Debt to Dreams

To all the new readers from Credit Card Lowdown Welcome. For a little more background please see my About page. I will have to say that I am excited about how far I have come from February 2006. I also realize that I have a long way to go with $3800 in credit card debt remaining and over $120,000 in student loans making money for someone else. I made some difficult decisions since then and I am pleased that I did.

Here is a quick list of what I felt were the best decisions I made in the past year:

• The biggest decision I made was to get engaged in April 2006 and married in December of 2006. In terms of dollars and cents, by combining households my wife and I managed to decrease our living expenses dramatically.
• The second biggest decision I made was to sell my truck. I had never been a budgeter but once I did I found out my truck was costing me over $700 a month in combined expenses(insurance, fuel, loans, parking, etc..) Since I happen to live close enough to the hospital and stores I decided to sell my truck. Financially it has been a tremendous benefit but it has been difficult at times, particularly meeting friends outside of work hours. We did keep my wife’s car and it continues to be a significant expense in our lives.

Amazingly those two decisions were enough to turn my finances around. I hope to have the rest of my credit card debt paid off by November 2007 when the last of my 0% balance transfers expires.

The story will not end there unfortunately; my private school loan comes out of forbearance in November as well and has accumulated over $2000 of interest in 3 short years on a balance of only $10,000. At an interest rate of 8% and I will have to make a decision to pay it off using our savings or to make the minimum payments until I finish residency.

I hope that this blog will be helpful. My end goal is to prove that no matter the current cost in dollars and time; it still makes financial sense to become more educated. It just requires a lot more tolerance for large negative numbers and a willingness to help your fellow man.

Well the month of May is finally over and it was a busy one for us. Since May was a five week month I was expecting a better end result but five weeks of expenses cut into our savings budget. Here is how things break down.

Our Guidance for this month:

• my wife began contributing to her 401K at work again so this represents the large monthly increase
• I continue to make a monthly $200 contribution to my Roth IRA for this year with plans to max it out if possible at the end of the year
• my $4000 in my Tradition IRA sits in a money market account awaiting placement into a mutual fund. This will be the subject of a following post
• The true cost of my medical school loans is beginning to show. I recently received an update about my Residency and Relocation Loan coming due in November. This time they included an update on my interest expense. Over $2000 in Interest on my original $10,000 doesn’t look like such a good idea now. Also soon to be the subject of another post.

The gist of last month is that we were about $1500 short in the savings department which hindered our overall growth. It will be some time before our portfolio makes up the majority of our monthly gains so we continue to be dependent on the basic fundamental of spending less than we make. The addition of an extra $2000 to the school loans didn’t help the situation and I need to make a decision of how to address this come November.

Thanks for following along.

I like to make the argument with my friends that as Generation X, we are at the whims of the Baby Boomers and the AARP. Because they make up such a large proportion of US population that their shear numbers mean that any political or economic moves will be to benefit themselves and not necessarily the county as a whole. I bring this up because on the front page of the USA Today was an interesting article about the wealth difference from this generation gap.

I haven’t checked their data but this is the first time that I have read about this disparity. The fact that there is a wealth gap makes sense because younger generations have not had time to accumulate a large amount of savings. I am sure they are picking the data that fits their story but here are some interesting numbers:

• ages 55-59: median net worth rose 97% over the past 15 years to $249,700 in 2004. Median income rose 52%
• ages 35-39: median net worth fell to $48,940 and median income fell 10%

After looking at the data I don’t know what is more concerning; the fact that there is an increasing spread or the fact that half of all 59 year olds have less then $250,000 saved for their impending retirement.

The rest of the article goes on to ask the question why is a poorer younger generation subsidizing a wealthier older generation in the form of Social Security and Medicare taxes.

All in all a pretty interesting article with some really good tidbits.

I just received a replacement credit card in the mail for one of my long standing credit cards. When I called the number listed to activate my card I was asked to call from my home phone or wait to speak to an “account manager”. The reason for this is that my “home phone” is a cell phone which confuses their computer system as it only recognizes land lines as a “home phone”.

I was put through to an “account manager” after only 2 rings and she quickly activated my card and explained the problem with the computer system. Then she proceeds to attempt to persuade me to take advantage of my special low rate for balance transfers and access checks to pay off some of my high interest debt. This is pretty normal and I explained that I have paid off almost all my credit card debt and it was at 0% which was better than what they were offering.

