Critique my finances please...

[hightower]

It's been probably a little over a year now since I started "getting serious" about my finances.  I'll spare you the details on why it took me so long to see the light, but I discovered WCI around 7-8 months ago.  I am confident that I have moved in a very positive direction overall, but moving forward I wanted to get others input about how I'm doing and any changes I should make to my current plan.  I guess this is kind of a mid-year tune up of sorts...it was sparked by WCI's recent article about being debt free.

Details:

35 y/o married, no kids.

Income: His: Approx 250k (can be more or less depending on extra shifts, bonuses, etc). I work primarily as a hospitalist, but also have a side gig doing suboxone treatment and cover at a pulmonary rehab program occasionally.

Hers: 56k

Airbnb rental: ~13k annually

Debt: Mortgage: 294k at 4% 30 year on a house probably worth between 500-600k

Loan from family for house renovations: 48k at 2.5% for 30 years

Student Loans: 102k at 2.6% fixed ($488/month)

Car Loan: 32k at 3.29%

Credit Cards (zero interest cards opened to pay off remaining high interest student loans and a down payment on the car): 41k at 0% for 18 months

Savings/Retirement Accounts: 220k This will be the first year we max out all tax advantaged accounts annually as well as contributing to a taxable account.  This number includes a 10k emergency fund.

 

My concerns are related mostly to the debt. I have a total of just over 500k of debt right now.  This is a lot obviously, but compared to where I was a year ago when I finally started paying off my student loans, it's actually better.  Our home has also appreciated a lot in the last 4-5 years so our net worth is much higher than it used to be.  I started with 250k of student loans, some with interest rates as high as 7.25%.  I've gotten rid of everything except that last 102k at 2.6% and the balance on the zero interest credit cards.  I kind of slipped backwards a little a few months ago when I decided to buy myself a new car and added a car loan to the mix.  To be fair, it is an electric car and I am doing a lot more driving now then I used to due to a job change and I'll be getting a $7500 tax credit next year from it.  It's saving me probably 2-3k a year on gas, so I don't feel too bad about it, but I still would rather not have a car loan.

My plan has been:

1. Focus on contributing as much as possible to my tax advantaged and taxable account now since I'm still relatively young and want to maximize time in the market.

2. Pay off car before the factory warranty is up (48 months).

3. Pay off credit cards before introductory period is up or transfer to another zero interest card at that time.

4. Make minimum payments on mortgage, family loan, and student loans given the low interest rates.

5. Downsize home in the next 1-3 years and move to my in-law's farm where we could build a much smaller house on free land and have a smaller mortgage (probably 100k less than we have now).  We would pay off the family loan as soon as our current house sells of course.

Given that we're in one of the longest bull runs in history, I'm starting to question my plan.  If the stock market were to drop significantly, I would want to be able to jump on the opportunity to buy lots of cheap stocks (like so many of you got to do in 2009 through now).  More freedom from fewer fixed expenses would be nice in that kind of a market.

Should I stop contributing so much to the taxable account and instead focus on getting rid of the car loan asap (could probably get rid of it by the end of the year if I'm aggressive)?  Should I try to pay off my student loans quicker?  Or should I just stay the course and focus on accumulating stocks and not worry so much about the fact that stocks are rather expensive at the moment?

Just looking for general comments and criticism.  We still have a lot of debt and that bothers me.  I'd like to immediately get down to having nothing but the student loan and a smaller mortgage.  That would feel comfortable to me.  My next biggest concern is increasing the size of our retirement accounts.  I feel that we're behind because the first 5 years I was in practice I wasn't contributing nearly enough to these accounts and we were spending too much.  We're doing much better in that regard, however.  If we stick to our budget we should be able to save 1/2 of our take home pay each year from this point forward.  We are actively working on identifying ways to spend less by analyzing our purchases each month and looking at where the waste is.

 

 

[The White Coat Investor]

I agree your total debt is a lot, even though you're "managing" it well. I mean, look at the interest rates! But I think a focus on lowering the total debt burden would be appropriate. A major target should be the credit cards- that debt will need to be paid in a little over a year and it's no small chunk of change. I also wouldn't want to owe a family member for 30 years, so maybe that one next. And, well, you took out a debt you didn't even need, didn't get particularly good terms on it, and don't even feel bad about it as evidenced by your justifications for it. I doubt you will, but I'd sell the car and buy a beater until I could afford a fancy $30K+ car.

