Debt to Dreams

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.

The current market turmoil is providing a good opportunity for individuals to assess their risk tolerance.

For younger individuals such as myself, a little short term volatility will be averaged out over the next thirty years. Thus, the common financial advice is to keep yourself 80% or more in stocks to take advantage of those years of double digit gains in the equity markets.

This is good canned advice for the average person but it lacks the individuality that makes personal finance so personal. What if I am super risk adverse? What if I don’t ever want to see my portfolio or net worth go down? Do I ever have a chance of passing that magical $1,000,000 threshold in retirement?

I will say YES, you can still have a million dollar retirement without ever having to buy a single stock.

All you need is an upper middle class income, a savings account, and time.

If we were able to continue our family’s current average cash savings of $3000/month for the next 35 years and stuff this in a mattress we would have over $1,250,000 to sleep on at retirement.

That my friends is saving for retirement the hard way; the really hard way!

The biggest risk with this approach is the risk of inflation erroding the value of your savings

So, compared to the alternative, It looks like I will be sticking with stocks for my retirement. It’s a lot easier to save $3000/year invested in stocks than $3000/month invested in cash.

Sorry for the Delay, I have been working in the ICU this month so my time and attention have been directed elsewhere…….. as it should be.

Only a couple of weeks ago I wrote “Minimal Risk, Maximal Satisfaction”, That was before the stock market regained some volatility. Couple that with an average savings month and we had our first negative net worth month on record.

We were not able to save enough of our income to offset the decline in our equity accounts. I was hoping to climb above the -$60,000 by the end of July, but it will have to wait for a better month. Despite the negative numbers the fundamentals in our household remain stable and barring any catastrophic economic collapse we should be back on track next month.

Here is the Damage:

Here is some Guidance to those numbers:
Looking at our balance sheet our Cash/Savings looks out of proportion to the rest of our assets. Part of that is due to a new 0% balance transfer offer that I took advantage of in July. It was the first time that I did this for the sole purpose of arbitrage. It was pretty easy and I hope to take advantage of a couple of other offers floating around over the next couple of months.

The main reason I keep so much cash on hand is maintain the ability to pay for short-term expenses, otherwise known as emergencies. Without this cash I would have to generate more credit card debt or having to liquidate a stock or bond investment at an unfavorable time and incur unwanted taxes.

Being newly married, halfway through residency without any established long term plans, maintaining our financial flexibility to take advantage of opportunities remains goal #1.

After watching our investments gyrate, my wife and I reaffirmed our main goals for the next 5 years which are basically:

1. pay off all of our non-student loan debt
2. build a 4-6 month emergency fund
3. save 20% for a down payment for a house
4. max out our Roth IRAs each year

On the liabilities side, the majority of my student loans remain in forbearance. This is a sort of purgatory where you watch your student loans accumulate interest but you don’t have to make you make monthly payments. I will renew this arrangement at the end of this month for yet another year.

Or should I say, Minimal Risk, Maximal Returns! As I have been watching the markets race to new records over the past six months I have been remarkably unenthusiatic about it.

In years past when stocks, or real estate were zooming up, all I could do was watch and get a sick feeling in my stomach. It was the feeling you get when you are way behind and you feel like everyone else is just getting further ahead. All I could see were opportunities lost.

This time it is different and I think I know why… This time I am at least investing SOME money in the market.

To me this emphasizes the importance of just starting an IRA or 401K. Even though I have a large amount of debt, some of it at interest rates just over 8%, I have been able to have peace of mind by investing $200/month in my Roth IRA. That is not a lot by most standards and the majority of our savings have been used to start our Emergency fund, but it is enough for me to think that at least I am doing something.

Although I am missing out on maximizing my growth by not investing lump sum, I am also more comfortable that I will not have invested at a peak by investing over time.

So if you have that hollow feeling in your stomach when you watch the evening news, Just Start and I guarantee you will feel better in no time at all.

Since we have passed the 6 month mark I thought it would be appropriate to revisit our Financial Plan for 2007. When we made this plan back in January, I was not quite sure what to think. We were recently married and still in the process of combining our lifestyles and finances. Six months into the year, our modest goals look very achievable.

