Debt to Dreams

Even before running the numbers for our household I can predict that 2008 will not be as financially successful for us as 2007.

In 2007 we were able to take advantage of having two incomes, one household and no children to pay down some debts and accumulate a comfortable cushion of cash for emergencies.

As 2007 draws to a close, those synergies are now history. Over the next 12 months our household is going to have two major changes:

The first change that will affect us the most is that our primary bread winner, my wife, will be down-shifting to part time with the addition of our first child. This is going to affect us in many ways:

• our total family income will decrease by at least 40%
• our family health insurance costs will increase as I add my wife and child to my employer’s plan
• our household costs will rise with more individuals in the household and for a longer period during the day

The next big change is that I will finish my residency on June 30th, 2008 and begin my 1st year of fellowship in July. This is a significant development for us financially because it is going to require a cross-country move… again

• We will need to find the most convenient, cost effective way to move our household back across the country
• we will need to find good housing that is close enough to the hospital to enable us to maintain our single vehicle household

Combined, these two changes will make it a challenge for us to simply balance our inflows and outflows. With that in mind: I look forward to the challenge and lessons that this year will bring.

I know that if we are able to continue to control our spending and make small increases in our net worth on a household income of $60,000, we will be able to make significant gains in the future as I find ways to increase our income.

Although at times the journey to financial freedom appears to be long and hard, I do take some solace in the fact that as a 30 year old, our long run of financial growth is going to come from a series of short runs strung together. Here is to 2008 being another positive short run.

I took a portion of my time off during the holidays to update my accounts in Quicken and analyze where we ended up spending our money over the past 12 months.

I was quite disappointed to find that we were $20,000 over what I had guessed our yearly expenses would be in 2007.

I had forecasted our expenses to be about $40,000 in 2007. I arrived at this number as a random starting point based off the calculation that this is what we could spend with a pre-tax income of approximately $53,000($40,000*1.3265).

$51,000 was my expected salary for 2007. I had hoped that once we were married that we would have been able to live solely off my salary and be able to save my wife’s entire salary, unfortunately we weren’t even close most of the time.

Our biggest surprise was that our biggest expense was our education. A focal point of this blog that I will develop as time goes on is that although pursuing higher education is a very expensive proposition, if you chose the right career this money should be seen as an investment and not as an expense.

That being said, I am counting the money we pay on our student loans as an expense that we incurred years ago, similar to a mortgage.

This year our student loans made up 23.75% of our spending for a total around $15,600. The vast majority of this money went to pay off my sole private loan that I had taken out during the interview process for residency.

With my private loan paid off, we will continue to make our minimal monthly payments on 2 of our remaining loans and I will keep my largest loan in forbearance for at least 6 more months.

We are lucky that housing only makes up about 15% of our spending. Although our rent is as much as a mortgage for most individuals, we are doing our best to minimize the expense by living in a studio apartment in a walkable part of town. Because we rent in a large city where I am finishing my training, this is a pretty fixed cost for us until July.

Ever since I have had to buy my own groceries I have been amazed at how much money I spend on food. This year groceries were our 3rd highest expense and made up 10% of our expenses. This doesn’t sound excessive but when 10% is equal to $130/week, this is a high priority item for our family.

My explanation for our grocery bill is that as a physician, I see on a daily basis what a bad diet and lack of exercise can do to a person, therefore my wife and I are very particular about what we eat. We eat very little processed foods and strive for as “natural” of a diet as possible. We try to buy all of our fruits and vegetables at a local farmer’s market and do eat a fair amount of fresh fish or meat. This diet of nutrient dense foods is much more expensive than the usual low nutrient/high calorie food all around us. That being said, we will find a way to bring this down for next year.

Vacation and Travel was another surprise as our 4th largest expense of 2007, comprising a little over 7% of our expenses. Between flying back home and attending a conference or two we have spent more of our income on airfare and hotels than clothing, utilities, transportation or any other normal “household” expense. I know that this is mostly due to the fact that I have not done the best job of managing our miles programs maximizing our free flights.

This is a category where we could really save some money in a few years at the end of my residency by moving closer to our relatives when we settle down.

The rest of our expenses are all small contributors(about 5% or less) to our yearly total. This is good news in the sense that our expenses are balanced but bad news for 2008 when I am looking for areas of our budget where I could save us money.

With 2007 now behind us I have been taking note of what we have accomplished in a year’s time. .