Then she suggests that I instead take advantage of the offer to invest the money to get a higher rate of return. I was completely surprised. I know that these account managers likely get a commission of some sort for each person they get to sign up; but to have her suggest to basically take a loan against a credit card to invest in a better yielding asset just proves to me that the credit card companies are truly pushing hard to keep the average American maxed out.

I know that many individuals have been able to make this work to the tune of a couple hundred dollars of profit a month but I don’t feel that it is worth the effort. I have enough debt as it its and work in a field that helps me truly appreciated the uncertainty that there is in life.

If financial apathy were a disease it would be considered an epidemic. It would be a deadly, debilitating disease that ruins lives. Common age of onset would be late 20’s but we are starting to see signs of childhood onset as well. It is treatable with education but is rarely diagnosed until it is a late stage disease.

Currently I have come down with a mild case of financial apathy. There was a mild prodrome of symptoms in April but it is now in full effect. I likely exposed to it from multiple sources and have been unable to shake it over the past two weeks. This is likely due to multiple reasons:

1. My work hours in the hospital have increased somewhat making it more difficult to keep up with the blogsphere as well as my usual readings.
2. I have taken on added responsibility at work which has renewed my enthusiasm for the field of Medicine, relegating blogging to 3rd fiddle behind family and work.
3. We have hit a plateau in actively managing our money. Over the past 5 months we have done a good job of cutting expenses, budgeting and automating our savings. At this point we have fallen in a routine of saving X amount of our income per month +/- any unexpected expenses.
4. We remain about 2 years out from any “real” changes in net worth. In this regard our life is like that of most Americans. We will not see any large changes in our net worth one way or the other and will just continue to chip away at our 6-figure debt.

The elephant in the room that I need to address is the management of our retirement investments. Currently they remain invested in a mixture of overlapping funds in dire need of an overhaul. I have yet to bite the bullet and make a well balanced portfolio out of the mess. I think that I will be able to address this later in the year when things have settled down at work again.

Thanks for following along. Check back in 2010 when I finally finish my training. By then I should finally be able to start making a dent in my school loans and will be able to play catch up with my retirement savings.

After watching our small portfolio make noticeable gains over the past two months I am beginning to develop an appreciation for the power the stock market has for building wealth. As the stock market continues to set new highs, the gains in our portfolio are adding a noticeable pep to our monthly monthly savings. After a couple of good months it is easy to see how everyone thought they would be able to retire 10 years early during the boom at the end of the late 1990’s. As much fun as it is to our portfolio’s rise, the reality is that I will likely see a bear market or two before I retire.

Some Guidance to our month’s finances:

• The new Traditional IRA was opened for the 2006 Tax year in order to decrease our tax burden from ~$1300 to ~$300. As nervous as I was about investing lump sum in a peak market, as long as we don’t see a greater than 25% decrease over the next year it will have been the right choice financially.
• We continue to save a significant portion of our income. Our goal is to be able to live off of a single income by the end of this year in anticipation of eventually going to a single income household.
• I continue to dollar cost average my way into my Roth for 2007. It appears I may need to make a lump sum deposit at the end of this year to reach the maximum contribution limits.
• now that we are a few months into the year our good habits have really helped make saving a habit. In our effort to squeeze some additional monthly savings we canceled our gym membership which will save us about $70/month.

We have hit a bit of a lull in our financial management. This has been directly related to an increase in our work hours. We will continue to focus on the big picture and do the right thing for the time being but I am afraid it is part of human nature to to become more lackadaisical when everything is going well.

Yes this is blasphemy, but I have not calculated how much money I would need to retire, live independently, etc… yet. This does not mean that I plan to spend every penny I make and expect to live off of Uncle Sam in the golden years. It just means I rather focus on other things at this time.

The problem I have is that I know that my life 10 years from now will be vastly different than it is now. Without any accurate or reasonable estimate of what my expenses will be 10, 20 years down the road I don’t want to make an estimate of my savings based on an estimate of my expenses.

It would be very easy to pick an arbitrary large number like 7million. I realize that the interest earned on this amount could easily be triple my current salary and would allow me to “retire” almost regardless of what the future would bring.

To make this blog more personal and to keep my goals lofty yet attainable I want to calculate my savings goal based upon what my family spends, what we will likely spend in retirement, plus a fudge factor for the unexpected. What will I focus on while I wait for my expenses to peak, which in theory will occur in my late 40’s?

