Student Loans Archives - Page 2 of 4 - The Broke Professional

When You Don’t Want to Be Making More Money

Having a child was one of the best decisions we ever made.  Seeing our son go from sitting up to crawling to walking to running and now parroting everything he hears (gotta watch what I say now!) has been a joy and a privilege to be a part of.  Raising a child has its ups and downs, but there is no sweeter challenge in my opinion.

Old Faithful

Through all the highs and lows of trying to corral the little guy long enough to shove some food down his throat, there is one thing that has always been there through thick and thin.  My wife, of course, but also our emergency fund.  While many people complain that you just can’t make any money in a savings account in today’s low interest environment, I would argue that having adequate emergency savings has allowed our family to avoid getting into credit card debt, which is huge.

Credit card debt is something we never plan to take on (have you read this article people?!), and it is our emergency fund that ensures this doesn’t happen.  I give the example of our son earlier, because we needed the emergency fund right when he came into the world.

Born to be Expensive

When you become pregnant, the doctor gives you an expected delivery date.  This is based on millennia of evidence that kids are usually formed in the womb and then released in about 9 months.  In our experience, however, consider the delivery date as a guideline, because that’s exactly what my son considered it when he decided to come out early.

He was slated to arrive in early January, an assessment that the doctor was “fairly confident” in.  Our son was fairly confident that wasn’t going to happen and decided he wanted out 2 weeks earlier.  Coming out a little earlier is fairly common, so what does the emergency fund have to so with it?  I planned to use 2013 FSA money (mistake #1) to pay for all the hospital costs, which were many.  Since he wanted to be born in 2012, that was no longer a possibility.  And since we didn’t really budget for the costs (mistake #2), we had to get the money from somewhere.

E-Fund to the Rescue

Luckily, ever since I got my first job I began socking away a portion of my income into a savings account every month.  Once I became an optometrist, this amount increased accordingly.  So we had a nice amount saved up and hadn’t touched it for a while.  All it took was a simple transfer from my savings account to my checking account.  No worries where the money would be coming from, no working extra to scrounge up the money, and more importantly, no going into credit card debt like most people end up doing.

Many people balk at having healthy a healthy emergency fund, or an emergency fund at all, because of the opportunity cost involved.  That is, money which is earning very little interest in an emergency fund could be earning much more money if invested in the stock market or in real estate.  This is most likely true, but it’s off point because the purpose of your emergency fund is to give you the ability to pull out money quickly when needed, which investing in the stock market or real estate will not allow (except a Roth IRA, which is just one of the reasons why it is awesome).  Having the ability to draw cash in a short amount of time should be a cornerstone of any financial plan, no matter what type of investor you are.

My emergency fund has saved my skin a bunch of times, and I would imagine it will keep doing so.  Unless you’re independently wealthy and have gobs of money just laying around, having a well stocked emergency fund will give you piece of mind and keep you out of the red.


Student Loan Interest Deduction: Who Really Wins?

Give them more interest deductions please!

Give them more interest deductions please!

I’ve talked to many colleagues and students about what their student loan payoff plan is and why they chose it.  I’ve heard extreme answers like some who are just going to stretch their plan out as long as possible and pay the minimum until the end, and some people who are forgoing investing their money or getting married until their loans are paid off.  Others don’t really have much of a plan.  They will just pay the minimum and throw some extra money at random loans.  My method of choice is the Avalanche method, in which you pay the minimums and apply any extra payments to the loan with the highest interest rate.  It will save you the most time and money.  Period.

Regardless of what method (or lack of method) people used, many did mention or have questions about the student loan interest deduction.  For 2015, the IRS will allow you to deduct any student loan interest paid from your Modified Adjusted Gross Income (MAGI), up to a maximum of $2,500.  There are some stipulations, of course, that will disqualify some new grads or make it tough to get a decent deduction.

Income Limits

Many tax deductions and credits have income limits, presumably to help those who need them the most.  The income limits for the student loan interest deduction is $80,000 for those filing as single and $160,000 for those filing a joint return.  Many people with a health profession degree such as medicine, optometry and dentistry have starting salaries in the 6 figures, which means if you’re single, no student loan deduction for you.  Which is slightly ironic since these are professions with high amounts of student indebtedness.

What this all means is that for many professionals graduating with student loan debt, the deduction will never apply to them.  Lots of new grads have heard of this deduction and will never be able to use it.  While not many will feel pity for a professional who makes 6 figures, it is disappointing that they will see no help from the government in paying off their loans.

