Debt to Dreams

Talk about penny wise and pound foolish.

I just wiped out most of my gains from the past 10 months of 0% balance transfer abritrage!

In the process of updating my excel spreadsheets for May I was checking my email and noticed that I had received an email from Bank of America letting me know my next statement was due.

I didn’t think anything of it except that I noticed that the minimal payment had jumped from $320 to over $800. Not a good sign! I quickly logged on and pulled up the most recent statement and confirmed that they had bumped my balance transfer rate from 0% to 19.99%. OWCH!.

I keep good records and I was sure that I had not initiated these transfers until July 2007 which I quickly confirmed. When I went back and read the details of the offer it was clearly stated that the offer ended in May 2008.

Apparently I should read some of my old posts more often. If you read the last line of this post, it is pretty clear that I knew that the balance transfer expired in May.

A phone call to customer service was to no avail.

For those that are keep track at home, the 2 results of my balance transfer arbitrage:

About $500 in interest

A much lower credit score!

I guess there is some truth to the rumors of doctors being bad with their money!

For those out there still entertaining the thought of going to medical school I have run across a couple of interesting articles on the dynamics of becoming a physician in todays environment.

• Forbes ran an article last month addressing the major concerns facing most physicians right now.

• There is a large divide between the generations of physicians currently in practice and those such as myself entering the work force.

As a resident who has yet to enter the work force I am very conscious about physicians and our attitudes towards our work environment.

I personally believe that myself and many of my colleagues made an “investment Mistake” when we entered medicine.

We thought the past performance of physician salaries would guarantee future results.

From a pure investment point of view my choice to go to medical school will likely be a poor decision compared to the career choice of others.

The current trends in medicine are creating a type of job security that no-one wants: Being relatively underpaid and overworked.

If not for the satisfaction that a physician gains from developing a skill and learning to perform this skill well for the benefit of others, the future of our health care system would be bleak.

The good news for me is that I still enjoy what I have chosen to do and realize that I have the freedom to pursue better opportunities should they arise.

Not one cent from our day jobs went into savings or investments during the month of April. To complicate matters, we also did our part to spend the US out of a recession.

Here are the numbers for the month ending April 30th:

• The key number on that chart has been our monthly living expenses

  We have been unable to get our living expenses below our critical $4000 threshold since February. We have been over budget by about $2000/month in 3 out of 4 months thus far this year.

  Each month this has been due to a large “one time expense” such as car repairs, airline tickets or hospital bills.

  Unless we can get our spending under control, it will be very difficult for our family to get ahead until I am completely finished with my training.

• I have been delaying my IRA/403b contributions for 2008 until I begin my fellowship

  Although my salary will essentially the same, my benifit plans will change when I change training institutions. Although I do not anticipate being eligible for a match this will at least ensure that all my savings for the year will go to the same mutual fund company.

• We are not doing anything really well and we are not doing anything really poorly.

  We are just living and enjoying the experience of being new parents. Because we made sure we have adequate insurance coverage and a sufficient emergency fund, we are comfortable living a little above our budget for the next 14 months.

We had an unremarkable April in our alternative income endeavors. Thanks to Google Adsense, we were able to add an extra $0.97 to our alternative income earnings.

Here are the results for the month ending April 30th:

My thoughts for the month:

My quest for alternative income has slowed to a crawl as my residency training intensifies.

As someone who has spent the past 12 years studying and training for my day job it is exciting to start counting the months until I am finished instead of years. My focus and dedication at work has intensified as I draw closer to the big day when I make the transition to an independent practitioner.

The next 14 months will be spent looking for all “the low hanging fruit”, making sure that I am keeping my finances simple and doing those things well while not exerting too much time and energy in low yield endeavors.

Why should I even continue to attempt to develop an alternative source of income?

One of the most common reasons given for having multiple streams of income is the security/flexibility that it provides. As someone who stands to earn a very respectable salary in a field with a very high barrier to entry I do wonder if the time I spend on these projects are the best use of my limited time outside of work.

The good news is that currently they are something I enjoy and are a somewhat productive way to decompress after work.

However as these projects become more time intensive, it places me in a bind since I am unwilling and unable to take time away from my day job and family.

For now I plan to plug along as I have been for the past year or so and see where it leads.

We managed to blow through the first quarter of 2008 in good shape considering all the changes we have undertaken.

The slight bounce in the financial markets helped overshadow a lack of new contributions to our savings and investments. Our net worth is now above the -$50,000 level for the first time since December 2007.

Here are the results for the month ending in April:

My Guidance to these numbers is as follows:

The interest earned on our cash savings continues its fall in April.

