Melissa is a medical school student who lives with her husband Gabe in a small city in New England. They’d like our help planning for a future that’ll allow them to pursue their dream of living on a homestead while Melissa establishes her career as a physician and Gabe works remotely as a software engineer.
Case Studies are financial (and life) dilemmas that a reader of Frugalwoods sends to me requesting that Frugalwoods nation weigh in. Then, Frugalwoods nation (that’s you!), reads through their situation and provides advice, encouragement, insight, and feedback in the comments section. For an example, check out last month’s case study.
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With that I’ll let Melissa, this month’s Case Study subject, take it from here!
Hi Frugalwoods nation! I’m Melissa, I’m 32 and I live in a small city in New England with my husband Gabe, who is 36. I’m currently in medical school and Gabe works from home as a software engineer.
Though we live in the city now, our eventual dream is end up on a homestead in New England. We love living here, it’s a beautiful part of the world, and we’re close to our families–both of our parents live in the same area as do many of our siblings.
Our corner of New England has a special community we love with values that align with ours. Our dream is to have a home near family with 20+ acres and lots of vegetable gardens, orchards, berry patches, animals, and three or four kids.
I love yoga, cooking, meditation, sewing, knitting, and vegetable gardening (I’m getting more into flower gardening). I’m very much a DIY kind of person. My most recent interests are baking sourdough breads, brewing kombucha, knitting felted blankets, and perfecting a beeswax-olive oil balm recipe. My husband and I are both pretty active: running, hiking, skiing, spinning, going for walks around town, weightlifting, etc.
Gabe enjoys reading, yoga, meditation, eating the food I cook (just kidding, but not really), and learning about new technologies. We tend to go to a lot of potlucks, spend time at our interfaith society, and volunteer in our community. Occasionally we’ll go out to the movies, or to a show. We both love being outdoors and gardening or working on projects, so we can really see ourselves loving the homesteader life. For the most part we’re very happy to spend our time with each other and at home.
Gabe doesn’t plan to stay at his current software engineering job forever. While he makes a good salary, there are some issues within the company that have been challenging.
We’ve been chatting about him taking a peek at other positions in the near future. That being said, he’s worried that it might be a “grass is greener” situation and that changing positions might not actually solve anything.
So while there isn’t anything immediately driving him to look for a different position, it’s a conversation we’re having about how he might make a change in the next year or so. Someday, he would like to own his own product company and is exploring what his career might look like in order to achieve that and how to make it a viable option.
Occassionally Gabe does some freelancing, but he’s really scaled back on that in the past year. These days it’s infrequent that we get income from that, but when we do it goes to savings.
I took the scenic route to medical school, and even though I’m an older student, I’m really glad I did. It took a while for me to decide that I wanted to become a doctor and to feel as though I’d had the experiences I wanted to have. Prior to med school, I worked as a first and second grade special education teacher at a school for children with psychiatric disabilities, as an in-home therapist for New American children with medical needs and/or developmental delays, as a research coordinator studying opiate withdrawal in newborns, and as an educator and medical case manager at an HIV/AIDS organization. I’ll graduate with my MD in 2022.
Medical school is a lot of work but I really love it! My mind is blown pretty much every day. Two weeks ago I was learning about micronutrients and today I’m studying brain anatomy!
I love interacting with patients and am working on an exciting community service project on nutrition education for new moms in treatment for substance use disorder. School has been way more fun than I ever thought it would be, and very affirming that I’m in the right field. I’ve been tremendously humbled by the opportunities that are available to me and am grateful to be in a profession where I’m constantly learning and able to help others. Even though there are some long days and tough exams (neuroanatomy… oof) I wouldn’t say there’s anything about my current situation I don’t like–except for the sleep deprivation that comes before an exam and the tuition. I also don’t get outside or move my body as much as I’d like, and sometimes I’d like more flexibility in my schedule. Overall, I feel like I have a pretty good balance because school has been much more manageable and fun that I thought it could ever be, and I feel thankful to be where I am in life.
I have three more years of school and plan to become a Family Medicine doctor so I’ll have three years of residency, and then might do a fellowship for a year in Maternal Child Health. I’m very interested in these areas but am also trying to keep an open mind (hey, I might love dermatology, you never know… but I have a hard time picturing it). I’ll make a salary as a resident (somewhere in the $50k-$60k range) and then my salary as a physician will vary, but around $200k is average in our area from what I’ve been told (although primary care providers have been getting paid more in recent years due to increased demand, so this might change).
Melissa’s Medical School Tuition
I chose a school where I get significantly reduced tuition. That being said, it still costs around $40k a year. Unfortunately, I learned that loan-service programs wouldn’t work for me. While there are some programs that pay your tuition in exchange for service, they require you to be geographically mobile, such as serving in the military (which doesn’t seem like an option for us, for lots of reasons) or in the National Health Service Corps Scholarship Program (while I would consider this as an option, I spoke with a representative who works placing doctors in this program and found out that this almost never happens in the Eastern U.S.- it’s usually in places like Alaska or Wyoming). Staying close to family is non-negotiable for us. Most of our family lives within driving distance, and we each have only one parent who is still alive, so it’s incredibly important to us to be near them, especially as they age and our (future) children are young. While we would consider moving within New England, moving farther away doesn’t feel right.
I also realized that Student Loan Forgiveness Programs for primary care providers are a big gamble, and one I’m not willing to take. Theoretically, I could qualify for it since I’m planning to go into Family Medicine, and I could take out my entire medical school tuition in loans and work to have them paid back for a certain number of years of service within rural New England… BUT there are lots of strings attached including whether these programs will even still exist by the time I graduate from residency (residency is like training after school to become the type of doctor you want to be) and how much we would have to contribute to the loan payback given our combined income.
Considering how long I would have to hold onto these loans (over a decade before they were paid off. We are VERY adverse to debt at this point so that seems like an unbearable amount of time) as well as the limitations on where/how many hours I would have to work to even be qualified to get them repaid… we decided it just wasn’t worth banking on that as a strategy, even though it was tempting.
