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Mark Apker

In Monthly Expenses

Paying off loans is fun!

It’s the beginning of a new month, and while, for most people this occasion might be fairly inauspicious, in our home it’s a HUGE DEAL! Why is it such a huge deal you may ask? It’s the start of a new budget!

At the beginning of each month Katie and I take some time to do a final review our budget from the previous month and see how we did in each category. We tally up how far under budget we were in each category, and ensure that, if we did go over in any of our categories we’ve covered those expenses from our surplus. Once we have reconciled each category we add up how much under our budget we were, zero out all the categories, and add all surplus money to the category titled “extra money to put towards student loans.”

As I mentioned in a previous post, we’re usually able to come in well below our budget. This is where it gets exciting: WE GET TO PUT ALL THAT EXTRA MONEY TOWARDS OUR STUDENT LOANS!!!

Earlier this week, through careful budgeting and spending, and some windfalls, we reached an important milestone. We finished paying off my bar study loan. When we began focusing our resources on this loan the balance was about $21,000 and the interest rate over 8%. Today, we are free. Free from the thousands of dollars we had accrued in interest, free from the hundreds of dollars that were accruing each month when we began paying off this loan, and free from the $35 we accrued in interest last month, and will never accrue or have to pay again.

A few other amazing things happen when you pay off a loan too. We budget a few months in advance so the money we had earmarked to pay the minimum on this loan in June and July went instantly towards the next loan we’ll be focusing our attention on. We were able to delete a line on our budget. We won’t ever have to think about that loan again. That expense is gone. We get all that money back forever. We get to “snowball” meaning, much like a snowball rolling and gathering more snow and getting bigger, we get to take our ever increasing surplus of money from obligations we’ve eliminated and instantly use that money to pay off the next loan we’ll be focusing on even faster.

All of these things are awesome, and make you feel good! When you pay off one loan it makes it that much more possible to pay off the next loan, and it gives you additional hope that your task of getting out of debt is possible.

I wish upon each of you suffering under the weight of student debt the same good fortune! Keep pushing, and those loans will be gone sooner than you think. Feel free to share your success stories in the comments below!

In General Financial Advice

What to do with windfalls?

Windfalls:

A few weeks ago some people were scrambling to finish paying their taxes (not you, you finished yours a while ago, right?). About now a slow trickle of the magical “tax refunds” are being disbursed to people around the United States. “Wow, this is cool!” they will say. “I just got $3,000, time to go buy that (fill in the blank) I’ve always wanted but have been too irresponsible with my money to save up for!” “Never mind that the responsible thing to do would be to pay down my (fill in the blank with student loans, mortgage or credit card debt), I want new cool stuff that will bring me temporary and hollow happiness!”

I know none of the people reading this are that person, but there are a lot of people who think exactly this way.

*quick aside*

If you pay money to the government in the form of income taxes, your tax refund should be as close to zero as you can make it. Unless you’re cool with the government borrowing the money you’ve earned interest-free for months at a time, you should do some math to figure out how many deductions you should claim to ensure you’re contributing as much as you should, but no more. There are a lot of good tax calculators out there you can find with a quick Google search to help you do this. Then it’s a simple matter of reaching out to your HR department and having them adjust your withholdings.

There, now you’re accumulating that $3,000 as you earn it, providing you with the awesome ability to put that money to work right away. If you do, you’ll now have a “tax return” of $3,116.22 for the year (assuming a 7% rate-of-return invested monthly throughout the year). That’s not too bad for completing a few easy tasks! You’re welcome.

*end aside*

The question for this week is, what do you do when a large and somewhat unexpected chunk of money comes your way? This question came about a few weeks ago when, on one fateful day, I checked my mailbox and found not one, but TWO pieces of mail notifying me of upcoming drops of money into my financial bucket.

The first informed me that it was time for the annual “University of Michigan Family Economics Study” survey. This is a fantastic study that measures household financial health through generations. I was fortunate enough to marry into this study. For my trouble (and detailed information about my financial situation) I will be compensated with $75! Not bad for a simple phone conversation.

The second bit of mail told me that I was a part of a class-action law suit because a past employer had been doing some shady things and that now, five years later, I was being made whole. I had to send a post-card to opt-in to the suit. Once a certain date has passed I will be mailed a check for my portion of the award. The expected sum: $125. Not exactly enough to retire on, but I had written that money off a long time ago and I will welcome it to my bank account gladly and with open arms!

One day, two pieces of mail, $200.

The individuals in our tax example above would immediately formulate intricate plans for their windfall. A new thing for the house or car, a fancy meal or something else equally unnecessary. Being exceptionally boring and predictable my windfalls will go immediately to the category of my budget titled “Income: to be budgeted.” My prediction is that, once I’ve reconciled my budget for whichever month I receive this money, these modest sums will find their way to the budget category “Extra money towards student loans.”

How lame am I? Being exceptionally lame, I did some math to find out exactly how lame I am. Over the next 5 years, my decision to use this money to pay off student loans will earn me $83.53 in interest. Now, admittedly $83.53 isn’t a lot of money. However, there is GREAT power in making these decisions consistently. Each time we make a small decision to reinvest the money we receive rather than spend it on whatever thing we see that we want, we are moving ourselves closer to reaching our financial goals, whether that be paying off student loans, a mortgage, credit card debt, or financial independence (really, these things are related and mastering each will improve your life dramatically).

But, what about our person who received $3,000 in the example above, what would happen if they invested their money? After five years they would be $1,252.88 closer to financial independence. That’s real money.

Being wise with windfalls has become a habit for us because we are not emotionally connected with our money.  Our happiness is not dependent upon money. We are not living in a state of “scarcity” common among people at all income levels. We have enough, so we are not constantly hoping for more money to purchase some new “thing.” That power over things will give you the ability to manage windfalls wisely.