This is no surprise as the Fed has been dropping interest rates for the benefit of the economy as a whole. The optimist in me reminds us that this is still an extra $200/month in our pockets thanks to the generosity of the credit card companies and thier 0% balance transfer offers.

In what we hope will not become a trend, we also made a small withdrawal from savings to help cover the expenses for our upcoming move.

It was nice to see some gain in our investment portfolio in April.

I don’t get too excited about these short term changes in our portfolio. They help make our net worth numbers look better but they have very little influence on our day to day finances.

I have invested very little time and effort here and used the services of an uncle who is a financial planner.

The quarterly statement for my consolidated school loans arrived

It added another ~$800 to the balance for my school loans. It has been disheartening to watch this balance grow and to not make any payments on it. That will change this fall when I begin repayment on this loan.

I am happy with our Net Worth numbers for this stage in my career

The real challenge for us over the next 12 months will be maintaining enough of a cash flow to avoid having to dip into savings.

Our family has benefited greatly from having my wife at home with our daughter. However, our lifestyle and upcoming move are likely to bring expenses that we will not be able to cover on a single salary alone.

Sorry for the delay, some of this info is a bit dated as I try to catch up with my posts.

Our savings contributions continue to be feast or famine. With both my wife and I collecting a paycheck in January, we were able to contribute a nice lump sum to savings in February.

Reality came back quickly in March and we were unable to save any of our income. The rest of 2008 is beginning to look pretty bleak as well with our big move in July and the related moving expenses.

Here are the results:

The Numbers:

Our Living expenses dropped to the $4,000/month level in March
As a young family living in a large expensive city we struggle to keep our expenses in check. We have been able to trim most of our excess fixed costs each month. There is no gym membership, no landline, minimal magazine subscriptions, etc……

The $4000/month level for our living expenses is important b/c it represents the approximate level that we can live off of with our current income level. To reach this level we need to be very conscious with our variable expenses.

My wife continues to work part time.
We have been able to avoid child care costs by having her work on the days that I am post call and able to watch our daughter.

Her supplement to my income will end in May as we prepare for our big move. Unless we are able to trim our expenses in our future locale, we will have to consider having her work part time again when we get settled.

It will be the 4th Quarter before we have a chance to turn things around.
Managing our personal finances can be frustrating because changes seem to move at a glacial pace and it is rare to be able to make large changes to our net worth very quickly. I remain optimistic that if we keep focused on the fundamentals we will be successful in the end.

Sorry for the delay, Here is the data from 2 months ago. The life of a resident may appear glamorous on TV with shows such as ER and Grey’s Anatomy embellishing the drama. However, the real reason this post is late is the combination of our 5 month old at home and lots of call at work.

When I look at this list I have to ask myself; “are these really sources of alternative income?” If you take a quick look at the list of my sources of “Alternative Income”, there isn’t much alternative about it…YET.

There isn’t anything unique about collecting interest from a savings account.

Many of us had savings accounts from a very early age. The only unique spin on our savings is that over $60,000 of the balance is in the form of 0% balance transfers from the credit card companies.

The family farm is pretty unique in America today but it’s not a reliable source of income due to the challenges associated with agriculture.

This will be interesting to follow as the generations change. Will we have a younger generation interested in farming again given the surge in commodities? Will we be able to increase our profitable without becoming a large corporate farm? How will the search for bio-fuels affect agriculture in the USA? I don’t have any answers but I do believe that I will see tremendous changes in how we feed and power our world.

My venture into the wide world web definitely would definitely qualify as alternative income.

It is a field far from my formal training and is done in my spare time. How this will turn out remains to be seen. Currently I am not covering my expenses and hosting fees but the potential for this to become a secondary source of income remains. The largest challenge for this income stream will be devoting the amount of time needed to write good original useful content.

And I haven’t won the lottery yet…..

I apologize for being late with these posts. I remain dedicated to this blog and continue to find bits of time to keep up with drafts, etc… Unfortunately/fortunately I don’t sit at a computer at work and thus I am always 24-48hrs(a week perhaps) behind the latest news of the blogsphere.

A positive tidbit about being busy is that until I sit down and fill out my spreadsheets, I don’t have an idea how we are doing each month.

From what I see here, we did well in March on containing the borrowing costs for our $197,000s worth of Debt!!!

Although having over six-figures of student loan debt will be significant financial burden for many years into the future, I choose to focus on a couple of positive points.

• The first benefit is steady work. My wife and I used our time in college(and after) to gain marketable skills in industries that had a history of having steady jobs. I actively pursued a career in health care knowing that in the future I should at least have a job if economic times got bad.
• The other positive point is that a student loan is one of the better forms of debt to have. This year my wife and I were able to reduce our taxable income through the interest paid on our student loans. It doesn’t reduce our taxes dollar for dollar like a tax credit could but it does help with the mental anguish.

