Latest posts by FIRECracker (see all)
- Don’t Let Fun Hold You Back - December 11, 2017
- Friday Reader Case: Help! My Kids Are Holding Me Back - December 8, 2017
- The Five Stages of Early Retirement - December 4, 2017
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:
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
- 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,
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!
|Total Annual Income (before-tax)||$55,000/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:
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:
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?