I had a 0% interest loan of $15k for my first year of tuition. I took this loan, which was a little less than half of my tuition, and paid the rest out of pocket. I was offered $5,400 in 0% loans every year for the rest of my program. Additionally, I might receive a $20k scholarship for my third year of school if I’m accepted into a program where I do all of my third year clinical experiences in an underserved area.
Melissa and Gabe’s Debt
It’s tough to feel like we’re making any progress financially because much of what we’ve been able to save has gone to paying back debt. Just a few months ago we realized that for the first time in our adult lives we have a positive net worth. While this is certainly something to celebrate (and it does feel good to have less debt), it also feels like we’re stuck working hard to save, and then seeing all of it get sucked up to pay another loan.
And we.are.so.sick.of.student.loans. They feel never-ending and it’s hard not to feel resentful about the cost of education. It’s great that we don’t have much more to pay back (relatively speaking) but I still have 3 more years of tuition. Right now it feels like we’ll never not have some debt or tuition to pay for. We’re in our 30s and we’d like to be in a better place financially and feel like we have something to show for all our hard work (something to show in terms of savings not, you know, flashy cars and caviar).
To provide context, in the last several years (within the last 5 years really, but especially in the last 2-3 years) we’ve paid back about $130,000 of debt in the form of:
- $19,600 for a car loan: $18,600 for car, and a thousand for taxes/registration/fees, etc.
- $53,408.30 of Melissa’s student loan debt: almost all of my student debt is from what’s called a “post-bacc” which is a program for people who don’t have an undergraduate science degree and need to do coursework to apply for medical school. In retrospect, I wish I’d done this is in a less expensive way. About $20,000 of my student debt is from graduate school, most of which was paid for by a scholarship. Only the $20k could have qualified for loan forgiveness, but would have taken a long time to repay with a decent chance it might not ever be forgiven due to issues with the program.
- $56,732.63 of Gabe’s student loan/credit card debt: these are hard to pull apart since he went to a software bootcamp, which at the time didn’t qualify for any loans, so he had to use credit cards and private loans to pay for tuition and living expenses. Some of this is consumer debt, but the majority is from schooling. He also had federal loan debt from his undergraduate degree, which is rolled into this sum as well.
If we include the $48,636.58 we’re planning to pay back this year, it totals $178,377.51 in debt payoff. We’ve never actually added this all together, and it’s definitely a surprise!
I want to recognize how fortunate we are to save so much and have the ability to pay back this debt. I know many, many people who accrue massive school loans without the possibility of paying them off for many years. I am beyond grateful that my tuition is only $40k a year, instead of around $65k (which is what it is for many medical students) and that I don’t have to take out loans to cover my living expenses. Having a spouse who is working and making a high income while I’m in school is unique and gives us a degree of control over our finances that is not available to many other students. I recognize that we have special circumstances for which we are truly thankful.
Even though I know I’ll make a significant income once I’m working, I feel bad for bringing so much debt to our marriage and for having high tuition. I think I have a lot of anxiety and guilt around money.
It’s a combination of feeling nervous that we’re behind for our age and trying to catch up, and the nagging feeling of knowing my tuition is high and that it’ll be years before I make much income. My work before school didn’t pay that much (we were also less financially wise) and even though Gabe’s salary has increased significantly in the past 5 years, most of this went to debt payoff, so we have little savings or wealth accumulation from most of our 20’s.
Gabe had his own interesting journey in his 20’s that involved living in NYC, France, and helping his sister start a successful–and delicious!–gelato business.
I sometimes feel conflicted/guilty for spending money, even on perfectly reasonable purchases, such as when I needed boots for winter because we live in New England and all I had were rain boots after the zipper broke on my previous pair. I’m also worried about our ability to recover from the lack of savings in our 20s along with tuition/debt payoff in our 30s and to eventually become financially healthy.
I’d like to figure out a different mindset about our finances now. Simultaneously, I recognize how privileged we are to have the income/income potential we do, and that often feels uncomfortable to me. Especially when I’m working alongside so many nurses (LNAs, RNs, NPs, etc.) and other medical professionals, social workers, administrative assistants, etc. and a wide variety of patients who often don’t get paid what they deserve.
Looking To The Future
Gabe and I plan to have kids–possibly three or even four of them! In fact, we’re planning to start our family soon, while I’m still in school. Big picture: both of us would like to have the freedom with our work to be very involved in our family life and homestead while having jobs that are fulfilling and driven by passion, not financial need, and to have the ability to travel more.
Where Melissa and Gabe Want To Be In Ten Years:
In ten years, I expect to have been working for 3-4 years, depending on whether I decide to pursue a fellowship or not.
Given this, we would like to:
- Be debt free (minus a mortgage, although we’re so adverse to debt at this point that we’ve considered trying to avoid a mortgage altogether)
- Consistently max out our IRAs as well as our 401ks
- Have a 6-month to 1-year emergency fund saved up
- Probably own another car (paid in full)
- Have savings accounts for all of our future children, with a minimum of $20k in each (we haven’t figured out our long-term savings goals for our children, but we know we want to)
- Have investments/savings circa $1.4 million (including retirement; see math below)
Here’s how we figured out these numbers:
- Save approximately $65,000/year x 10 years= $650,000 (this is what we save of Gabe’s salary now)
- Minus our current debt: $48,636
- Minus my medical school debt: $60,000 (approximately, if we continue to do what we’re doing now)
- Plus at least $10,992 in retirement per year (what we put into Roth IRAs now) x 10 years= $109,920
- Plus $48,234 (what we already have in Roth IRAs/Betterment account)
- Plus $115,500 (approximate residency take-home pay for three years, if we continue to live off Gabe’s salary alone and save all of mine)
- Plus $560,000 (four years of take-home pay for my salary as a doctor, if I work full-time and we continue to live off of Gabe’s salary alone (this is assuming I earn a $200,000 salary)
- Maybe have some sort of passive income stream, but we haven’t figured out what this would be yet
- Long term goal: Be financially independent in our 50s or sooner
**We recognize this is over-simplified because it doesn’t account for interest rates, and more importantly, kids. Also, it depends on us continuing to live off only Gabe’s salary, and him working full-time. Plus we didn’t factor in if/when/how we want to buy our dream home**
I see myself practicing as a family medicine doctor who focuses on women and children in a rural setting. I’d love to work at a clinic in a high-need area in New England. In ten years, I’d also like to be working on research in my area of interest, hopefully with some publications, doing public health work, and serving as a mentor/teacher to others in healthcare. I’d also like to establish a long-term partnership with a clinic in Central America.
