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Loans - whats been your experience?


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The way I look at it is that aggressively paying down your mortgage can have some serious costs:

  • opportunity cost: the market is doing very well right now.  I spoke with my broker this week and he said that on average, my accounts are up about 12% over the past year.  Those gains aren't taxable until I sell, and then will be at capital gains rates.  My mortgage is 3%, so I lose 9% on every extra $ I put towards mortgage principle vs putting in to an investment account.  Also, I'm pretty close to losing my ability to itemize my deductions on my income tax if my mortgage interest drops more.
  • flexibility: I can get $ for any purposes quickly (few days) from an investment account.  Timing will matter, as the market fluctuates.  However, getting cash out of the house would take much longer and would involve a 2nd mortgage, home equity loan, home equity line of credit, etc.

I view the taxable investment account as the better place to put extra $'s once I've maxed out my ROTH, 401K, and HSA contributions (also the 529 plan for the grandson).  The $'s are still there if I need to pay down/off the house.

For younger folks, not being able to get cash quickly in the event of an emergency and the lost earning potential of investments are big downside.  Everyone must evaluate the interest rates they're paying on debts: student loans, car loans, and mortgages vs what investments are yielding and also consider the tax ramifications.

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Mathmatically you are right Ohio, but you didn't talk about the risk involved. 

Most of us know we are at risk for a global pandemic, and one that might take out a significant percentage of the population.  17 months ago we thought we might be at the beginning of one.  Nobody could have IMAGINED that PAs would be fired/furloughed/hours drastically cut.  

3 years ago I could do as much locums work as I wanted.  Since then there have been almost a thousand new NP grads in my state snapping up those jobs at as little as $45/hour.

What would you do if your big income that allows you to afford the big mortgage, the big car payments, and the big student loan dried up?

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On 6/26/2021 at 4:02 PM, mgriffiths said:

Started with ~$125,000 in student loans as I graduated 12/2016.  Initially put essentially 100% of any extra money onto my student loans...after funding tax efficient retirement accounts.  I also had the student loans set to a 30 year repayment to have the smallest required payment so that more of my excess payments went to the principal.

First job (left after just less than 6 months), employer did not pay anything toward my student loans.  Second job paid $10k per year.  When I left job 2 for job 3 (approximately 2.5 years ago) which doesn't pay anything on student loans, I refinanced to private loans for a MUCH lower interest rate and a 5 year timeline.  At differing times since then I could have paid off the remaining balance in cash, but decided to fund other things like starting to save for our kid's college or similar.  In April 2021 I refinanced again, and now I have a 1.75% interest rate with a 5 year timeline, and I have zero plans to pay anything extra.

I have $27,906.82 left paying just over $500/mo.  When it's all said and done, it will have been approximately 10 years - assuming I do just let it ride.   I could have made it MUCH faster, but we have definitely come out FAR ahead by fully funding roth IRAs and 401Ks every year.

Where are you finding 1.75% on a 5 yr loan for student loans if you don't mind sharing 

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21 hours ago, Boatswain2PA said:

What would you do if your big income that allows you to afford the big mortgage, the big car payments, and the big student loan dried up?

Boats,

I think we agree on not over-extending yourself with what you buy.  My concern is for folks who have been putting all their extra cash into their mortgage and are now within a few years of paying off their house, but still have that mortgage when they hit a personal economic crisis.  They haven't eliminated the mortgage payment yet but don't have the funds to weather the crisis.  Then they're stuck either trying to sell their home, or borrow against it, at the very time their reduced income makes them unattractive to lenders.  If instead they'd been putting that extra cash into an investment account that was building towards the mortgage payoff amount they'd have the flexibility they need.  Once the account matched the payoff amount, they could pay off the house and lose the mortgage payment at the same time.  Said another way, at the bare minimum, have an emergency fund that covers 6-12 months of living expenses, even if you don't build up other easily tapped accounts.  That's the risk I'm talking about - being forced into damaging financial decisions when preserving flexibility could have avoided that.