Those of you who have been following along may notice that I have removed the $4,000+ of student loan interest I accumulated in 2007 from my February totals. I have been using a modified form of cash accounting with this series and do not want to account for the interest accumulated until it is actually paid.

The trap of doing this it that it visually appears to minimize the total costs of carrying these loans for a full 30 years. To keep the total costs of these loans in perspective I will total the interest paid for the life of the loan.

One quarter into 2008 we are finally feeling the difference between having dual incomes with no children and a single income with one child.

Our impending move at the end of June(as I transition from being a Resident to a Fellow) has caused my wife to drop to part time at work rather than having to find and pay for childcare for a few months.

While this has been great for our family, it has slowly become a challenge for our finances. We have gone from a household living off of a six figure income with minimal expenses to one having to live on roughly half that income with slightly higher expenses.

We have gone from striving to get ahead to striving to get by.

The mental difference between the two is dramatic with every financial decision now being well thought out. It helps me appreciate the struggles that many families face trying to get ahead when it seems that they are doing everything they can to get by.

It has been important to remember that the drop in income does not fundamentally change what we are trying to accomplish financially.

It instead helps us focus on making sure we are on doing the little things better so our big picture remains bright.

The common response in this situation is to focus on limiting your expenses. This is something that we have been slowly working on for the past 2 years and is slowly reaching a plateau as we have eliminated all of our easily eliminatable expenses.

It is equally important for us to do what we can to maximize our income beyond working more hours because this is no longer possible.

When we were getting ahead, I was focused on maximizing our monthly gains and the best way to increase our savings. Now that we are just getting by, small changes in fees/percentages/expenses are the only variables that we have control over.

Example: We have been relatively complacent watching interest rates fall on our cash equivalent savings. As I write our Emigrant Direct accounts are earning only 2.75% APY. After a quick look over at Bankrate.com, I found multple other less popular(for a reason) banks offering much better rates(up to 4.05%).

That is an additional $1,500/year gain just for taking a few minutes to open a different online savings account.

Another Example: Our health plan has long had a heath survey to take with a financial reward for reaching certain health milestones. This week I finally filled out the survey(it took digging up some old medical records) and now have a $30 gift card to Amazon.

These are little things that brought in a little more money for our household. 2008 looks like it will be a year that the little things will make a big difference.

Even if we are just getting by, that means we are still getting ahead.

My wife and I have been tracking our expenses diligently since January 2006. The process of actually sitting down and developing a system for keeping track of where our money is going has been enlightening and the most useful step towards financial independence for our young family.

In 2007 we were able to make dramatic cuts due to the cost savings of combining two households and other various one time savings.

In 2008 the “one time expenses” have gone the other way and hindered our progress vs last year. The result was an extra $1,294.90 being spent in the first quarter.

That being said, here are where our dollars went for the 1st Quarter of 2008:

1. My Landlord took 18% : Our rent would cover the mortgage of a very reasonable house in most parts of the country. Renting is one of the prices we have to pay to complete my training. Although we would prefer to be building equity, we are trading that equity for the flexibility that renting provides to a busy Resident. The last thing I want to do post call is to fix broken stuff.

2. Our Doctors took 14% : I find it interesting getting bills from physicians and hospitals know that one day I will be sending out the same bills. After seeing what is being charged for medical services I find it very believable that medical bills are the most common cause of personal bankruptcy. The caveat here is that I rather be bankrupt and alive than rich and dead.

3. Our Grocery(and Farmers Market) received 14% : This is a marked improvement for our family. Since we have gotten married my wife has done a great job of slowly helping us eliminate waste from our food budget.

We came from two different families which had two very different approaches to food. This was easily identified by looking in the refrigerator. My family always had a full fridge but at times had to throw out a lot of extra/old food. Her family had a relatively empty fridge. With her running the budget our refrigerator is looking a lot like the one she grew up with. We are less wasteful, saving money and healthier for it.

4. The Insurance Industry got 8% : As a very risk adverse individual, one of the first things I did after finding out my wife was pregnant was to update all of our insurance policies. I went through our Renters, Life, Disability and Auto insurance policies to make sure that we were carrying the appropriate coverage for the life changes ahead.

The end result is that I can sleep soundly at night know that my family will be on a stable financial footing should anything happen to me or my wife. The one form of insurance which is contributing to the majority of our insurance costs is my disability insurance policy. Given my ongoing training, this was a very important decision for us which I covered in this post last fall.

