Work 401k Seminar Prep

As part of my job, I was recently put in charge of hiring new graduates to join our finance department. Once they start, we pair them with a mentor and I stay in touch and offer career advice and guidance as needed.

As part of my ongoing advice and guidance, I’ll be hosting a 401k seminar later this month. This is the first time I’ve done something like this, and I’m honestly pretty excited. I’ve solicited questions from the group and a couple of themes have emerged. As part of my preparation, I wanted to share some of my thoughts on these topics.

To provide some context, the audience is all 20-something recent college graduates working at their first job. We pay them pretty well (mid 50’s), are in a lower cost-of-living area, and provide some amazing benefits. Our company offers an excellent 401k match and relatively short vesting period.

401k Match – this is ‘FREE MONEY’ and there are almost no good excuses for passing this up. As an incentive to get you to contribute to the account, employers will often provide matching contributions. Make sure you’re at least getting your full match.

Vesting Period: The money your employer puts in your 401k might require you stay working there for a period of time. I’ve seen as short as 2 years and as long as 7. If you leave the company before you are fully vested, you may forfeit some of the employer contributions. The money you put into a 401k from your paycheck is always yours and you’ll never have to give it back. 

Q: What is the difference between After/pre-tax contributions and which should be a priority?

A: We have the choice between traditional and Roth 4o1k’s. My general advice to anyone is to focus on Roth contributions. This is especially true for those who are young. The difference between the two is that you end up with lower take-home pay by doing Roth, but you end up with much more in retirement. Here’s a simple example:

Either way, a 6% contribution puts $3k into your 401k. The difference today is that if your contribution is in a Roth, you end up paying slightly more taxes now, but won’t ever have to pay taxes on that money again.

If you invest $3k per year for 30 years and it grows at 8% per year, you end up with $339,000. Not bad for only investing $90,000, right? But you will pay taxes when you withdraw if your contributions are made pre-tax (traditional). All of a sudden that $339,000 is more like $288,000 (15% taxes). It’s even less if you want to take out so much that you get pushed into a higher tax bracket.

On the other hand, if you had been making Roth contributions, that $339k is ALL YOURS. This is why I sometimes say that Traditional 401k/IRA’s include ‘Phantom Money’. Even though you see the balance, it’s not all yours unless it’s Roth.

My preference is to have all of my contributions go into Roth. Since employer contributions can’t go into Roth, I’d prefer to have as much as possible actually be MINE. For those currently doing pre-tax contributions, I’d consider transitioning your contributions over.

Q: Can you talk about 401k early withdrawal penalties and payback options?

A: Honestly, I’d rather not. Long term you’ll always be better off finding ways to avoid taking money out of your 401k before retirement. While you are actively employed, the only way to get money out of your 401k is to take a loan. Loans are paid back via increased payroll deduction. Although it is true that you pay yourself back with interest, the interest rate you pay yourself is generally much lower than the returns you’d be missing out on if the funds had stayed invested.

The big risk of a 401k loan is that if you leave the company, the balance of the loan is due in full within 60-days. Any amount left unpaid is considered an early withdrawal, taxed, and penalized (if you’re younger than 59 1/2).

Several in my audience may be considering going back to school for an MBA in the next few years. To them, I would recommend avoiding student loans but definitely plan ahead and do not rely on 401k funds to pay for the degree. Although there are provisions where Roth contributions can be withdrawn without penalty, I still believe that it should be avoided before retirement.

Q: What’s the right mix of stocks and bonds?

A: This is perhaps the hardest question to answer because there really is no one-size-fits-all answer. The right mix for each person depends on your goals and risk tolerance. You may have heard that in the early stages of your career you should be as aggressive as you can tolerate, but without having gone through a bear market it’s hard to really know your risk tolerance.

There are rules of thumb out there like “120 minus your age is the percentage you should have in stocks and the rest in bonds”. Rather than give that blanket statement, allow me to share how my asset allocation has shifted over the years.

My Asset Allocation History

When I started my first 401k, I loaded up on stocks and maybe only 5% in bonds. This was back in 2006 and the market was hitting new record highs, sound familiar? A few short years later, I had built up around $25k with more of a 70/30 stock bond split. And then the financial crisis hit. My portfolio was basically cut in half in what seemed like a matter of days. This was a huge gut check for me and caused me to rethink my asset allocation. Thankfully, I didn’t get out of the market like many clients I was advising at the time wanted to.