And the Winner is…

Banks make money by keeping people in debt.  Be it mortgage debt, home equity lines of credit, credit card debt or student loan debt, banks get fat off of consistent interest payments coming in from its customers.  Some may call me pessimistic (my wife certainly does), but I like to look at transactions from the other side of the table.

While the student loan interest deduction does indeed help a lot of people, the “people” it helps the most are the banks that issue the student loan debt.  As I mentioned before, many professionals I’ve talked with mention the interest deduction as a reason they are not paying their loans off early.  This is music to a bank’s ears.  Not only does the deduction not affect their bottom line in the least, it allows them to keep collecting interest payments from its borrowers when they might have paid off those loans otherwise.

For example, a loan of $50,000 with a 5% interest rate has a $500 minimum payment.  With minimum payments only, this loan would take 10 years and 10 months to pay off with $14,814 in interest paid along the way.  What happens if you’re able to double your monthly payment and pay $1,000 a month?  It shaves the life of the loan down to 4 years and 9 months with $6,185 in interest paid.  Paying down your loan aggressively will finish off your loan 6 years faster and with $8,000 more in your pocket instead of the banks.

The winner, once again, is the banks at the expense of the borrowers.  I use this as extra motivation in trying to pay off my loans as quickly as I can, and I hope others will also.


The Best Way to Get Rid of Debt as a Student


What debt can do to your life.

During the first week of optometry school, in between classes we had a parade of administrators coming in and out giving various pieces of information.  We were briefed on how to read our class and clinical schedules, studying tips and the various clubs that were available.  A guy from the financial aid department also came in and talked about some housekeeping stuff when it came to our loans.  Before he began his talk, he put a slide up that said the following:

Live like no one else will today, so you can live like no one else can tomorrow.

I’m pretty sure only half the people in the class were even listening to the guy since we were all worried about the next test, but the half that saw the slide thought it was good but mostly kind of cheesy.  He didn’t really go into much detail about the saying, but maybe he should have.  Because that little slide gives you everything you need to know about debt: avoid it in the first place

Debt can Destroy

I’ve written about accumulating debt and the best way to pay off your student loans.  It can become a long and protracted battle that can take decades to win.  And there lots of casualties along the way.  People put off getting married, buying a house and starting businesses because of debt.  People also get divorced, lose their homes and have to shut down their businesses because of debt.  It can destroy dreams and prevent them from happening in the first place.

What that slide tells me is that avoiding debt means going against the grain of society’s expectations.  It is pretty normal for college students to go to bars, eat out a lot, spend spring break in the Caribbean and spend summer break in Europe.  These are common stereotypes and no one would bat an eye hearing a college student do these things.  But these stereotypes are also very expensive and can destroy dreams.

Going to a restaurant for dinner and drinks is a fun and normal thing to do, but if you pay for it with a credit card and are not able to pay the bill in full and on time, that dinner has just damaged your future.  If you got a little more student loan money than you needed, spending it on a vacation to the Bahamas will make the banks very, very happy since you will be paying them interest for a long time.  Just like investing early on in life will put time on your side and let you get some big returns, accumulating debt early in life will get time working against you.

Live like no one else will

We are constantly at the mercy of marketers, and marketers are very smart people.  They want us to give them our money and they want it now.  Being in debt is normal in today’s day and age, so it takes some willpower to be debt free.  An effective way to do this is to first see how much you’re spending and what you’re spending it on.  This can be as simple as recording it on the notes app of your phone or using a sophisticated website like Mint to automate it.  Look at all of your non essential spending and aim to cut it in half next month.  Take the other half and invest it or just park it in a savings account.  This can get money working for you instead of against you.

Once you start living how no one else chooses to as a student, you will be accustomed to saving money.  It will become like breathing.  Once you get out of school and start making the big bucks, you will have more money than you’ll know what to do with.


How to Slash Student Loan Interest by Over 50%


Student loan interest. The gift that keeps on giving.

Everyone knows the story about student loan debt in America.  It’s a trillion dollar industry that is burdening graduates and sucking life out of the economy.  It’s a combination of skyrocketing tuition costs, easily available loans and lots of ignorance that makes it all possible.  Most of us have been affected by student loan debt and almost everyone knows someone who has had to carry the burden.  I’m not one of those people that wants all student loans to be forgiven and be on my merry way.  There is a cost to higher education and the student should bear some of that cost, but it is rising way too fast and destroying lives in the process.