At any rate, I think you're heading in the right direction, but I see too much debt management and too little debt payoff. I mean, I don't think you even mentioned in the entire post how much debt you're paying off per month or how much you've paid off in the last year. That kind of reflects to me way too much comfort with debt. You build net worth by:

1) Saving/investing more money

2) Paying off debt

3) Letting stuff you own increase in value

Try to do all three to the best of your ability.

And yes, I would not invest in taxable while having a car loan, student loans, credit card debt, family debt, and maybe even a large mortgage. It's not a matter of "but I can earn more than I'm paying in interest." Access to debt/credit is causing you to take on more debt to fuel your lifestyle. I mean, you make $300K and have a negative net worth, right? You're too focused on income and not enough on net worth. Income doesn't make you rich. Net worth does. Buying a $30K+ car with a negative net worth is a bad move no matter what your income is.

Calculate your net worth and the percentage of your income going toward building wealth and focus on increasing those rather than the more minor details of your investments and debts.

[jfoxcpacfp]

How long have you been out of training? Are you planning on remaining DINK's? If not, I would probably recommend working more and dedicate the extra income to paying down debt with a specified goal by the time you are ready to start a family. If your wife plans to be a SAHM, you'll lose $56k/year or have extra expenses for childcare.

It may sound counter intuitive, but I'm most concerned about the 0% $41k cc debt. If, for some reason, you couldn't pay it off in 18 mos and/or transfer to another 0% card due to whatever emergency occurs, that would be trouble.

I personally do not believe the stock market is overvalued or in some kind of huge bubble and trying to predict one so that you can buy equities on a discount is not a recommendation I'd make. You'll have plenty of opportunities to do that. Don't assume that a lot of people jumped on the opportunity to buy cheap stocks in 2009. Some did, but far from most. It feels a bit different when you're trying to catch a falling knife and you are bombarded with emotion and self-doubt and listening to every crackpot on TV and the internet, just hoping for a word of wisdom that you won't recognize when it hits you.

Without a real plan, those are my top of the head concerns: too much debt (but I realize you've been working on bringing it down, so I don't intend to criticize good behavior) while you have the opportunity to work extra to focus on erasing some of it. Nothing serious and, assuming you've been out of training only a year or so, good job of saving.

[jhwkr542]

My impression is that you have lots of small debts that can be tackled one at a time or all together. Your concern about market timing should have no impact on where you put your money. If you truly have those concerns, I'd say don't leverage your debts a la Zaphod. Just figure out what you're going to pay off first and stick to it. What you decide to pay off first may not make a big difference in the long run. I may prioritize that 0% credit card because it's a ticking time bomb and maybe pay off the mortgage last. Other than that, I like Dave Ramsey's approach of paying off the smallest first so you feel like you're making a dent.

[amphora]

1. It seems like you have a good plan and are taking your debts seriously.

2. Are you downsizing for purely financial reasons? If so, you don't need to as saving half your take home salary puts you on a solid track for financial success.

3. I would pay off the debts in this order: Car loan, student loans, mortgage, renovation loan. Because your rates are relatively low, it's justifiable to leverage your debts and invest extra income in taxable rather than in paying off debt early.

4. Not sure why you have credit card debt. Are you just having fun with 0 % interest or were spending too much before? It's fine to delay paying it off with a 0% interest rate, but don't increase your credit card debt just for consumption.

[hightower]

amphora wrote:

1. It seems like you have a good plan and are taking your debts seriously.

2. Are you downsizing for purely financial reasons? If so, you don’t need to as saving half your take home salary puts you on a solid track for financial success.

3. I would pay off the debts in this order: Car loan, student loans, mortgage, renovation loan. Because your rates are relatively low, it’s justifiable to leverage your debts and invest extra income in taxable rather than in paying off debt early.

4. Not sure why you have credit card debt. Are you just having fun with 0 % interest or were spending too much before? It’s fine to delay paying it off with a 0% interest rate, but don’t increase your credit card debt just for consumption.

Click to expand...

The only reason I have credit card debt is because of the zero interest loan offer.  I had approx. 29k of student loans at 6.8% and thought why not pay them off with a credit card and invest the money that would have gone towards the loans during the 21 months of zero interest.  However, I now see that behaviorally speaking it made me feel too comfortable with the debt I had and led to me buying a car I shouldn't have bought.  I also put the down payment for the car on the zero interest card which only added to the feeling that we were in better shape than we actually were.

We're considering downsizing not only because it would instantly help our net worth, but also because we've always wanted to move to her family's land.  We like gardening and having chickens, horses, etc.  So, it's something we actually want to do, not just doing it for financial reasons.

