A Resident's Finances - Feedback wanted!

[Queue]

This thread was inspired by a recent forum post where the OP wanted their finances critiqued. I'd like to ask the same, although we are currently in the early years of residency. WARNING: This is a bit of a ramble.

After lurking around for the past several months, I’ve been wanting to take a very hard look at our current financial situation. After some quick napkin math I calculated that our current savings rate is just slightly north of 17% right now, and that has me a little pessimistic. I’ll include all the relevant numbers I can think of below. Just wanted some advice about our overall financial picture, as well as suggestions about how we may be more efficient or ensuring our spending accurately reflects our goals. (It’s funny how sometimes we know the theoretical answer, but are unable to accurately assess and tackle our own personal situation)

Background: Wife just finished surgical intern year and is about to start a flight medicine job in Japan with the Air Force for 3 years. I’m a stay at home dad with our 8 month old. After wife finishes the flight med job, the plan is to continue on with her surgical residency.

Debt:

$215k @ 5.75% in school loans. About 30k from wife's undergrad/grad, the rest from med school. I was lucky to have no undergraduate debt, but we made bad decisions about taking out more loans than we needed considering 3 years of my wife's med school tuition were paid for by the Air Force.

$14k @ 3.5% in a personal loan from my father to continue to pursue a commercial pilot’s license.

$2,994 on our CC right now. That’s this month’s purchases. We pay everything we can on CC and then pay off at the end of the month to accrue flight points with Delta Reserve.

No car debt.

 

Income:

Appx. $63,000 or $5250/month after tax

 

Savings:

My spousal Roth IRA with USAA: $458.33/month. Current value is $7,140

Wife’s Roth TSP: $205/month. Current value is $1,224

529 started for daughter. $100/month. Current value is around $900 (She will get an additional $600/year from my parents)

Emergency fund. $0/month. Current value is $9,640

Loan Repayment: $144.36/month. We are pursuing PSLF, so only paying the minimum under REPAYE.

Checking account: Current value is $3997

 

We have been using YNAB off and on for a couple of years to help get our finances under control. We went from not keeping track at all, to knowing where roughly 95-99% of our money goes. I think we miss tracking the odd $5 purchase every now and again, but no big deal in the grand scheme of things.

So we're saving $907.69/month (Roth IRA, Roth TSP, 529, REPAYE) out of our $5,250/month income = 17% savings rate.

 

My tentative plan:

1. Sell one of our cars. We just paid off my wife's car using the loan my father gave me, since the interest rate on the car loan was higher than the loan from dad. I'm hoping to get $8000 (KBB value) from it, which is how much was left on the loan when I wrote final check. So that would knock down my debt to my dad to $6k.

2. I've been accruing flight hours towards my license, but that will have to go on hold while we are in Japan. I hope to be able finish paying him back by next November. I could probably pay my dad back in 4-6 months if our budget doesn't change much, but I really want to...

3. ...prioritize maxing out all of our tax advantaged space. Continue to fully fund my spousal Roth IRA, start and fully fund a Roth IRA for my wife, and max out her Roth TSP. That should be a total of $29k per year.

My only goal for retirement savings at this super early stage in my wife's career is this: as much as humanly possible (within reason)

 

Moving to Japan will undoubtedly come with many challenges, including movings expenses (will be mostly refunded from AF eventually), some forced lifestyle changes, opportunity to do some much cheaper traveling throughout Asia, etc. If we can stick to a 29k savings out of a roughly 80k after tax income, then we'd be looking at a 36.25% savings rate after tax, which is much closer to where I want us to be, and hopefully still have plenty left over to take advantage of living in a new country for a while.

If we get super spunky I suppose that we could start a taxable account, as I don't believe that we have access to any other tax advantaged space at this time, but now I feel like I'm putting the cart before the horse so I'll leave it here. Any thoughts you have on my plan, or something that I'm not fully considering or missed would be greatly appreciated.

 

 

 

 

 

[jfoxcpacfp]

I think you're doing a fairly decent job especially considering that you are heading into PSLF. You obviously went off track if you graduated med school with $215k debt considering that you went into it with only $30k and 3 years were paid for (and you didn't have to stay home with a baby then.) Perhaps you missed that blog post on WCI...

It seems you have righted your ship, though, and are making progress toward financial maturity and have stopped the bleeding - good for you. Should I presume that your goal is to become a commercial pilot once your wife finishes residency? And that she will be finished with military service? If so, the future looks bright unless you have some huge spending goals such as your own private plane.

Your ages w/h/b helpful, but I think you're doing great by maxing out your Roth. I would recommend one for your wife before the college fund. You can catch up on college savings later - let the grandparents do the heavy lifting for now.

I disagree with your savings calculation as I don't count debt service as savings and would leave out the $144.36 loan repayment. I also calculate savings rate based on gross, not net, income. Using net allows you to manipulate income tax withholdings, which vary depending upon how you fill out your W4 form. Choose a lower % goal based on gross income and stick to it.