The government does try to help here and there with forgiveness programs and interest rate “freezes”, but like so many issues nowadays, student loan debt is a problem that the government has allowed to flourish and it is now trying to clean up after the fact.  That means it is the responsibility of the borrower to find a way to get rid of the debt and get rid of it fast.

With tax filing season upon us, students are receiving their 1098-E tax forms which state how much interest they paid to their lender.  Interest is what the banks love, because it costs them nothing and costs the borrower everything.  It’s like a nice bonus thank you check to the lender that you pay month after month for years on end.  It doesn’t go towards paying down principal, which is what you need to do to become debt free.

When I got my forms this year, I was pleasantly surprised to find that in 2014, I paid less than half the interest which I paid in 2013.  You usually do pay less interest as time goes on since the principal is going down as well, but I didn’t expect a 57.4% decrease in interest paid.  What did I do so different in 2014?

Did I consolidate all my student loan debt into one easy to remember payment?  I did look into this but consolidating would have actually increased my monthly payment along with my interest rate.  No thanks.  I make payments to three different lenders but it’s all done automatically so it’s no big deal.

Did I qualify for a government program?  I make too much money (which I guess is a good thing) and don’t live in areas that would qualify me for government assistance.  So no government help for me.

Did I decide to sign up for the other federal options like income based repayment?  No because signing up for any of these delayed payment programs would only increase my length of indebtedness and total interest payments.

The only thing I did differently in 2014 was that I decided to pay off my debt even faster.  I did this by simply looking at my budget and figuring out how much extra I could afford to put towards my student loan payments each month.  At the time it was $400 extra, so I simply applied that as an extra payment to my loan with the the highest interest rate and went on with my life.

No crazy forms to fill out and no praying that Congress would magically forgive my loans.  Just attack the loan with the highest interest rate month after month.  This is the most efficient method to get out of debt there is.  The name of the game is to get out of debt as quickly as possible with the lowest amount of interest paid, and the Avalanche Method is the quickest way to get it done.

So if you find yourself paying a lot in interest every year, find out how much extra you can afford for debt repayment and attack that highest interest rate balance.  Better yet, cut out unnecessary spending and just funnel that money into debt repayment.  That is the best way to decrease your interest payments and quickly increase your net worth.

Note:  Student loan lenders want all of your money, so some of them will apply extra payments towards interest rather than principal.  Make it clear to your lender by phone or email that any extra payments should be applied to principal only.  You can also time your extra payment to be applied on the due date of your minimum payment, which will cause it to be applied towards principal.    


Are College Savings Plans Even Necessary?


That’s my son there. The one with the mustache and low student loan debt.

It feels amazing finding new ways to save money on taxes.  Tax deductions and credits are the government’s way of kinda rewarding us for doing things that are beneficial for society.  The government believes that saving for retirement is important, so they allow for 401k and some Traditional IRA contributions to be deducted from your income.  They think having children is generally good for society, so they will give you a tax credit for bringing a child into the world.  And if you have a business, you can get a tax break for having lavish steak dinners!  Because you know, they help your business grow, thus helping society.

Besides those federal tax benefits, there are also some state tax benefits.  And one of the big ones is the deduction you receive from contributing to a state college savings account, also called a 529 plan.  Some states feel it’s beneficial to have college educated citizens, so they will allow a state tax deduction for 529 contributions.  Not all states allow this deduction (I guess they don’t like education), but luckily I live in one that does so I take advantage of it.  But it wasn’t always like this….

Rewind to November of 2012, about 6 weeks before my son was born (little bugger came two weeks early and messed up my FSA strategy but that’s a story for another day).  I read that you could start a 529 plan for an unborn child, which sounds weird but is cool because I was itching to get all the tax benefits a child offered.  So I signed up for Maryland’s 529 plan before he was even born and started contributing.  Pretty cool that I could contribute towards his college costs while he was still a fetus.

Then I started reading about 529 plans a little more in detail.  There is a pretty large camp of personal finance bloggers and gurus that are dead set against it.  I was kind of surprised at this because I always thought of saving for your kid’s college education as a good thing, but it seems it’s not for everyone.  The standard response against contributing to a 529 plan I read was that you should only do it AFTER you have built up a good emergency fund (which makes sense to me), AFTER you get rid of all of your debt and AFTER you are able to save for retirement.