I agree with the general sentiment that debt reduction should be our priority.  It's low interest, but it's still debt.  I'll leave our current taxable account alone and start diverting money towards the car loan first.  Once that's gone I'll get rid of the stupid credit cards. When we sell our current house our personal/family loan will be fully paid off and any left over money can be used to pay off the remaining student loans.  At that point we'll be debt free except for a new mortgage, which should be significantly smaller than our current one.

[Dr. Mom]

Stop spending money you don't have. Nothing else really matters if you can't do that.  Pay off family loan ASAP.  Is family really okay watching you buy stuff on credit and a new car on a loan when you owe them money?  Honestly, I would have a hard time with that if you were my son or daughter.  After the family loan, pay off what you want.  Plot net worth every 6 months so you start seeing how debt reduction can grow net worth.  I didn't get it until I started plotting it out.  Read Benjamin Roth's, The Great Depression: A Diary, before you start worrying about market timing your investing.  Don't read it for history, but for his insights on watching his clients' choices about debt and money management.  Good luck!

[hightower]

Dr. Mom wrote:

Stop spending money you don’t have. Nothing else really matters if you can’t do that.  Pay off family loan ASAP.  Is family really okay watching you buy stuff on credit and a new car on a loan when you owe them money?  Honestly, I would have a hard time with that if you were my son or daughter.  After the family loan, pay off what you want.  Plot net worth every 6 months so you start seeing how debt reduction can grow net worth.  I didn’t get it until I started plotting it out.  Read Benjamin Roth’s, The Great Depression: A Diary, before you start worrying about market timing your investing.  Don’t read it for history, but for his insights on watching his clients’ choices about debt and money management.  Good luck!

Click to expand...

You're right.  We have a long standing bad habit of spending money we don't have.  For what it's worth, we're WAY better now then we used to be. The car was a temporary slip up that we've both agreed won't happen again.  Geez, I'm starting to sound like an addict now:/

Part of the reason we want to downsize our house is because it's an old house that still has a list of needed repairs/upgrades that we just don't want to spend money on.  In the past, we would have just spent the money without thinking about it and probably would have paid for them with debt.  Fortunately our family is not worried about the loan because they know we plan on selling the house and paying them back immediately when we do.

I'll check out the book you recommended. Thx

[ajm184]

First and foremost, congratulations on having more financial awareness and acknowledging you still have work to do (as must of us do).  You are open to advice which is good, but it is still up to you to execute on the advice; talking is 1/10, doing is 9/10’s.

With the information given I would have a different prioritize of your debt:

1. Continue to maximize your contributions to tax deductible retirement plans.


2. The 41K credit card debt. Yeah, I know it has a 0% teaser rate, but it is terrible debt on a multitude of levels.  Paying it all off will give you the ability to access credit as an emergency fund supplement (and hopefully not needed) as your emergency fund is way too small currently given your debt situation.


3. Home and associated family loan. Sell the home, ASAP.  This comprises about 60% of your total debt.  Even at the low of your estimated value, getting a check for $175 - $200K after repaying the mortgage loan is key.  You acknowledge you want to downsize, do it.  Use the proceeds to a. pay the family loan and any remainder for CC debt (see above) plus a ‘new home downpayment’.  In addition, I would rent for a year or two to save towards another home or aggressively repay other debt.  The larger the differential between rent and mortgage the better.   Zero guarantee on your home’s value until someone else gives you a check.

Other Suggestions:

1. Set some goals here with respect debt reduction or other milestones; celebrate success. Perhaps dinner and movie night with your wife, doesn’t have to be extravagant.


2. I would suggest better understanding of your overall finance versus rates/amounts. Determine/track your Net Worth.  I use Quicken but can be done on excel or a number of apps.


3. I would do a budgeting exercise (track every outgoing penny for a month or two); determine if there are places that you can cut back. Then set and keep a budget for a year or eighteen months.  I’m not a huge fan of budgets, but I’m guessing it will find you 5 to 10k of money you can put towards debt repayment and more importantly the discipline it takes will be essential to you in my opinion as you transition for debt management to wealth accumulation.

[Donnie]

Here are my observations:

• Buying a new car was a bad idea


• Financing a new car at 3.29% was a bad idea


• Borrowing on a CC to fund a down payment on a car was a bad idea


• Borrowing on a CC at all is generally a bad idea.  You are going to be in a bad way if you don't pay that off in the interest free period.


• Borrowing from family is a bad idea, especially when the likely reason you needed to borrow from them is because you couldn't get credit anywhere else.


• I suspect you are spending too much, but you didn't provide an income statement.