Last year was a year full of firsts for us:

• It was our first year of marriage
• It was our first year with a combined household of income and expenses
• It was our first year of truly watching what we spent and where we spent it
• It was the first time we needed to buy Life and Disability Insurance.
• It was our first year with only one automobile in the family
• It marked the first time I have been out of Consumption Credit card debt since about 2001
• It was the first time I have had an emergency fund to pay for unexpected expenses.
• It marked the birth of our first child
• And…..it was the first year of this blog!

As I look ahead to 2008 we will continue to have some firsts for our family but with what we were able to accomplish in 2007 I believe that we are on our way to a stable financial foundation.

After catching up on some reading this holiday weekend, I never envisioned that at the ripe old age of 30 that I would be out of touch but I just had to marvel at an article the most recent issue of Money Magazine.

Of course, all kids need stuff, and there’s no reason to completely deprive them of things they’ll enjoy and even show off to their peers

Wow, I am already old fashioned and I haven’t even finished my education. There are lots of “things” children need but I doubt “stuff” is the most important one on the list.

I also wonder about the benefit of showing off to their peers. I remember playing the game of “my dad is …….” but an arms race of who has the most expensive gadget doesn’t teach children anything except that you are measured by your stuff.

If this is everyone’s approach to raising their children, no wonder the average upper middle class family spends $182,000 on each child by the age 17.

I will have to admit that I am tempted to follow what it costs us to raise our children. In a society in which the majority of households don’t budget and don’t know where they spend their money I find it hard to believe that they know how much they spend yearly on their children.

If this data is correct however I am in for a rude awakening.

I am currently in year 8 of my post college education and the only asset I have accumulated in that time is my ability to earn an income as a skilled worker. I am completely dependent upon my ability to work to repay my debt, pay my expenses and accumulate wealth(just like most other Americans).

Since I have devoted so much time, energy and money to learning a specific skill it is important to insure that it will not be for naught if I were to get injured. This has become particularly important now that I am married and will need to support a family in the future.

After much research this is what I have learned:

• As a resident I am in the most vulnerable financial portion of my career. I have already invested over $120,000 in my education but I am yet to see a return on that investment until I become a board certified physician. It is important for me to insure my ability to earn the income I have invested years into learning how to earn.
• Some physicians have physically demanding jobs. When you read the statistics available on disabilities, some of them are very high. For example; 1 in 7 people between 35-65y/o can expect to become disabled for 5 years or greater. Take these two items together and it is highly likely that I could suffer a disability at some point in my career that will prevent me from physically performing my duties at a sufficient level to continue my career.
• Insurance Companies base their rates on several factors, including age, occupation and health status. At this time I have all three of those factors on my side. I remain young and healthy and I am a couple of years from finishing my training, this is an ideal time to purchase a non-cancelable and guaranteed renewable policy.

With that in mind, I have decided that I was looking for the following in a policy:

1. Non-cancelable and guaranteed renewable rider This way once I purchase a policy the insurance company cannot cancel, change the provisions or add restrictions to it.
2. An “own occupation” definition of disabililty. Most insurance plans will consider you able to work if you and perform any form of medicine. For someone who has devoted years to learn a very specific skill it is important that you are compensated if you cannot perform that skill.
3. A cost of living adjustment rider this will keep the value of my benefits from being eroded by our very real risk of inflation.
4. A Future Increase/Purchase Option Rider; this rider would allow me to increase my coverage and maximize the amount of disability insurance I can carry.
5. With a Financially Sound Company: my policy will only be as good as the finances of the company writing the policy. If the company is going to go bankrupt in 10years, my policy will not mean too much.

After much time and effort I was able to purchase a policy with all these desirable features. Interestingly there were only 2 companies that carried a policy with all those features resulting in not much of a choice.

The cost of my new policy is such that I will have to temporarily divert my monthly Roth IRA contributions to pay for my disability insurance premiums for the time being.

This will cause a slight delay in my accumulation of retirement assets in 2008 but it does not prevent me from realizing my dream of financial independence in the near future. Not to mention I now sleep much better at night.

After a steady start to the year, the market turbulence continues to make its presence felt.

Our balance sheet shows more outflows than inflows due to the renewal of family insurance policies and one time expenses related to the holiday season. This increase in spending made it difficult to offset out loses with savings alone.