I like to focus on the habits and actions that will have a positive effect on my life.

We all have the same basic needs which need to be met. After meeting our basic needs our expenses are merely lifestyle choices. In light of this we will focus our efforts in 2007 on developing good financial habits and learning to taper our lifestyle choices no matter what our peer group is.

Here is how we decided to handle some of our biggest expenses and the choices we have made to help us get on tract to financial freedom.

1. Housing- easily the largest expense for most Americans today with families spending anywhere for 20-50% of their income on housing. For us, the choice was to squeeze into a studio apartment and save about $100-200/month compared to a one bedroom. Other benefits of the squeeze include a lot of double and triple thinking before any household purchases.
2. Transportation- likely the second largest expense for most people. After much debate, once we were married we decided to become a single car family. It can be an inconvenience at times and requires some sacrifices but has already been our greatest cost saving move for 2007. With this decision we said goodbye to monthly payments, and hello to lower gas, insurance and maintenance costs. This has saved us for us over $700/month
3. you can almost predict pretty reliably what your biggest expenses will be in the future. Everyone will need to pay for housing, transportation, food and for some, education for their children. Eventually as we age medical-care costs will become a very large expense as well.

This will remain our focus for the time being. Until we begin to plateau into a more normal period of life it will be expense management for us. The elephant in the room that we have yet to address is the fact that our portfolio is not balanced or managed. This has been on our to do list since January but it keeps getting bumped. Eventually we will have to sit down and figure out our expenses and balance.

In the spirit of Tax season I was thinking about all the various taxes we pay and was kind of wondering if there was any way for me to avoid some of these taxes without having to worry about some governmental agency showing up at my door one day.

The only taxes that I feel I could easily avoid and not alter my life all that much would be to avoid the “sin taxes”. More elegant writers than I have sold a lot of books on principles less complicated than this. If you are looking for a catchy phrase for your next book think Avoid the Sin taxes.

It is an easy to follow, healthy, effective way to save money. The 3 items most commonly considered under “sin taxes” are smoking, drinking and gambling. Some people might start to lump gasoline in there soon with all the talk of global warming.

After a little research I learned that they are a remnant of Puritan New England when sumtary laws were used in an attempt to control sin. They covered many things including the regulation of extravagance in food, dress, tobacco and drink.

The actual benefit of “Sin Taxes” to society has been debated but for an individual you could save a fair bit of change by avoiding them.

• In the short term by avoiding products that fall under sin taxes you would eliminate some very expensive habits from your life. The obvious example is smoking. It has been stated before but it bears repeating that at $4/pack a pack a day habit costs about $1465 a year. Plug that number into one of those retirement calculators, and it is a very large number.
• most of these habits tend to have negative effects on our overall health. Keeping with the smoking example, if you smoke for 30+ years and then you get lung cancer at 68. The first year costs of treatment is at least $36,000 on the low end. Hopefully you will have insurance but if not, getting sick is a good way to wipe out your savings.

People could argue that gambling isn’t all that bad until it becomes a problem. I know that for a large number of individuals gambling is the the same as going to a football game or the theater with the added benefit that every once in a while it might cost you nothing.

These sin taxes along with “mental lapse” costs can be pretty significant. Between parking tickets(if you pay them), speeding tickets, late fees, ATM fees, etc… we probably spent over $1000 in 2006 for these “mental lapses”

Our goal this year is to eliminate these completely. I have a feeling it will be harder than we think.

Why am I perpetually behind? Why do I always have 20 magazines to read, 20 emails to return, a couple of presentations to give and all these great thoughts for posts that never get written?

I seem to walk a fine line between getting things done and being hopelessly overwhelmed by what needs to be done NOW.

I am begining to think that I am one of those people who always seems to bite off way more than I can chew. In all honesty, I realize that I do it because on some level I like it. Some people climb shear rock walls 200 feet above ground without a harness for their adrenaline. I just try to squeeze 80hrs of work, time for family, what used to be a social life, maintain a healthy lifestyle and attempt to get out of debt into a 168hr week.

But, I digress.

How does this apply to personal finance? What I perceive I can accomplish has been warped by our instant gratification, technology based, information society. People lease a new car every three years. Movie stars change their S.O’s about once every two years, I seem to need a new cell phone at least once a year and computers, ipods, TV’s, and the internet change almost monthly if not weekly.