I kept a 70/30 mix for years and was a believer of the age-based asset allocation model. When friends or family members were just starting out, I would recommend using Fidelity Freedom Funds or Vanguard Target Retirement Funds that automatically rebalance as you get closer to your target retirement date, eventually landing in a 20/80 stock/bond mix. There is nothing wrong with this approach, and for many people, it may still be a great one.

My Current Allocation Strategy

Where I differ now from the mainstream age-based strategy is that I am planning on retiring much earlier than traditional retirement age. Also, I believe that we in the DIY$ household have proven to not act irrationally during bear markets. During down markets, we don’t sell and continue to dollar-cost-average into our investments. This tells me that we can handle having a larger allocation to stocks. Our current asset allocation is over 90% stocks, and we plan to keep it that way until and during retirement.

I am subscribed to the strategy outlined in Simple Wealth, Inevitable Wealth. Simply stated, this strategy is to only invest in stock mutual funds, and during retirement to keep a cash reserve equivalent to 2 years expenses. During retirement, we will replenish cash from investments except during significant down markets. During those times, we’ll draw down cash to allow the market to recover and build the cash account back up after the investments recover.

This strategy may not work for everyone, but this is why personal finance is so personal. You need to find what works for you, develop a plan, and stick to it. That’s the important part though, having a plan vs. not having a plan. I’m sure we’ll have plenty more to talk about, but these are the thoughts I’ve collected thus far.

Investing in a 401k

        

I recently met with someone who has decided to begin investing in his work 401k but didn’t know how to get started. He had all of the plan literature from when he got hired, but had ignored it because he didn’t really understand it and it seemed like so much information that he didn’t know where to start. Unfortunately, I’ve found this response to be common. In an effort to remove some of the roadblocks to getting started, Congress now allows employers to automatically enroll new employees into their company 401k into default investments (usually ‘target date funds’). While this is a good start, it certainly isn’t enough. Below I will walk through the decisions you need to make when investing in your 401k.

How much should I put in to my 401k?

  • Your 401k through your employer can be a great place to invest. My rule of thumb is to invest whatever you need to in order to get the full employer match. Every 401k is different so you’ll need to look up your plan specifics. My employer matches up to 5%, so I make sure that I always contribute at least 5%. The person I helped the other day was eligible for a 50% match up to 6% contributions (so if he put in 6%, the employer matched with 3%). If you are able to save more than what your employer will match, you should set up a Roth IRA on your own. Why not just max out your 401k? Generally speaking, your 401k is going to have limited investment options. If you wanted to invest in something that wasn’t in the lineup, you wouldn’t be able to do so. Maybe the fund choices are great, maybe they’re not. I would only recommend adding non-matched money to your 401k after you have already maxed out your Roth IRA for the year (current maximum is $5,500 for IRAs).

Pre-tax or after tax?

  • Whenever possible, and with few exceptions, I recommend making your 401k contributions AFTER-TAX. This means that the money you are adding to your retirement is invested after you have already paid income taxes on it, but also means that when you withdraw it, you can do so TAX FREE. Money that your employer contributes to your 401k, or that you put in PRE-TAX, is considered taxable income when you withdraw it in retirement.
  • To illustrate the true power of TAX FREE growth, consider this example. If you invested $5,000 per year over the course of a 30 year career and earned an average return of 10%, you would have over $800,000 at the end of 30 years. How much is actually yours (as opposed to the tax man) depends on whether you put the money in before or after taxes.

        

  • Make sense now? I’ve talked about the power of compound interest, but here again you can see that of the if you invest for a long period of time the majority of your account ends up being earnings. The first column shows how much you’d have if you simply put $5k/year under a mattress and the second column is if you put it into a savings account (assuming a 3% return, which is currently very high but average over a long period of time).
  • The advantage of a 401k is shown in the last three columns. Under each of the three scenarios, I am assuming that you earn an average return of 10%, the only difference is how and when you pay taxes. If you invest $5k/year outside of a 401k, you’ll have to pay taxes on earnings as they happen and end up with the middle column, or about $500k. Not bad. However, if you invest in a 401k, you don’t have to worry about taxes each year, so you’re able to keep the entire amount invested and growing. You actually end up with the same amount in your account whether you are contributing PRE-TAX or AFTER-TAX, but the difference is if your account is PRE-TAX, then only about 75% of that money is actually yours, the rest you’ll have to pay to the IRS as you withdraw. If you withdrew the entire amount all at once, your tax rate goes up and you get to keep even less than that.
  • The takeaway here is that if you make annual contributions of $5k PRE-TAX, you end up getting an annual tax benefit of ~$1,250, but end up paying about $200,000 in taxes down the road, whereas if your contributions are made AFTER-TAX, you don’t get the tax benefit now, but end up paying a lot less in taxes over time.