Here is our Balance Sheet:

We continued our arbitage again last month with the addition of almost $20,000 in 0% balance transfers

Although the majority of these no longer cap the 3% balance transfer fee, there are cards out there that continue to limit these balance transfer fees at anywhere from $0 to $99. As long as these transfers continue to result in positive cash flow for our family, I will continue to take advantage of them.

The payoff of my private school loan represents a small victory for our family. The ability to remove a liability from our balance sheet and lock in a 8.27% return was a win/win for us. Although we depleted our cash reserves by almost a third by doing this, we still have enough cash on hand to cover any unexpected emergencies.

Now that we are well into December, I hope to spend some downtime over the holidays analyzing our results and formulating our plan for 2008

Yesterday marked the first full year of our journey from my six-figured educational debt to financial independence.

We have made quite a bit of progress over the past 12 months, increasing our net worth by almost $40,000.

We have been able to do this with the simple strategy of spending less than we earn and taking advantage of our limited time with dual incomes and no children.

Although our strategy thus far has been very conservative, I view these first few years as the foundation for our later growth.

By having a strong foundation of emergency funds, insurance and good financial habits we will be able to be more aggressive in the pursuit of future growth.

Most of my increase in future cash flow will come from the transition out of Residency to being a fully licensed independent practitioner.

Like most individuals who work in the service sector, I have no way to leverage my income other than working more hours. With most physicians already working close to 80 hour weeks the option of just working more hours will not be realistic.

To compensate for my lack of leverage I hope to slowly build my alternative income sources.

None of these will result in overnight success. With age on my side however, I am willing to be patient in my pursuit.

In the past 10 months that my wife and I have done an adequate job of limiting our expenses and accumulating capital in the form of cash savings. We are almost able to live off of one income and we have accumulated enough cash to pay our living expenses for 6 months in the event of an emergency.

We are now faced with the common question: “What is the best way to invest $5,000-$10,000 right now?”

This is always a difficult question because everyone has a different tolerance for risk and different end results in mind. Here are my choices this month:

• keep the money in cash earning less than 5%
• go with the higher historical average of the stock market
• take a guaranteed 8.27% return

I could keep this money in cash and sleep very well at night. This will likely give us the worst return of the three options but it also gives us the most flexibility. Our living expenses have fluxuated tremendously over the past few years and we continue to be dependent on 2 incomes to make ends meet.(just barely)

I will not be investing this money in the stock market. I came to this conclusion based upon the assumption that in 3-4 years I should be able to triple my retirement investments without the same level of sacrifice to our savings. I realize that I am approaching an age where I should be regularly contributing to my retirement and I will be kicking my self if the market races to 20% returns over the next 3 years. Since this is the first significant savings our family has been able to accumulate my primary concern is to not lose money on this investment.

What I will do is pay off my Private loan which has an interest rate of 8.27% This isn’t as sexy as finding a great stock that will go up 200% in the next 12 months, but it is the right decision for us at this time for multiple reasons.

• The most tangible reason for me is that this is a no lose proposition. I view good personal finance management as a series of good small decisions. By paying off this loan, I will be limiting my borrowing costs, decreasing our family’s monthly expenses and thus increasing our available monthly cash flow.
• The 8.27% interest rate on this loan is by far the highest interest rate on all of our liabilities. Our credit cards are at 0%, my consolidated school loans are at 2.85%, my wife’s loans are at 3.375 and my Federal loan is at 5%. Although some of our student loan interest has been tax deductible, the added benefit of this deduction does not outweigh the financing costs of this loan.
• With falling interest rates at this time, the benefit of carrying so much cash diminishes. I could reasonably expect the spread between the amount I am earning on my savings and this loan only to get larger as time goes on.

The deciding factor was when my loan holder sent my repayment schedule. I took one look at the image below and saw that if I took the full 10 years to repay this loan, I would have spent more on finance charges than what the loan was originally worth. Only by looking at the total cost of this loan and not the $100 montly payment does the true cost of borrowing this money become apparent.

Paying down debt isn’t fancy but its often the safest choice available. As a simple investor I will take the consistent 8% return this gives me. As our family’s finances become more secure I will feel more comfortable seeking a higher return.

I had a reminder last month of how thankful I am that I finally managed to get my financial house in order(as much as you can with a ton of educational debt)

As I have progressed in my education, each step has required a progressively more expensive examination to reach the next level. I just found out the latest step in this journey is going to cost me close to $1000.