Gabe sees himself possibly working part-time while our kids are young, and definitely at a different job than the one he’s currently in. He’d ultimately like to own his own product company and identifies that as his long-term goal.
While we both see ourselves working, it would be nice to have more flexibility to decide how we want to work: whether part-time or for an income at all. We’re not sure if we’d want to work part-time, but it would be nice to have the option while we have young children.
I’ll be delivering babies and working busy days at the clinic, but would like to have the flexibility to choose where and how I practice. Many physicians face several hundreds of thousands of dollars in debt when they finish residency, and this can influence how they decide to practice (and what area of medicine they go into). Ideally, I’d like to have my passions (for family, homesteading, and primary care) drive how I practice medicine instead of financial necessity.
We’d like to spend part of the year traveling, both for fun and for me to work in global health (we’d like to make this a family experience in which we develop sustainable, long-term relationships). Gabe is working on his Italian citizenship, and we hope to have this in the next year or so (then I will get mine through him). Long term, we would love to have a home both in New England and in Europe (probably Italy) where we could spend a fair bit of time throughout the year.
I would love to open free clinics in our home state and another in Central America (I speak Spanish, and we’ve been exploring countries we’d like to spend time in long-term) that could provide care to underserved populations, where I could establish relationships with patients and other providers. My sister (she’s the most amazing nurse and is working a long shift in the cardiology unit as I write) and I have dreamed about working together and having our own clinic one day in the future.
Melissa and Gabe’s Finances
|Gabe’s paycheck||$10,311||Gabe’s income, minus the following deductions: health and dental insurance, taxes, and reimbursements|
|Gabe’s annual bonus||$1,050||Gabe receives a guaranteed 10% bonus (but could be higher) minus taxes = approximately $12,600/year|
|Melissa’s Medical School Tuition||$1,857||We’re on a payment plan for the spring and fall, but this is the monthly average|
|Rent||$1,600||For now we live in town. It’s close to school/work/the hospital and we’re not sure we’re quite ready to move out of town yet. We walk everywhere and have a great quality of life. Although we’d love to have a homestead, we felt it was a bit premature to dive into that at this point in our lives. We’ll be in this area for the next few years, but don’t know where I’ll be placed for residency so it didn’t make sense to buy. That, in addition to the very expensive cost of buying a home in our area, makes us renters for the time being. We’re looking forward to owning our dream home one day…|
|Groceries||$544||A little high for a few reasons. I’m a bit of an impulse shopper when I see a sale and end up buying things I didn’t expect to buy that day (I do try to only get things I know we’ll use though). Specifically, we live near two stores that sell steeply discounted organic food (think of an incredibly inexpensive TJMaxx but for all the amazing food…that jar of raw organic almond butter is only $2.99 because the label is torn). I’m working on this- we’ve talked about sticking to a list more, and only going to these stores once a month. Also, we live in an area that has a thriving local food scene, so we like to support local and organic food when we can, including our summer CSA. We are mostly vegetarian, eat most of our meals at home, and pack lunches. We buy almost all unprocessed foods and try to buy direct from farmers in bulk for more savings. I volunteer to get a discount at our co-op, and we stack savings there by shopping on certain days when the prices are lowered. I struggle to get around $500 or below. When we do, I find that the next month’s bill is higher so they end up balancing out.|
|Melissa’s health insurance||$225||Subsidized through school. It’s much less expensive than getting insurance through Gabe’s work, and the least expensive plan we could find. I don’t currently have dental or vision insurance so I need to figure something out on that end. Any recommendations for affordable but good coverage?|
|Clothing and shoes||$161||Wow! I had no idea we were spending so much in the category. It looks like we don’t buy things often, but when we do they’re expensive (running shoes, winter boots, professional clothes for me when I’m in clinic, winter jacket, rain jacket, Gabe buying new pants and shirts for the first time in 5 years…). I am trying to be more intentional and buy fewer things that I love, feel great wearing, and know I’ll have for years. Also I think we didn’t buy clothing for so long that we’re both feeling as though we want to look more put-together than we have in the past.|
|Gifts for family and friends||$145||Birthdays, baby showers, cards, Christmas, tickets for events we go to with friends/family sometimes, etc. Gabe comes from a large family, and Christmas is a big deal in mine. We try to be mindful of how much we spend in this category, but it’s hard.|
|Two cell phones||$123||We’ve thought about doing an AT&T MVNO but are nervous because we both tend to use a lot of data for school/work and are afraid of going over the limit and getting charged more than what we pay now|
|Yoga/meditation||$120||Unlimited monthly yoga classes for both of us. We love our yoga studio. Each time I think about cutting this area of our budget, I just can’t bring myself to do it. While they do offer jobs in exchange for membership, they ask that it’s reserved for people who really need those opportunities. Our studio is also unique in that it’s a non-profit, so they charge very little compared to other studios and use membership dues to support all sorts of amazing programs (yoga in prisons, for people with traumatic brain injuries, in recovery from substance use disorders, Pride yoga, etc.)…So I think of this as half membership and half donating to a great cause. Gabe goes at least 5 times a week.|