How to invest the money once it is in the 401k

  • The most important part of saving for retirement is to actually put money in your account. The second most important thing is to minimize taxes. Once you’ve done this, the next most important part about saving for retirement is how you actually invest. This topic is often the part that is considered the most confusing or intimidating part of investing, but it doesn’t have to be. Unless your 401k plan has hundreds of investments to choose from, I generally recommend one of two different options, and it is dependent upon how much time and effort YOU want to put into managing your account.
    • Age Based Strategy: The aged based strategy is what I would recommend for someone who prefers to be hands off, doesn’t want to pay additional fees for customized professional management, and who has not yet done significant research into the various investment options that exist. Nearly all 401k plans will offer this type of strategy and you can often identify it by the funds including the target year (2020, 2030, 2040, etc). These tend to be very diversified and are invested with the assumption that you plan to retire in or near the ‘target year’ mentioned in the name of the fund. While I do NOT have any of my own money invested in these types of funds, I don’t lose sleep knowing that I have friends and family invested in them when they are bought for the right reasons.
      • A thought about Age Based Funds: I have frequently seen investors buy multiple different age based funds in their 401ks. I met someone recently who was wanting to retire in 20 years and had invested his 401k across several different age based funds (He had 2020, 2030, and 2040 funds). These funds are generally structured so that you only should be buying one, and investing the majority of your assets in that one fund. If you were to look at what the funds are invested in, you’ll see that you don’t get any additional diversification by having a different target year fund (they will generally invest in the same things, just in different percentage allocations). If, for example, you were to invest half in a 2040 fund and half in a 2030 fund, you’ve essentially just created a 2035 fund, which is probably a separate fund you can choose. If you feel that you need something more customized than this and want to do the leg work, you should build your own portfolio using other funds.
    • DIY Asset Allocation: This is the method that I invest in my personal 401k, and the method I recommend for anyone looking to manage their own 401k. Because the majority of 401k’s only have limited investment options, I almost always recommend looking for the index fund options. Index funds are invested to match the performance of an index, like the S&P 500, whereas other funds are invested to try and beat the market. There is a lot of debate out there as to whether mutual funds even can beat the market, but the data clearly shows that many funds do not do as well as the index they are trying to beat. Because you generally only have a few choices for funds in your 401k of the thousands of funds that exist, the odds of your employer selecting the best of the best actively managed funds in all categories in all times, is virtually zero. Once you eliminate the actively managed funds from your selection, you will probably be left with only 3-6 funds to choose from.
    • The next question you need to ask yourself is: How much risk can you handle? For these purposes, risk can be measured by the portion of your account invested in stocks vs bonds.
      It has been said that the younger you are the more aggressive an investor you should be. While I agree with this in theory, it isn’t a perfect one-size fits all approach. I would add two additional considerations. 1) If you are invested so aggressively that you lose sleep worrying about losing money, or if you find yourself frequently wanting to sell everything, you may want to invest with slightly lower exposure to stocks than your age would dictate. If you do this, you should understand that you’ll need to be saving and investing more to compensate for the lower returns you should expect. 2) If you are reasonably confident that you will NOT need to use a portion of your assets in your lifetime, and plan to leave an inheritance to your heirs, you should invest that portion with THEIR timeline in mind and not yours. This means you may have a more aggressive portfolio than your age alone would indicate.
    • The way I have invested my 401k is to put 50% in the S&P 500, 10% in International stocks, 10% in Small/Midcap stocks, and 30% in bonds. Roughly once per quarter, I will look at my account balances and see how this has shifted and rebalance back to the same mix. Over time, one would expect stocks to outperform bonds, so naturally the 30% in bonds may shrink. Gone unchecked for long-enough, the bond allocation could shrink so much that my whole account is more aggressive than I intended. Periodically rebalancing is a process to naturally ‘take earnings off the table’, by reducing exposure to whatever has had the best relative performance.