Luckily over the past year my wife and I have managed to accumulate a sufficient emergency fund to help us to cover unexpected large bills like these.

Although in most instances I wouldn’t qualify a test as a “true” emergency, this bill happened to come shortly after I had paid off the last of my old credit card debt, reminding me of my old habit of living beyond my means.

Couple that timing with some comments from a few of my classmates who live paycheck to paycheck and I am thankful that I no longer have to place the unexpected expenses that come up each month on my credit cards to be paid off some time in the future.

Everyone is different in how long it takes them to accumulate an emergency fund. I found that for us, it was very helpful to have a lump of seed money after selling my truck to help this account have some heft to it as soon as I opened it. Perhaps this could be a good use for a holiday bonus this year.

More than once in my life I have been told that if nothing else, at least I am consistent. Our family’s consistency showed again last month with yet another steady gain of $4000 for the month.

More importantly I flnally paid off the last of my consumption credit card debt marking the first time since medical school that I am free from credit card debt.

Here are the details:

For the first time readers all of my credit card debt is now in the form of 0% balance transfers which I have placed in FDIC insured online savings accounts. This results in an extra couple of thousand dollars a year after taxes and fees.

Taking advantage of these 0% balance transfers does make our finances a little more interesting but so far it has been worth the effort. The main negative side effect is that it has resulted in a significant decrease in my credit score.

Our student loan debt is real and not a typo. Our total balance is currently around $140,000 and we are currently paying off some of our smaller loans with the majority of my student loans in forbearance.

We continue to devote the majority of our positive cash flow into short term savings accounts Although the yields on these accounts are falling, most of our family needs are short term and I do not have enough confidence in the stock market right now to risk a significant downturn. Therefore a very large percentage of our assets remain in cash.

I feel slightly guilty about our low contribution rate to our retirement accounts. I realize however that the fact that we are actually contributing to these accounts right now is a step in the right direction. Neither my wife nor I are eligible for a matching contribution. Our incentive to save is low while the expenses for our young family remain high. This metric will likely become worse before it becomes better over then next two years.

The next month and a half will be very busy for us. We are quickly approaching the holiday season, our first wedding anniversary and our first year of blogging.

September is now gone and the results were better than I had expected. Without any large changes in our household fundamentals we benefited from the gains in the equity markets and had our best month over month gain this year!

Here are the results;

Some thoughts on the past month:

We have accumulated a few new 0% Balance Transfer in September The difficult part however has been to find an offer that now caps the balance transfer fees. They are out there but only about 1 out of 5 limits the balance transfer fee to less than $100. With the interest rates in our online savings accounts falling this makes theses offers less attractive.

The majority of our monthly gain came from gains in our savings and retirement accounts. We are able to accumulate our savings quickly by attempting to live off of only one salary. I don’t put a lot of weight into the gains in our retirement accounts since it will be years before we touch this money.

I will pay off the last of my “true” credit card debt at the end of this month. I thought I would have been more excited when this day came but my dreams have since moved on to bigger things. We continue to slowly pay off our debts but with the majority of our debts at less than 5% interest I plan to make only the minimal payments on these for some time.

I have begun to think about out goals for next year. The past year has been very straight forward for us financially. The next 12 months will be much more exciting/difficult. We will be moving back across the county, not to mention my wife and I will both be changing jobs. Despite these challenges we hope to continue our steady progress towards financial independence.

A sign that I am way behind the times: It’s almost October and I am just now getting to this months issue of Money magazine!

I was surprised to see this in one of their articles:

even a $100,000 debt is a reasonable trade-off for a medical degree

This is the foundation of this blog. As I approach 30y/o our family’s net worth remains negative, mostly due to my educational costs and some poor finacial decisions in residency.

I have a hunch that I should be able to play catch up over the next decade but the long term picture of my career choice is hazy. I sense some discomfort among some of my collegues about the brewing health care crisis and the push for socialized medicine.

We shall see. There are no guarantee’s for tomorrow but I’ll keep you up to date.

Since one of the “features” of this blog is the vast amount of debt I carry, I thought I should do a better job of detailing how much it “costs” me each month to finance my educational debt and my cost of living.

The key word in that sentence is Finance. The majority of these expenses are expenses that would be completely avoidable if I lived a cash only life. I do not belive in living a cash only life and it would have been impossible for me to get where I am today without financining my education.