In Monthly Expenses

Yeah, but budgeting is easy when you have plenty of money…

So, my post last week sparked a few comments. One of those comments was that it’s easy to budget if you have plenty of money, but that most people in debt don’t have enough to cover their basic needs. My experience is the opposite. Budgeting is more difficult in a comfortable situation because the consequences of spending are noticed less. I think it’s much easier to budget if you’re forced to by your sparse income – and once you budget, you’ll find you have money left over to start paying down any debt you may have!

ANY adult with the ability to work full-time can cover their basic needs. I don’t care who you are. You can be a high-school dropout working as a janitor at the high-school you dropped out from and you will still earn enough money to live and support a family. It might not be glamorous, but it can be done, and I’ll show you how.

As I’ve mentioned, I’ve been blessed. I have enough to pay my loans and live within the somewhat generous budget we have established for our family. That wasn’t always the case. When we had very little income we were forced to live within a budget because a single frivolous expense would make it impossible for us to pay rent, get to work, or accomplish some other equally important task.

Last week I shared our family budget. In that post I mentioned that we could trim fat if we had to. This week I’m taking it a step further. I’ve evaluated my budget, done some math, and created a model for how tight I could trim my expenses (like if I lost my job, or some other tragic event occurred).

Below is the same spreadsheet as last week but with a new number: my “bare bones” number. If I was in dire straits, this bare bones number is how I would spend my money (and, actually, it’s a good approximation for how I did spend my money when we were in a desperate situation). I’ve also included a description of what I cut from my actual budget to arrive at my bare bones budget.

Category Monthly Budget Bare Bones Budget Bare Bones Description
Utilities  $                 215.99 $                 260.99 Added internet and phone which are currently business expenses.
Food1  $                 630.00 $                 450.00 I removed all “eating out” and a few other minor frivolities.
Fuel & Vehicle Maintenance  $                 184.00 $                   96.00 We could downsize to one car and this number reflects that.
Household Items & Miscellaneous  $                 392.95 $                 202.95 Removed allowance and babysitting.
Annual Subscriptions & Memberships  $                 107.90 $                   61.70 Removed all unnecessary expenses and memberships.
Vacations & Gifts  $                 265.00 $                     0.00 Vacations would be suspended and we’d get creative for gifts.
Charitable Giving  $                 556.40 $                     0.00 Donations would be drastically reduced.
Living Expenses Subtotal  $             2,352.24 $             1,071.64 Wow! That’s a HUGE difference.
Housing  $             1,368.74 $                 950.00 Move to a smaller home. This is for a 3-bedroom apartment in my area.
Housing Subtotal  $             1,368.74 $                 950.00
Personal Expenses Subtotal  $             3,720.98 $              2,021.64 My definition of basic needs costs $24,000/yr.

 

If you’re an adult, and you make less than $24,000 a year, you’re doing it wrong. Stop, take a moment to reevaluate your life, and start applying for jobs. Unskilled laborers make more than $35,000 a year. If you don’t believe me go to indeed.com, search “unskilled labor” and filter by “full-time.” This is the bottom rung of employment in our society.

But, being intelligent people who are motivated to work hard, you can (and will) do better than this. If you have a college degree, there are any number of jobs you can get that will pay you $45,000 a year. And, if you have a professional degree, you can find a job making at least $65,000 a year.

So, let’s say you’re an average American. You have a modest mortgage that costs you about the same amount monthly as my bare-bones budget, you have $16,750 in credit card debt, $29,000 in car loans and $50,000 in student loans.2 Can you escape your situation? YES!

If you live on $24,000 a year and you make $45,000 a year (assuming that $50,000 earned you an undergraduate degree), that gives you a surplus of $21,000 a year (assuming you have 3 kids like me and between credits and tax rates you pay very little or no taxes). What shall we do with that surplus?

This being a blog primarily about student loans, let’s start with those. Let’s say you refinance your $50,000 in loans at 4.5% and are satisfied with a ten-year repayment. Your monthly payment will be $518.19. This leaves you with ~$1,231.81 a month to pay down your credit card balance. If you are diligent in putting all of this remainder towards your credit card debt, that $16,750 will be gone in 16 months (assuming a terrible 18.5% interest rate). Then you’ll be able to put all of your surplus towards student loans! If you began putting all of your surplus towards student loans at month 17, you will have all of your loans paid off by month 42. That’s only 3 ½ years of living poorly to have the rest of your life to live like a king! Would it suck? Yes. Would it be worth it? That’s for you to decide.

This brings me to my last point. How much money you make really doesn’t ma… WAIT!!!

I forgot car loans!

No, I really didn’t. A car loan is almost never necessary. Sell your financed car, use the money to pay off your loan, and either buy a cheap and reliable used car, a bus pass, a bike, or just walk.

There are plenty of alternatives to financing an expensive car.

As I was saying. How much money you make really doesn’t matter. All that matters is how you choose to spend the money you do have. How we spend our money comes down to what we all personally value. I value relationships with my wife and children and paying off my student loans. That’s why, in my budget, I’ve allocated money for dates, excursions and vacations. I’ve done the math and decided that I’m willing to spend another year getting out of debt to redirect money to those activities.

When someone says they “can’t get out of debt” what they’re really saying is that they value their current lifestyle more than financial freedom. That’s ok if they do. But, now you know exactly how to tell them what their alternatives are. There are always going to be reasons given for why a budget like the above won’t work for someone in their specific situation. However, the benefits of financial freedom are worth making your best attempt.

Next week we’ll talk about something fun. Windfalls!

1 For a family of five, if you earn less than $37,000 a year you’re likely eligible for full SNAP benefits. If you need assistance with food, check out the USDA’s SNAP eligibility page. If your employer doesn’t cover health insurance and your income is $45,000 there are some excellent options available. I was able to find good healthcare plans for $1,050 per year through healthcare.gov for a family of five.

