4 Books New Grads Should Have Read BEFORE Finishing School

Students in undergraduate and professional school usually have one thing on their minds: sleep!  The next thing is usually studying to do your best (or to just stay afloat) in your respective program.  Many times this requires a laser like focus where nothing else matters except the next test or practical.

But on the other side of that diploma or degree, real life is going to be waiting.  Which means you are going to have to make a lot of financial decisions which could potentially affect the rest of your life.  I would advise students to take a few minutes a week (that’s really all it takes) to read some good books and form some type of financial plan.

I’ve recommended four books for students to read while they’re in school.  Like I said, it just takes a few minutes a week and I know every student can find a few minutes between ping pong tournaments (and studying of course!)

These are light reads that are packed with great information to get you started on the right financial footing.

Good grades are important, but you’re only in school for a small part of your life.  Taking some time to plan the rest of your life is essential.

Here are the recommended books:

I Will Teach You to Be Rich by Ramit Sethi

This is the first book i read after graduating optometry school.  And I’m glad I did.  It touches on some theory when it comes to investing, but it is ultimately a very practical book and this is what I appreciated about it.  Ramit talks about what specific bank accounts he recommends, how to invest and even how to negotiate when buying a car.  The overarching theme from this book is to DO SOMETHING rather than not acting.  Getting 80% of the way there is a whole lot better than getting 0%.

The Millionaire Next Door by Thomas Stanley and William Danko

If there ever was a book out there that tells you what REAL wealth looks like, this is it.  MND is a light read that talks about the characteristics of real life millionaires.  Despite what society and the media tells us, millionaires don’t usually drive around in luxury cars and have gigantic houses.  More often than not they are hard working people who spend their money very wisely for a long time.  This book is especially important for those new grads looking to get a new car and/or house right away.  If you want to be a millionaire, this book will show you that’s just not the way to go.

Richest Man in Babylon by George Clason

I was fortunate to read this book while I was in optometry school, and I’m really glad I did.  It is a light and short read that can help establish a solid financial foundation.  The book consists of Biblical sounding parables that contain financial wisdom.  The main theme I got from this book is the biggest financial lesson of all: you will never get ahead unless you spend less than you earn.  Constantly spending 100% of your earnings is no life at all.

The White Coat Investor by James Dahle MD

This is a great book geared mainly to MD’s and other health professionals, but has some great advice for everyone.  The White Coat Investor is a fantastic blog that teaches professionals about student loans, investing and keeping more of your money.  Honestly, it is one of the blogs that inspired me to start blogging and trying to help my fellow broke professionals.  Great book for investors and a must have for anyone graduating from professional school.


How I Increased My Net Worth by $70K with One Click!

Where have you been all my life??!!

Where have you been all my life??!!

It has been a long time since I wrote about net worth (2 years!!).

Looking back at that awkwardly written article, my views on net worth have changed a little since then and I started doing something big when it comes to my own net worth: actually tracking it!

Automatic or Manual?

Tracking your net worth is important because it gives you a look at how you’re doing with your finances over the long term.  Just like any business wants to see that profits chart trending upward over time, you want to see your net worth trending up too.

I’ve checked in on my net worth from time to time, but never as a regular exercise where I could actually gain some useful information from.  I started tracking it regularly a year or so ago.

Many bloggers recommend using websites like Mint and Personal Capital to track their expenses and net worth.  With these sites you link your accounts (checking, savings, loans etc) and they will give you one handy place to look at your income, expenses net worth.

While both of these websites are good in their own ways, they ultimately didn’t do it for me when it came to tracking net worth.

I gave up Mint a few years ago because it was becoming a chore to properly categorize all my transactions and it wouldn’t automatically update some of my student loan accounts.

I then switched to Personal Capital and have actually been using it for a couple of years to track my net worth and it worked great.  But again there was an issue with some accounts not updating and it wasn’t able to link to one of my student loan accounts.

So then I took the (relatively) drastic step of figuring out my net worth by hand.  Or by keyboard.  And it has made all the difference in the world.  While logging into my various accounts and noting down the net worth is more time consuming than just having a robot do it, I do find some advantages from manually calculating my net worth:

  • It gives me a better overall impression of my financial situation.
  • I can pick up any mistakes.  Since doing manual entry 3 months ago, I have found a checking to savings transfer I forgot to make and a transfer issue with my 401(k).
  • I don’t feel compelled to check my net worth often.  Because it takes some time to do this, I simply dedicate one day per month to figuring out my net worth, which I feel gives me a good picture of my finances.  When I was doing my net worth with Personal Capital, I would find myself wanting to check it every week or so, which is an exercise in futility.
  • It just feels satisfying typing numbers in a spreadsheet and seeing where you stand.  You should try it sometimes.

Another Change

So now that I have extolled the virtues of manually calculating my net worth, what’s all this about increasing my net worth by $70K with one click?  It’s pretty simple.

My definition of net worth changed.

For the longest time, I never really considered home equity as part of a net worth calculation.  I strictly thought of net worth as the difference between money you have in any type of account and any outstanding debts.