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Yeah, a balanced approach is usually best in everything as you reach for safety, then financial security, then financial freedom and wealth.  A balance of cash and investments (so you don't HAVE to sell investment), a balance of cash flow and wealth, and eventually a balance between multiple income sources, etc.

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If I am correct boats is a Dave Ramsey guy so before you even start paying for your house you have a 15,000-30,000 (3-6 months of expenses) emergency fund & you are putting 15% towards retirement with the rest going towards your house. Baby steps 4,5 & 6. So even if someone had been puting lets say 50K extra a year before a crisis happened and lost their job, they aren't going to have to sell their house to stay a float. 

While yeah it looks great what you could of earned if you had put all your money in the stock market, or even crypto at this time, like Boats says you are not taking account for risk. For example if you had taken out a zero principal loan and invested all your money in the stock market in 2005 you would of lost everything in 2007. Yet many of the financial "gurus" at that time were recommending this at that time. While I don't agree we everything dave says (we had an issue renting the car we wanted with the company he endorses, Dollar, because we don't have a credit card), his plan on getting out of debt and building wealth is pretty solid, with minimal risk and reproducibility across income brackets regardless of how the market is doing. 

FYI my wife and I have paid off 167K in 20 months following his plan, so it works well for PAs early in their careers who have high amounts of student loans. Its not flashy, but it does work. 

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41 minutes ago, newton9686 said:

If I am correct boats is a Dave Ramsey guy so before you even start paying for your house you have a 15,000-30,000 (3-6 months of expenses) emergency fund & you are putting 15% towards retirement with the rest going towards your house. Baby steps 4,5 & 6. So even if someone had been puting lets say 50K extra a year before a crisis happened and lost their job, they aren't going to have to sell their house to stay a float. 

While yeah it looks great what you could of earned if you had put all your money in the stock market, or even crypto at this time, like Boats says you are not taking account for risk. For example if you had taken out a zero principal loan and invested all your money in the stock market in 2005 you would of lost everything in 2007. Yet many of the financial "gurus" at that time were recommending this at that time. While I don't agree we everything dave says (we had an issue renting the car we wanted with the company he endorses, Dollar, because we don't have a credit card), his plan on getting out of debt and building wealth is pretty solid, with minimal risk and reproducibility across income brackets regardless of how the market is doing. 

FYI my wife and I have paid off 167K in 20 months following his plan, so it works well for PAs early in their careers who have high amounts of student loans. Its not flashy, but it does work. 

Question for you - I am a big Dave Ramsey fan as well. I am graduating in one month and I have a job lined up, and I am getting prepared for paying off my loans - I have $80k. I have always wanted to pay it off as quickly as possibly - goal is 2 years. When you paid off your loans did you contribute anything to retirement? Of note, this position is an independent contractor position (1099) so I will have to open my own retirement plan. 

I know Dave says to throw everything at student loans and not contribute to retirement, but I've heard others say different. I am 25 yrs old, single, no car payment, no other loans. 

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1 hour ago, Student0024 said:

Question for you - I am a big Dave Ramsey fan as well. I am graduating in one month and I have a job lined up, and I am getting prepared for paying off my loans - I have $80k. I have always wanted to pay it off as quickly as possibly - goal is 2 years. When you paid off your loans did you contribute anything to retirement? Of note, this position is an independent contractor position (1099) so I will have to open my own retirement plan. 

I know Dave says to throw everything at student loans and not contribute to retirement, but I've heard others say different. I am 25 yrs old, single, no car payment, no other loans. 

It may turn out that you have to be at your job for a while before you qualify for the 401K.  If that is the case, it makes sense to use the extra money to pay down your loans until you are eligible to sign up for the company's retirement plan.  Even then, it can make sense to put money into an IRA or Roth IRA.  I would max out on any tax advantaged accounts before I would put a lot extra into paying off students loans, but that's me.  If you live a frugal lifestyle, you may find yourself being able to put the maximum into the retirement accounts and still pay down the loans.