PS - Your warning was well-deserved  

[The White Coat Investor]

17% savings rate as a resident? That's fantastic. You know mine was much less than that, right?

However, I'm lost as to how your wife is in the military but has $215K in student loans. It's usually one or the other, but you guys seem stuck with both, which is a huge obstacle in your financial progression. I just connect someone who can save 17% as a resident, but took out $215K in student loans despite only having to pay tuition for one year in med school. Columbia or something?

I guess you just figured the whole budget thing out recently, but wow, what a change. As usual, it isn't so much where you are at as the direction you are moving in, and you're going in the right direction.

A few things you need to be thinking about:

1) PSLF for her. All this military time counts so make as many payments as possible

2) Roth for any savings- Roth TSP and Roth IRA

3) Military residency would be best probably, not only to keep making PSLF payments, but for the higher pay.

Does your dad know you told him you needed a loan for one thing and then used it for something else? Gotta be careful with family loans.

Pay off the loans that won't be forgiven before you start to invest in taxable. And consider ways to develop an income for yourself that work around your family responsibilities.

[Queue]

jfoxcpacfp wrote:

You obviously went off track if you graduated med school with $215k debt considering that you went into it with only $30k and 3 years were paid for (and you didn’t have to stay home with a baby then.) Perhaps you missed that blog post on WCI…

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The White Coat Investor wrote:

However, I’m lost as to how your wife is in the military but has $215K in student loans.

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If only I could go back and verbally abuse my younger self. Her med school was a private DO school that cost $42k per year. We took out $72k the first year to cover tuition and living expenses. We then continued to take $30k for the next 3 years to cover living expenses. I worked your basic low paying jobs during those 4 years in order to live with her, as the school was in the middle of nowhere. (Town of about 10k people or so without the college) However, we were financially oblivious to what we were doing to ourselves.

jfoxcpacfp wrote:

Your ages w/h/b helpful

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I'm 27 and my wife is 28.

jfoxcpacfp wrote:

I disagree with your savings calculation as I don’t count debt service as savings and would leave out the $144.36 loan repayment.

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This makes more sense than my calculation. I think I blurred the lines between savings, and money going towards net worth. Given that, we're probably around 13% or so.

jfoxcpacfp wrote:

Should I presume that your goal is to become a commercial pilot once your wife finishes residency? And that she will be finished with military service? If so, the future looks bright unless you have some huge spending goals such as your own private plane.

Yes, commercial pilot is the plan, but kids throw quite the monkey wrench into the equation, so we shall see. We are leaning towards her being done with military service after she completes her residency. No private planes are in the equation at the moment. I'm just trying to get through the next 7-8 years with the goal of getting back to broke ($0 net worth).

The White Coat Investor wrote:

I guess you just figured the whole budget thing out recently

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Indeed. Ironically it was my wife who introduced me to the WCI website. I think she regrets it, as the last 6 or so months have been me relentlessly trying to figure out how to get us on the right track towards FI, and asking her for input after she gets home from a 14 hour shift...

The White Coat Investor wrote:

Does your dad know you told him you needed a loan for one thing and then used it for something else?

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It was actually his idea for the loan as well as using part of it to pay off the car. I was against it initially, as I didn't want to muddy the waters too much, and I hated the idea of asking him to fund my flying, but he reasoned that it didn't make sense to take out a private loan as the interest rate would be sky high. The man is incredibly trusting of my wife and I, and I'd chop off my right arm before disappointing him or going behind his back.

[hightower]

I think you're doing pretty darn good for living on 63k a year with that kind of debt burden.  The key will be avoiding the temptation to upgrade your lifestyle for the first couple years that your wife is making the big bucks.  That was my biggest mistake financially.  If I had stayed put in our cheap condo after residency and not bought a big house, I'd be rolling in it now.  Especially if I would have paid off loans quickly and started investing aggressively (this was in 2011 when the stock market was still recovering).  So, you're way ahead of me just by being on this forum right now.

But, yeah stick with your current course, avoid any new debt, and pay off all debt when your wife starts working.  You guys will be A-OK.

[Queue]

Thanks Hightower. Lifestyle upgrade would probably have been an automatic thing for us just a few years ago. More money = more things right!? Now, it's more likely us choosing very carefully what we can really afford to upgrade without having to give up an inch of our future financial goals.

I'm actually a bit anxious to see what it feels like to go through a bear market. We've only recently started contributing to our retirement, and our accounts have only ever dropped by a few dollars at a time, and have generally gone up, albeit only a few hundred dollars or so. I'd like to think I'll just see it as normal market corrections and an opportunity to continue funding at the current level at the least, or even try to amp up the contributions if possible to buy while prices are low. Only time will tell.