2 Source: https://www.nerdwallet.com/blog/average-credit-card-debt-household/

In Monthly Expenses

Our Family Budget

Apker Family Budget

Since I began writing this blog I’ve had a lot of people ask me; “How are you going to pay off $350,000 in student loan debt”?!?

Fair question.

The shock inherent in that question hasn’t even had the benefit of full information. Our plan is to (hopefully) be free from student loan debt within five years (more on how this is possible in future posts)!

“What”?!? “No WAY”! “You’re either crazy, getting a TON of help from family, or insanely wealthy”!

I assure you that we’re not getting any help, we’re not insanely wealthy, and we’re not doing anything TOO crazy.

I will admit that both Katie and I have very good incomes, but more important than that, we try to live well within our means. To do that, we faithfully adhere to a family budget.

First, a little background.

There was a time, not very long ago, when we were really poor. Like, not able to pay the rent, buy groceries, clothes or other necessities poor. That period between the end of law school and the beginning of my MBA program forced us to push the limits of how little we could spend to survive.

We never ate out, we cooked a lot of meals with superfood staples (lentils and rice are cheap, healthy and delicious), and we limited every other expense as much as we could. At our tightest we were sustaining four people spending less than $1,750 a month living in Portland, Oregon. For reference, our rent at the time was $1,275 a month. We were spending less than $500 a month for everything else (full disclosure, we were relying on government assistance for health care and food).

Some will say those numbers are impossible. I’ll have you know that it’s certainly possible, it’s just not that much fun!

I look back on this time as a tremendous blessing in disguise. If we hadn’t been forced to live as frugally as possible, we may never have learned how inexpensively one can live if one really tries. Now that we’re focused on paying back loans as quickly as we can we’ve upped our budget enough to give us a little more luxury. Though we’re still living very inexpensively we feel spoiled because we have so much compared to what we did have. Perspective is everything.

For those who haven’t had the luxury of poverty to teach you how to budget, this lesson will be harder to learn. Self-imposed restrictions can be difficult. But, like a healthy diet or exercise plan, it will be worth it!

Given our lofty goals and our focus on frugality, Katie and I have decided to share our budget with each of you. As you look at the expenditures for each category keep in mind this is the most we’ll ever spend in a month. Just because there’s money left in a budget category near the end of the month doesn’t mean you can spend your money on worthless things. Money remaining in a budget category is not “permission” to spend. Budget categories are guidelines that should only be reached when something out-of-the-ordinary occurs.

As you get used to living within a budget it doesn’t feel like a restriction. You become free from the impulse common in our society to “have things.” I’ve found that having things has rarely made me happier, but the additional time with my family during inexpensive outdoor activities and the health which comes from avoiding fast food are very valuable. We try hard to stay well below our budget in each category, each month.

Staying below our budget is a fun game for us. The less we spend, the more money we get to put towards our highest interest student loan! As we reconcile our budget at the end of a month, and see how many hundreds of dollars we are under our budget, it provides a rush. That rush makes all of the decisions to monitor the thermostat, skip a meal out, or bike instead of drive, worth it.

With that, here are the numbers.

Category Monthly Budget Description
Utilities  $                 215.99 Includes electricity, gas, water, sewer, garbage.
Food  $                 630.00 All food expenses, regardless of the source.
Fuel & Vehicle Maintenance  $                 184.00 Gas for cars, regular maintenance and savings for repairs.
Household Items & Miscellaneous  $                 392.95 Household items, expenses for children, everyone’s allowance, babysitting.
Annual Subscriptions & Memberships  $                 107.90 Insurance, YNAB, iCloud, Amazon Prime, AAA, credit card fees, etc.
Vacations & Gifts  $                 265.00 Saving for Christmas and Birthday gifts, and for family and couple vacations.
Charitable Giving  $                 556.40 Includes tithing and other donations.
Living Expenses Subtotal  $             2,352.24
Housing  $             1,368.74 Mortgage and HOA.
Housing Subtotal  $             1,368.74
Personal Expenses Subtotal  $             3,720.98

 

It’s important to note this is a high-level overview of our budget for introductory purposes. I’ll follow up with more information on how we’re able to stay within the budget amount in each of these categories in future posts.

Again, I want to make it clear that these are our maximum expenses per month. We (all five of us) easily live on less than this, and we don’t feel deprived at all. We feel rich! I mean, look at the “Vacations and Gifts” category, the “Annual Subscriptions & Memberships,” and “Charitable Giving”! All of those are things we could easily do without, or drastically reduce, if we were forced to. And, I know what you’re thinking. “That food budget: six-hundred and thirty dollars a month”? “They must be super high-rollers”!

We are. We eat out like six times a month on that luxurious number. A goal of ours is to go out less frequently on date nights and put another ~$50 a month towards student loans.

That household and miscellaneous number? There’s definitely some fat we could trim in there.

And really, as Katie and I were reading this just before we posted it we were like “we spend THAT MUCH, we can do better than that!”

If we were really ambitious and Spartan, we could lower these numbers. If we didn’t have student loans to contend with, we could easily live on less than $40,000 per year without too much sacrifice. And, if (when) we pay off our mortgage, we will easily come in under $25,000 per year in living expenses.

Faithfully adhering to this budget is integral to our ability to pay off our student loan debt. If we didn’t live on a budget, we wouldn’t have enough surplus to make the payments mentioned in the previous post.

This isn’t a pipe dream, these are real numbers and anyone can do it. If you currently have and adhere to a budget, I challenge you to look for ways to trim fat wherever you reasonably can. If you don’t currently have a budget WHAT THE CRAP ARE YOU WAITING FOR!?!? Go sign up for Mint or YNAB right now! Seriously…I’ll wait…

If you’re committed to paying off your student loans, or if you just want to live better for less, I highly recommend checking out the sources of both information and inspiration listed below! Also, please feel free to share your comments, I’d be happy to answer any questions you may have.