To keep this simple I broke down our goals into:

Savings: We have managed to build our emergency fund to cover about 4 months of living expenses. We will continue to save the majority of our excess earnings here as the beginnings of a down payment for a house. We are still over 2 years away from looking to buy a home so we do have time in our favor.

Investments: Back in January I was toying with the idea of still being able to max out our Roth IRA’s lump sum for 2006. When our taxes were done, we actually ended up saving $1000 off our tax bill by contributing to a Traditional IRA instead. This will not effect us too much in the long run since I should be able to convert this into a Roth IRA in 2010. For our current year I have been contributing $200 a month to my Roth for 2007 with the intention of making up the difference at the end of the year. My wife is contributing a minimum amount to retirement at this time which remains a point of discussion.

Debt: Debt has been a central part of my life for the past 7 years and will continue to be for the rest of my life. The key difference between the Dr. T of 3 years ago and Dr. T today is that I am using debt more wisely now and I am more educated on the pitfalls of not managing debt. My goal for our debt management in 2007 is to rid myself of the last of my credit card debt from years past and to continue making my student loan payments. At this time, we have been able to do this and will pay off the last of my old credit card debt in November. My private loan comes due in November as well which will add to our monthly payments

Expenses: When I looked at our expenses from 2006 as 2 separate individuals I was quite embarrassed with our sum total of about $98,000. This number included multiple “one-time” expenses so it was not an accurate representation of our day to day lives. I figured we should be able to cut that to about $40,000 for 2007 and judging by our results so far we are pretty close.

Here is the break down of our expenses so far this year.

As you can see we are about $4000 off our goal at the half way point. The biggest reason for this is that we have done a little more traveling than expected this year and we continue to spend too much on groceries. I am confident that we will be able to make some cuts over the next six months and squeeze in under $40,000.

So far, so good. We shall see what the next six months hold for us.

It’s OK, I THINK I know what I am doing this time. I didn’t buy a new car. I didn’t go on a fancy vacation. I simply decided it was time to play the credit card arbitrage game.

After spending the past 2+ years aggressively paying down my credit card debt I have managed to eliminate the balances on all of my credit cards except one. Instead of closing my old accounts I selectively kept them open to help Improve my credit score.

These were cards that:

1. I have had for at least 5 years - They add history to my credit report
2. Have high credit limits - They keep my credit utilization ratio low

After watching many other bloggers and their success with this technique I was waiting for a opportunity to start with a minimal effect on my credit score.

Bank of America was the first to step up offering 0% on Access checks and balance transfers till May 2008 with a $75 balance transfer fee. Interestingly this was only offered on 1 of my 3 Bank of America credit cards. The other two were still offering 1.99% on balance transfers.

It couldn’t have been any easier. Now until May 2008 I just need to be vigilant about paying my bills on time and making sure I don’t get any universal default charges.

June is behind us now and we are half way through July so it is about time for an update. For those not in the medical field, July is a special month in an academic hospital because on July 1st all the Residents advance a year. For that reason you sometimes will hear someone say: “don’t get hurt, injured, sick, etc.. in July”.

Here is how we did in June

Some thoughts on our Progress:

• Our savings rate has remained surprisingly constant for the first half of this year. It could be better, but we have been able to save the equivalent of one salary each month.
• My wife and I had a discussion about contributing more to her 401K or opening a Roth IRA for 2007.
  • She would prefer to keep her savings secure in a savings account since we are anticipating some major expenses once I am finished with residency.
  • I am in favor of maxing out our Roth IRA’s in anticipation of one day having a combined salary that would prohibit us from contributing to a Roth.
• My Educational Debt continues to hang like a dark cloud in the horizon. I can continue to defer the majority of this debt until I am finished with residency, however my residency and relocation loan begins repayment this November.
• The remainder of my credit card debt will be paid in full in November. It continues to sit with 0% financing until that time.

The majority of my time has been spent at work but I will continue to post about once a week(hopefully more!) until things begin to settle in. Thanks for following along.

By now if you have been reading about personal finance you will have read an article or two on delayed gratification. Most people will agree that an element of delayed gratification is very useful if you plan to accumulate wealth. In fact, some very smart individuals over at Stanford even did a study back in the 1970’s by offering hungry 4-year-olds a marshmallow, but told them that if they could wait for the experimenter to return after running an errand, they could have two marshmallows.

