Window offering salary loans

Should you pay off your loan or save?

Yes.

Oh, but you wanted to know, which first? It’s a question that virtually every client asks me, but the answer is (as with so many things) it depends. So, I’m going to suggest you work through this checklist.

You should always pay off the minimum required payment on your loan. If you don’t do that, you’re in a world of hurt and that’s a topic for another time. But I’m going to assume that you can scrape up at least a little more than that and you’re wondering where you should put it. BTW, I’m going to be thinking mostly of education loans, but this advice also applies to credit cards and home mortgages.

  • Do you have an emergency fund?

Without an emergency fund, you’ll never get out of debt. We don’t know what the emergency will be, but we know that they come up fairly regularly. See my post here for more discussion. No emergency fund, no extra loan payoff.

While I like to see an emergency fund of 3-6 months necessary expenses (including loan payments!), it can take people just starting out a couple of years to build to that level. A $1,000 emergency fund is barely survival (one vet bill or car accident deductible can easily wipe that out.) Once you have at least $3-$5,000 in your emergency fund, you can begin to consider other possibilities, but I can’t advise going whole hog until the fund equals at least your health insurance deductible + out of pocket max + rent, utilities, and loan payment for however long it might take you to find a new job.

  • Are you contributing enough to your employer’s retirement fund to get the match?

If your employer matches your contribution, that’s a 100% return on your money up to the amount of the match, e.g., if you contribute 1.5% and they match it at 1.5%. If you contribute 3% and they match 1.5%, that’s a 50% return. (We could keep going—you contribute my recommended minimum of 10%, they match at 3%–30% return). No legit credit card or high interest loan is going to charge you 30% interest. Plus, you get an additional return on this investment and maybe a tax deduction, although I recommend you go with a Roth option if you have it.

Before paying extra on any loans, you should contribute anything you can scrape up until you at least get the full match.

  • Are you saving enough for retirement?

This is actually a different question than the one above. You need to be saving 10% of your income toward retirement, and more if you didn’t start until your mid-30s or later. Until you can put away at least 10%, in most cases I recommend you focus on retirement savings rather than early loan payment.

  • What’s the interest rate on the loan compared to your investment return?

As a rule of thumb, I use 5% as a basic cut point. If you’re a dummy and keep all your money in a savings account, you’re earning .5%-2%, so take it and pay off the loan. But let’s say you have a pretty good investment (maybe, quality mutual funds) and you’re earning an annualized rate of 6-8%.

What’s the interest rate on your loans? Credit cards at 22%? Pay them off as soon as you can. I still recommend that you contribute to the retirement plan first, but maybe only for the minimum match until you get rid of the high interest payments.

Student loans at 6-7.75%? As soon as you’re contributing at least 10% to retirement savings, start attacking these loans. They’re as high or higher than you’re going to earn from investments. Even if your employer only matches at 1.5% and you’re contributing 10%, you’re making 15% immediately + investment gain. However, I can wrap my mind around going after these once you’ve secured the minimum match. It’s not a numbers answer, it’s what will make you feel better.

Student loans at 3.25-4%? I wouldn’t rush to pay these off before term. You’d be better off saving more, even if it isn’t in a retirement account—a quality balanced or target date fund should produce better returns. However, if you have managed to accrue an emergency fund of 6 months fixed expenses, a “goals” fund for whatever your goals are (kid’s college, house down payment, etc.) and you just really want to be debt free, then you should do what will make you feel better. These are pretty far down the totem pole, however.

Mortgage? Mortgage interest rates are really low right now, so in most cases there’s no financial reason to pay them off rather than investing any excess money. There are a couple of exceptions: let’s say you have a big bonus or sudden inheritance, and your family might qualify for college financial aid. You might be better off paying off or paying down the mortgage since the value of the house isn’t counted on the FAFSA (it is on the CSS-Profile), whereas an investment account will be counted as available for paying.  The second situation is retirement: most people I talk to feel better when they own their home outright at retirement, since it’s probably the biggest monthly outlay. Just be sure you  have enough for unexpected repairs before you clean out cash to pay off the mortgage. You don’t want to be back borrowing on a line of credit at a higher rate.