Happy budgeting!

http://www.mrmoneymustache.com/

http://www.getrichslowly.org/blog/

http://earlyretirementextreme.com/

 

2 In Monthly Expenses

So! You had $350,000 in student loan debt. Tell us about that…

So! You had $350,000 in student loan debt. Tell us about that…

Ok, I will.

First, apologies for the hiatus. I made the choice to have knee surgery over the holidays to allow for maximum downtime. Even though it was nice to have downtime, surgery still sucks. And between recovery and catching up in other areas of my life, blogging had to be put on hold.

And, I’ll be honest, I struggled with whether or not to share as much specific information as is contained in this post. However, after a lot of thought, I decided to be open with my information. The reason I wanted to be specific is because, as we go through this journey of debt repayment I don’t want to take any shortcuts. When I say that I’m paying off almost $350,000 in student loan debt in less than five years people are skeptical. I must either be rich or living in abject poverty. I’m neither of those things. The more you know about how I’m doing this, the more confidence I hope to instill in others that they can do it as well.

Now, back to the subject at hand: debt. Or, more specifically, our plan for paying off a whole ton of it quickly!

In August of 2016 we hit our debt high water mark of $342,568. “Wait”! “You said $350,000”! I know, I know. I rounded up for ease of comprehension and a little dramatic effect. Close enough though, right?

We had been on income based repayment for a few months to qualify for a home loan, and we were putting all of our “extra” money at this point towards our lowest-balance, highest-interest loans. In August we refinanced all of our student loans that had interest rates of over 5.5% using So-Fi (more about refinancing in a future post). The balance of the refinanced loans was $300,976.11.

Because we’re planning on paying off these loans within the next five years (seriously), we opted for a variable rate which started at 2.94%. Since August the rate has moved a little, both up and down, and we’re currently paying $2,943.90 per month to So-Fi. If we continued to pay the minimums on this loan we’ll pay it off in 10 years.

But, we’re not planning on paying the minimums!

First, we need to deal with some of the remaining $47,500 in loans.

The largest of these loans was a “Bar Study Loan” from Discover. In March of 2011 we were out of money and the job market was still bleak. It was at that point I decided to take the Bar to avoid, or at least have a good answer to, the question “did you take/pass the bar”? We borrowed $13,000 to cover living expenses for 4 months and pay for my bar study course. This loan was at a rate in the neighborhood of 8%!

We were barely making ends meet for years after I took (and passed!) the Bar. Over the years, as this loan was in deferment, it ballooned. I just checked how much I’ve paid, and how much we currently have as our remaining balance. On this loan, to date, we’ve paid $8,581.89, and our remaining balance is $10,823.62. Meaning, by the time we’ve paid off this loan, the $13,000 we borrowed will have become about $21,000! OUCH!!!

The minimum payment on this loan is only $134.88 a month, but if we paid this loan at this rate, we’d be in the poor house forever.

This loan was technically a private loan, so we couldn’t refinance it when we consolidated our other loans with So-Fi. This loan is offender number one on our list, and we’re throwing every extra penny we have at it to pay it off as quickly as possible. Our goal is to pay off this loan before the end of 2017. However, we’re confident that as we focus all of our energy towards this loan, we’ll see the balance fall more quickly than we expect (more on outperforming expectations in a future post).

The remaining loans aren’t nearly as onerous. We’ll likely wait until after our So-Fi serviced loans are repaid before we tackle these.

In brief, these loans are:

  1. A $15,500 loan we took out to pay for my MBA at an interest rate of 5.5%. We’re currently making monthly payments on these loans of $297.70.
  2. Two small loans from undergrad with a balance of $3,682.20 at an interest rate of 1.4%. These loans aren’t even keeping pace with inflation but at some point I imagine having them around won’t be worth the annoyance they cause and we’ll pay them off. The monthly obligation is only $50.
  3. The remaining ~$7,500 is from a small loan I was able to take out during law school called a “Perkins Loan.” These loans are relatively low interest (5%) and have a few other special provisions attached which made them slightly more valuable to keep than refinance. The monthly payment on these loans is $63.64.

So, when you add all this up, the monthly minimum obligations on all our outstanding student loans is $3,494.12 for a ten-year repayment.

For many, the idea of carving $3,500 a month from their current spending may seem impossible. Though Katie and I are both in good work situations currently, we’re by no means rich. So far we’ve been able to meet our monthly obligations relatively easily, often with a fair amount to spare and apply towards our Discover loan.

How, might you ask, are we able to do this?

I’m glad you asked!

In one word: spending. Or rather, the lack thereof.

Next week I’ll give you a breakdown of our monthly budget and how we’re able to make numbers like this work (Spoiler Alert! It’s because our monthly living expenses are much less than our monthly expenses for student loans).

In Uncategorized

Health, it’s that important.

This week I’m going to take a break from hard lessons and math to talk about an important subject: your health.

For those of us who are hyper motivated to pay off student loan debt and (eventually) become financially independent there are usually a consistent set of driving forces. Those driving forces may consist of some combination of serving others, spending time with family, experiencing the world, or becoming a quite recluse and getting back to nature without being beholden to anyone.

To be successful at any or all of the driving forces mentioned above you need to be healthy.

Health has been thrown into sharp contrast for me lately. During high school I felt like I was Superman. I was active, strong, and seemingly immune from serious injury. During my Freshman year of college I suffered an injury which ended my track season. For the first time in my life my body told my brain, in no uncertain terms: STOP!!! I just couldn’t go.

All of the abuse I subjected my body to during my youth has caught up with me recently. Last year I had shoulder surgery to repair an old injury. Next week I’m having surgery to repair a fully torn ACL. In addition to these two relatively major procedures there are other niggling things with my health that are sub optimal.

So, for all of our sakes, take care of yourself.

There is a significant ROI on life. Through good health we extend our lives and allow ourselves to continue to make a positive contribution to the world and enjoy all of our reasons for living. Let’s all make sure to carve out some time to be healthier, stronger and leaner.

