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- Reader Case: Feeling Disheartened about FIRE.Please help! - August 15, 2022
Hi y’all! It’s been a while since we wrote a reader case hasn’t it? Well, back by popular demand, here’s one from a 25-year-old who’s worried she’s behind the curve when it comes to her finances:
“I just finished reading Quit Like a Millionaire (in one day, couldn’t put it down!) and I am feeling very inspired.
However, I am NOwhere near where I should be at age 25 with my finances. I’ve been putting off creating a budget, retirement plans, and saving since I graduated college and I’m not sure why.
I feel like there are probably a lot of young people with student loans and no savings like me so hopefully answers to my questions will help a lot of people.
Here is some information:
Annual Salary: $45,000 and after taxes I take home about $32,160.00 (this is the first time I’ve ever realized that, ouch.)
Currently I have $4,965.97 in my checking account.
I also have an Acorns investment account, I’m not sure if this is a good thing or not. I have attached what my portfolio looks like that they made for me. Currently my income balance is $356.50. I contribute $15 weekly and every time I use my debit card they round up the cents to the nearest dollar and contribute the amount to.
Should I keep this? Should I move this money and start an index investment account? Truly, I don’t know much about it.
Now on to my debts….
Interest rate: 5.29%
Monthly payment: $287.13
Interest rate: APR 16.49%
Minimum payment: $38.00 However I have never only paid the minimum payment, usually I pay between $100-300 each month.
My student loan is broken down between Groups, Group A-G. Each group has a different balance and interest rate:
Group A Balance: $3,432.74 Interest rate: 3.15%
Group B Balance: $2,348.55 Interest rate: 6.55%
Group C Balance: $4,468.77 Interest rate: 3.61%
Group D Balance: $5,452.02 Interest rate: 4.41%
Group E Balance: $2,274.52 Interest rate: 4.41%
Group F Balance: $5,408.02 Interest rate: 4.04%
Group G Balance: $2,139.13 Interest rate: 4.04%
Group H Balance: $2,262.45 Interest rate: 3.61%
Total Student Loan Balance: $27,784.20
Monthly Payment: $130.76
I’ve read to pay off the student loan with the highest interest rate first but I can’t figure out where it lets me do that. I pay the monthly payment and then it divides that between each group.
That’s pretty much all of my finances, now for my questions:
I truly just don’t know where to begin. Should I pay off my debts first and then focus on saving? Should I go ahead and put money aside to save/invest?
My work does not offer retirement. Through the book I have found I would like to start a Roth IRA. Do you advise doing that through my bank?
I guess I would just like to get advice on where to begin and my first steps. I did like all the information about on index investing and I’ve started to read your blogs about it as well. is that a top priority with all the other things I have going on? Also, I’m not sure where to even start that, a website? is Investing and saving for my retirement considered one and the same?
I’m sorry this is so much, but I do believe I just need to get started and can stay on the right track. I’m not really focused on early retirement as I know that’s not in my near future, but just to have money saved and a bright future would be so helpful.
Thank you for everything and I look forward to hearing from you!
So, JSO is only 25-years-old. Fucking hell. That feels like AGES ago—when my sagging eye bags weren’t a thing and I still had a thigh gap. Ah, to be 25-years-old again.
Given JSO’s spunky young age, feeling like “I’m nowhere where I should be with my finances” is a bit of an over-reaction. Girl, you have time on your side. Don’t sweat it.
Remember, most people at 25-years-old are just getting out of college and starting their careers. They have a long road ahead of them.
I get that your student loan feels soul-crushing, but given that you’re American and have a balance of $27,784.20, that’s pretty laughably low compared to the 6-figure debt monsters other readers have written to us about. Don’t freak out.
Take a deep breath, let it out and repeat after me “I’m young. I can do this. My skin doesn’t have a single fucking wrinkle in it.”
Done? Okay good.
Now, let’s dig down to the nitty gritty of your finances. Even though your situation isn’t a complete clusterfuck, you’re still making some rookie mistakes (understandable when it’s this early in the game) that we need to fix ASAP.
What you’re doing wrong:
Having a Car Payment?!
Oh hell no. You don’t have the salary to justify this. If you want to justify it, get a higher paying job or a promotion. In the mean time, buy a used car or use car-sharing like we did.
When we first came to Canada, we didn’t have money to buy a car, so my Dad bought a used bike from a garage sale and rode it to and from school. He did this during the winter, even when it was snowing because the town we lived in didn’t have an extensive public transportation system. I remember being bundled up and stuffed in the front basket of his bike whenever we needed to go anywhere as a family. I didn’t mind. It beats living in a third world country, picking through the trash, and getting stomach worms.
If he can deal with that, you can deal with a used car. And even when he finally got his first job and we could afford a car, he still bought a used one.
Get rid of the car loan. I’m serious. You want to be a financial badass? Act like one.
Saving While In Debt
Don’t do this. It feels good but it is just mathematically wrong. The interest rate from your debts will swallow all the interest and returns from your savings and investments.
Because you don’t have a 6-figure salary, you need to prioritize. Here’s what you should do, in this order:
1) Pay Off Your Credit Card Debt!