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5 hours ago, Student0024 said:

Question for you - I am a big Dave Ramsey fan as well. I am graduating in one month and I have a job lined up, and I am getting prepared for paying off my loans - I have $80k. I have always wanted to pay it off as quickly as possibly - goal is 2 years. When you paid off your loans did you contribute anything to retirement? Of note, this position is an independent contractor position (1099) so I will have to open my own retirement plan. 

I know Dave says to throw everything at student loans and not contribute to retirement, but I've heard others say different. I am 25 yrs old, single, no car payment, no other loans. 

I have not really put anything towards retirement so far. We have been trying to maximize the amount we put towards student loans and the rest of the consumer debt we had. I doubt many people will give you much push back with this plan since you are so young and you are not being offered a match. This is the one place where a lot of people have an issue with Dave Ramsey because he does ask people to stop taking advantage of the match for a short period of time. Just be aware many of these  "math wizards" who dont have enough money come the end of the month. So while from a theoretic perspective they are correct, they underestimate the fact that personal finance is really only about 20% financial theory and 80% what are you willing to give up to get out of debt.   Looking back on our journey just because we are on the 3-3.5 year plan, just given how much debt we had to begin with, combined with the fact that healthcare providers are usually playing catch up anyways when it comes to retirement, I MIGHT recommend someone take advantage of the match if they were in a similar situation or worse on a case by case basis. With that said the longer you stay in baby step 2, the less likely you are to get out (it gets tiring being frugal and not enjoying a similar lifestyle as you colleagues). And every dollar you put towards retirement is time longer in baby step 2.

 

Regardless, if you can get out of debt and maximize yourretirement after baby step 3 you are going to have 30+ years of a six figure income. If you put 15%+ of that towards retirement and get anywhere close to 10-12% ROI, you are going to have more money than you or likely your grandchildren can spend, by the time you get to retirement. 

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I'm pretty conservative financially, having grown up in my maternal grandparents' house.  They had lived through the Great Depression and stories of those times were dinner table fare.  That plays out in terms of spending habits: not spending out meals out, minimal clothing purchases, paying cash and/or paying off the credit card monthly, etc.  However, I'm not a fan of doing things, even aggressively paying down debt, that would leave you in a liquidity crunch.  Having an emergency fund that covers 3-6 months of routine expenses sound good, and is much better than many folks do, but really isn't enough for many PA's.  If you work in a specialty that requires hospital credentialing, it can easily take more than 6 months to find a job, get hired, go through credentialing, and get your 1st paycheck.  Having to get licensed in a new state can also extend that.  Cash applied to debt only improves cash flow when the debt is paid off and the minimum payment is no longer required.  Cash flow is what you have to manage carefully when you've suffered an income loss. Borrowing against your home may not be possible if you don't have an income.

Choices about putting money into tax advantaged retirement accounts vs paying off debts depends on a number of factors: interest rates charges on the debts, e.g. credit cards are almost always so high that they need to be paid off ASAP, tax deductibility of interest, e.g. for mortgages or home equity loans, availability of employer matches for 401K contributions, investment rates of return, etc.  Folks need to be smart about where they put their money.

Another recommendation: always have more than 1 employer.  It's much easier to increase/decrease hours once you're already hired and credentialed vs having that whole process to do.

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22 hours ago, Student0024 said:

Question for you - I am a big Dave Ramsey fan as well. I am graduating in one month and I have a job lined up, and I am getting prepared for paying off my loans - I have $80k. I have always wanted to pay it off as quickly as possibly - goal is 2 years. When you paid off your loans did you contribute anything to retirement? Of note, this position is an independent contractor position (1099) so I will have to open my own retirement plan. 

I know Dave says to throw everything at student loans and not contribute to retirement, but I've heard others say different. I am 25 yrs old, single, no car payment, no other loans. 

I would get rid of your debt before investing.  If you had a company match then maybe take the match first, and use everything else to pay down the debt, but without a match, at 25 yo....kill the debt.