Next week: our student loan repayment plan!

In General Financial Advice

How much debt can you afford?

So, how much student loan debt can you afford?

Like any good question, the answer is: it depends.

How much student loan debt you can afford depends on how much money you can expect to earn upon graduation. How much money you can expect to earn upon graduation depends on three factors, in this order:

  • Major
  • Effort
  • Intelligence

“Wait,” you might be saying, “that’s it”?!?

Yep, that’s it.

“But I went to ______ (fill in the blank with Harvard, Stanford, or some uber hip west-coast liberal arts college that nobody’s ever heard of).” “You mean to tell me that my college choice won’t impact my income AT ALL”? “I spent like $300,000 on that degree”!

Sorry Lindsay Library and Sammy Science Lab, that’s exactly what I’m saying.

In the most important study of its kind, Dale and Krueger found that, when basic measures of intelligence were controlled for (using SAT scores, high school GPA, and the like), average salary is consistent regardless of college attended. This is true, not just a few months after graduation, but years later.

So, no. Your expensive undergraduate education didn’t buy you much more than if you had gone to a State School, or that school which offered you a huge scholarship but wasn’t quite cool enough, at half the price.

I know it hurts, but it’s the truth. I just hope, for your sake, that you didn’t get a liberal arts degree. Speaking of…

1. Major

Choice of major has, by far, the greatest impact on expected earning after graduation. If you want to earn a reasonable wage right out of undergrad, the word you need to know is ENGINEERING. With a degree in the broader field of engineering, you can expect to earn 50%-150% more upon graduation than your liberal arts counterparts (who are paying the same tuition as you).

If engineering isn’t your thing, get some type of business degree (like accounting, supply chain management, marketing, etc.). You’ll still earn a fair amount (33%-100% more than liberal arts majors), but with a slightly different brand of math and a bit more of a “softer side.”

If neither of those are your cup-of-tea, other options include: nursing (or other degrees in the medical field), and perhaps government or political affairs (depending on the market and your stomach for being a cog in the bureaucratic wheel).

If you want to earn $50,000 or more when you graduate, these are your options (and yes, I know I’m oversimplifying this, but blog posts are short and this is designed as a general guideline that is true a vast majority of the time).

You might be thinking “what about if I’m planning on going to grad school”? As I said before, plans can change. You can still go to grad school with a marketable degree. I knew plenty of people in law school who had engineering degrees. And, these people were actually more prepared for law school because their degree had taught them to challenge ideas, and provide more proofs and evidence, than my soft political science degree had.

If you must do something else because it is your “life’s passion” I suggest getting a double major.

Pair your music or theater degree with a marketable business degree. Pair your arts degree with engineering. Understand what skills are complimentary between your passion and something you can actually get paid for doing. Use your marketable degree to get your job, then use your passion to differentiate yourself within your chosen field, or just have fun on the side.

You’ll earn more, be more fulfilled, and be more successful if you do. This leads me to…

2. Effort

Regardless of what major you choose, you’ll have to work hard. Not just in school. Going to class should be a very small part of your college education (for some, it’s not a part of their education). You still need to get good grades, but you need to do more than that. Explore internships, go to career fairs, go to guest lectures, visit with companies that come to your campus, get to know the career counselors at your campus, set up informational interviews, study abroad, get a job!

In short, know your options and build your network.

All of these things impact your marketability when you graduate, thus impacting your ability to pay back your student loans.

Finally…

3. Intelligence

I’m sorry to say it, but you’re kind of stuck with this one. Of course, you can always learn and expand your mind. But, some have an innate capacity to learn and understand certain subjects which is greater than others. Understand your limits and where your particular brand of intelligence will lead to the most success.

Explore what works for you.

Don’t have the stomach for blood or trauma? Maybe don’t go into nursing.

Not good with numbers? Engineering probably isn’t your thing.

Be honest with yourself. If you are you’ll be more successful.

 

That was nice and all, but weren’t you going to tell me how much debt I can afford?

Ok, ok. I will.

Here’s the formula and here are my assumptions. It’s important to note that this is the MAXIMUM DEBT ALLOWED. I’ll go into more detail in future posts about why even this much debt is a bad idea, and how you can avoid it.

Already have more student loan debt than the maximum allowed by my formula? Don’t worry, we’ll come up with a strategy for helping you climb your own personal debt mountain, conquering it like so many boot-and-khaki-short-clad hikers on a weekend excursion!

Warning! Boring math alert!!!

Your debt shouldn’t equal more than:

(Average starting salary * 80%) * 15% of your income * 10 years to repay your debt

Assumptions:

First, you don’t want to be in student loan debt for more than 10 years. You just don’t. You’re well into adulthood after 10 years. Things happen, life accelerates. After 10 years you really should be well on your path to financial independence (more on financial independence in a future post). I recommend being able to pay off your debt in less than 5 years if at all possible. But, like I said, we’re going for the maximum allowed.

Second, you’ll be paying 15% of your income towards student loans at a minimum. Again, I would recommend you keep your spending as low as possible to increase this percentage as much as possible to pay off your loans as quickly as possible, but this is the percentage given by the federal government for income based repayment as your expected percentage of income towards loans, so I’ll go with that for now.

Finally, 80% of your field’s average expected starting salary. Why only 80%? Because you might not end up with the highest paying job in your field! Like I said earlier, plan for the worst and be pleasantly surprised if things work out better.

So, let’s say you’re getting a computer science degree. Your average expected starting salary is $71,200. 80% of that is $56,960. 15% of that is $8,544. Multiplied by 10 years is $85,440. That’s the maximum debt you’re allowed for one of the top paying undergraduate degrees.

Wait! I didn’t account for interest! I did, it just wasn’t necessary to spell it out. But, since you’re getting all nosy about it, let me tell you why interest doesn’t matter.