Basically, your kids college education costs are last on the totem pole.  Besides, they can get scholarships or student loans to pay for school.  This started to make a lot of sense to me so I halted all contributions to the 529 plan and shifted it elsewhere.  This felt good for a while, but I did some soul searching and realized that I do in fact want to contribute to my child’s education. I feel it will help my family and even the world (I’ll explain this later).  Contributing to a 529 plan seems like an old school thing to do, and I realized that I am kind of old school.  Here’s why I decided to change course and start contributing to a 529 once again:

  • I never had one.  All parents want their kids to be better off than themselves.  It’s just a natural inclination.  I feel the same way and I would do anything I can, within reason, to make sure my son has the best opportunity to succeed.  And I believe contributing some money once a month until he goes to college is a very reasonable thing to do.  I got through college by working and taking out student loans, which was fine but it would have been nice to get a $20,000 boost or so from the get go.  I would like to provide this for my son, and it makes me feel content that he will be able to get a head start that I never really had.
  • I HATE student loans.  I make my distaste for student loans pretty clear on this blog, as I have written about the best way to pay them off and the correct mindset you need to pay them off.  The interest rates for student loans keeps going up and up, and all they do is decrease your purchase power and really hamper your ability to invest early on in life.  Genes are pretty powerful, so I have a feeling my son will come to hate them alongside with me.  By being able to contribute to his college costs and lessen his student loan debt, I will be doing him a great service.  And I will be helping the economy (and thus the world) too since having a society with too much student loan debt hurts every economic sector.  Except banking of course.
  • Tax break.  As I mentioned earlier, Maryland provides a state tax deduction for contributions to the state 529 plan.  I look at a 529 plan as basically a Roth IRA for education expenses.  You contribute with after tax funds, and your earnings and contributions grow tax free.  Then when you withdraw for qualified education expenses, you don’t pay taxes either.  Pretty good deal.  Add on the additional state tax deduction, and it becomes an even sweeter deal.
  • It’s pretty painless.  The aforementioned state tax deduction for Maryland is capped at $2500 for the year.  So that’s my contribution goal.  Divide that by 12 months, and it comes to a $208.33 monthly contribution.  Definitely swingable.  If I keep that up until he’s 18 and don’t even count any earnings, that will be $45,000 towards college.  A nice chunk of change that will not strain my monthly budget too much.  Any future disposable income I get will likely go towards my own student loans, so I don’t see myself adjusting this unless they raise the tax deduction cap.
  • It increases net worth.  If you’re looking to improve your long term financial standing, you need to keep your net worth going up.  It’s a lot more fun to think of decisions in terms of net worth rather than how much money you have in your checking account.  Contributing to a 529 plan will help my net worth tremendously by increasing my investments along with getting the yearly tax break.

Some would argue that one of the main purposes of existence is to make more people.  Keep the human race going kind of thing.  Just giving birth to a child is a big sacrifice for the mother, and there will be a lot of sacrifices to come for the parents as the child develops.  The conventional wisdom is to make sure your retirement is secure before you start contributing to a 529, but that leaves a whole lot of unanswered questions.

How much money do you want to live on during retirement?  When do you want to retire?  Will you be willing to work part time during retirement?  Do you want to retire at all?  Does this mean you can’t contribute anything to a 529 plan until you reach your retirement “number”?  I went through these questions, and in the end I realized that I would sacrifice a lot for my son.  While I certainly don’t want to be a “burden” for my son by being an old and poor man, I feel my personal situation makes it okay to contribute a little bit each month to help my son financially when he’s transitioning into adulthood.

I know I’m going way back here, but writing this post reminds me of a scene from the movie I Robot with Will Smith, who plays a guy named Del (thank you IMDB).  In the scene, Del is trying to save a drowning child.  They both end up getting in trouble, and the rescue robot then arrives.  Through cold and heartless calculations, the robot determines that there is a much greater chance of saving Del’s life compared to the child.  He then proceeds to rescue Del, and the child is left to die.  While deciding whether or not to contribute to a 529 plan isn’t nearly as dramatic, I’d like to say that there was a little bit of self sacrificing Will Smith in me that guided my decision.


Does Student Loan Debt Hurt the Economy?

Student loan debt has the potential to wreak havoc on our finances.  It also seems to be affecting the economy as well.  Read on at Young Finances to find out the details.




My Financial Kryptonite

This hood ornament only cost me $20,000!