The one thing that doesn’t seem to change is how often I get paid and how long it seems to take to accumulate savings. In comparison to how quickly I could spend my paycheck on new gadgets it seems like an eternity to watch our savings account grow each month.

I start to question what am I doing wrong? Did I choose the wrong field? Are the mistakes I made in the past going to haunt my forever?

Luckily these thoughts pass quickly. I look at my day to day life and realize that although I am perpetually tired(show me a Resident who isn’t!), I have a happy, comfortable life with many blessings.

The problem I suffer from is being impatient and having an altered sense of where I should be. Perhaps I should stop reading MM’s blog. When this happens, I try to redevote myself to “doing the right thing” and realize that I don’t have to be ready for retirement tomorrow. I have good old Uncle Sam to take care of me(wink, wink)
Heck, as I mentioned before, I still have a few years before I get what I would consider my first real job. I just have to remind myself from time to time to focus on forming good habits and pay attention to the big things.

such is life….

In the wake of a great March I wanted to share some thoughts on what I think have been good financial decisions for us this year. To paint a picture of where we are now, I want to show where we started. This has proved difficult since I only have last year’s data entered into Quicken, thus I can only show you what we have done since last year.

By only showing you the data from 2006 is it tough to truely appreciate how far we have come. (You probably won’t hear that everyday from someone with $140,000 of non-mortgage debt!)
Here is a chart with our expenses after the First Quarter of 2006:

A large proportion of these expenses were related to one time events like moving across the country and getting married:

1. In January 2006 my wife moved to the same city and incurred all the costs one normally associates with moving across the country. Her work paid for some of the moving expenses but not the costs of establishing a new household, thus our household expenses were high for that quarter.
2. As with most couples we had the costs of maintaining two automobiles, renting two apartments and the cost of food. Pretty normal expenses and likely proportional to what most people in a larger city spend.
3. Out of proportion due to the one time nature of the event is the large percentage of clothing and wedding expenses. Combined these made up 15% of our expenditures and were our third largest expense. The good news from this is that we are not stuck paying for these things years down the road plus interest.

Contrast that with our expenses from the first quarter of 2007:

There are some differences to note:

1. The first thing some people may notice is that the total expenses for the quarter have been cut almost exactly in half which in a way makes some sense because we sold or eliminated half of our largest expenses from last year. Most people who get married will probably not see such a dramatic difference.
2. Vacation is higher in the first quarter because we had to purchase airline tickets for two trips that will occur in the second quarter. One of those trips I am expecting a partial reimbursement from my Residency program because it is an educational conference.
3. Utilities are high because we consolidated our cellular plans to a family plan which resulted in a one time, cancellation of contract fee that I was unable to avoid.
4. My wife deserves some recognition for her cost consciousness and for almost completely eliminating our clothing expenses thus far.
5. The large Other category is just a combination of multiple other small expenses like magazine subscriptions, postage, dry cleaning, etc……

We hope to continue on our success so far this year. We are very close to being able to live on just my salary alone which would be a great accomplishment for us.

Wow, is it April already? The first quarter is over and I am excited to see that we have managed three solid months of consecutive growth of our net worth. While not as impressive as some of the more established bloggers, this has been a solid quarter for our family.

Most of this gain has come from merging our households in January and the decreased expenses we have seen because of it. Amazingly our earnings have declined by about 27% compared to a year ago but we are financially better off. I guess it goes to show that your income is only one side of the equation. Not having a wedding to pay for also helps.

Here are the numbers for March 2007:

Some Guidance to our numbers:

• The large increase in our savings is the result of March being a 5 week month and my wife getting 3 paychecks instead of 2. We will continue to place the majority of our monthly savings into our online savings accounts until we have an adequate emergency fund. Based upon our average monthly expenses this year, our goal for this account will be around $18,000.
• Our investments continue to follow the market. I remain a simple investor at this time, invested 100% in mutual funds. I do not expect our portfolio to outperform any index. Heck I am not even sure what our expenses are on most of our funds. Getting that house in order remains a challenge for another day.
• As I mentioned before, I have started to contribute to my Roth for 2007 and hope to convince my wife to do the same.
• Our debt continues to be manageable with 2/4 of our school loans in repayment and our credit card debt at 0% until November.

Over all we are pleased with our progress. We continue to work on forming better habits and making good decisions. I wish we had more time to devote to other activities but it appears now that our spare time will be at a premium until I finish Residency. Good thing its only about 2 more years!!