The second you leave school you’re going to refinance your debt at ~4.5%. Then, you’re going to increase your salary at that rate through your ingenuity, hard work and persistence (and inflation will help with the rest). Those numbers are close enough to washing out (and this is a simple enough exercise) that we’ll give you intelligent young people a pass for now (for those of you who REALLY want exact numbers, I’ll post a debt repayment calculator soon).

Now, let’s take a look at a degree in social work. Your average expected starting salary is $33,800. 80% of that is $27,040. 15% of that is $4,056. Multiplied by 10 years is $40,560. That’s the maximum debt your allowed for a lower paying undergraduate degree.

It’s important to remember that, during this repayment period, the lower on the earning scale you are, the more Spartan your living expenses are assumed to be. 15% of an engineer’s salary might not impact standard of living much, but 15% of a liberal arts major’s would drastically impact standard of living.

So, as you think about your education, remember not to get into more debt than your degree can sustain. Going into hundreds of thousands of dollars in debt for undergrad isn’t practicable, and it isn’t smart (regardless of what your SAT score may tell you). You can still go to an expensive school, but plan ahead. Gather all the scholarships you can. Save money beforehand. Work during school and summers. Live on nothing. It’s possible, but it does require creativity (though, not as much creativity as figuring out a way to live once you’re hundreds of thousands of dollars in debt making $35,000 a year!).

Next week: The anatomy of a budget.

In Backstory

Backstory Part 4: Be open to new ideas and opportunities.

Lesson 4: The Rebound. Be open to new ideas and take advantage of opportunities when they come your way.

In October of 2012 my boss at Nike told me my contract would end on December 31st. At that point our student loans had been in hardship deferment for 15 months. For those of you young and naive readers out there, hardship deferment is when you’re too poor, or don’t have stable enough income, to make the monthly payments on your student loans. And if you thought the student loan overlords would take pity upon our souls, and keep our interest from accruing while we were suffering through a difficult situation, think again! During this time our student loan balance was increasing to the tune of $18,000 per year!

Our student loan balance was so large we couldn’t wrap our minds around what it would take to pay it off. The enormity of the task when contrasted with our current financial situation was incomprehensible. At least knew we could cover our living expenses and count on a few months of stability.

We needed to take advantage of these few months and come up with a plan to get to the point where paying back loans was fathomable, let alone possible.

The Friday after my boss told me my contract would end, Katie and I went on a date. We brought a notepad and wrote down ideas.

One of the ideas we decided to pursue was for me to take the GMAT and get an MBA. Someone at Nike had mentioned an MBA as a way of becoming a successful business attorney. I thought maybe I could do part-time legal work for my own firm and spend the rest of my time getting an MBA from a school nearby (probably going into more debt to fund a portion of our living expenses and my education in the process).

The other idea we pursued was to aggressively and humbly send out my resume and cover letter to law firms throughout the state. My hope was that firms in more rural areas may have a hard time attracting young talent. Thus, they’d be more willing to take a chance on a green attorney.

I did two things concurrently.

I signed up to take the GMAT.

And, I went through the yellow pages for the entire state of Oregon and made a mailing list of about 175 small law firms. I crafted a cover letter and resume which spoke to my Rural-Oregon, blue-collar upbringing. Then, I printed out and sent those two documents to every firm on my list.

Then, a miracle happened: SOME OF THEM ACTUALLY RESPONDED!!!

I could hardly believe that after years of hardship, struggle and rejection, that anyone might want to hire me. Every time a firm contacted me I felt a rush of much needed confidence. In the end, I received about 20 positive responses. Each one brought with it the hope that I might finally get a real job.

A few weeks after my contract with Nike ended, in January of 2012, I took the GMAT, and our entire family took a road trip through Oregon to meet with 18 different law firms. We arranged to stay with friends and family to keep our costs as low as possible.

The morning of the GMAT I was frustrated. I had been sick with the flu for a week. I had barely studied. I wasn’t optimistic. I actually looked into postponing the test. But, there was a $50 dollar fee for rescheduling it, and we couldn’t afford $50 dollars, so I went and took it!

I finished the test and began walking to the front desk to collect my score. I caught the eye of the old couple that ran the Kaplan testing center. They both gave me a sly smile and thumbs up. As the old man handed me my score, he said “we don’t see many scores like this around here.” I looked at the paper, I read the numbers, and I had no clue what they meant. Was it good? It must be, otherwise they wouldn’t have said anything. But how good was it?

But, there was no time to figure out the riddle. I returned home late and early the next morning we were on the road to meet with a host of law firms. The next five days were a whirlwind of driving hundreds of miles with kids and meeting sage old men. Apparently, my eagerness and youth had most appealed to lawyers of advancing years. They were looking for a young man to add some energy to, and eventually take over, their firm. Of the firms I interviewed with, only one had an attorney younger than 55. It wasn’t until I had a day with no meetings, and we were staying with friends, that the subject of my GMAT score came back up.

My wise friend, Tyler, asked, “how good is your score”? When I didn’t really know we started looking up average entrance scores at the schools I was thinking about attending. My average score was WAY higher than the schools I had initially considered. We looked up a list of top business schools and compared my score to their average entrance scores I looked up and said “do I want to go to Harvard or Stanford or something?”

This test score opened a gaping door of opportunity that I hadn’t considered. I applied to, and was accepted at, several top business schools. Some offered very good scholarships.

Also, my trip through Oregon bore some fruit. I received full-time offers from three of the law firms I had interviewed with! Now, for the first time in 5 years, we had choices to make.

First we considered the legal opportunities. The law firms were each offering about $70k/year. We did the math and realized that if we took one of these offers we wouldn’t be able to significantly pay down our student loan balance right away. However, it was likely my income would increase when I took over for the older attorneys within a relatively short period of time.