This hood ornament only cost me $20,000!

There are so many ridiculous things people buy in this world which makes them less of a person.  There are people that buy cigarettes regularly every day.  These will burn a hole in your wallet as well as your lungs.  Then there are those who get endless subscriptions to magazines they never read, costing them money every month and destroying forests in the process.  There are also the people who sit in idling cars every day to get their daily fast food fix.  This wastes gas and makes you fat and lazy.

There are many more crazy things out there that people spend money on, but there is one object of people’s affection that is my biggest financial foe.  I call it my Financial Kryptonite.  Not because my finances are like Superman, far from it.  But because I want to stay as far away from this purchase as I can because I know the destruction it will cause, not just on my current finances but on my future as well.  And that bane of my existence is:  luxury cars.

When you spend thousands of dollars on something, you want that thing to be very useful and to (hopefully) appreciate in value.  A house, for example, is such a thing.  You and your family can live in it for years and years and have lots of lasting memories.  Many people in the world don’t have a roof over their head, so if you have one, count yourself among the fortunate.  Houses can also appreciate in value over time, hopefully turning you a profit when it comes time to sell.  This, generally, makes buying a house a good investment.

This is unfortunately not true with cars.  Cars certainly are useful.  They allow people to get to work and run errands to keep their house and lives in order.  They allow you to travel to friends houses and new locales to keep life exciting and fresh.  But what they don’t usually do is appreciate in value.  As soon as you sign the contract for a new car, it IMMEDIATELY loses value because now it’s a used car.  Every mile you drive it and each piece of wear and tear will lead to a further decrease in value.  While this doesn’t sound too appealing, cars are almost a necessity for people who don’t live in cities and don’t have access to reliable public transportation.

The luxury curse

Now, are you interested in wasting EVEN MORE of your money for something to get you from Point A to Point B?  Get a luxury car.  Luxury cars are simply slightly souped up models of your every day Toyota and Nissan, and usually only souped up on appearances.  I’m not exactly a car nut (and I’m glad because that’s an insanely expensive hobby), but from some conversations with car nuts I have found out that luxury models and their corresponding mainstream models are almost exactly the same under the hood.  What you’re paying for is strictly appearances, and boy will you pay.  Here are some ways you’ll end up paying more by going with a luxury brand over a mainstream one:

Higher sticker price.  An Internet search found that a 2014 Toyota Camry runs for about $22,000.  A 2014 Lexus RS, which is essentially the same car except shiner and more leathery, is about $36,000.  That means you’re paying $14,000 extra for shiny!

Higher gas prices.  Many luxury car makers say you need to use premium gasoline for their cars.  While this is debatable in some circles, a gallon of premium gas is around 40 cents higher than regular.  That comes to about $5 more per tank of gas for the privilege of driving luxury.

Higher maintenance and repairs.  While luxury cars are almost identical to their mainstream counterparts, many luxury cars use parts that will only work in luxury cars, and those parts are usually more expensive or bought through the dealer.  In any case, you will be paying more for 4 new tires on your Acura than on your Honda.  Even regular maintenance, such as an oil change, costs more with a luxury brand.  Again, paying more for the “privilege” of driving luxury.

Higher insurance.  Car insurance companies will factor in nearly everything to determine your premium, and that includes if you drive a luxury car or not.  Luxury cars are usually more pricier, so it stands to reason that you will pay more to have them insured.  Yet another sneaky increase in cost of ownership of a luxury car.


The higher sticker price should scare most people away from buying a luxury brands, but knowing how much more the cost of ownership is should send everybody running for the hills.  But it doesn’t.  And that’s because the luxury car makers are marketing geniuses.  Luxury car commercials throw around words like “elegance” and “refined” to describe their cars.  This makes people feel good and will get that dopamine flowing once you sit in one for a test drive.  They play to our emotions and desire to be pampered, which keeps people coming back.  As I’ve heard from many people who have bought luxury cars themselves, once you go luxury, you don’t go back.

Now I’m not one to find joy in shaming people’s financial decisions.  While it can be fun at times,  everybody makes mistakes and everybody has purchases that they regret, myself included.  But I will make an exception for luxury car consumers.  If you consistently buy luxury car brands, you’re in need of therapy.  Your money can be used for so much good for yourself, such as paying off debt or investing for your future.  The fact that you’re risking your family’s financial future for some pieces of leather and a temporary pang of superiority shows that you have went off the deep end.  Your Lexus is exactly the same as your neighbor’s Camry, but the difference is your neighbor can afford to drive himself and his family on vacation a few times a year while you can shuffle your car to and from work to make up the price difference.