I will break these costs into a few basic categories:

1. Banking Expenses and Fees: The introduction of online banking and the general competition for customers should help keep these costs low for most individuals. For our family, these costs are minimal. The hospital I work for has a special agreement with the bank we use and this waives some of the various fees they would normally charge.

2. Credit Card Expenses and Fees: Historically this has made up a large percentage of my borrowing costs. Once I educated myself and learned how to take advantage of the 0% balance transfer game these expenses fell dramatically. Now these expenses are comprised mostly of my balance transfer fees.

3. Student Loan Expenses and Fees: At this time the majority of my educational loans remain in forebearance collecting interest without me actively having to pay them. I will not count the accumulated interest as an expense until I write the check for it each month. This will only represent the financial costs my loans are placing on me at this time.

4. Investment Expenses and Fees: Most studies show that people have more money at retirement if they pay lower fees over time and control their taxes. This is basic, common sense investing but is harder than it appears. I would bet that most of us don’t actually follow how much we are paying in fees each year. By actually following how much it costs me to invest I hope that it will help me make better decisions about how and where I invest for my retirement.

I was waiting for a good starting point for this series but I decided that the best starting point is now.

Here is how much I spent in August to Borrow Money:

Things to note from this first post:

1. Our Banking Fees are almost non-existent. We only use our bank’s ATMs for cash withdrawals and if we are traveling we just use debit with cash back to avoid the fees.

2. Our credit card expenses are high this month due to the two balance transfer fees I had to pay to play the 0% balance transfer game. In the process of consolidating this information I did find that my wife had at some point signed up for a “credit protector” program for one of her credit cards which has been charging her $12/month for their services. By cancelling this we were able to save a few extra dollars each month.

3. Our Investment expenses have been low because we are not currently very active investors. The year to date fees from this category are the result of my investment of $4000 in a Traditional IRA in April. I am willing to bet we will see a lot more of the “Adminstrative Fees” of our investments at years end.

4. Suprisingly our student loans are only activily costing us about $66/month. This is strictly the interest we pay each month. I am not including the principle. This amount also does not include the bulk of my loans for which I only recieve quarterly interest statements because they are not in active repayment.

I hope you find this interesting. It has definitly been useful for me to organize this information.

Late again this month. It has become apparent to me that my 4th year of residency is going to require a much greater time commitment than my prior 3 years.

That being said, our finances continue to tick along. We have managed to make saving a significant portion of our income a habit and at this point are looking for easy ways to earn a few extra bucks each month.

Here is the Summary:

Things to note for September:

The most notable change is the dramatic increase in our cash and short term savings. Since the first 0% balance transfer was so easy we added another transfer in late August. These transfers have dramatically increased our short term savings on our balance sheet and helped us earn an extra $200 in interest for the month of August.

Also of note we were able to increase our net worth above the $-60,000 threshold for the first time. If we can maintain our current household income/household expenses ratio, it will take us another year and a half to 2 years to get back to $0 net worth.

We are expecting a very busy last quarter to 2007 for our household.

• Within the next 60 days I will have to start making payments on my private loan as well as repay my first 0% balance transfer of $3500.
• We are entering fall which is normally a period of high expenses for us with lots of holidays, birthdays and now an anniversary.
• I will have new changes to my health insurance, life insurance and disability insurance policies which will increase our expenses for next year.

And we are already almost half-way through September.

I never thought I would carry over $45,000 in credit card debt. That amount represents about a years worth of living expenses for our household.

Even when I was at my personal finance low 2 years ago with over $14,000 in hard earned credit card debt, I never thought I would let my debt get to such levels.

The difference is that this $45,000 is now earning me about $180/month in pre-tax interest. After standing on the sidelines waiting for a good opportunity, Bank of America was very kind to me in July and sent me a 0% balance transfer offer. I quickly turned this offer into a $19,500 balance transfer.

That balance transfer wet my appetite for other convenient balance transfer offers. After reading a couple of other blogs I found a way for me to do this without applying for a large number of new credit cards:

• I first asked to have my credit limit increased on my other old BoA credit cards.
• I then had the credit limits from these two cards transfered over to the credit card with the 0% balance transfer offer.
• I then used this increased line of credit on my 0% BoA card and transfered this to my online savings account.

I now have just over $45,000 in credit card debt earing me cash for the next year. I think this is as far as I am willing to go unless another great offer falls in my lap. So far this has been a low effort, high reward way for me to earn a couple extra dollars each month.