 

You can be 27 and debt free, something unheard of in our consumeristic society.

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2 hours ago, Boatswain2PA said:

I would get rid of your debt before investing.  If you had a company match then maybe take the match first, and use everything else to pay down the debt, but without a match, at 25 yo....kill the debt.

 

You can be 27 and debt free, something unheard of in our consumeristic society.

I disagree a little bit

 

pay off debt as fast as you can is great.

BUT

agreed with doing 401k to get a match

but ALSO - donate the max to a ROTH IRA - the compounding that occurs over the years is real - you basically can not "make up" lost years if you do not contribute now.  This is about $5500/year so it would only slow down you pay off of the loans minimally but at the back end (when you want to retire) those extra years of contribution make a HUGE difference.

 

Money in the market typically doubles every 7-8 years.  I plan to have 2m in the market at retirement - I pretty much only did ROTH max contributions since age 21..... (used to be only $2000/year)   

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39 minutes ago, ventana said:

I disagree a little bit

 

pay off debt as fast as you can is great.

BUT

agreed with doing 401k to get a match

but ALSO - donate the max to a ROTH IRA - the compounding that occurs over the years is real - you basically can not "make up" lost years if you do not contribute now.  This is about $5500/year so it would only slow down you pay off of the loans minimally but at the back end (when you want to retire) those extra years of contribution make a HUGE difference.

 

Money in the market typically doubles every 7-8 years.  I plan to have 2m in the market at retirement - I pretty much only did ROTH max contributions since age 21..... (used to be only $2000/year)   

2 million is a little low honestly. I’m trying to ball hard in retirement. Following the Dave Ramsey plan and just doing 15%, with his income over 30-40 years we are looking at 5-10 million easy 

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2 hours ago, ventana said:

I disagree a little bit

 

pay off debt as fast as you can is great.

BUT

agreed with doing 401k to get a match

but ALSO - donate the max to a ROTH IRA - the compounding that occurs over the years is real - you basically can not "make up" lost years if you do not contribute now.  This is about $5500/year so it would only slow down you pay off of the loans minimally but at the back end (when you want to retire) those extra years of contribution make a HUGE difference.

 

Money in the market typically doubles every 7-8 years.  I plan to have 2m in the market at retirement - I pretty much only did ROTH max contributions since age 21..... (used to be only $2000/year)   

Sounds a little rich to me.  Using the Rule of 72, for money to double every seven years you have to average just over 10% ROI each year.  If one can consistently perform in such a way they are beating the historical ROI for a 100% stock portfolio.

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1 hour ago, GetMeOuttaThisMess said:

Sounds a little rich to me.  Using the Rule of 72, for money to double every seven years you have to average just over 10% ROI each year.  If one can consistently perform in such a way they are beating the historical ROI for a 100% stock portfolio.

I’m pretty sure if you look at the S&P 500 and Dow Jones over the last 30 years they have averaged somewhere around 10-12 %

Someone please correct me if I’m wrong. 

Edited by newton9686
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S&P 500 is 7.86% since 11/00.  Even at an annualized 10% ROI your money would double every 7 years in round numbers, and that’s 100% in the S&P 500.  Assume that you are starting now and working 40 years, you’d roll over your money 5+ times.  You’d have to start with a base (working backward from $4M) between $200K-250K.  That would have to be a pretty remarkable market trend to accomplish that, or one would have to be adding a boatload of cash on their own over time to reach it.

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6 hours ago, ventana said:

I plan to have 2m in the market at retirement - I pretty much only did ROTH max contributions since age 21..... (used to be only $2000/year) 

Weren't you a money manager for wealthy football players or something before going to PA school?

I would hope this young PA has closer to 7-8 million (not counting what inflation is going to do).  15% of $150k/year at 7% return is $5 million (not counting pay raises and inflation) by age 67.

Edited by Boatswain2PA
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my emergency fund unfortunately would be this:

work a lot more(if possible- as in no injury/health issue as the course of the financial crisis)

home equity loan(house almost paid off so a lot of equity)

Several low-interest, high limit credit cards with a lot of room on them.  