Personal Finance Perfection


I hope somebody else besides me knows who this is.

I hope somebody else besides me knows who this is.

I’ve been reading personal finance blogs for a few years now and have been writing some posts myself for about a year.  On personal finance websites you can find all sorts of guidelines and advice for almost every financial topic you can think of.  Investing, taxes, saving money on food, credit card rewards and student loans are just a few of those topics.  Reading, and implementing, these words of wisdom is enlightening and is a sure way to improve your financial life.  Most people are putting their current and future financial situation at risk, so it would be a good idea to listen to these nerdy financial bloggers whose passion is learning about money.

But how much good advice can be too much?  Reading all of this advice is great and helpful, but sometimes you can’t help but think every piece of good advice you hear is just another reminder of something you’ve been doing wrong financially.  I realize this sounds incredibly pessimistic and we shouldn’t let our past financial mistakes paralyze us, but I struggle with this myself sometimes.  There are so many different aspects of personal finance that if I’m not able to reach the zenith in each one, I feel I have fell a little short.  Here are some of the great pieces of advice most of us have come to hear about our finances:

-Max out your 401k ($17,500 is the 2014 limit)

-Max out your Roth IRA ($5,500 for 2014)

-Max out your HSA ($6,650 for 2015)

-Get full health coverage

-Get a big life insurance policy

-Get disability insurance

-Eat all of your meals at home

-Start biking to work

-Don’t turn the AC or heat on in the house

-Have at least a 20% down payment for a house

-Buy your cars with cash and make sure they’re at least 15 years old

-Ask for a raise at work every year

-Use credit cards for everything

-Get rid of your gym membership and run every day

-Don’t buy any name brand products of any kind

-Check out the local thrift store for clothes

-Keep trying to get more side income

-and many, many, MANY more!

While some of these examples are a little extreme, I’m just trying to illustrate the fact that there are so many facets of personal finance we can work on, it can become overwhelming to try to chase them all and be perfect at personal finance.  If I don’t buy my cars with cash or I enjoy eating out once in a while, does that mean I have failed as the CEO of my finances?  This is a question I did struggle with at some point, and sometimes still do.  But I’ve realized there is almost no way to reach the max in all of these areas.  For example, I love using credit cards for everything so I can get rewards and keep better track of my finances.  Yet I know people who hardly ever use credit cards yet are doing just fine financially.  Does their decision not to use credit cards mean they are trying to sabotage their financial health?

I’ve come to realize that this is EXACTLY why the subject is called personal finance.  For the same genetic and social reasons that all humans don’t grow up to be the same person, everyone’s financial tendencies end up being a little different as well.  Obviously, the general idea is to spend less and earn more, but there are so many different ways to do that.  Some people love thrift stores, others don’t care for them.  Some people love spending money on new luxury cars, but they don’t care about buying the latest gadgets.  This personal finance journey we’re on is all about finding out what we value and trying to optimize that.

So while I may not be perfect in all aspects of personal finance, I know that I’m a heck of a lot better than I was 5 years ago.  And that personal improvement is what we should all really seek.


The Only 2 Ways to Beat Inflation

Run for your lives.

Run for your lives.

There’s a saying that goes, “If you’re not going forward, you’re going backwards.”  If you take it literally,it makes no sense at all.  I mean if you’re not going forward, you’re just staying still in one spot right?  So chill out what’s the problem!?  The problem is, that while you may be relaxing in your little spot, the REST OF THE WORLD is going forward.  Meaning that if you stay in your little spot, you are moving backwards relative to everyone else.

So now that this little lesson in perspective is over, how does this apply to your financial life?  It’s because inflation will make your money worth less (and eventually worthless) year after year if you don’t do something about it.  For some reason I think of inflation as a big, horrible beast.  This beast that just devours everything in its path with no regard for the carnage it leaves in its wake.  I would like to eventually convince you all to think of it in this way too, because if you’re not paying attention to it, inflation will eat you alive.

(Very) Short history lesson

In order to learn how to beat inflation, we have to know a little bit about it.  It’s a very deep topic with many economic theories pertaining to it, but in general, inflation is an increase in the price of goods and services over a period of time.  This is usually because of the diluting effect of pumping extra money into the economy.  More money available means that you need more money to purchase the same product over time.  This means your purchasing power decreases over time.

