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.

Health care stethescope

That other retirement account: Financial planning for HSAs

Health Savings Accounts (HSAs) may be the best deal out there, if you can get it. All of us like to beat the tax man, right? HSAs are what’s known as triple tax free: you get a deduction when you put money into the account, the account grows tax free, and as long as you make withdrawals for allowable health care expenses (pretty easy to do), you don’t pay any tax on that either. They’re like a traditional IRA or 401k going in, and a Roth coming out.
But like many good things, there are a few problems and things to watch out for:
1) I’ve probably repeated this for the millionth time now, but you don’t have to pay yourself back for the medical expenses in the year you spent the money. You can accumulate the receipts (and carefully file them so you can find them) and withdraw them in any year, as in when you actually retire. You’ll have to be able to pay your deductible and out of pocket costs out of pocket, but if these are fairly low, you can keep the HSA invested.
2) As with every financial account, watch the fees. Some accounts ding you heavily if you don’t keep a minimum balance. Some charge you a monthly fee. Some employers will pay fees while you’re employed with them, but if you leave they stop paying the fees and the account starts getting bites out of it. If this is the case, you can rollover your HSA into a servicer with different (hopefully, better) rules.
3) It doesn’t do you any good to park it in a savings account paying half a percent. In this case, woohoo it’s growing tax free. But the growth is infinitesimal. You want an HSA that allows you to transfer the bulk to a brokerage, or at least invest in mutual funds. Even if you still work for the same employer as when you deposited the funds, you can rollover the account (or most of it) to a provider of your own choosing. Be sure you carefully check fees and options at your current account, and at the one you are thinking of opening.
4) If you are working with an investment advisor, you may want to consider whether the HSA should be invested as part of your overall portfolio strategy. If it’s going to be untapped for years, it should be managed to build wealth.

Once you’re retired, it’s probably a good idea not to hoard that HSA. If you leave it to your spouse, it becomes their HSA. But for any other heir, it’s a lump sum distribution that they will have to pay taxes on.

So, how do you use it up? Well, of course you can submit those hoarded medical expenses you’ve saved. You can also use it to pay premiums for long term care insurance, premiums for Medicare Part B and Part D (drug), vision and dental care not covered by Medicare supplement insurance, and any copays and deductibles. You cannot use it to pay supplemental or Medigap premiums.

Since these accounts do not usually grow extremely large, it seems to me that it would be pretty easy to use it up during a normal retirement. It’s a nice way to build up a war chest for unexpected medical expenses that crash retirement budgets. Too bad I can’t use it for veterinary bills.