I have money in a 401k and could take some out, but there would be a substantial penalty, so I have never touched it. 

I do have a substantial disability policy as none of my employers provide one, but it doesn't cut in for 6 months. 

I am entitled to a pension at 65 from my first job. I could take it now, but at a significantly reduced rate(like 1/3 of the monthly value if I were to wait until 65). 

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A lot less risky if you saved 6-12 months of expenses in liquid accounts.  The time someone really needs money is when everything goes south (injured, market tanks, prior company goes bankrupt, etc).

We have cash savings buttressed by four rolling 12 month CDs giving us about a years worth of expenses covered.

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11 minutes ago, Boatswain2PA said:

We have cash savings buttressed by four rolling 12 month CDs giving us about a years worth of expenses covered.

I have a rolling 6 month series of CD's, each enough to cover a month's worth of routine expenses.  Only problem is that interest rates are now 0.4%.

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I took out about $12k/yr to live on during PA school and even got a grant. But I graduated from one of the more expensive private schools so I still ended up with over $125k in debt from PA school.  I was accepted to another school that was 1/3 the cost so that would've been much easier to pay off but considering that I got my first job through a rotation my school set up, who knows where I'd be right now. 

What I did: I got a good job right away and started to pay off debt immediately. Paid off oldest and biggest loans first and then refinanced my loans to a lower rate. Lived frugally the majority of the time. Bought a new, $20k car because my old beater cost more to fix than it was worth. Went on some great vacations. Bought a house. Put into 401k. Paid for our big backyard wedding that we planned and coordinated ourselves. Did some renovations to the house. Sold the house for a profit which I used to pay down debt. Bought another house. Paid off debt in 4 years.

What I'd do the same: all the above. It all worked out in the end. Had some good times and bought some things which extended my payoff timeline, but looking back it was worth it to me.

What I'd do differently: go on a couple trips during PA school before starting my job. Put even more money into the market and 401k earlier on.

What I'd recommend: keep expenses low, live with a roommate if you can, enjoy yourself but be smart about it, and put all your pennies into paying off debt as quickly as possible. 

Edited by SedRate
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On 7/4/2021 at 11:40 PM, Boatswain2PA said:

Yeah, especially with real inflation running about 10%.

please provide a source - on my quick search it is somewhere in the 3-4-5%% right now - not 10%

 

https://www.cfr.org/in-brief/how-much-too-much-us-inflation-debate-heats?gclid=Cj0KCQjwiqWHBhD2ARIsAPCDzamout_-bDVdTh0OB_cTLJufQKgvws2IYNrq4oXv9S7c5mY1is2Y8hEaAoTpEALw_wcB

https://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp?reloaded=true

 

 

I have been following this inflation concern and it is exceptionally interesting that cars are making up almost the entire thing.  (ngcb1

ngcb1

So I am concerned that there is some misrepresentation of the data to even get it to 5%, (excluding cars makes it FAR lower) and then to DOUBLE this 5% to 10% seems like alternative facts.......   

 

 

Would appreciate seeing where BOATS got this 10% figure from

 

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On 7/4/2021 at 12:15 PM, newton9686 said:

2 million is a little low honestly. I’m trying to ball hard in retirement. Following the Dave Ramsey plan and just doing 15%, with his income over 30-40 years we are looking at 5-10 million easy 

not so in my mind

2m is 80k/year for a 4% withdrawal per year (widely accepted conservative standard)

as this is ROTH it is tax free 

So my 160k in income/income need - no tax saves 15k, no saving for retirement 15k - mortgage paid off 15k - no college saving for kids - takes my salary value to 100k -  80% of this (another benchmark) is 80k.  Now specifically to me, my wife has the same savings, and we have two other income streams/investments that will bring in a sig amount.

 

But if I were single and looking at retirement the 2m would cover me just fine. 

 

 

And then there is another 30k in medicare a year..... making the 80k 110k (so I actually get a raise when retire)

 

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