|Household goods||$118||This has been an expensive category for us since we moved into the apartment we’re currently living in (we moved in August 2018). It feels like the first “grown-up” place we’ve lived in and we’d like it to feel comfortable since we expect to be here for several years. Things like a shower curtain, water filter replacements, paint for household projects, but also new coffee mugs, cloth napkins, a rug, lamps, bedside tables, new laundry basket, etc. We’re trying to be mindful to buy only things we really either need or love and will have for many years. That being said, we feel like we’re set in terms of these up-front costs, and have been spending significantly less in this category lately. It’s been more like $23 per month for the past few months, for things like a replacement blender container for the one I broke when I accidentally left a metal spoon in with my smoothie ingredients…oops!|
|Travel/visit with family and friends||$105||Gas driving to visit family that’s a little farther away, ferry rides, plane tickets to visit grandparents in Florida or a sibling in another part of the country, etc.|
|Car gas||$96||We mostly walk but drive places as needed|
|Gifts for each other||$85||Birthday and Christmas gifts…as I write this I realize we could cut this category completely and use it to fund one big trip a year.|
|Gas bill for apartment||$76||Higher in winter, but an average (we have gas heat and stove- which we love!) and our apartment is well-insulated|
|Travel/Experiences us two||$76||A few weekend trips a year, half marathons, apple picking, etc. We’d like to spend less in other categories and more here so we could travel more, especially internationally. We have a hard time letting ourselves spend money on travel and not save instead, so I’d love to see us be more intentional in other areas and feel more comfortable spending here. We did a big trip to Central America before I started school, and decided not to go on another one this summer for both budget and timing reasons. We’re thinking we’d like to do anther trip next winter/spring.|
|Car insurance||$73||Through StateFarm|
|Food and drink with family and friends||$71||Dinners, coffees, potlucks, Thanksgiving, girls night wine, etc. It’s hard not to spend here.|
|Giving/donations||$70||We give to our interfaith society and other charities that are important to us|
|Gym||$60||I get a gym membership with tuition, but Gabe pays for his ($33/mo) plus he does some Crossfit classes (although he’s not sure he wants to continue with those)|
|Entertainment||$58||Netflix, Spotify, movie tickets (Gabe enjoys going about once a month), an occasional video games for Gabe, a book we can’t get from the library, a community cooking class for me, etc.|
|Pharmacy and toiletries||$56||Soap, toothpaste, toilet paper, shampoo, floss, contact lens solution, sunscreen, etc.|
|Car maintenance||$51||Getting winter tires changed over, new windshield wipers, oil changes, yearly registration, etc.|
|Co-pays||$50||Dentist for Gabe, yearly check-ups, therapy, eye exam and contact lenses, etc.|
|Internet||$40||We split with our neighbors|
|Peloton||$39||A splurge, but I absolutely LOVE spinning (nothing else makes me sweat as much) and use this as a great opportunity to get in a workout when I otherwise wouldn’t. I’ll do a 30 min class between study sessions.|
|Date nights||$38||We’ve been trying to spend less on takeout and instead put our funds towards one meaningful meal with each other every month|
|Subscription/fees||$34||Chase Sapphire credit card yearly fee of $95 for 2 cards, google storage, YNAB (which we use to track our expenses and it’s been a game changer), password protector application, and Costco. We try to be aware of this and only have subscriptions to things we use regularly and are important to us.|
|Electric bill||$27||Pretty consistent|
|Takeout||$26||We’re trying to be mindful of this category and have been spending less here so we can instead put our efforts towards one date night per month.|
|Supplements||$21||Magnesium, Omega 3, vitamin D in the winter, etc.|
|Cleaning/kitchen supplies||$17||Vinegar, hand soap, baking soda, sponges, dish soap, laundry detergent, etc.|
|Coffeeshops and pastries||$15||Something Gabe really loves is going out to coffee a few times a week. This is a tradition he’s had since his days in NYC and Paris, and he really enjoys it. We also live in an area with some pretty amazing cafes.|
|Renter’s insurance||$11||Just in case, and it has actually come in handy|
|Haircuts||$11||I cut Gabe’s hair and have yet to convince him or anyone else to cut mine, so for the time being I get it cut twice a year at a salon I like to support that’s all about empowering women who work in the cosmetology industry.|
|Impulsive/Treat yourself||$7||We should name this “Kombucha, dried fruit, and chocolate”, our go-to treats.|
|Postage for mailing||$2|
|Parking||$2||When we have to pay for a parking meter somewhere|
|Item||Amount||Notes||Interest/type of securities held|
|Savings account||$38,324||This is our emergency fund/other savings we’re not sure what to do with||Through Capital One, earns 1% APY|
|Melissa’s Roth IRA||$22,887||I have more in my retirement due to a rollover from my years as a teacher.||Through Betterment, on autodeposit. Max out by contributing $458/mo.|
|Gabe’s Roth IRA||$15,036||Started several years ago.||Through Betterment, on autodeposit. Max out by contributing $458/mo.|
|Betterment account||$10,039||A fund we started a while ago and aren’t sure what (if anything) to do with||80% stocks, 20% bonds set to “Moderate Risk”|
|Checking Account||$5,310||We don’t keep much here, just what’s needed to pay for monthly expenses.||Through Capital One, earns .2% APY|
|Melissa’s Retirement Account||$575||An old account I contributed to while working per diem for a while. I keep meaning to do a rollover….ah, the paperwork!||Through Fidelity, a managed fund.|
|Item||Outstanding balance||Interest Rate||Loan Period/Payoff Terms|
|Student loan||$16,637||6.80%||All of these loans are currently in deferment (still accruing interest) but we were planning to have them completely paid off in the next few months|
|Medical School Loan||$15,000||0%||From my school through a specific program. I’ll be able to re-apply but likely won’t get approved for as much next year. I anticipate needing to apply for federal loans to make up the difference.|
|Vehicle make, model, year||Valued at||Mileage||Paid off?|
|2014 Subaru Forrester Premium||$13,613||76,694||Yes|
Melissa’s Questions For You:
1) Does our current tuition strategy make sense?