Those who could wait the fifteen or twenty minutes for the experimenter to return would be demonstrating the ability to delay gratification and control impulse. About one-third of of the children grabbed the single marshmallow right away while about another one-third were able to wait 15 or 20 minutes for the researcher to return.

Years later when the children graduated from high school, the differences between the two groups were dramatic: the resisters were more positive, self-motivating, persistent in the face of difficulties, and able to delay gratification in pursuit of their goals. Those having grabbed the marshmallow were more troubled, stubborn and indecisive, mistrustful, less self-confident, and still could not put off gratification. They had trouble subordinating immediate impulses to achieve long-range goals.

Every July I get a quick reminder of a different form of delayed gratification……SLEEP. Anyone who has had to take overnight call and function at a high level for 30-40 hours strait can truly appreciate just how great a full night’s sleep can be. I might not be any richer but waking up refreshed after a brutal call is just a wonderful feeling. Just another crazy way of practicing your skills of delayed gratification.

See you all in the morning.

As part of my quarterly financial roundup and the continuous quality improvement(CQI) project that is my life, I spent my day off last weekend going through my filing cabinet. I was looking in my various folders for lost pieces of obscure information(what was my last Heb B titer?) and trying to squeeze some more space from our studio. I was throwing out now useless pieces of paper I had saved and I looked at the balances on my old credit card statements. Wow, after looking at those statements from 2001 to present, I know why I spent the past 5 years in credit card debt. I was spending money I didn’t have! My average monthly expenses were higher than my current levels of expenses and I didn’t even have a job!

That started me thinking; How much can we expect a person to change their financial habits over time? Am I headed in the right direction? Since I did not come from a rich family do they know something I don’t? I assume that this is a natural progression of financial awareness that most individuals go through.

Here are some of the “Phases” that I have seen in the development of my financial habits since college:

• Phase 1 was my underappreciation of the true cost of long term debt. When I was applying for medical school, I didn’t apply for various scholarships and grants because they were only worth $2000. When faced with the prospect of a six figure education bill I took the “another couple thousand won’t make a difference” approach. I maxed out every loan available to me because it was “free money” that I wouldn’t need to pay back for years.
• Phase 2 was the start of my gross negligence of daily living expenses. This quickly led to my entry into the world of credit card debt. I spent freely on gym memberships, groceries, entertainment, etc..because it was “free” money that I hadn’t earned. Only 2 years before I was working as an RA and counting every penny to get through undergrad debt free.
• Phase 3 was when the loan checks stopped coming and I realized that I was WAY IN DEBT. I noticed that it was costing me money each month that I could be spending on better things and that if I didn’t change my habits, it was going to only get worse.

Luckily for me, I went though all this in a matter of 5 years. I know many others who continue to idle in Phase 2 and haven’t yet realized the trouble they are in. I believe that people can change their habits and 2 large factors in this change are acceptance and education. I won’t go into the acceptance part except to say that, until you accept you have a problem, you cannot begin to fix it.

By following people facing the very same problems and watching them successfully getting out of debt I educated myself on what was working for others. I became a thief of their ideas. I would try different methods and suggestions for getting organized, tracking my expenses and cutting my spending. With this approach I have been able to see some short term results and I am very optimistic about the long term.

I find financial management similar to residency. The days are long, months fly by and you lose track of the years.

When I stop and think about it, managing our finances shouldn’t be that hard. If you get down to the basics you just need more money coming in than you have money going out. Very original thoughts, I know. When I realized that I was in over my head in late 2005, my first response was to try to clamp down on the outflows since my post tax dollars are much more valuable than my pre-tax dollars. To make the biggest impact I decided to focus on my largest expenses which were housing and transportation, the same as 90% of other people.

I reached the point that I think many people in debt reach. You look at your balances, you look at your income and you realize that, whoa! If something doesn’t change soon I will not be able to keep my head above water. As a Resident, the majority of us have the benefit of knowing that we will be getting a big raise as soon as we finish Residency. Therefore, many of my colleagues in a similar situation just decided to keep piling the debt on with the assumption that once we finish they will be able to pay these debts off without having to change their lifestyle. This was a very tempting option. The problem was that I really didn’t think I would be able to pay my minimums if I continued to accumulate my debt at the same rate.