Then we thought about getting an MBA. This time, unlike when we started law school, as we considered the return on investment for higher education we did it right. We researched. We talked to people. We thought about probabilities and best (and worst) case scenarios in real terms. We looked at industry outlooks. We looked at growth forecasts. We considered the trajectory of the economy. We thought about the types of jobs my experience would lend itself best to. Finally, we looked at how fulfilling the jobs I could expect to find would be to me.

When we weighed the two options, we decided to give higher education one more try. In an ironic twist, I think the fact that I had options made it easier for me to go back to school and get an MBA. I wasn’t going back to school out of desperation. I was doing it because it felt like the objectively right choice. Also, if our projections were correct, I expected my earning potential would be greater with an MBA than it would have been with one of the legal jobs. Plus, I just thought I would enjoy business work more than being a small-town attorney.

As cool as going to Harvard or Stanford would have been, seeing as we were already heavily in debt I decided to attend a much less expensive MBA program with excellent average starting salary statistics and a very high job placement rate.

During the first year of my MBA program my suspicions were confirmed. The business world is COOL! Business school is all about human behavior, math and statistics, and ethical responsibility. It’s about creating value and sharing that value with the world. I felt empowered to directly make the world a better place. I LOVED business school. It fit me, and it felt right.

During the summer between the first and second years of my MBA program I won the internship lottery! I worked in a process improvement strategy internship at Adobe. I love Adobe. Their products are cool. Their employees are cool. The company is just cool.

After graduation I worked as a business manager at an engineering firm. In early 2016 some friends at Adobe reached out and said the perfect role for me was opening up. I was offered the job and in March of 2016 I came back to Adobe. After seven months of being back at Adobe I can say without hesitation that an MBA was totally worth it for me. I love what I do, I love the people I work with, and I don’t believe there’s any other path I could have taken that would have resulted in this much happiness and satisfaction for me.

As a HUGE bonus, while I was in my MBA program Katie networked with a local graphic designer. That designer asked Katie to shoot some styled desktop images. It sounded fun so Katie agreed. After the shoot she asked her graphic designer friend “is there a market for images like this”? The graphic designer explained the market need and in true Katie fashion she though “I can do that”!

She began selling styled images on Etsy in April of 2014. Her sales grew like crazy during the first six months and steadily continued. In August of 2016 Katie launched a new full-service subscription model website: katemaxstock. Things are going phenomenally. She’s providing value to her clients and she’s able to make her business work within her schedule.

So, after nearly a decade of misadventures we both feel like we’re in a position where we can be happy long-term and we have a solid plan for paying off our debt!

So, how did we get here? Let’s recap.

When a new opportunity came our way we never said “this isn’t part of our plan,” or “this isn’t what I went to school for.” We always took the time to look into it. We objectively evaluated all new opportunities and thought “will this make my life better”?

When I jumped to different contract roles, and took the leap to humbly send out my resume and take the GMAT, eventually leading to business school and getting the job I have today, my one goal was always to do what was best for me and my family. The same is true for Katie as she left law school, began in floral design, pivoted into photography and finally specialized in stock photography. The goal was always to do what was best for our family.

So, to you out there who are about to go to school or who have already graduated and are trying to pay off debt, my advice is: be creative. The road less traveled often has the richest rewards. Look at every opportunity for what it is: an opportunity. Take advantage of the ones you should, and ignore the rest. But don’t ever disqualify yourself from an opportunity simply because it wasn’t part of the original plan. Needs change, circumstances change, and plans change. Take advantage of those opportunities which best meet your current situation.

Things will work out.

 

Next week: How much student loan debt can you afford?

In Backstory

Backstory Part 3: When life gets tough stop complaining and figure it out!

Lesson 3: The Fallout. When life gets tough stop complaining, roll up your sleeves, and figure it out!

As much as I like the other lessons explored to date, this is probably my favorite. 2011 and 2012 were a couple of really crappy years. My work was inconsistent, we had no way of paying back our mountain of student loans, and we didn’t have enough money to live day-to-day.

Not having enough money to live on, and having to rely on charity, was a hard lesson. Not having a clear path to success was incredibly difficult. Scrimping and trimming every last bit of fat from our budget wasn’t fun. But, these few really difficult years taught us far more than all the years we spent in higher education. It was during these years that we became adults. We accepted responsibility for our situation, and we began working our butts off to find a way out!

The substantial loans we accumulated during law school went into repayment in July of 2011. I had just finished the bar exam and had hope that, when the results were posted, I would pass and be able to find a job.

During all the nonsense that was my life, Katie wasn’t idle. After leaving law school she applied for lab technician jobs, but it turned out her undergraduate degree wasn’t very marketable (more on marketable undergraduate degrees in a future post). After several weeks of rejection, she became frustrated and began applying for anything she saw available. She worked odd-jobs, waitressed for a day, and was generally rudderless. Finally, she remembered one of her many talents: she is a gifted floral designer. She had taken classes during high school and college, and had arranged flowers for several weddings while we were undergrads.

She found an open position with a florist near our home. A few weeks later she said “I can do this myself” and decided to start and run her own floral design business from our home. Being 100% supportive of my intelligent and capable wife we began work.

We converted a small room off our garage into an office where she could meet with clients. We bought a cooler, work-bench, and after a few months she earned enough money to buy a delivery vehicle. Although her income was good, we were not disciplined financially during this time and we were not nearly as wise with the money Katie earned as we could have been. We spent what she made and didn’t plan ahead or reduce our reliance on student loans.

By 2011 she decided flowers weren’t lucrative enough, and that they didn’t provide a satisfying level of value to clients. She hated the wastefulness of spending thousands of dollars on something that would be dead in a week. She decided to use her connections in the wedding and events industry to pivot from floral design to another of her artistic talents: photography.

We fondly remember 2011 as the “black hole year.” I struggled to find work and took the bar exam. Katie spent the year selling one business and building another. The hustle was constant and the rewards few.