I could be paying more in tuition or less. We chose the amount we pay because it’s what’s leftover after the 0% interest loan my school offered me (we’re planning to keep that loan and pay it back once I’m in residency). If paying out of pocket for tuition is a good strategy, what do you think is a good balance to strike between paying tuition and saving? Currently we pay about $24,000 out of pocket and have $15,000 in loans for the year.
2) Two goals for 2019 are to have all of our debt (not including my 0% loan) paid off and to have $37k-$42k saved as a safety net/some other savings account we haven’t figured out yet. Do you think these are reasonable and achievable goals?It makes sense to pay back my non-0% student loans ($48k) soon since they’re accruing interest, right?
3) Where do you recommend we focus on saving so that our spending aligns better with our values?
I have some ideas of where we could start… Furthermore, what should we do with that extra money: put it towards tuition, savings, or other investments?
4) What do you suggest we do for our retirement savings?
We’re waiting for Gabe’s 401k at work to be set up (and pushing his company on this and other benefits–they’re a small business but have stated that they’re working on the 401k but are being really slow about it).
However, we’re not sure he’ll be there for several more years and so is it worth putting funds into one just to transfer them over to another fund? If we should still be putting funds into his 401k, how much? Should we continue to contribute to our IRAs? Basically, how would you approach retirement/savings overall and balance it with other goals (e.g. tuition)?
5) Do you think our 10-year plan is realistic, achievable, and sustainable?
If not, how do you think we could set ourselves up so that it is? What are your thoughts on our ability to become financially independent or, at the very least, have the option for both of us to work part-time at some point?
Mrs. Frugalwoods’ Recommendations
I have to start with congratulations because Melissa and Gabe are in fantastic shape! Melissa may not see it, but I think they’re doing terrifically. Yes, they’ve paid off a lot of debt, but, you guys, THEY’VE PAID OFF A LOT OF DEBT! This can feel like treading water, but the salient point is that they’re not drowning–they’re thriving while managing a pretty substantial tuition and student loan debt load.
Let’s dive into each of Melissa’s questions:
1) Does our current tuition strategy make sense?
In my opinion, yes. I’m a big fan of 0% interest loans, as long as you have the ability to one day pay them off, which Melissa and Gabe do. Melissa should check the paperwork to determine if the loan’s interest rate is adjustable and if so, when it’s scheduled to increase. If it were me, I’d keep the 0% interest loans and continue paying the remainder of her tuition out of pocket.
2) Are our 2019 goals to have all of our debt paid off (not including the 0% loan) and to save $37k-$42k reasonable and advisable?
I am in favor of Melissa and Gabe paying off their non-0% interest debt. What I really appreciated about her debt spreadsheet is that she sorted her debt not by total dollar amount, but by interest rate. This is crucial because with any debt, it’s the interest rate that matters. You could have a $500K mortgage at a 3% interest rate and a $500 credit card bill at a 24% interest rate and the place to focus would be on the 24% interest rate debt, even though it’s a much smaller dollar amount. Make sense?
Pay off debt in order of interest rate, not in order of dollar amount. This method is called the debt avalanche and there are others who advocate for the inverse approach—paying off debt according to smallest dollar amount, irrespective of the interest rate (called a debt snowball). While the snowball method can be a more psychologically satisfying—because you’re able to see tangible results faster, it’s not a mathematically sound approach.
All that to say, Melissa is spot on to assess her debt according to interest rate and I commend her for ignoring her 0% interest rate debt at this point in time.
This means that Melissa and Gabe are aiming to pay off $48,636 in debt this year, which I encourage them to do. Since they have the cash flow, it makes sense to eliminate this debt rather than continue to pay the interest these debts are accruing.
At present, Melissa and Gabe are spending $6,107 per month with an income of $11,361 a month, giving them $5,254 each month to work with. This is fabulous!
Since Melissa and Gabe already have a robust emergency fund of $38,324 (which would cover more than six months of expenses), I’d take the $5,254 leftover every month and plow it straight into paying down their debt. If they choose to take this approach, their $48,636 in debt will be paid off in just over nine months. Hooray!
After paying down this debt, Melissa and Gabe can turn their attention to building up their savings reserves. But again, since they already have an emergency fund and since their debt is accruing interest every month, I would pay off the debt before starting to save more.
If they follow my advice and pay off all of their debt in nine months, they’ll have three months left in the year to pursue their goal of boosting their savings. At $5,254 per month x three months, they’ll be able to save $15,762, which is fantastic!!! I’m not sure where Melissa derived the savings goal of $37k-$42k, but that won’t be feasible unless they dramatically increase their income or decrease their spending, neither of which I think is particularly important for them at this stage.
I think it’s a perfectly reasonable approach for Melissa and Gabe to prioritize paying off their debt this year and accept a slightly smaller (but still impressive) savings rate.
3) Where do you recommend we focus on saving so that our spending aligns better with our values?
Ahh yes, you know I love it when people ask about their expenses, because I’m going to review them anyway! I like reviewing spending because, often, it’s the simplest thing a person can do to immediately impact their finances.
You don’t have to wait for a raise, you don’t have to wait for investments to grow, you don’t have to wait until you’re finished with school or until you find a new job… you can start saving more money TODAY. After all, all you have to do is… nothing. You just have to stop buying some stuff!
That being said, Melissa and Gabe aren’t extravagant spenders and, as outlined in question #2, they’re not far off from being able to achieve all of their goals this year already.
In every Case Study, I like to point out that what you choose to save or not save is a very personal decision. Cutting every last expense is NOT the right answer for everyone and I am NOT an advocate for making yourself miserable in the process of achieving financial stability. I AM an advocate for values-based, goal-oriented spending. I think it’s important to assess whether all of your expenses bring you fulfillment and a good return on your investment.
I think it’s also important to question if your rate of savings will help you to achieve your long-term goals. But what you spend on? That’s a very personal choice and one you have to make for yourself. My job is to identify areas where you might be able to save, but only you can decide what level of savings is right for you. If you’re struggling with where to save more and how to map out a longterm financial plan, I encourage you to take my free 31-day Uber Frugal Month Challenge.