5. We gave the struggling airlines 5% : With a new baby and our family currently living 3000+ miles from our hometowns let it suffice to say that we have had to make a couple of transcontinental flights so far this year.

As difficult as air travel can be, the cost to cover this distance is very reasonable compared to the time and fuel it would take to drive. It has also caused us to give some serious thought on where we would like to end up settling once I am finished with my training.

In summary it looks like we will be close to our goal of spending <$50,000 for 2008. We still have some significant expenses for the year: a move cross country, some auto work and perhaps some more medical bills.

It will be close, but we will have to do better than we did in 2007 because we will not have the luxury of having two full time incomes to pick up the slack.

We have reached the end of a rough 1st quarter to 2008. We are still well below our net worth peak of -$45,237.37 in November of 2007 due to multiple factors.

This was to be expected after our family navigated the expensive holiday season and added a new family member to boot!

Voluntarily cutting your family income by 50% in the middle of a recession isn’t normally viewed as the best way to get ahead financially. However it appears like we are pulling it off and I believe that we will be able to get away with it for a couple of reasons:

1. This will not be a permanent drop in income for our family. In 3 short months I will be moving on to the next stage of my training and starting a one year Fellowship. Although my monthly salary should stay about the same, my work hours should decline somewhat and I should be able to work a little overtime.

2. The change has allowed my wife to become a more active participant in our family’s financial story. Since she is no longer able to “just work a little more overtime” to pay for a splurge here and there, she has made it a personal challenge to decrease our family’s expenses so that we can still maintain some slight growth in our net worth.

Here are the results for March:

1.Cash and Savings: As I mentioned in my Savings percentage post last month. Our savings will likely continue to see-saw throughout this year.

I refuse to return to my old habits of being penny wise but pound foolish, so we are keeping a little more slush in our checking accounts to cover our expenses each month. Once we have finished paying the bills and we are sure we won’t need the cash, we then send it to savings. With the interest rates on cash accounts falling, the incentive to maximize our cash returns isn’t there.

2. Investment Accounts: Most of our investment accounts suffered a slight decline in March. I have begun to educate myself more in this arena and hope to make some changes here over the next 2 years that will result in a more balanced portfolio.

Although I did manage to max out my contribution to an IRA for 2006 and 2007, I did so with only a rudimentary knowlege of portfolio management. As I become more knowledgable and opinionated I hope to offer some useful insights.

3. Credit Card Debt: We paid only the minimums again this month. This debt is entirely in the form of 0% balance transfers and actually makes up the majority of our cash savings.

It is costing us nothing to keep this balance on our books and is earning a dwindling but respectable cash flow each month. The return was much more attractive 6 short months ago, but it has been an easy way to earn an extra couple thousand dollars.

4. Student Loans: My wife and I continue to chip away at our educational debt. I have to admit that it is frustrating to see the balances fall so slowly. On the positive side, we did recieve a small tax benefit for the interest we paid over the past year.

While 2 out of 3 of our loans are in current repayment, we will not bear the full brunt of this debt until this fall when I begin making payments on my $114,000 loan.

In summary, March was an ordinary month in the life of a young middle class family in America.

We miss being able to place $3000 cash into savings each month but this year will help us appreciate just how hard it is for most Americans to make large financial changes quickly.

The good news for us in February was that we were able to move a significant portion of our earnings to savings.

In fact we were able to move 102% of our EARNED INCOME for the month of February to savings/retirement.

Before you look at those numbers and blow them off, let me provide some details.

Like most households our monthly household expenses are cyclical. Some months we have more expenses than paychecks, etc.. To smooth out our financial reports I don’t include the balances of our checking accounts in our list of assets each month.

I do this for a couple of reasons:

First, we are normally very efficient at not letting our excess cash sit around. Anything over our normal monthly expenses we quickly transfer to our online savings account. A couple of clicks of a mouse and our money working for us as soon as possible.

Second, our bills are due throughout the month. To make our updates as simple as possible, I make our monthly updates as if all of our bills are paid. To be able to pay off our bills the week I make the summaries, I don’t report the slush I keep in checking.

Here are the results: (earnings are pre-tax)

The first two months of 2008 have been quite a transition for us. With so many changes at the beginning of this year: New baby, wife pulling back to part time, etc… We wanted to be sure we had the cash flow to cover our expenses without having to dip into savings.

To do this, we cut back our savings in January and early February until we were sure that we could pay our bills. The excess we then sent to savings at the end of the month.

We may continue to have this see-saw patten for the first part of the year with some months being more cash intensive than others.

The important number is the year to date(YTD) savings percentage.