That is what my wife asked me when she paged me at work today. I already feel a little like a slug for pawning our taxes off on a professional. The last thing I want to hear is that we really dropped the ball in some other way.

Luckily for us, it wasn’t too much bad news. It was simply that we owe about $1,400 in taxes. The good news is that we may be able to avoid $1000 of this if I simply contribute $4000 to a traditional IRA for last year. I had already thought about contributing to a Roth for 2006 but had ruled it out for multiple reasons (see this post). The opportunity to avoid about $1000 of taxes changes the picture. Ideally we are using the majority of our savings right now to build an emergency fund. However, by contributing the majority of our savings to an online savings account we have been focusing a little too much on the short term given the historical yield of the stock market.

I have been hesitant to invest lump sum the market right now as it seems to be teetering near a peak. This however, has forced my hand as I am not about to send an extra $1000 to Uncle Sam when I have $4000 sitting in a savings account. Ideally this should be a no brain-er but I am still a little gun shy from my past investing experiences.

The next 30 years should tell me if this was a good investment or not.

Since the deadline for taxes in now less than a month away my wife and I have finally gotten our tax documents in order. For the past two years I have done my taxes myself. For the 2004 tax year I used Turbo Tax and it worked quiet well. The only issue I had with the program was that I was not able to use a lot of the automatic deductions that it would try to find for me.

The following year since I didn’t find Turbo Tax overly helpful I just did my taxes for 2005 with pencil and paper. For a single guy with no reason to itemize it was very straight forward. It did feel a little odd to be using paper after filing the prior years return on-line.

This year will be different. I will be having a “tax professional” preparing our joint tax return for 2006. There are two reasons for this:

1. The main reason is my wife and I will be filing a joint return this year since we were married at the end of 2006. My wife’s job enables us to use some deductions that I do not know very. To complicate this, in my wife’s quest to keep our tiny apartment clean she also tends to throw everything out. Because of this we do not have many receipts or records of a lot of the expenses that I think we will need. In an attempt to keep my sanity I will let a professional try to figure the mess out.
2. The second reason and just as important is that this year happens to be one of the busier years of my training. Attempting to read new sections of the tax code while being sleep deprived doesn’t strike me as a good idea.

Hopefully after this return is done and when my schedule returns to something resembling normal I will be able to do our 2007 return without any help.

I hear this phrase used sometimes about some of my friends who cannot seem to make up their minds about what they want to do with their life. Many of them were “pre-med” with me in undergraduate and for various reasons decided that medicine was not for them. Next a few applied to business school and received their MBA. Finally a couple of them went back to law school and earned a JD and finally joined the working world.

For those of us who don’t have the means or the desire to accumulate a large amount of student debt(been there!) MIT offers what they call OpenCourseWare. It is basically a publication of MIT course materials.

According to the website it is based on MIT’s conviction that the open dissemination of knowledge and information can open new doors to the powerful benefits of education for humanity around the world.

I browsed through some of the classes I wish I had taken in college and found the experience O.K. If you have an interest in a subject and wanted some direction this basically gives you a syllabus to follow and a reading list to help focus your self studies.

Some of the courses are better than others but most provide some combination of syllabus, calender, Readings, lecture notes, assignments and study materials.

Some people may find it difficult to absorb Nuclear science and engineering at home but if you ever get the inkling for some extra homework for your children the guidance is there.

I think I will start with something a little lighter…

I don’t know how I missed this article on MSN Money in late February. It is really an eye opener about the way we are taxed. Unfortunately the article doesn’t really go into the details of how they calculated all these tax rates for each age group.

As I skimmed the article something significant did catch my eye: My wife and I happen to fall near the lowest real tax rates on the chart.

I don’t know what to make of this information without the details but it is nice to know that I am not having all of my earnings being garnished in the form of some tax. This does bring up the question why does a 30y/o couple making around $50,000 a year have the lowest real tax. In fact if you look at the chart the lowest real tax rates fall in the 50,000-$100,000 range which would likely be considered the upper middle class.

If you happen to be someone who champions help for those who are worse off than we are then it really gives you some ammo to work with. Without better details however these are only generalizations. These differences probably result from different consumption taxes like “sin taxes” which tend to affect the lower class population more than the upper classes.

Like everything in life nowdays… the devil is in the details