 

TAKEAWAY: The most important part about investing in a 401k is ACTUALLY PUTTING MONEY IN YOUR ACCOUNT. The next step is to make sure you’re doing so in the most tax efficient manner. Lastly, you’ll want to make sure that whatever you’re investing in is right for you.

Do you have any questions about your 401k?

Step 5 – Grow Your Income – Financial Offense vs Defense

It’s been said that “Offense wins games, Defense wins championships”. Similar to sports, you need good offense and defense to be successful financially.

I like to refer to things like budgeting and frugal living as financial defense. Spending money can be very easy, and have good financial defense ensures that you aren’t spending everything you earn and are saving and investing for the future.

Financial offense is your income. Growing your income and career are some of the best investments you can make to enable financial success.

Financial success is NOT guaranteed with a higher income, but it certainly helps.

To illustrate this point, let me share an interaction with a prospective client several years ago that I will never forget. He called my office and asked to set up an appointment with a financial advisor. Our office had 8-10 different financial advisors, and like many financial service companies, we generally determined what advisor a client was paired with based on the amount of money they had to invest. This segmentation of clients is common since different strategies and complexities exist for larger portfolios than smaller portfolios that may not have as many alternatives. The prospect wasn’t very forthcoming about his investments, but assured the scheduler that he probably should meet with the most experienced advisor in the office. When he came in, it wasn’t long before we realized that he was the poster child for the phrase “all hat, no cattle“.

This prospect bragged that for the preceding 8 years, his income had been between $500,000 and $800,000 per year as an attorney, and felt he had reasonable expectations for that income level to continue. Clearly he had done well growing his income and playing financial offense. The problem though was that he was not very good at financial defense. His total investable assets (checking/savings accounts, investment accounts, retirement accounts) were only about $100,000. Where did it all go? Well, he had a beautiful house and an equally beautiful vacation home, both of which were worth considerably less than he owed on them. He also had multiple very expensive luxury vehicles with very large car payments. If that wasn’t enough, he also felt that his income justified picking up aviation as a hobby, so he had bought a small airplane for $300,000 or so. In total, his debts were approaching $2 million and he had a negative net worth. It was hard to believe that someone with that high of income could be living paycheck to paycheck.

Sadly (or maybe not so sadly), this person never ended up becoming a client of ours. He didn’t have enough investable assets to meet my minimums, and our philosophies differed so much that it wasn’t worth making an exception.

On the flip side, I have met several people who have become millionaires while earning average $40-50,000 incomes, but mastering financial defense.

The point of this is that YES, growing your income is useful in building wealth, but doing so can be meaningless if financial defense isn’t also practiced.

In the next post I’ll continue discussing financial offense, including my income history and what I’ve done to grow my income.

Net Worth over time

Update: This was the first time I published my net worth – see here for the latest update!

In the hopes of removing some of the social taboo associated with talking about personal finances, I wanted to share some details of my household net worth over time. I will periodically provide updates to these figures in order to enhance my own accountability and hopefully to motivate or inspire any readers.

Deciding to pay off debt, and doing so aggressively, was critical to the success that I have seen thus far. Not having any non-mortgage debt freed up several hundred dollars per month to save and invest, and living on a budget has helped to develop spending habits that have ensured that saving and investing remain a priority.

Benefits of Diversification

Diversification isn’t just to avoid the risk of a single company stock going bankrupt. It can also reduce the ups and downs of your portfolio.

Take a peek at the chart below. What it shows is what would have happened over the past 5 years to $1,000 invested in 5 different companies. The bold orange line, however, is what would have happened had you taken $1,000 and invested it evenly between the same 5 companies.

 

There are a few things to notice here.

First – over 5 years, the values ended up roughly around the same whether you chose to invest in a single stock, or in a diversified portfolio of the 5.

I purposefully picked stocks with similar performance over this time frame to make the main point, which is that even though you end up in roughly the same spot after 5 years, the diversified portfolio got there with less dramatic ups and downs than the individual components.

Lastly – notice that these 5 companies come from 3 different industries (Industrials, Energy, and Information Technology), so the fact they had very similar performance over the past 5 years isn’t because they were in similar businesses.

 

 

Step 4 – Diversify Your Investments

Enron, WorldCom, Lehman Brothers, General Motors, American Airlines, Radio Shack. Notice anything similar between all of these companies? Every one of them for one reason or another declared bankruptcy. What that means to an investor is that if you owned stock in those companies, you would have lost your entire investment. Most of these examples are well known, but this is something that occurs fairly often and without a lot of attention (how many companies can you name that have declared bankruptcy in the past year? There have been several). The takeaway from these examples is simple – don’t invest too much of your portfolio in any one company.