Since Melissa requested, I’ve combed through their expenses and identified several areas of discretionary spending where they could save more:
|Item||Current Amount||Proposed New Amount||Amount Saved||Mrs. FW’s notes|
|Melissa’s Medical School Tuition||$1,857||$1,857||$0||Fixed expense, no change.|
|Rent||$1,600||$1,600||$0||Fixed expense, no change.|
|Groceries||$544||$400||$144||Melissa noted that she can be an impulse shopper in this category and that she sees where they might save more every month. I encourage her to explore what she can do to reduce this.|
|Melissa’s health insurance||$225||$225||$0||Fixed expense, no change.|
|Clothing and shoes||$161||$50||$111||It sounds like Melissa and Gabe haven’t bought any clothes or shoes in a long time and so may now be experiencing the need to build out their wardrobes. That being said, this could be an area where buying used (thrift stores/garage sales, etc) might reduce their costs. They also might consider doing a clothing-buying-ban after they feel like they have adequate wardrobes.|
|Gifts for family and friends||$145||$50||$95||Whoa! I’m all for giving gifts to family and friends, but $1,740 per year seems like an awful lot. This may be a priority category for them and they may wish to spend this much, but, there also might be ways to reduce this through incorporating some of the frugal gift giving ideas in this post. Melissa mentioned she loves to DIY and so making homemade gifts might be something that she’d enjoy.|
|Two cell phones||$123||$20||$103||Nope, that’s not a typo. MVNOs can be as cheap as $10 per month per phone. The savings are so dramatic that I strongly encourage Melissa and Gabe to investigate the data usage offerings (since she noted that’s their reservation) and find one that works. The best part about MVNOs (other than their cheapness) is that it’s very easy to switch between them. So if you don’t like one? Switch to another.|
|Yoga/meditation||$120||$120||$0||Oooooooooohhhhh you know this is a tough one for me because I love me some yoga. It sounds like this is another sacred cow priority for them and if that’s the case? Keep it!
What I question is the yoga membership + the gym membership + the Peloton membership. All told, they’re spending $219 per month ($2,628 per year) on fitness memberships. There’s nothing wrong with this and there’s no reason to cancel them if they’re all being used. I just want to highlight the total overall cost to ensure that Melissa and Gabe are consciously choosing to spend this amount.
|Household goods||$118||$50||$68||Melissa noted that this was mostly in start-up costs for their new apartment and that the amount’s been much lower in recent months.|
|Travel/visit with family and friends||$105||$105||$0||So I have a similar comment here as I had under “gifts for family and friends”: this isn’t exorbitant, but it’s also not cheap.
Melissa and Gabe noted that spending time with family is important to them and I agree! However, they have three different categories of spending related to this: gifts + travel + food w/family = a total of $321 per month ($3,852) per year.
Again, not a bad thing and not necessarily something they need to reduce or eliminate. I just want to bring their attention to these categories.
|Gifts for each other||$85||$0||$85||I’m going to agree 100% with Melissa’s note on this category: ” …as I write this I realize we could cut this category completely and use it to fund one big trip a year.”|
|Gas bill for apartment||$76||$76||$0|
|Travel/Experiences us two||$76||$76||$0||Per Melissa: “We’d like to spend less in other categories and more here so we could travel more, especially internationally.” Sounds good to me!|
|Food and drink with family and friends||$71||$25||$46||See my note above under “travel/visit with family and friends”|
|Gym||$60||$0||$60||See my note above under “yoga/meditation”|
|Entertainment||$58||$58||$0||Going to leave this as is for now, but it’s another category Melissa and Gabe can assess for priority level.|
|Pharmacy and toiletries||$56||$56||$0|
|Peloton||$39||$0||$39||See my note above under “yoga/meditation”|
|Takeout||$26||$0||$26||Per Melissa: “We’re trying to be mindful of this category and have been spending less here so we can instead put our efforts towards one date night per month.” Sounds good!|
|Coffeeshops and pastries||$15||$15||$0||This goes back to the main goal of identifying priorities and spending only on those. If this is a true priority, keep it! If not? Nix it.|
|Renter’s insurance||$11||$11||$0||Definitely keep the renter’s insurance! It’s inexpensive and important to have!|
|Impulsive/Treat yourself||$7||$7||$0||This is a pretty negligible amount for impulse buys, so I say, keep it!|
|Postage for mailing||$2||$2||$0|
If Melissa and Gabe decide to implement the savings I’ve outlined, they’ll be on track to save an additional $777 per month ($9,324 per year). They’re not in a dire situation and they certainly don’t have to make these changes to their spending. But, if they decide they want to accelerate their savings goals, these are some ways to do it.
Credit Card With A Fee?
One expense I want to discuss a bit more is their Chase Sapphire Preferred credit card with an annual fee of $95 for two cards. I’m assuming they have this card for the fabulous travel rewards but, if that’s not the case, there are other, no-fee cards they could switch to. The only reason to pay an annual fee on a credit card is if the benefits/rewards you’re accruing far outpace the annual fee.
Chase Sapphire is an amazing travel rewards card, but if Melissa and Gabe just need a reliable cash back card without a fee, they might consider either the Fidelity Visa (which provides an unlimited 2% cash back) or the Chase Freedom Unlimited card (which provides 3% cash back up to a certain amount). Both of these cards offer decent cash back percentages and don’t have an annual fee (these are affiliate links). For more on how to manage a credit card strategy, check out: The Frugalwoods Guide to a Simple, Yet Rewarding, Credit Card Experience.
4) What do you suggest we do for our retirement savings?
If Gabe’s company starts a 401k and if his employer matches any percentage of employee contributions, Gabe should definitely contribute. An employer match on a 401k or 403b = free money. Since Gabe might not be staying at his current employer, he’ll need to consider any vesting requirements (when an employer requires you to work at the company for a certain number of years before you’re eligible for matching funds).
Melissa and Gabe each have a Roth IRA, which is great! I’m going to do a quick rundown on IRAs for our general edification.