As with all things financial, your mileage may vary. There are a lot of moving parts to consider when contemplating loans, and achieving the right balance isn’t the same for everyone. But that’s why people talk to a financial advisor, no?

Tiffin wallah in Mumbai (food delivery)

Spending: Convenience or necessity?

Yes, in fact I do know it all. Until someone points out that, in fact, I have my head under my wing. This is about the blog post I didn’t write.

Recently, I saw individual Horizon Organic Milk packs advertised at Whole Foods.  I was about to write a scathing post about how the price was about 4 times the cost of a gallon of organic milk, how you could afford to let some of that gallon go sour and still be money ahead, and how you could just buy your kid a thermos—reusable and better for the planet than a ton of packaging.

Besides, if it’s popular or pitched to millennials or moms, it’s a ripe target to make fun of. We like to cast them as lazy over-spenders who complain about inadequate wages, right? But heaven forbid we should actually give credit for creating or buying into good ideas.

A recent Facebook post by Stephanie Tait on September 5th screwed my head on a bit straighter. Please search for this, and be sure to read the comments.  (Sorry, Stephanie, but I can’t figure out how to link directly.) Correction: here’s the link. Don’t miss it!  I’m just going to cite a few of the issues and products mentioned.

Waterproof case for cell phone

Ms. Tait kicks off with this—oh yeah, millennials are so hitched to their phones they can’t take a shower without them. Uh-uh.

Ms. Tait points out that for many disabled people, the phone is the lifeline and only way to call for help if needed. Without that, showering is far too dangerous unless someone else is actually in the house. This introduces a host of corollary issues: someone else’s schedule, whether you’ve gotten sufficient sleep to conform to that schedule, your state of health or exhaustion on any given day, and on and on. Makes a waterproof case seem like a simple solution, well worth the money.

Rent-a-closet services

You’re an arrogant spendthrift if you subscribe to these services. At anywhere from $100-$160/month, you can outfit yourself in designer duds that you don’t need, while returning them when you tire of them or they need maintenance. For $1,200-$1,920/year, you could buy quite a few wearable pieces, particularly if you keep things for several years. (I’ve been wearing one black dress for 9 years, but hey, that’s me.) You’re a lazy, status obsessed victim, right? Uh-uh.

Let’s say you’re someone with a need for professional appearance and low vision, or disabled in such a way that selecting or shopping is a major effort. (I always think shopping is a major effort, but again, that’s me. Dear daughter has always been disappointed in this.) Subscribe to a wardrobe service and you won’t need to shop, outfits will be coordinated and appropriate, and you’ll have an amount-certain budget item.

Pre-assembled meal kits and delivery

I’ve really laughed at these: frozen foods where you provide the slave labor and pay twice as much for someone to chop things for you, introduce lots more microbes, and get tiny amounts. Why not just cook on Sundays and put stuff in the freezer? Can people really be such inept morons that they can’t broil a piece of meat, steam some vegetables, and make a pot of rice? Uh-uh.

When my mom got too sick to cook, my dad was at a complete loss. In more than 50 years of marriage, he had never cooked a meal, and was extremely proud if he toasted the bread for a sandwich. We tried meals on wheels (at that time, about the quality of a student lunch), and Seattle Sutton (once Mom spotted that carton of yogurt, it was all over). Dad couldn’t manage grocery shopping, so I did it, and I brought over tons of frozen meals. But not everyone has a daughter who lives 5 miles away and can drop everything. Also, Mom felt incredibly guilty for getting old and sick, and they both felt an extreme loss of independence—they were stuck with what I cooked, and were too embarrassed to ask for anything different.

I think Dad could have managed cooking a meal kit. It would have saved shopping, given them interesting things to eat, and Mom could have given useful input even if she wasn’t the one standing at the stove. There are a lot of steps and mandatory excursions involved in cooking for yourself, and meal kits eliminate a lot of them.

Restaurant delivery services

You’re working hard just so you can pay for expensive restaurant meals whose expense means you have to work even harder. And you’re lazy and entitled and can’t be bothered to learn to cook or plan ahead, right? Or even manage to cook a meal kit? Uh-uh.