I’m not really sure why I never factored in home equity.  I guess I thought because a home can be difficult to sell and equity is so illiquid, it doesn’t need to be part of my calculation.

But you could say my time as a homeowner has “matured” me.  I’ve been a homeowner for 3 years now, but only recently did I start including my home value and mortgage as part of my net worth.  To be honest, a home is more liquid than my 401(k), since I can’t really touch my retirement money until about age 60.

And once I included my home value as an asset and my outstanding mortgage as a debt, my net worth shot up by about $70,000 and finally brought it into the positive range.  Take that student loans!


-Tracking my net worth manually once a month has been a very enlightening and fulfilling task compared to having a computer calculate it.  I will keep up this practice for as long as I can to get a better idea of where my finances are going (hopefully up!!)

-Net worth is your assets minus liabilities.  I’ve decided to include my home value and outstanding mortgage in that equation, but you might not want to.

I’ve seen people include their cars and furniture in their net worth, but I don’t think I’d ever do that.  Technically, you can sell your body (and your soul) for a lot of money, so should you include that as well?  I’m satisfied with just including my house and mortgage at the moment.

-There are tons of great net worth programs and spreadsheets out there.  I got mine from a finance blog which I can’t remember for the life of me, but just search around and find a method that works for you.

-Net worth is an important number, but it’s not as important as making sure it’s trending up over time instead of down.


Where to Stick Your Bonus Paycheck


What if I told you that if you’re an employee, you most likely get a bonus twice a year?

What if I told you that you get this bonus without doing any extra work?

And what if I told you, that you can use this bonus to take a nice bite out of any debt you may have or just give a little extra padding to your savings?

You would think that I’m crazy to promise such a thing, but all you have to do is look at the calendar.

There are 52 weeks in the year, which means that people who get paid bi weekly will receive 26 checks throughout the year. But if you divide 26 checks by 12 months, you get 2.167, not 2.

So what this all means is that during 10 months of the year, you get paid twice.  But during the other two months, you get paid thrice!  That’s right, you get an extra paycheck twice a year.

Why is this important?

MINDSET.  When determining their budget or deciding to see if they can afford a service, most people assume they get paid twice a month and calculate from there.  This is just how people are wired nowadays.  This can be a good thing or bad thing depending on how it’s used.

But the purpose of this post is not to discuss the pros and cons of being in a monthly payment mindset.  The point is that if you are in that mindset, you get an extra paycheck twice a year without fail.  But the important thing is to actively decide to DO something with that extra money.

The worst possible thing you can do with that extra paycheck is to just let it sit in your checking account and have absolutely no plan on how to use it.  I’m assuming this is what most people do, because most people have very little awareness of their money is going.

If you just let it sit in your checking account, it will most likely get spent on something you don’t need.  Best case scenario, the money just sits there and doesn’t do anything to further your financial well being.

So what SHOULD you do with this money?  This is something to really think about because this can potentially be a life changing decision.

Here is a little cheat sheet to get you started.  Everyone has different goals and life situations so this may not apply to you word for word, but I feel this is a good way to figure out where to put that extra money:

1.  Pay off family and friends.  Owing people money feels really bad.  But owing family or friends money should feel even worse.  If you borrowed money from a family member and there was no mention of you paying it back, pay them back anyway.  Resentment can build if these debts linger for too long.  These relationships are too valuable to lose and can be difficult to repair.  Use that extra paycheck and take care of that debt once and for all.

2.  Pay off any high interest debt.  No matter what your goals are, keeping around any high interest debt will ensure that you reach those goals as slowly as possible.  Some people don’t feel comfortable with having any debt at all, but I’m okay with having some lower interest debts that don’t stretch you financially.

I classify “high interest debt” as anything with an interest rate above 6%.  So this definitely includes credit card debt and any other type of consumer debt.  It can also include auto loans and student loans depending on your situation.  Make sure the payment goes entirely towards the principal amount.  I’ve dealt with sneaky companies that will apply the payment towards any interest owed first, which does nothing in paying off the balance.

3.  Pad your emergency fund.  I firmly believe that having a healthy emergency fund will help you avoid almost any financial catastrophe.  Some recommend having 3 months of expenses, while others recommend having up to a year’s worth of expenses.  Everyone has different life circumstances and dispositions, but if your emergency fund is not where you would like it to be, just stick your bonus paycheck in your savings account.

While savings accounts don’t generate a whole lot of income, that’s not their purpose anyway.  That money is there in case of an unexpected expense that you can’t cover with your normal cash flow.  Keeping your emergency fund healthy is as important a financial goal as any other.

4.  Increase retirement contributions.  If you don’t have any financial “fires” to put out, it’s time to focus on retirement savings.  Retirement can seem worlds away for most young professionals and millennials, but it is imperative to keep contributing to your retirement accounts because you have time on your side.

Time allows your retirement accounts to grow exponentially, and contributing consistently early on in your career will help provide the foundation for massive growth.  So when you get that extra paycheck, consider increasing your 401(k) contribution or just transfer the money right away to an IRA or brokerage account.  Needless to say, your future self will thank you.