Roth IRA (Individual Retirement Account):
- A Roth IRA is a retirement account that’s post taxes.
- This means you pay taxes on the money you put into a Roth IRA, but you don’t pay taxes when you withdraw the money in retirement.
- A Roth IRA grows tax free.
- You need to be age 59.5 before you can withdraw money penalty-free (although there are exceptions).
- Your eligibility to contribute to a Roth IRA depends on your income and your particular tax situation. Melissa and Gabe should examine these factors and determine if a Roth IRA or a traditional IRA (see below) makes the most sense for them.
- I like this Nerd Wallet article on Roth IRAs if you want to read more.
Traditional IRA (Individual Retirement Account):
- A traditional IRA is a retirement account that’s pre-tax
- This means you don’t pay taxes on money you put into an IRA, but you do pay taxes when you withdraw the money in retirement.
- There are no income limits. Anyone can contribute to a traditional IRA.
- You need to be age 59.5 before you can withdraw money penalty-free (although there are exceptions).
- More about traditional IRAs here.
The bottom line is that contributing to some sort of tax-advantaged retirement account (such as a 401k, 403b, IRA, Roth IRA, SEP IRA, etc) makes sense for most people in most circumstances. Gabe and Melissa are already contributing to Roth IRAs, which is great. As their income increases and their employers change, they should re-evaluate what makes the most sense in light of their tax bracket. As I noted above, if either of their current or future employers offers to match their contributions to a 401k or 403b, they should take advantage of this free money.
Asset Allocation and Money Management 101
In addition to an expense review, I’ve started including an overall asset allocation review in every Reader Case Study to help folks track where they are. Below are the basic money management steps I advise just about everyone to follow. I’ve made notes of where Melissa and Gabe are on each step and, spoiler alert, they’re doing very well.
- Track your expenses religiously. Know exactly what you’re spending every month. If you’re not tracking your spending, you can sign-up for the free service Personal Capital, which is what I use and recommend for expense tracking (affiliate link).
- Melissa and Gabe are doing this through You Need A Budget (YNAB), which is fine, but which does have a subscription fee. If they’re comfortable converting to a free service (such as Personal Capital), that could be another area where they could save. If you’d like to know more about how Personal Capital works, check out my full review.
- Pay off high interest debt. List all of your debts in a spreadsheet and sort by interest rate. Prioritize paying them off in order of highest interest rate first.
- I outlined above how Melissa and Gabe can attack their debt and have it all paid off (except for the 0% interest loans) in just over nine months.
- Build an emergency fund. An emergency fund should be kept in an easily-accessible bank account, such as a checking or savings account, NOT in investments, retirement funds, or cars/houses/expensive china. An emergency fund is money you can access immediately in an emergency. I recommend saving three to six months’ worth of expenses (meaning three to six months worth of what you spend every month, which is why it’s important to do #1: track your expenses).
- Melissa and Gabe have a combined $43,634 in their savings and checking accounts. At their current rate of spending ($6,107 per month), this would cover them for seven months, which is a tad overboard. They might consider funneling a bit more of this cash into their brokerage account.
- Contribute to retirement accounts. Especially if your employer matches your contributions, putting money into a 401k or 403b is a no-brainer. Here’s more on why: 401ks Are Your Friend: Demystifying Personal Finance Part 3.
- We’ve amply discussed this above for Melissa and Gabe.
Savings Accounts Side Note
One of the easiest ways to optimize your money is to keep it in a high-interest savings account. With these accounts, interest works in YOUR favor (as opposed to the interest rates on debt, which work against you). Having money in a no (or low) interest savings account is a waste of resources because your money is sitting there doing nothing. Don’t let your money be lazy! Make it work for you! And now, enjoy some explanatory math:
- Let’s say you have $5,000 in a savings account that earns 0% interest. In a year’s time, your $5,000 will still be… $5,000.
- Let’s say you instead put that $5,000 into an American Express Personal Savings account that–as of this writing–earns 1.70% in interest. In one year, your $5,000 will have increased to $5,085.67. That means you earned $85.67 just by having your money in a high-interest account.
And you didn’t have to do anything! I’m a big fan of earning money while doing nothing. I mean, is anybody not a fan of that? Apparently so, because anyone who uses a low (or no) interest savings account is NOT making money while doing nothing. Don’t be that person. Be the person who earns money while sleeping. Rack up the interest and prosper. More about high-interest savings accounts, as well as the ones I recommend, here: The Best High Interest Rate Online Savings Accounts.
Start investing! Investing in the stock market is how you grow your wealth. Without this crucial step, you won’t reap the advantages of compounding interest and you’re unlikely to build your net worth in a meaningful way. I personally invest in low-fee total market index funds through the brokerage of Fidelity. Vanguard offers a similar product. You can do this yourself (it’s just like any other form of online banking) and there are more details here: For the Love of Frugal Hound, Manage Your Money Yourself! (by following The Simple Path to Wealth).
- Melissa and Gabe have a brokerage account through Betterment, which is a robo advisor. This is fine; however, it’s likely they’re paying higher fees than if they managed their investments themselves, such as through low-fee total market index funds. If Melissa and Gabe want to take their investing game to the next level, exploring the DIY route could save them money in the long run. However, the salient point is that they are invested, which is great!
- Melissa was wondering what to do with their investment account and the answer is: nothing! Investments are to keep and hold for the long term. Allow them to grow over time and reap the probable rewards many decades in the future.
- If Melissa and Gabe decide to save up for a downpayment on a house, then they can consider scaling back their contributions to their brokerage account. You don’t want to invest money you’re likely to need in the short term (such as within the next five years or so).
- Explore other options for investing in order to achieve diversification. After completing steps 1-5, you should continue investing in your low-fee index funds (and rebalancing them) on a regular basis (I recommend automating this process) and you can also start to look around for diversification options. This might include, for example, real estate. Mr. FW and I rent out our home in Cambridge, MA for a profit. Renting a property can be a fabulous financial decision and it can also be an absolutely abysmal one. It depends on many factors, including the rate of return you’d receive. For more on renting out properties, I recommend the site BiggerPockets, which discusses real estate investing.