As we mentioned before, there’s absolutely no sense in investing if you have credit card debt with interest rates of 16.49%! Whatever you earn in investments will immediately be given back to the bank. Do you like giving banks money? Clearly, they don’t make enough money right?
I know it feels “safe” to be saving money while having debt, but it isn’t. That’s like trying to to swim with a boulder tied to your leg. Don’t do it, unless you like drowning.
Why do you have $5000 in savings while having $1000 in credit card debt with an interest rate of 16.49%?!
Pay that shit off right hell now.
2) Get Rid of Your Car Loan
Buy a used car or use a car-sharing service instead. If you absolutely can’t get rid of the car loan because the car’s depreciated too much, get your butt in gear to pay if off ASAP. Get a promotion, switch to a higher job–anything to increase your salary so you can justify this expense. Do not save or invest until this is paid off. You will not earn enough from a savings account or investments to offset the 5.29%.
2) Tackle Your Student Loan
“I’ve read to pay off the student loan with the highest interest rate first but I can’t figure out where it lets me do that. I pay the monthly payment and then it divides that between each group.“
Outside the debt repayments, you’re saving $930/month. After getting rid of the credit card debt and car loan, use that to kill your student loans and you should be done in 2.5-3 years. Contact your loan provider to apply your payments to the highest interest rate debt first.
Don’t even think about investing until all your debt is paid off.
You asked about whether Acorn makes sense. At this point it doesn’t because again, you can’t invest until you’ve paid off your loans.
“My work does not offer retirement. Through the book I have found I would like to start a Roth IRA. Do you advise doing that through my bank?”
By “my work doesn’t offer retirement”, I think you mean, your work doesn’t offer 401K matching or a pension.
In terms of whether you should open a 401K or Roth IRA, you’re right that you should start a Roth IRA (as we explained in Chapter 12. Good job for reading carefully!) You don’t need to do that through work since it’s after tax money, you can open it with any financial institution (we recommend Vanguard) However, as I mentioned in my earlier points, your priority should be paying off debts first, so don’t think about investing until that’s done. Once your debts are paid, off max out your Roth IRA.
“Is Investing and saving for my retirement considered one and the same?”
Yes. You want the money you’re saving for retirement to be invested, otherwise, it’ll erode from inflation. You also want to optimize your taxes when investing to avoid overpaying taxes. That gives you more money toward retirement.
Speaking of taxes, what is going on with your tax rate? I don’t get why you’re paying 28.9% tax even though you’re making $45,000? I put your numbers into the Smart tax calculator and even in the worst-case scenario (NY), the tax rate is 23% not 29%. Maybe there are other deductions at your work that I don’t know about, but make sure you check this to see where your money is going.
Okay, so now that we’ve prioritize what you should be doing, let’s look where your finances should be going.
Life After Debt:
Here’s how much your financial situation will improve after your debts are paid off and getting rid of the car loan.
Your monthly expenses will only be $1750, which means you will have a savings rate of ($2680 – $1750) / $2680 = 34.7%. Not bad! You’d be putting away $930 each month. Considering that 60% of Americans don’t have even $1000 in savings, you’d be better off than most of your peers EVERY SINGLE MONTH! Instead of “nowhere where I should be with my finances”, you’d be “way ahead of most people”.
This means you would need $1750*12*25 = $525,000 to become FI. Putting away $930/month or $11,160/year after expenses, this will take you:
|Year||Starting Balance||Annual Contribution||Return (6%)||Total|
Note: Inflation is accounted for by a 2% increase per year in salary to account for inflation. For a detailed breakdown of this math, refer to Appendix D in our book Quit Like a Millionaire.
Since you’re still so young, once you’ve paid off your car loan and student loans in 4 years, you’ll be 52 years old once you are FI. That’s still 13 years earlier than the regular retirement age of 65, even with a take home salary of $32K.
But this is under the assumption that you never change jobs and never get a promotion. You’re only 25 years old—that’s around the same age were when we started working. There’s a lot of time for you to move up the corporate ladder.
If you end up keeping the same expenses but get a promotion or earn some side income that brings up your pre-tax salary to $62,000 or post-tax salary of $45K, you’ll be able to double your yearly portfolio contribution to $24,000, which would bring down your time to FI to:
|Year||Starting Balance||Annual Contribution||Return (6%)||Total|
Less than 15 years!
That means, after paying off your debt, you would be only 44-years-old at the time of financial independence.
Now, this might seem challenging, and I’m not going to lie, it won’t be easy, but as we’ve learned from fellow early retirees and Rob and Robin, authors of “How to Retire Early”, it is absolutely possible. She started later than you (in her mid 30s) with a much lower salary of $15K as a travel agent, switched to nursing and trippled her salary. This enabled them to retire in 15 years in their early 40s.
You’re not boned so don’t freak out. You’re young (25 years young for christ’s sake!), have a manageable amount of student debt, relatively low expenses, and a long time horizon to move up the corporate ladder and increase your salary.
So don’t panic, take a deep breath, and get cracking on that debt!
What do you think? Do you agree with JSO’s thoughts about her finances? What should she do?
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