5.  Invest in yourself.  Making an investment in yourself can mean many things.  It could mean taking time out of your day to read or practice a skill.  It could mean networking with influential people in your field.  It can also mean spending some money to buy a product or education that will increase your long term earnings.

Daily improvement should be a a constant goal for everybody, but if that nice little bonus check can cover the cost of tuition or help you buy a product or service that will make you lots of money potentially, then that’s where the money should go.  This is where creativity and consistent hard work come into play in determining how lucrative this investment could be for you.

There aren’t many times you can get “free” money.  But during 2 months out of the year, you can get pretty close by getting an extra bi weekly paycheck.  As with any type of new earnings, try to stretch those dollars are far as they can go in meeting your financial goals.


The ONE Decision that Will Ensure Financial Success

How’s that for some clickbait??

But in this case, it’s actually true.  And I have a study to back it up.

Fidelity conducted their annual Couples Study, which asked around 1,000 couples various questions regarding their finances.  And they concluded that there is indeed one thing that will give couples the best chance of financial success.

But before I make the big reveal, here are some interesting findings from the study:

  • You make HOW much?!  Fidelity asked couples if they feel they communicate very well with each other when it comes to finances.  72% said they did.  But when asked the simple question of how much they think their partner actually makes, four in ten didn’t get it right.  And a good portion of them were way off.  It’s kind of like how everyone thinks they are an above average driver, which is literally impossible.
  • Almost half of the couples questioned didn’t know how much money they would need to save in order to maintain their current lifestyle during retirement.  While this isn’t too surprising given that most people are clueless when it comes to their personal finances, what surprised me is that the majority of this uninformed group consists of Baby Boomers, many who are going to retire in a few years!  Now that’s dangerously ignorant.
  • Worrywarts.  It seems we are a very anxious and worried populace.  About 75% of the respondents said they were worried about health care costs in retirement (did anybody say HSA?).  And over half said that they are worried about outliving their money.  So half of the people in the country are worried that they will die penniless.  That’s a problem.

That’s a lot of bad news.  But there is hope.  There ONE thing that can ensure a successful transition into retirement and produce less anxiety about the whole thing:

Drumroll please…….

Have a plan.

The study showed that those who had a plan for their retirement were way ahead of their counterparts with no plan, and felt a lot better about the whole idea of retirement.

Now while having a plan is indeed just one thing, it has a lot of different components.  Having a good plan will give you and your family the best chance to earn and grow money while keeping it safe along the way.  This requires a lot of moving parts.

Fidelity lists a few things to help get started with your plan, such as goal setting, starting your emergency fund and setting up an estate plan.  These are all great things, but here are what I think are the most important things to do when forming the financial roadmap for the rest of your life:

Make a debt repayment plan.  To me, this means getting rid of all high interest debt (anything over a 10% interest rate) like credit cards ASAP, and then prioritize paying off your debt with the next highest interest rate.  This doesn’t mean focus on getting rid of all debt before you do anything else.  That would be a short sighted decision that will possibly cost you money at the end of the day.  Student loans and mortgage debt, for example, can have low interest rates along with potential tax deductions, so it may not be a priority to pay those off right away.

The fact is, being stuck in high interest debt will hamper all of your other financial goals.  So it’s important to get rid of those debts first and make a plan to pay off the rest.

Get your spending in order.  I don’t currently use a formal budget, but I did before and it was very helpful in finding out where our money was exactly going.  It’s surprising when you see the transactions staring you right in the face.  We decided to cut down or get rid of the things we were spending our money on that we really didn’t want to, and that freed up a lot of money for investing and paying down debt.

There is always extra money to be found by using a budget.  This money can then be used to supercharge your other financial goals.  But it will never be found unless you track your spending, so it’s a good exercise to do every so often.

Find ways to increase income.  Once your debt repayment and spending are in place, focus on finding ways to increase income.  Cutting expenses is important but it doesn’t require much imagination and can only go so far.  The main ways to increase your income are getting a raise at your current job, start some side jobs/businesses or work hard to grow a full time business.  Within these three methods, however, you can get very creative.

Creating new streams of income takes some work building a foundation which won’t make you much money initially, but hopefully will provide solid income in the future.

Finding new avenues of income also serves as a form of financial protection.  If someone just relied on their primary job for their income and happened to lose that job, they would be in a very tough spot.  But if you lose your job while having other streams of income, you can just ramp up work on those streams and maybe even eclipse your previous income.

I agree 100% that having a plan is the path to financial success for couples and everybody else.  It will allow you to optimize your financial goals by making sure money is going where it needs to be.  How you get that plan is different for everybody.

Fidelity is obviously looking for customers to sign up for a plan with them, and many people would feel more comfortable working with a financial adviser to set up a blueprint.  But I believe anyone can do some research and figure out most of their plan and talk to an adviser to fill in some gaps if needed.

The vital thing is to set up a plan, because if you don’t, you’ll likely end up somewhere you don’t want to be.

Fidelity Couples Study


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.


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