As one of the other posters said, you should stop spending money you don't have.  You make a high wage, but you are not rich.  If you were a business, your creditors would be foreclosing on you.

Look at your free cash flow before student loan debt service.  Work to make that number 25-35% of gross income, then you can aggressively start fixing the issues above. Sell the car and buy a used one.  Pay down CC debt, pay down car debt, pay down family debt, in that order.  I find them all three pretty scary, personally.  I would stop funding retirement accounts unless there is a match from your employer.  The CC debt is a time bomb.

[Dr. Mom]

Your family is not worried about the loan...

Maybe that is where your comfort with debt comes from?  Pay your family back first.  Money is fungible.  Pay your own stuff off when the house sells.

When you build on the free land, who owns the land that the house is built on?  Is that another family loan, gift, or unknown?

[hightower]

jfoxcpacfp wrote:

How long have you been out of training? Are you planning on remaining DINK’s? If not, I would probably recommend working more and dedicate the extra income to paying down debt with a specified goal by the time you are ready to start a family. If your wife plans to be a SAHM, you’ll lose $56k/year or have extra expenses for childcare.

It may sound counter intuitive, but I’m most concerned about the 0% $41k cc debt. If, for some reason, you couldn’t pay it off in 18 mos and/or transfer to another 0% card due to whatever emergency occurs, that would be trouble.

I personally do not believe the stock market is overvalued or in some kind of huge bubble and trying to predict one so that you can buy equities on a discount is not a recommendation I’d make. You’ll have plenty of opportunities to do that. Don’t assume that a lot of people jumped on the opportunity to buy cheap stocks in 2009. Some did, but far from most. It feels a bit different when you’re trying to catch a falling knife and you are bombarded with emotion and self-doubt and listening to every crackpot on TV and the internet, just hoping for a word of wisdom that you won’t recognize when it hits you.

Without a real plan, those are my top of the head concerns: too much debt (but I realize you’ve been working on bringing it down, so I don’t intend to criticize good behavior) while you have the opportunity to work extra to focus on erasing some of it. Nothing serious and, assuming you’ve been out of training only a year or so, good job of saving.

Click to expand...

Been out of training 6 years now.  I know we're behind.  I wish I would have found this site while in residency, but oh well. We're working on starting a family, so far no luck. But, we're hoping that will change in the next year or so.  My wife will get some time off, but she'll likely return to work after (she likes her job).  Fortunately my mother would be ecstatic about baby sitting if we needed her to so childcare expenses wouldn't be as bad.  I agree with the working extra suggestion. I currently have some good opportunities for extra cash that I'm taking full advantage of.

[Doctor Money Matters]

I would say to sell your house if you are going to do so anyways. Might as well take the tax free capital gains to pay off any other loans if so inclined. Rent for a year and come up with a plan to build on your family's land.

You would be able to pay off everything and potentially still have money to invest or for building the new home. Given the low interest rates I might consider investing over paying off the loans, but only if you feel your jobs are secure.

[hightower]

Dr. Mom wrote:

Your family is not worried about the loan…

Maybe that is where your comfort with debt comes from?  Pay your family back first.  Money is fungible.  Pay your own stuff off when the house sells.

When you build on the free land, who owns the land that the house is built on?  Is that another family loan, gift, or unknown?

Click to expand...

My in-laws own the land.  Their family has lived there since they migrated here from Germany in the late 1800's.  My father in law still lives in the house he was born in and that his parents built.  My wife grew up in the same house.  Technically my mother and father in law own the land now, but they are gradually shifting ownership to their children in the form of a trust. Each of the siblings will own 25% of the property when they pass.  They want to keep the land in the family so they would just be gifting the lot to their daughter if we built there.  We're very fortunate to have that opportunity.

They want us to pay them back, but aren't concerned with doing so more quickly (we've offered to do so).  You're probably right to an extent that if they had been "tougher" with us about paying them back first, we might have seen that debt as more of a priority.  Owing them money does bother me though which is yet another reason I want to sell our current house and pay them back.

[RogueDadMD]

I think others have given good detailed suggestions.  However as you are making $300k/year, so there is no reason to have any credit card debt or a $30k car loan when you have big student loans.  The investment arbitrage is minimal and you are leading yourself down the wrong path trying -- taking out a CC loan to invest in the market isn't generally what entrepreneurs mean when they talk about being leveraged.

Knock those out in the next 12-18 months (or less if you can).  If you can downsize the house that's great, but building a new one is a long-term project.  Pay off the family loan by selling the current house.

If you can sell and move into a cheap apartment while planning the next house then go for it and take your time.

Voila -- debt free and making $300k/year.