After running the numbers it was obvious that small changes were not going to make much of a difference. I don’t drink that much coffee or eat out that much. I first downsized my living space from a one bedroom to a studio. This helped me in two ways. First it made me realize that I had way too much junk that I would never use during residency; and second, it helped keep me from spending money on things I didn’t have space for and couldn’t afford. The biggest cost saver for me however was an obvious choice: get rid of the car.

This is the point that 99% of people stop reading, call me crazy and explain how for them, making such a move is just not possible. I will have to agree that with most people it would be very, very difficult to live without a car. What I am suggesting to consider if you really need (1+) cars for each member of your family. While I debated it for months, I did not sell my car until a few weeks before my wedding when I knew that we would have at least one working car in the family.

I did have some reservations at first, but after seeing an extra $600/month in my checking account I quickly decided that it was worth the inconvenience. We have been able to continue this for a whole 6 months by:

• using public transit and the shuttles offered by the hospital
• walking or riding our bikes when the weather allows(and occasionally when it doesn’t)
• pooling all of our errands into one weekly trip

Will we be able to continue this into the future? This will most likely be determined by where we eventually settle. Most towns and small cities don’t have adequate public transit. Will the roads be safe to ride a bike to work on? How far from work/town will we live? These are questions that we will have to address in the future. Our goal for now is to see if we can remain a single car family for at least the next 2 years.

Other than the addition of a new line to my Monthly Updates I haven’t expanded much on the $4000 I invested in a Traditional IRA to take advantage of tax savings for 2006. Because the decision to invest was a last minute decision based upon my tax return I had not done any due diligence or research on where to place the money.

In a crunch, I did exactly what a large portion of Americans do: I took the easiest possible path and went to a financial planner. My situation is slightly different because I am lucky/unlucky enough to have an uncle who is a financial planner. Since this was a last minute investment and he had offered to help in the past I decided to write him the check and see what he could come up with for me.

Although I wrote the check back in April, until now that money has just been sitting in a money market fund while we worked around our schedules and time zones to get a chance to talk about what he suggested. His solution was this:

split the $4000 up into 4 different $1000 investments; each in a different class to diversify the investment. To do this he suggested class C shares in a World fund, Midcap fund, Large Cap Value fund and a Small Cap fund

This is a perfectly reasonable suggestion and likely the same one I would have gotten from any other financial planner. The problem I had was that I was not overly impressed with how he arrived at his suggestion.

• The first decision he made that caught my eye was the designation of Class C shares. In my limited investing experience I had never used or learned about the different classes of shares because I never thought that I would be investing through a broker. What I learned about class C shares made me question his decision to use Class C shares for my investmet.
  • I learned that class C shares carry the highest annual expenses in lieu of paying a front end or back end load and have a 1% penalty if you pull out within a year
  • they seem to be best if used for diversifying your money in the short term, allowing managers to chase yields without incurring loads as long as the money has been invested for 12 months.
  • Why then am I investing in class C shares when it will be at least 30+ years before I touch this money? The increased yearly expenses are sure to result in lower returns over this period. My impression is that he simply intends to chase yields every year or so without having to pay a load on either end.
• The way he picked which funds to invest in also seemed to be cookbook. He simply had a computer program which sorted out the funds that had the best 3,5,10 year yields in their respective categories. He didn’t seem to be making any long term decisions about which direction he thought the economy was headed, he just knew to split the money up and put it where people have been making money in the past 3, 5, 10 years.
• This form of diversity might not work anymore as we saw at the end of February when almost every asset class took a dip. Currently between my wife and I our retirement is 100% invested in stocks. With any hiccup in the global equity markets, we will likely see some significant loses.

For these reasons I question why we need to use financial planners. Your local financial planner is reading the same magazines, reading the same books, and might not have gone to school any longer that you and I. Should I be paying this guy X% of my assets each year. What value do they add to the equation or are they just yet another layer of middle men making a cut. We will see how he does. If his picks do well does this mean I should move the rest of my investments with him? Only time will tell. I will admit, he has more time than I do.