Finally, in October of 2011 Katie landed her first few weddings as a photographer, and I found a contract position that would bring in some money. During 2012 Katie’s photography business was successful. She photographed dozens of weddings, built a brand and reputation, and took care of many of our expenses. I spent 2012 hopping from contract job to contract job, trying to find something worthy of my education that was stable.

We were barely making ends meet, but we were learning and things were getting better.

So, what did we learn?

We really learned how to budget:

We cut every unnecessary penny of expense from our lives. Our rent was $1,200 a month, and our total expenses were $1,600 a month. We spent no money on entertainment, we never went out to eat, we didn’t buy gifts for each other. The $400 difference was spent on utilities, transportation to work, and household items we needed. We took full advantage of both food stamp benefits and state healthcare. Speaking of…

There’s no shame in doing whatever you need to do:

Government programs aren’t the most efficiently run, but they’re there for a purpose. That purpose is to help otherwise responsible people make ends meet when they have no other alternative. My only regret with government programs is that we didn’t take advantage of them sooner. I would advise anyone who qualifies to use these programs to do so.

My only caution is that you don’t get used to spending all the benefit money provided each month. Continue to budget and use this resource wisely. Don’t get sucked into buying low quality, easy-to-prepare food just because you have benefits available. Stick to healthy fruits, vegetables and proteins.

Also, any balance remaining on your account carries over after you’re no longer eligible for benefits. These “saved up” benefits can really help with the transition to full-time employment. Once our eligibility ended we were able to make our remaining balance last for an additional five months!

It’s the small things that matter:

Looking back, this time was a blessing. We focused on what was really important: friends and family. Through our hardships we built lasting relationships with others. When I wasn’t working or applying for jobs, I was able to spend a lot of time building my relationship with my son. During this time we were as financially poor as we will ever be. But, even as poor as we were, we felt rich because we had a healthy and happy family, we had enough food to eat and a place to sleep. I had skills which I knew would eventually allow me to provide for my family, and we learned lessons about financial responsibility that we may never have learned if we hadn’t been forced to.

These financial lessons (which we have been and are currently applying) will be a tremendous benefit to us throughout our entire lives.

If you work really hard, things eventually work out:

By the end of 2012 we were finally climbing out of our black hole. Katie’s business was thriving and I landed a contract job at Nike. The contract was only supposed to run for 6 weeks but it was extended several times to the point where I was there for nearly 6 months!

We knew our current hustle wasn’t sustainable, but these breakthroughs gave us enough money and time to rebound and plan our next steps.

Next week: the rebound.

In Backstory

Backstory Part 2: Things don’t always go as planned

Lesson 2: Things don’t always go as planned. Understand your worst case scenario and at least be aware of it. Or, even better, be prepared for it.

Then law school happened.

Katie has an undergraduate degree in Physiology and Developmental Biology and wanted to use her scientific knowledge to become a patent attorney. I have a (useless) Political Science degree and wanted to work in politics. We had done some research on the job market for attorneys going into our chosen fields and learned that, in the market that existed in 2007 when we were entering school, Katie could expect to earn a very good income when she graduated (about $140k/yr), and that I would be able to earn enough to make law school worth my time (about $80k/yr).

Our plan seemed reasonable. We took out our allotment of student loans with full confidence that we would earn our degrees, begin jobs in our chosen fields, and pay back our student loans over the course of the next decade.

Then life happened.

Katie had a crisis when she felt the distinct impression that law school wasn’t the right path for her. She spent months agonizing over her decision. Finally, near the end of our first semester, she took a permanent leave of absence.

We were so caught up in whether this was the right decision for her, we didn’t have time to think about the financial impact Katie’s leaving school would have on us long term. It turned out that the impact was bigger than we realized.

Although Katie had a full-tuition scholarship to the law school we attended, we had still taken out some loans on her behalf to pay a portion of our living expenses. More importantly, most of the (very little) math we had done around how long it would take to pay back our loans assumed her high expected income upon graduation. With that patent attorney paycheck out of the equation, our ability to pay back loans looked bleak.

Then, in 2008, our outlook went from bleak to impossible. The legal profession was one of the hardest hit by the economic crisis. Many attorneys who graduated in 2007 and 2008 lost their jobs. The attorneys who graduated in 2009 weren’t able to find jobs. When I graduated in 2010 the market was at its worst. Fewer than 20% of my graduating class was able to find work. Those looking for work were competing for spots with the experienced attorneys who had been displaced at the beginning of the crisis. All government agencies were on hiring freezes. I started looking in earnest for full-time work at the beginning of 2010. By the middle of 2010 finding a job looked increasingly impossible so I delayed graduation a semester (taking on more loans in the process) to give myself more time to look. It was futile. I applied to hundreds of jobs in 2010 (5-10 jobs a day, many of which required multiple very specific essays), and got only a handful of interviews. Besides that, the jobs I was applying for were nowhere near the pay I had expected going into school.

So, what did we learn?

First, things don’t always work out how you plan. We entered law school fully expecting that our best case scenario would be waiting for us with open loving arms upon graduation. We were probably more delusional than optimistic.

We should have at least taken a few minutes to think about the answers to a few questions, like:

What do we do if either of us feel like law school isn’t the right path?

What do we do if we’re not able to get a job?

What if one of us gets really ill?

What if we have a child?

You get the idea, there are a lot of MAJOR things that can happen over the course of a few years and we hadn’t considered any of them. Having not even considered them, there was no way we could have had a plan in place to be prepared for them.

For those of you thinking about post-graduate education, think about what could happen.

For those of you in post-graduate education, think about what is happening.

For those of you with advanced degrees, how did it go? Exactly as planned, I’m sure.

Take time to think in real terms about what you’re getting yourself into with post-graduate education: debt, time, uncertainty, changing preferences, changing industries, etc.; and make a plan taking your worst case scenario in mind. Then, if everything turns out perfectly: GREAT! If not, at least you’ll be prepared to deal with the fallout.

Next week: the fallout.