff …. from the far side of the planet …
http://christianprofessionalsoverseas.com/targeted-international-school-job-searches-by-city-or-country-series-1
I would say say that it is fine to take the gift from his parents and then a little ways down the road he could pay them back or buy them a nice gift. Maybe he sends them on a cruise or something. And he should be debt free by Christmas with his savings/spending rates. I also agree with the comment above that CO could do something else for extra money. He could tutor for VIPKID or something else that is on his own time (and he might make extra money, but it is just isn’t as social).
That’s a good idea, Jason! Repay them for their generosity with a nice gift later on.
I don’t see the need for him to take the money from his parents. He is on track to pay off his debts on his own. I don’t like handouts, I feel it’s always hanging over your head! There is a lot of satisfaction in doing it on your own.
I like Jason’s idea too of CO taking the parents money now and later repaying them with a nice gift such as a trip/cruise (which they would probably have fun bragging to their friends about that their great son sent them on a trip.)
Another way to think of this, instead of a “handout” is an “early inheritance”.
Assuming his parents are going to have more than enough funds for their retirement, he will inevitably inherit some funds from his parents (possibly shared with siblings).
The parents are probably investing that money, but it’s hard to beat 5.75% after taxes. So, yeah… worth paying down the debt even if we assume those dollars will inevitably be inherited in the long term.
You gotta read the fine print on these 0% interest credit card balance transfers. Some of them charge 2% up front on the amount transferred for only 6 months at 0%, some are for longer; math up the actual cost and figure out the effective interest rate you’re paying.
Admittedly, it’s better than the 20% plus you would normally pay on a credit card balance, but don’t be fooled into thinking your loan is not costing you anything.
Re the gift: accept it graciously and put it to work.
I’d like to offer a perspective from the parent end of this discussion. I have an amazing kick-ass, only child who moved out of the house right after high school and began immediately supporting herself. She is very strong and proud and doing even the smallest thing for her was always a battle. Her Dad would say “Take this, you are just getting a tiny bit of your inheritance early!” It gave us such pleasure when she would accept. We lost her Dad very early and I have told her how much it meant to him to be able to share those times with her. We always recognized her personal space and power and there were never any “strings attached”, either emotional or actual (at least I hope). So take it from a parent’s perspective….being able to do something for your kids is a treat and a true life pleasure. So once in a while…..take the gift and just say “Thanks”.
Good case, FIRECracker, and hope you guys and the fellow PF bloggers there have a great Chautauqua! I hope to attend in the future.
Every line in the case indicates the person is generally responsible with money. So, this isn’t a case of splurging the gift or squandering on stupid shit. Also, parents aren’t going to take it all with them – so they wanting to help out with some money isn’t a bad thing. He shouldn’t feel bad about accepting it because – sooner or later – parents’ money leftover will come as inheritance anyway. Parents also feel good having helped their son/daughter when they can see the impact rather than leaving it all in an estate. So, as long as this $2500 doesn’t have a material impact on the parents’ lifestyle, I would say, go for it! And thank the parents for their love and financial responsible lives that allowed them to do this.
It sounds like he’s conflicted about it. Given that, and given that this money would be used to pay off debt that’s only at 5%, I’d recommend he say thank you to his parents, refuse the check, and do it on his own.
The gains from the $2,500 check on a 5% debt are not THAT huge (something like $125 the first year) I’d go with the thing I THINK he is going to be more comfortable long-term: the feeling that he pulled out of this himself, and the hard-to-quantify-long-term benefits of achieving a goal sans handout.