Saturday, October 10, 2015

A Cautionary Tale

Let's start this off with a story about someone I'll just call John. John began working for a company in his early 20s and ended up staying with his same employer for over 30 years. During this time, John managed to work his way into a position that paid him very well. To give you an idea, his co-workers with similar tenure and title have averaged $200,000 per year or more for the past decade. John and his wife stayed in the same house in a working-class neighborhood even as his income increased to where some years' earnings would have exceeded the value of his home. While they didn't spend a lot on their home, they did spend a lot on other things, such as vacations.

Sadly, when John was in his mid-fifties, he suffered a stroke that left him unable to work. In an instant, he went from a comfortable income and lifestyle to unplanned early retirement. Although he had been earning a good income, he and his wife didn't have much to show for it in savings or investments. This didn't stop them from continuing to spend like they always had though. As their savings were depleted, an additional source of cash was discovered in the form of taking out a second mortgage.

As you can imagine, this story doesn't have a happy ending. John passed away recently, in his late 50s with next to nothing left to support his wife and family.

John happens to be the friend of a friend and this came to my attention when I saw a GoFundMe site set up for people to help donate funds to cover the cost of a funeral. John's widow was left without even enough money to cover the cost of a $7-10,000 funeral, where just a few years earlier he had been earning more than that each month. This is always sad to see, but even more so when I know that the financial outcome didn't have to be this way.

What can we learn from this story?
  1. Save money and plan for the future. I've heard people say "I'll start saving for retirement after (fill in the blank)". Except as soon as that event happens, something else urgent comes up that causes them to continue delaying. Saving needs to be a habit and be done intentionally.
  2. Have life insurance. Even a small amount would have helped in this situation. I currently carry life insurance worth ~6x my income and have a net worth of ~5x my income. If I were to die, my wife would be left with a net worth greater than 20x our current household expenses. We have a plan in place where if something were to happen to me, my wife would know what to do with the money and would not have to work again. John's widow has no plan.
  3. Repeat after me, "INCOME IS NOT THE SAME AS WEALTH". It isn't the amount of income you earn that determines your financial success, but rather the amount that you keep. I have met several millionaires who never earned an income near that of John's, yet John died with nothing to his name. Income is only here temporarily, whereas true wealth is here forever.

Sunday, October 4, 2015

Employee Perk?

A friends' employer recently announced a new program whereby the company will pay off a fixed amount of employees' student loans each year for up to five years. With so many Americans carrying student loan balances, it seems like a great perk. Or is it?

I think that this perk will, in fact, do very little to help this particular companies' employees build wealth. The company may receive some positive media attention and reduce employee turnover costs (which is probably actually their goal), but a better long-term impact on their employees' financial well-being could be achieved by teaching financial literacy.

The obvious challenge with offering something like this is that an employer alienates those employees who either never took out student loans or who have already paid them off. Contrary to what the media seems to portray, about 30% of all college students get their bachelor's degree without any student loans. I will concede that some of these students come from wealthy families, but if we define wealthy as the top 1% of the country, then how do you explain the other 29%? These are largely going to be students who either worked part-time while in school and full time in the summer and saved money to pay for an affordable in-state school, or who worked hard to earn a variety of scholarships. Either way, paying your way through school requires work and is definitely possible.
My wife was able to do so successfully, and while I did borrow for my bachelor's degree, we paid it off quickly and did not borrow anything for my much more expensive graduate degree.
That aside though, my problem is not about eligibility or fairness in who receives it. I think the greater problem is the potential attitude of apathy towards paying off student loans and the additional excuses to stay in debt. Very few graduates can expect to have their employer pay off their entire student loan balance under programs like this, yet when it is offered I expect most employees to use the program as an excuse to not pay anything more than the minimum payment.

Another company, PricewaterhouseCoopers, has been in the news lately for their program, which pays $1,200 per year for up to 6 years towards employees' student loans. What is overlooked are some of the other facts. First, Big4 accounting firms are known to have very high employee turnover (~25% per year), so the odds of anyone getting all 6 years of this perk are very slim. Second, if the average student owes $30,000 upon graduation at the average rate of 4.6%, then that $1,200 basically just covers the interest and allows you to pay off your loans in 7.5 years instead of 10 (paying just the minimum payments).

This benefit should truly be treated as a benefit, yet many will sit back, not do the math and assume that the impact of the benefit is much greater than it actually is.

I'm not saying that you shouldn't accept this type of benefit, or that employers shouldn't offer it. What I am saying is that if you are in the position to receive this, do the math, understand how much the assistance truly is, and don't use it as an excuse to not pay down your debt as aggressively as you can on your own. If you pay down all the way to the point that your employer will pick up the rest, fine. But just like you should be building a stash of cash for a rainy day fund, you should also be building a stash of cash just in case that benefit goes away (either from the company changing policy or from your switching employers).

Personally, I'm thrilled to not have any student loans. If my employer were to offer something like this, I would just miss out on it. But I would rather be debt free than be like some of my co-workers who lament only being able to deduct $2,500 in student loan interest. Let me repeat that for emphasis…they are paying more than $2,500 per year in interest on their student loans. I don't know about you, but I'd rather have that money work for my future than throw it away.

Earn interest don't pay it.

Thursday, October 1, 2015

Net Worth Update

Three months ago, our household net worth was approaching $500k. Well, it's still approaching $500k. In fact, even though we've continued to save each month, our net worth has gone down, largely due to overall declines in the stock market. During the past quarter, our Net Worth did creep above $500k, but it was only temporary as the market began to slide towards the end of August. So without further ado, here's the latest update:

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Our net worth declined by about $4k in the past three months. Not too big of a swing, but in order to really see what's going on here, it's helpful to see the details.

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As you can see, our cash has increased and our mortgage has decreased. According to Zillow, our home has even appreciated slightly. Although we added about $3,000 to our investments, they still are down by over $13k. The good news in all of this is that the money we've been adding has been buying in at lower prices. What's also good news is that as I've previously mentioned, I have been meaning to shift more of our investments to stocks from bonds, which I have done.