The long term average inflation rate in the US from 1913-2013 is 3.22%.  Let’s round it to 3% and assume this is the rate of inflation for every year for the rest of time so I can do math in my head.  That means if an apple cost $1, next year it will cost $1.03.  And it will keep going up 3% every year from there.  This also means that if you make $10,000 in one year, you will have to make $10,300 the next year just to maintain your standard of living.  This is why if you’re not moving forward, you’re actually moving backwards.

So how do we combat this beast that will destroy our finances?  There are only two ways available:  Make more money, or spend less money.

Making more money

This seems like an obvious bit of advice but there are many ways to diversify this.  Here are some down and dirty ways to beat the inflation monster by making more money:

Work more.  A no-brainer here.  If you’re able to work some extra days or take on some extra clients without degrading your quality of life TOO much, you can beat inflation this way.  Just working an extra day per month should be able to accomplish this.  Now of course you can’t continue to work an extra day year after year because you’ll run out of days and your spouse and kids will hate you.  So you need to find some other ways to increase your income.

Work FOR more.  Increasing the rate you get paid, by either asking for a raise or increasing your business rates is probably the best way to beat inflation when it comes to making more money.  This is because any increase on top of that will get you even more ahead of inflation!  For example, if you’re able to increase your salary by 5% each year, not only will you beat inflation every year, but each 5% increase will be compounded on top of the previous one.  So if you were able to get a 5% increase for your $10K salary, you will now make $10,500.  Another 5% increase will net you even more because it will be based on the $10,500 figure.  So your next 5% increase will get you to $11,025.  Eventually, you will leave inflation in the dust.

Getting a 5% raise every year is pretty difficult, but you should always be trying to get the highest raise you can whenever the opportunity presents itself.

Increase your investments.  Inflation needs to be battled not just year to year, but decade to decade.  Things will cost a lot more in 20 years than they do now, so you have to plan for that as well.  You can do this by increasing your contributions to your investment accounts.  If you invest wisely in the stock market with index funds you should be looking at a conservative 5-6% return on investment every year.  This will easily beat inflation, so increasing your investment contributions will increase your net worth and help ensure that you will have enough money down the road.

Spending less money

Being able to keep more of your hard earned money is another way to fight back inflation.  Using those savings to increase your investment contributions can provide a nice double whammy as well.

FrugalitySaving money is awesome.  There are no two ways about it.  It is said that a dollar saved is a dollar earned, but remember that we get taxed TWICE when we buy stuff (first income tax and then sales tax), so saving a dollar will actually save you a little more than a dollar.  It’s important to take a detailed and thorough look at your expenses every so often and see where you can shave off some money.  Reconsider your “necessities”, because a lot of them are just wants.

It’s also important to note that if you can cut your expenses down comfortably by 10% and can keep them around the same level for most of your life, those savings will help you for a lifetime.  By being able to live on less, you are giving inflation a sucker punch that it will not recover from.

Pay less taxes.  Uncle Sam wants his fair share for every dollar we earn.  And for good reason.  There is a country to run and it takes money to run a country.  The country being run WELL is a whole other issue, but the country still needs taxes to function.  But just like we do with our real uncles, we can play some games here.  Uncle Sam has allowed us to hide some of our money from him.  This is what a 401k account essentially is.  We get to set aside some money pre-tax and invest it in what we like (or what our company chooses for us).  We will have to pay taxes on this money eventually, but the hope is that in the meantime we reduce our taxable income early on and that money grows a lot before we have to eventually give our share in taxes.

You can also pay less taxes by making sure you take all of the deductions you are eligible for.  You can read up on these on your own or get your taxes done by a reputable professional.  Most online tax programs like TurboTax will do their best to make sure you get what you’re eligible for also.

There are still some steps to take even if you are wildly successful in saving money and making money.  If you make more money and end up spending it, you have done nothing to beat inflation.  If you save some money but just let it sit there in your checking account, it’s serving as a nice buffer but it can be doing so much more.  The key to bring it all together is to put your savings and extra income to good use by increasing your contributions to your emergency fund, decrease debt and increase investments.  Inflation will never know what hit it.


