Reallocating, or, Changing Your Spending Plan Categories

When you first start reading about personal finance, there are several big pieces of advice that you’re given to follow: pay off high-interest consumer debt, create an emergency fund, and invest in your 401k (especially if it comes with an employer match–free money, baby!). 

But what do we do when our financial reality changes, and it seems that we’ve possibly met some of our goals already? How do we choose how to change our spending plans?

Much like this chimp, I have some thinking to do. Image from pexels.com.

I recently took a look at my spending plan to tweak my in-case-of-emergency expense totals. In the event that I am laid off, how much money would I need to support myself, and what expenses would be sacrificed first?

There are some obvious ones–goodbye, climbing gym membership and Netflix–but there are some other expenses that aren’t as straightforward. For example, my housing is tied to my job. The organization I work for owns the building in which I live, which means I get to live in a studio in a HCOL area that costs about 2/3 of what rent would be if I paid market rental rates. This works for me as long as I keep this job. However, if I get laid off or choose to leave this job, I have 30 days to move. 

My current emergency account is calculated based off of keeping this apartment. However, if I were laid off from my current job, I know I wouldn’t want to look for another one in this area. No offense to all of you who absolutely love the south bay, but I haven’t exactly fallen in love with the area–I miss the Rocky Mountains, and snow, and not having to take more than one flight to see my family. None of my family lives in the area, and I have no “deep connections” to anyone or anything here–as such, if I lose this job, I would just move somewhere cheaper. 

At my current rent, I have 4.93 months of expenses covered. But is my monthly rate even accurate, if I would move anyway? Do I need to calculate at my current rental rate, or could I calculate at a lower one? 

More importantly, what would I do if I lost my job right now?

That’s pretty easy. I already have a ticket to Germany for December; I’d probably max the 30 days in my apartment here while putting in as many job applications as possible, throw all our furniture into monthly storage, and then fly out to the east coast to hang out with my family* for a month before heading to Germany to see my partner. And if I didn’t have a job by then–either back to mom’s to help her prepare her house to sell, or maybe spend some time job hunting while traveling in some low-cost locations.

Long story short, I had several numbers in my head. The first was six months of living expenses at my current rate. The second, which was higher, was $15,000. Why 15k? It covers a little over six months of my expenses, is enough to buy a new-to-me car if my 2007 Yaris decides to finally call it quits, and, frankly, it just seems like a nice big round number. But is that excessive, and is there a better way in which I could be using my paychecks? I’m currently throwing all this into a high-yield savings account, but at 1.8%, it’s not exactly the ideal place to make my money work for me. Additionally, I’m already on track to max out my IRA contributions for the year. So where should it go?

The way I see it, I have three main choices: put this money toward student loans, retirement, or invest. 

Student loans seems like it should be the obvious choice. I have over $40k of student loan debt at an average interest rate of 6.3%. As many financial advice books say, paying off student loans early is a guaranteed return–I won’t be losing any money, and I’ll have to pay these off eventually. At the current interest rate, though, it’s hard to decide–is my rate low enough to make me comfortable paying through the full 10 years, because the gains I would make in my other accounts would be more? Or would the money I lose to interest eat up anything I would make elsewhere? 

But there’s the psychological effect too–this $42k is hanging over my head, dragging me down and making me feel like I am in a financial panic, even though I know, logically, that I am not. As I’ve mentioned before, I’m pretty high strung, so maybe the sense of relief that would come with removing this debt faster would be worth the potential losses in other accounts. 

Another place my money could go is into retirement. I currently have a 401(a) retirement account with my employer. I do not receive any matching; they just give me 10% of each paycheck into that account. As long as I stay for two years, all that money is mine. I do, however, have the option of also starting a 403(b) account. This would use pretax money, so not only would I save for retirement, I would also lower my taxable income (which would be great, because, as I’m discovering, CA has a shit-ton of taxes–the highest income tax in the nation, to be exact). I just have to be comfortable knowing I can’t touch this money for about 27 years–although retirement savings is a long game, is it not?

Finally, this money could go into a non-retirement investment account. I would love to FIRE or FIOR, and an account like this would let me withdraw money before 59.5 without any penalties. As such, I could invest and know that I could access this money at any time. However, with that freedom also comes responsibility–namely, things like tax-loss harvesting and capital gains tax and a bunch of other shit that I have no idea what it is. Even though I keep trying to read more books, I still have no idea what I’m doing. So the thought of investing in an account like this still seems very overwhelming. I’ll get to that point… one day. But right now, I have a lot of other things on my plate to deal with. 