Of course, the counter argument is that if you just put all your money into something like Apple that has gone up a lot lately, you could have grown your portfolio by >20x in the past 10 years. True, but good luck figuring out what stock is going to do that over the next 10 years. In order to diversify a portfolio, you should have several different stocks. By doing so, you reduce the risk that a catastrophic event for one of your stocks wipes you out, but you also give up the opportunity for significant gains that can occur with individual stocks. The most successful investors I have met didn’t grow their assets to significant levels by being heavily invested in a single stock, nor did they put their wealth at risk by investing it heavily in an individual stock.

Other than simply not knowing any better, there are a few reasons that I have seen investors hold what I would consider ‘too much’ in one stock. Here’s what I have to say about them:

  1. “I work at ‘XYZ company’, I know what we’ve got coming down the line, you won’t believe how great it’s going to be” (often accompanied by a wink, wink). Or “I’m ok having half my nest egg in this stock because I work there every day and I can keep an eye on what’s going on with the company.”
    • You very well may know what’s coming down the line from your division, but unless you are one of the top 5 or so people in the company, there is no way you know everything that is going on in the company and what your competition is doing before that information is already priced into the company stock.
    • There are probably several stock analysts out there that know your companies financials way better than you do. These analysts are just as familiar with the financials of all your competitors and have a much better idea than you of how your company stock will perform relative to the competition.
    • If you have a lot of stock in the company you work for, it is actually riskier for you than it would be for someone else who doesn’t work for the company. If things went south for your employer, not only is your nest egg at risk, but so is your job. Double whammy!
    • If you really have enough time at work to ‘keep an eye on’ every facet of the company to know what is going to impact the stock price, and you’re not the CEO, eventually someone will figure out that you don’t actually do anything at work and probably aren’t really needed.

       

  2. Similar to the Apple counterargument to diversification, I have seen people fall in love with companies, either for their products, or simply because the stock has gone up a lot recently. Somehow this love for the company translates to an investor believing that they should dump most of their money into that companies stock. Apple is one example of this, but I have also seen investors get attached to automotive stocks (Ford, GM, etc), consumer staples stocks (P&G, Johnson & Johnson, etc), entertainment stocks (Disney), and Biotech/Pharmaceutical companies (Pfizer, Genentech, etc).
    • It was once said that “what was good for our country was good for General Motors, and vice versa“. Putting all of your money into GM may have sounded like a good idea at that time to some people. My how things have changed. I’m not predicting anything bad for any particular companies, but just remember that there is no stock that has consistently been the best performer.
    • When you develop this sort of obsession with any company stock, it makes it difficult for you to view it objectively and you can find yourself making excuses for poor management decisions and saying things remarkably similar to things you could hear from a gambling addict (“I’ll sell when it gets up to X”, then after it reaches ‘X’ you move your target sell price up, or “I’ll sell it if it drops to Y”, then when it does, you make excuses for why it shouldn’t have dropped in price, it’s a short term correction, it will be back, etc…).
    • What exactly is your strategy? Faith and hope are great attributes, but they are not an investment strategy.

       

  3. “I can’t sell now, I’ve made so much the taxes are going to kill me”.
    • You only pay taxes on your gains, not the entire sale amount. Even if you invested $1,000 and now it has grown to $100,000, it’s not like you won’t have the cash to pay the taxes, since you will get the full $100,000 when you sell.
    • The downside risk you take by holding a stock is always significantly more than the taxes you may have to pay if you sell. Mathematically, this doesn’t make sense. If you invested $20,000 and your investment is now valued at $50,000, you are risking $50,000 to save $4,500 (50,000 – 20,000 * 15%) by not selling and locking in your gains.

I have read books that claim that diversification is a bad idea and that you’d be better off making big bets with big payoffs. The only problem with that strategy is that even with the risks being calculated, it is still a bet. For every investor who has made a fortune with this approach, there are hundreds of investors whose stories you won’t hear because they lost everything trying the same thing. Diversification certainly isn’t as exciting or sexy as some of the other approaches, but IT WORKS.