- Melissa and Gabe aren’t quite here yet, but they can consider more diversification in the future.
- Analyze your income. Concurrent with all of this should be an analysis of your net income (that means the dollar amount you bring home every month, minus taxes and any other withholdings). In some cases, the best route to financial stability will be to increase your income while also lowering your expenses. Income is the crucial second piece to this equation and, the more you make, the more you can save. That’s a solid math fact.
- This will be more relevant once Melissa is working, but it’s always something to keep an eye on.
5) Do you think our 10-year plan is realistic, achievable, and sustainable?
I don’t think I’ve ever seen such a detailed, well constructed ten year plan. When I encourage people to create a ten year plan (in the Uber Frugal Month Challenge, for example), THIS is what I’m talking about. Melissa and Gabe dug deeply into their career aspirations, their plans for starting a family, and the financial underpinning that’ll make those dreams reality.
I’m impressed with their ability to project long term and I think they’ll be just fine if they continue in such a thoughtful manner. Let’s look at the specific goals Melissa outlined for their 10-year plan:
Goal #1: Be debt free (minus a mortgage, although we’re so adverse to debt at this point that we’ve considered trying to avoid a mortgage altogether)
This is totally doable. My caution is for Melissa and Gabe to not allow their aversion to debt to cloud the math of a mortgage:
I personally am (usually) a fan of getting a mortgage at a low, fixed rate. This debate is as old as the hills and people fall into one camp or another, but for what it’s worth, here are my thoughts:
- A paid-off house is a wonderful thing, but you can’t use a paid-off house to buy groceries or pay for health insurance if you’ve lost your a job (you might be able to get a Home Equity Line Of Credit, but that’s not a guarantee and certainly not if you’ve lost your jobs). A paid-off house is an illiquid asset (unless you’re able to sell it quickly, which is an unknown).
- There are opportunity costs to paying off a mortgage. Namely, you’re missing out on the potential investment returns you’d enjoy if your money was instead invested in the stock market. Mr. FW and I choose to hold mortgages on both our primary residence and our rental property because, mathematically, our money is better deployed in the stock market thanks to the average annual rate of return (7%) that you can expect after many decades of remaining invested in low-fee index funds. Essentially, money is better leveraged in the stock market than in a paid-off house.
- If you have a low fixed interest rate mortgage, then from a mathematical standpoint, I wouldn’t pay it off early. I view holding a mortgage–and having money properly invested in diversified assets (aka low-fee index funds)–to be a much less risky decision.
- A mortgage is an excellent hedge against inflation. Inflation is when money becomes less valuable and the neat thing about a mortgage is that it’s denominated in the dollars you originally paid for the house and so, over time, as inflation increases (which generally happens), the money you’re using to pay off your mortgage is “cheaper.” Essentially, it’s not bad to hold a mortgage and it’s actually a fine component of a diversified portfolio of assets. Paying off your mortgage to the detriment of investing is a lot like putting all of your eggs in one basket.
- It’s not that it’s a bad thing to buy a house in cash–it’s just that it comes at the expense of other opportunities to grow wealth. Many of us who are early retired/financially independent choose to hold mortgages–even though we could afford to pay them off tomorrow–for the above reasons. Bottom line: financial independence can happen with a mortgage; but it absolutely cannot happen without cash on hand.
Goal #2: Consistently max out our IRAs as well as our 401ks
- This sounds totally reasonable and within reach for Melissa and Gabe.
Goal #3: Have a 6-month to 1-year emergency fund saved up
- Check! Melissa and Gabe already have this.
Goal #4: Probably own another car (paid in full)
- Sounds reasonable and probably necessary if they choose to live rurally and have multiple kiddos. I highly recommend they pay cash in full for a used car. More here: Why We Buy Used Cars And You Should Too
Goal #5: Have savings accounts for all of our future children, with a minimum of $20k in each (we haven’t figured out our long-term savings goals for our children, but we know we want to)
- This is the only goal I question a bit because:
- Melissa and Gabe don’t have any kids yet and don’t know how many kids they’re going to have.
- More crucially, this should come AFTER all of their other financial goals are met. A kid can pretty easily take out a loan for college, but it’s nearly impossible to take out a loan to fund your own retirement. I think Melissa and Gabe will have no problem meeting all of their other goals and then saving for their kids, but I just want to reiterate that they need to secure their own retirement first.
- Sidenote: when the time comes, Melissa and Gabe should research 529s in their state (this is a tax-advantaged college savings account that CAN make sense depending on your tax rate and a number of other variables. For reference, I have a 529 for both of my kids).
Goal #6: Have investments/savings circa $1.4 million (including retirement; see math above)
- According to Melissa’s calculations, this should pan out!
While I adore the detail of their ten-year plan, I also see some shades of Melissa’s financial anxiety coming through here. It’s impossible for any one of us to accurately predict the rest of our lives. While there’s a lot we can do to prepare for a financially secure future, there are unknowns that no one can account for. And that’s OK. Melissa should feel confident that she and Gabe are on the right track and that they’re not doing anything wrong from a financial perspective. It’s easy to feel behind when you’re in school and not earning a paycheck, but Melissa has identified one of the most important elements of life: her vocation.
- Pay off all of Melissa’s student loan debt with interest rates. Don’t pay off the 0% debt prematurely.
- Review their expenses and determine if they’d like to incorporate any of the strategies I outlined for potential savings.
- Evaluate if it makes sense to have a credit card with an annual fee.
- Explore the possibility of moving from Betterment to a self-managed total market index fund with low fees.
- Relax into the knowledge that they’re doing just fine financially and that no one can map out the entirety of their financial life with a high degree of accuracy.
Ok Frugalwoods nation, what advice would you give to Melissa? She and I will both reply to comments, so please feel free to ask any clarifying questions!
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