For many people, getting out at night is challenging and dangerous. There’s the difficulty of transportation, seeing at night, danger for vulnerable or frail people, getting dressed up—it’s a lot when you’d just like some pad thai. Curiously, no one thinks twice about having pizza delivered, but when the meal might actually be pricey, stay-at-homes aren’t entitled to that. When my daughter was sick in her dorm room on a fairly isolated campus, the value of this for any home-bound person hit me square between the eyes. If you don’t have help on-site, or are tired of asking your friends, or would just like something special, accessing a service such as this can contribute more than its cost in both pleasure and utility.

 

Good design for disabled people, or the elderly, whether of space or services usually turns out to be good design for everyone. Who doesn’t like the handicapped stall better?! I, for one, am going to try being slower to judge and put more effort into understanding. If something allows more people to have a better quality of life, and participate more fully in society, it’s well worth the cost.

Person in hammock

Financial smarts: maximizing weekends

I’m all about getting the maximum juice from the financial lemon. I really believe you can get far more pleasure out of your dollars with a little forethought, and lead a much richer life with less money. But then again, I’m not the kind of person who would ever buy pre-boiled, peeled eggs. How is that even a thing? Except for elderly or disabled people who need things made as easy as possible, and that is most definitely not who they’re marketing to.

Recently,  Lifehacker’s Nick Douglas had an excellent article on maximizing your holiday weekend, and that’s really in my wheelhouse. I think much of it could apply to any weekend. Having been a horrible student of math in childhood, and dreading every Sunday night with its attendant un-done math homework, it’s been really hard to get over the rumination and fear at the end of the weekend. And even my daughter, who never even went to school, gets depressed on Sunday evenings. I guess we’ve all had enough terrible bosses to develop that dread of Monday morning. If nothing else, a lot of us feel that the days we so anticipated on Friday afternoon feel wasted by 8 pm Sunday.

I’d like to stress some of Lifehacker’s points, and add on a little of my own thinking.

  1. Do something to celebrate Friday night. Lifehacker regularly runs “three ingredient drinks” so if you need an idea to try something new, I can recommend the maraschino martini from last week. Friday night is the only night we have mixed drinks, so it’s special. Stop for a beer, invite friends over, go out to eat, whatever. I favor watching the expenses on this one, and not cultivating practices that result in a hangover Saturday morning or the rest of the plan falls apart.
  1. Get up on Saturday and Sunday by 8 am. Douglas makes the excellent point that this probably allows you to sleep later than in the rest of the week, but that you haven’t then slept so late that you feel the morning is wasted.
  1. I recommend you set aside half an hour to an hour before noon on Saturday to clean or repair something. This should be something doable—not requiring a run to Home Depot—so that you can feel pride that you’ve actually accomplished something. Sort a drawer, re-pot a plant, sweep the kitchen, vacuum the car. Bonus points if it’s something you’ve been putting off. Even if you get nothing else done, I promise you’ll feel better about yourself. In fact, keep a running list of achievements. If you note it in  your planner you can use it to reinforce yourself that you have indeed accomplished something.
  1. Make at least one effort to get out of yourself. Go out for coffee and be extra nice to the people surrounding you. Chat up the checker at the grocery store. Call your mom. Just do something to define yourself as a nice, social human being.
  1. This one is critical: plan something special for Sunday late afternoon/evening. You need something to look forward to, not dread. This has to be something you’re really looking forward to, not just watching the best PBS programs of the week. Go to a movie, schedule a mani/pedi (what we did last weekend), explore an inexpensive ethnic restaurant (again, bonus if you go with a group), go over to a friend’s or invite them over—and don’t sit around commiserating: remember board games?
  1. Spend some time with your pets. When was the last time you spent some focused time playing with your cat? Taken your dog on the walk she really wants? We’re always excited to get the kitten or puppy, but then they tend to become part of the furniture. Their joy can enhance your joy.

This is by no means an exhaustive list. Do you have any ideas or activities that take away Sunday night dread? Do share!