With January being the last month that my wife was able to collect a full time pay check for 2008, I expect our savings percentage to slow decline over the course of the year.

On one and a half incomes, our day to day living expenses will consume up a greater proportion of our earned income each month.

Although this will be a challenge for us, I believe that it will help us in the long run as we learn to become more thrifty and manage our expenses wisely.

Hope you enjoy the journey as much as we do.

This is my third post in this series detailing exactly how much my wife and I spend each month financing our family. When I made the list I was surprised by the variety of different ways we spent our hard earned dollars financing the modern banking system.

At this point, I am almost appalled by how large the numbers are getting and we are only 2 months into the year.

Here are the results from February:

A quick summary of the results:

Banking Expenses/Fees For the average American, the banking system has a number of products out there to help you avoid banking fees IF you are willing to jump through a number of hoops. To keep our fees down we use direct deposit and rarely use ATMs. If we are traveling and need cash we just use cash back from our debit card and use credit for everything else.

Credit Card Expenses It is no surprise that we have some charges here. Although we carry a large credit card balance, it is financed through 0% balance transfers. The majority of the $225 we have spent in this category is for annual fee’s on a couple of our Airline Cards and a premium card. I think over the next 12 months we will have to decide if these cards are really worth their yearly fee.

Investment Expenses/fees This is one category that still looks good but I have the feeling that I really need to do some better detective work. Most investment fees are buried in the investment so that it is difficult to discover just how much it is costing you. My contributions to my IRA last month were to an existing no-load fund. In theory there should not be any additional fees other than the yearly operating expenses.

Student Loan Expenses/fees The number that jumps off the table above is the extra $4000 in student loan interest accumulation. I realized last month that I was not accounting for the interest accumulating on my $100,000+ of student loans still in forebearance. Although the total for 2007 was reported last month, it was accumulating at the rate of about $335/month for the past year. Since I only get the bill quarterly at best, I’ll only report the change in balances at that time.

The interest alone on our student loans is greater than all of our monthly expenses except rent and food.

All of a sudden that $100,000 education isn’t looking to cheap.

February is well behind us and the calender is telling me that we are half way through March. I finally managed to drag myself out of the hospital and crunch our numbers for last month.

To state it plainly: Nothing Impressive

The economy is hitting the skids and the Fed dropping rates quicker than I can refresh my account page. This is causing me great angst. The main driver behind my alternative income, our credit card arbitrage, is becoming worth less every day.

When I decided to finally started to maximize my 0% balance transfers last July, I was expecting to earn 5% or more on this balance for months just by placing it in an online savings account. After the Fed’s rapid series of rate cuts, 3% is starting to look like an attractive rate. I am kicking myself for not hedging a portion of this money in CD’s when rates were higher.

Also my Internet derived income PLUNGED from an all time high of $6.36 in January to $0.16 in February. This is more in line with the historical averages of my earnings from my internet related adventures.

February was also a slow month on the farm No harvests right now and if I ever expect to win the lottery I think I am going to have to buy a ticket.

Nothing Impressive BUT, it is extra money in my pocket and yet another stepping stone on the way to financial independence.

A bit late with the results…… mostly because I was afraid to look but we eeked out a slight gain for the month and that is all I could ask.

The realities; read “challenges” of our family becoming a single income household are becoming more evident at this time.

Here is the Damage for February:

Here is our guidance for February:

1. We continue to place the majority of our savings into short term, cash-equivalent savings. I am not a sophisticated investor, but right now I don’t see many bargains out there and most of the major expenses facing a young family (1st home, moving, young children) are looming ominously on the horizon for us.

2. I made a lump sum contribution of $2000 to my IRA for the 2007 tax year. I had already contributed $2000 throughout the year in monthly contributions and my wife an I both decided that this was a good use of a couple of thousand dollars to help decrease our taxes again this year.

3. I also recharacterized my Roth IRA contributions for 2007 to a Traditional IRA contribution. After much reading and deliberation I decided that less taxes this year was better than the promise for less taxes in the future. It is too easy to see congress attaching some form of income/net worth stipulations to the tax-free benefits of the Roth IRA.

4. We also had another 0% balance transfer offer fall into our laps with no fees attached. With the addition of this $5000 balance transfer, we now have over $67,000 in 0% APR balance transfers from various credit card companies. Unfortunately, the Fed is making this a less lucrative proposition each month as they cut the interest rates.

While cutting your family income in half right when the economy is going into a recession isn’t at the top of everyone’s to do list it appears as if we will be OK.

The day is fast approaching when I will finish this stage of residency and proceed to move to the next step of my training. This will bring with it a fresh set of choices once again.