Besides, I have my Roth IRA. And though I know I shouldn’t touch that money until 59.5, knowing that I can access the deposits I’ve put into it, in case of emergency, does make me feel a little better. 

So what should I do? Loans, retirement, or non-retirement investments? 

I’m going to open a 403(b) for half of my emergency fund money, and put the other half toward student loans. I guess I just want to have my cake and eat it, too.

Realistically, though–with my interest rate, it’s hard to make a confident call. And although paying off my student loans early would give me some sort of psychological comfort, I would also have to face the reality that I put my retirement savings on hold, so when my loans are paid off, I wouldn’t have anything left to show for it. 

I currently have $500 going toward my emergency fund–I still plan on funneling $100/month toward it, but $200 will now go to a 403(b) and the other $200 will go to my student loans. This $200, plus my 401(a) money, plus my IRA, puts me at retirement savings of about 29% of my take-home pay. And $200 added to my current student loan spending plan amount is about $750, or about 150% of my estimated required payment**. I’ll be able to make a payment and a half each month. 

The whole point of this post is realizing that your financial goals may change–and that’s ok! Checking all your accounts every day might not be the healthiest thing to do, but every once in a while, you should look at your accounts, look at your numbers, and ask yourself: What would I do if I got fired this instant? 

See how you answer that question, and adjust your financial goals accordingly. 

* I recognize that the ability to just say I would go hang out with my mom is definitely a privilege–a lot of people don’t have that as a viable option, either because they don’t have any living family, or they have a bad relationship with their family, or their family simply couldn’t help support them. However, not only would my mom be absolutely thrilled to have me back for a little bit, but she would also get a bunch of labor from me in regards to cleaning and fixing the garage, painting, helping put down new carpet, etc. etc. etc. 

** This payment is estimated because my loans are still in their grace period. I graduated in June but won’t be required to make payments until January. However, I’ve used some calculators to estimate what my payment will be and have already budgeted for it/started paying these loans back. Once January rolls around, I’ll know the actually payment amount, and maybe consider refinancing with a lower interest rate.

The Thing About Money, Part 3: Student Loans, or, How debt scares the hell out of me

(This is the third post in a six post series titled The Thing About Money. Click to read The Thing About Money, Part I.)

I have $43,188.99 in student debt.

$40,328 is principal, and $2,860.99 (or 7%) is interest. The only reason the interest is so low is because I made a few payments here and there while still in school. On $20,500 worth of loans, I have an APR of 6.6%. On the other $19,828, I have an APR of 6%. 

This amount of debt makes me sick to my stomach. 

Counting each and every cent. Image from pexels.com.

In my 32 years of life on this earth, I have never personally had a negative net worth past $2,000. That was in consumer credit card debt I accumulated while struggling to find a post-college job that paid a living wage. I paid that amount off soon after I got a new job, and I’ve been in the positive ever since–until I started grad school. My current net worth is in the negative $20,000s. In the words of Elizabeth Bennet, “How is such a sum to be repaid?” 

(Of course, that was about an elopement. And I don’t have a handsome and conveniently rich Mr. Darcy to dispatch thousands of dollars to my aid.)

I’m not alone. Collectively, students in the United States owe a total of over $1.5 trillion in student loans. Per NerdWallet, the “average U.S. household with student debt owes $47,671.” Undergraduates finishing up in 2017 owe an average of $28,650 each. And this number can change depending on the field you go into–I owe over $40,000, and I am in a subset of education that is not known for paying well (as is the field in general). Medical students owe, on average, almost $200,000 a pop. According to this article from 2015, social work graduates can owe upwards of $60,000 in debt and expect starting salaries of only $41,000. These are all essential fields. Unfortunately, not all of these fields pay well. 

And all of us in these essential fields have a story. Here’s mine.: 

My student loan debt was just to pay for my master’s degree. I was very blessed in that I didn’t need to take out loans to fund my undergraduate education. My biological parents split when I was three, and my mom and stepdad divorced when I was sixteen or so. As such, my mom was the only parent on my FAFSA. 