Navigating Life After Graduation

Times they definitely are a changing.  And it couldn’t be more true for those that are graduating with a professional degree.  Be it a new graduate in medicine, law, engineering, dentistry or optometry (my profession of choice), there is a whole different world to face after the years of living in the university bubble.  And it can sometimes be a new and cruel world.  Now I’m not trying to garner sympathy for these new graduates.  After all they usually end up in pretty high paying jobs with plenty of room for advancement.  But there is also a unique set of challenges that face newly minted professionals that they should be aware of.

Lifestyle inflation.  This is arguably the BIGGEST reason for new professional graduates getting into financial trouble.  To become an optometrist, for example, you have to complete your prerequisite classes in college and get a Bachelor’s degree along the way.  This usually takes about 4 years.  After the grueling process of applying to schools and flying out for interviews, when you finally get into optometry school, 4 years of even more intense studying and clinical work await you.  After completing these 4 years (and passing the nerve wracking board exams), you are finally free to find a job or open a practice and finally start making some money.

After years of schooling and (hopefully) living like a poor student, it’s only natural for one to get in the I “deserve” this mindset right out of school.  As in, I “deserve” a new BMW because of all the work I put in (along with the $700 monthly lease payment).  And I “deserve” a sweet new fancy townhouse since I’ve been living like a pauper the past few years (and the $2500 monthly payment plus maintenance that goes along with it).  The examples are endless.  With inflation eroding buying power over the years and incomes not rising in the same manner, a dollar doesn’t buy you as much now as it did 10 years ago.  This is an essential point to realize, as simply having a certain title doesn’t enable you to get the goods right out of the gate.

Student loan debt.  The issue of the high cost of tuition and subsequent massive amounts of student loan debt is a hotly debated one.  And for good reason.  Tuition is increasingly rapidly year after year, widely outpacing inflation.  College was once thought to be an essential stepping stone for success.  Sky high tuition prices are making many re-think that.  While student loan debt is a big problem for all students, it is an especially big one for professional school graduates.  For the graduating class of 2012, the average student loan debt was $29,400.  This is not an amount to sneeze at, but I probably incurred that much debt sitting through my first 5 classes in optometry school.

While my final student loan debt (undergrad and optometry school) was around $140K, many of my colleagues were well into $200K.  So my student loan debt was almost 5 times the national average.  That’s a huge discrepancy and a problem that needs to be tackled hard.  Many students, myself included, underestimate the effect of student loan debt while in school.  And who can blame them?  With tests every week and sweat inducing clinical practicals to prepare for, who has the time to prepare for life after graduation?

Student loan payments will make up a substantial chunk of a new grad’s monthly payments.  In a lot of cases it can be the largest payment one has to make per month.  And if the banks have their way, this will continue for decades.  That can end up being tens of thousands of dollars in interest payments.  That’s money that you earn but you will never be able to use because it is lining the coffers of the country’s biggest banks.  As if their coffers need lining.  Students and new grads should be prepared for the hit that student loan debt brings and get ready to hit right back.  This means cutting back on your consumption and throwing whatever extra money you can towards your highest interest loan and then moving to the next one (also called the Avalanche Method).  If you can be diligent in this process, you can reduce the time you pay student loans by years and save thousands and thousands of dollars in interest payments.

Building a good credit score.  Unfortunately, the importance of a good credit score is lost on many.  Most people don’t know the difference between a credit score and a credit report, and why they should even bother checking them.  I’ve noticed that this is especially widespread among new grads, as they’re focusing on finding their place in the world and spending their new found money.  Eventually, most people end up applying for a mortgage or a car loan.  Even if it’s not in the near future, it will most likely happen.  This is the best time to improve your credit score, as it can potentially save you tens of thousands of dollars over your lifetime.

Applying for a mortgage or credit card will initiate a credit inquiry by the lender.  They want to look at your past history to make sure you’ll pay them back.  Instead of hiring a private investigator, your credit score gives them this info in a nutshell.  A low score means you’re not a good borrower.  You get the highest interest rate possible on your loan.  A high score means you are a pretty dependable borrower, so you get the lowest interest rate offered.  On a big purchase like a house, the difference between a low interest rate and a high interest rate can cost you potentially hundreds of thousands of dollars.  That’s a lot of cheddar.  Giving your credit score some attention even for just a few years will get it right where it needs to be.

A professional degree isn’t a ticket to a lifetime of riches like it used to be.  Many new grads are falling into financial trouble by not paying attention to these three big issues.  If you can weather the student loan debt storm and resist lifestyle inflation early on in your career, you will be setting yourself up for a lifetime of success.