[hightower]

Just start telling yourself now that bear markets are a good thing...because at your age they are.  The stocks are on sale!  Big sale sometimes!  You should position yourself to buy as much as possible after a major market downturn.  That's why getting out of debt early on is so advantageous.  You'll have more cash flow to invest. That's my goal right now...get rid of all of my debt so that during the next downturn I can really invest heavily in cheap shares.

[Donnie]

I agree with others that you are doing pretty well on savings rate given your income level. I would also pass on the 529 for now and contribute to wife's Roth or debt pay down. Given your likely income trajectory, you will probably never have a lower tax rate in your life, so you can't go wrong with maxing out Roth.

[Gamma Knives]

Not much to add but quick question when you said "Delta Reserve" were you referring to this credit card with a $450 annual fee (and another $175 for second card)? Obviously that isn't going to make or break you but I would be surprised if you are spending enough on that credit card to be worth the annual fee compared to other cards that are out there. I was thinking about getting that card but I don't think I spend enough to be worth the fee (and I'm a delta gold medallion); your mileage may vary.

[Queue]

Yes, that's the credit card that we use. The $450 annual fee is waived due to my wife being on active duty. Otherwise, we would have chosen a different card

[Gamma Knives]

Queue wrote:

Yes, that’s the credit card that we use. The $450 annual fee is waived due to my wife being on active duty. Otherwise, we would have chosen a different card

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Nice!

[ajm184]

A couple of questions; in your first post you stated you have an 8 month old son.  In a subsequent post you stated 'Kids'; which is it?  You stated you have started towards a commercial pilot license.  How far are you away in terms of money or flight hours?  Reason I ask is the your wife is working on an Air Force base, so you may be in position to make some progress towards your professional training and hopefully at a reduce rate/cost.  If you can generate some income while with your wife in Japan, it would obviously help in terms of investing or debt reduction.

[Queue]

We just have the one kiddo right now (it's actually a she ), but by the time I'm able to get the requisite hours to fly commerically we may have more. Unfortunately there is no civilian air club where we will be based at (Misawa, Japan if you're interested), so the odds are really stacked against me for accruing any more flight hours while we live overseas, although I won't say no if the opportunity arises. I currently have my private pilot's license with about 110-120 hours (I'd have to go check my log book for a more accurate count). I should be getting my instrument rating (allows me to fly using only my gauges instead of using the horizon) in the next 2-3 months before we leave, but will have to finish getting the final 100 hours once we get back to the states (commercial license is 250 hours), so it could be another 4-5 years until I finish. That's the reason I'm leaving the option of having more children by then open. I have an idea or two about how to possibly generate some extra income while in Japan, so we will see if either of those pan out.

As far as helping to invest further to reduce debt, I've been re-analyzing our budget since I posted this thread, and I think we've fallen into the trap of short changing ourselves in terms of how much we decide to save up front each month. Our monthly expenses average around $3,700, and that includes what we're already saving, so we have around an extra $1500 that could be used to either invest or pay down my debt to my dad. In the past that money has typically gone to the unexpected expenses that inevitably crop up each month. Had a $550 vet bill the other month, my wife demanded we buy a Nintendo Switch and games, extra meals out at restaurants, etc. Technically the money is there, so we decide to spend it. Now that I've identified that's happening, I'd like to see if we can't use at least $1000 to invest up front each month (fill up that tax advantaged space!), then use the additional $500 to start paying my dad back. It's probably good to leave a little wiggle room for the truly unforeseeable expenses that have to be paid (like the vet bill, our husky had to have a tooth pulled). I'll throw this idea at the wife and see what she thinks about it and report back.

[ENT Doc]

I have to disagree with something WCI said, at least if your wife's reasons for taking the HPSP money are like most - to pay for medical school.  If she is wanting to do a surgical residency I disagree with the idea that it is superior doing it in the military.  She only took the scholarship for 3 years, so after her flight tour she should be done her service commitment.  While you make more money as a military resident, it's not THAT much more even on an after-tax take-home basis.  If she does a 5 year surgical residency (don't expect any intern year time to count) that will obligate her to 5 years of service after residency.  Who do you think makes (a lot) more money - the civilian surgeon for 5 years or military surgeon for 5 years?  If she does decide to do a military residency then you have essentially committed yourselves to a 20 year military career - she'll have at least 13 years in at that point and I can't imagine how it is financially reasonable to not stay the full 20 at that point.  Great benefits, but you have to know what you're getting into.

As for the past mistakes, those are sunk costs.  Learn from them, and never let your kids make the same mistakes.  Hit it hard and save.  Enjoy Japan - it's a beautiful country with wonderful people and a great place to use as a home base to see any number of fantastic places on that side of the world.

[HandFellow]

This is probably the smallest item on the list, but why the Delta Reserve card?  That card has a 450/year annual fee and really on has value if you spend 60k/year on it to get the MQMs.