With a combination of grants and scholarships, my mom as the sole income provider for our family, working several jobs through college, and the decision to turn down my NYU acceptance for a more affordable in-state school (a decision which I regret only a little bit, but mostly not at all), I was able to graduate in 2009 with my BA in English, during the Great Recession. I bounced around a few minor jobs after that (including working for minimum wage for the first time since high school) and finally landed in South Korea, where I spent three and a half years teaching English to high school and college students. 

I’m confident that making the decision to move overseas is the only thing that helped me have a stable career trajectory in my twenties. 

After coming back stateside in 2014, I moved to New York City, where I worked at an artisanal nut milk company, a terrible for-profit medical school, and an international exchange nonprofit (that had a heavy endowment but, instead of paying its workers a living wage, threw us two big parties a year with all the free booze we could drink and acted like saints for it). While there, I started volunteering somewhere and discovered a deep passion for a field I hadn’t previously given a real look at. I threw myself into the volunteer work, and I deeply enjoyed it–but to do it professionally, I needed a master’s. 

It was 100% my decision to go back to school. By choosing the program I did (in-person at a private school with no online component), I knew I would be paying a bit more, but I thought it would be worth it. I chose an in-person only program because the curriculum and experiences required made it seem like it had more credibility to it* (although–surprise!–they added an online program in my second year, which had been in the works for multiple years, and which the school didn’t think worth mentioning to us). And while I am one of the lucky ones from my program that was able to find a full time job after graduation (although it took a cross-country move), a number of my fellow graduates are still looking. 

Most of my courses were taught by busy adjuncts who were professionals in the field but not professional educators. Some were taught by adjuncts who weren’t contacted by the university until a week before classes were supposed to start. Some were taught by adjuncts who didn’t hold the degrees for the program for which they were teaching. Some were taught by adjuncts who didn’t bother to show up on the first day of class (which, on a quarter system, is 10% of class time), who cancelled because they were sick and didn’t make up the class (instead touting it as some sort of favor to us), or who let us out after an hour of what was supposed to be a two-and-a-half hour class (two-and-a-half hours that we paid for, regardless of actual time spent). I mention this not to shit on adjuncts–after all, adjuncts make up the backbone of higher education and are often asked to teach under shitty conditions–but to show that, despite the astronomical tuition, I was not receiving the education that was advertised. Frankly, my education was not a priority for most of my instructors (although I can’t blame them–if you lack resources like time and money, you can only do so much). My university did not hold up their end of the bargain. As per the above linked article,

“If you are paying for a college education today, you are paying comparatively more money than previous generations have paid — nearly $70,000 in annual tuition, room and board, and fees at America’s most expensive schools — to be educated by a more poorly-resourced, poorly paid, and potentially poorly-motivated group of educators.”

– Dan Edmonds

So here I am, over $40,000 in debt, with a degree that some in my profession have started arguing only acts as a barrier to entry and shouldn’t even be a requirement for employment (although, for gainful employment, it most certainly still is). And for those of you who say I should have tried to get more scholarships and worked harder, please note that I applied for (and received) multiple scholarships as well as worked two to three jobs at any given time. During my last year, I worked full-time, went to school full-time, and worked a part-time job on top of that. And I still have negative $43,188.99 to show for it. 

The purpose of The Thing About Money series is for me to examine my relationship with money to understand why I have a hard time with it. In this instance, money is a heavy weight that is dragging me down with it. My student loans make me feel buried. That $43,188.99 plus future interest is getting in the way of my retirement (which we’ll talk about next week). It’s making me worry about ever saving up enough to put a downpayment on a house. It’s making me worry about how to pay off the loans and my rent next year (I live in a HCOL area for my job, and while thankfully this year’s rent is slightly subsidized, there’s no guarantee for next year). I have an emergency fund (once again, I feel the need to defend myself–I am a Good Poor!).

Is this debt the result of choices I willingly made? Yes. However, is this debt also emblematic of major problems with my university and the higher education system in general? Also yes. But as I feel powerless to change the system, I guess I just have to figure out a way to work within it. 

So that’s my story. What’s your student loan story? Feel free to include it in the comments. I’m sure it’s a doozy. 

*Please note that I am not claiming that all online degree programs are not reputable nor worth it. However, a recent study found that 53% of survey respondents thought that people learned less or much less in online degree programs as compared with residential ones. I never wanted my education questioned, so I went with a residential program. However, as explored above, perhaps that was a huge mistake on my part.