Debt Reduction Details

I discussed our debt reduction in my last post but wanted to share some additional details in the hopes that this information could be useful to any other readers. Below is an overview of our income, expenses, and debt repayments from the time we began aggressively paying down debt to the time that we had paid off all our non-mortgage debt.

debt payoff budget

Our Debt Reduction (condensed)

From the time we moved to our new town until our previous home sold, money was very tight. I still don’t know what would have happened if it took another month or two to sell our house, or if we hadn’t been able to sell at all before the bottom fell out from beneath housing prices (Just for curiosity I checked out the house on Zillow and even now nearly 10 years later the estimated value for the home is still less than we bought/sold it for by $25,000).

As I look back, the strangest part of this situation is that I feel that I knew better than to have gotten myself into a financial quagmire. I had a degree in Finance, and had even had excellent personal finance courses included in my studies that taught how to avoid this precise dilemma. What I have since realized is that acquiring financial knowledge is easy, but acting on it is something that not everyone does.

In early April, we sold our house and buckled down to pay down the rest of our debts as quickly as possible. Just a few short months later I was planning to start grad school and we didn’t want to have to take out any student loans to do so. We also wanted to get out of our dungeon apartment and into a house. By our math at the time, both of these things were possible, but not without serious focus and planning.

After selling the house, we were left with three debts and some very large upcoming expenses.

Our first plan was to sell off one of our cars and to go back to being a one car household. Although our new hometown didn’t have good public transportation, my wife’s new job wasn’t very far from mine and our work schedules allowed for us to commute together. We were able to sell Car 1 for $3,000 more than we owed, which immediately had to be used towards my first semester of tuition, which cost $8,170. Although we really wanted to be aggressive in paying down our debts, we had also committed to have $14,000 as a down payment for a house we were building that would be done in just a few more months.

Paying off Car 2 and the student loans became our top priorities after we moved into the new home, but had to be balanced against the need to pay another semesters tuition. Even though my employer was reimbursing a portion of my tuition, I had to pay for and pass the classes before getting reimbursed, and the next semesters tuition was generally due before I received the reimbursement for the previous semester. Once we were able to begin attacking our debt aggressively, we were putting between 21 and 71% of our take home pay towards debt. 13 months after getting serious about paying off debt, we had paid off the last of our non-mortgage debts.

There are so many things I could write about our debt repayment, but I’ll keep it concise and simple. While there are many details I have not mentioned, it is worth pointing out some of the lifestyle changes and sacrifices we made during this time to make it all possible. Some of these highlights include:

  1. Living in an apartment where I didn’t always feel safe, in order to save money.
  2. Living without owning a TV (our old one didn’t make the cross country move).
  3. Carpooling with my wife even before we sold the second vehicle to save gas.
  4. Playing cards with my wife at home instead of going out for entertainment.
  5. Enduring the teasing of co-workers for eating peanut butter and jelly sandwiches for dinner every night at my office to avoid eating out when I was away from home for 16 hour days.
  6. Never eating out for lunch with co-workers while paying down debt.
  7. Not buying any clothes for almost an entire year.
  8. The feeling of driving my car after it had been paid off. I swear that it seemed to drive smoother when I no longer owed anything on it.
  9. The sense of achievement each time I was able to write large checks for tuition and not have to borrow money.

I know that there are others out there who may have dug themselves into deeper financial holes than I was in, but the steps I took to get out of debt are no different than the steps that anyone can take to get out of debt. It’s been said that those who understand interest earn it and those who don’t understand interest pay it. Avoiding debt is critical to be able to build wealth and achieve financial success.

Moving Across the Country

We had a lot of scrambling to do with only 3 weeks’ notice before starting a new job across the country. The first thing we did was to put up a for sale sign in our yard. We had no desire to be long-distance landlords. The next thing we needed to do was to figure out our living arrangements and employment for my wife in the new location. Thus far in our married life, money had not ever felt tight, but that was about to change. You see, the timing of all of this was right around the peak of the ‘housing bubble’. Just a few months earlier, home prices seemed to be going up weekly and houses were going under contract very quickly. We didn’t realize it yet, but just a few months later, the market was not as much of a sellers’ market as it was before.

On top of the pressure to sell our house, we also had the problem of finding a new job for my wife in the new state. Although I was getting a small raise with the job transfer, it wasn’t anywhere near replacing her income, which was about half of our household income. Since neither of us had ever been to the area we were moving to, we were starting from scratch on her job hunt.

At this point in our lives, we had not been living on a budget and, even though I kept track of our spending, didn’t realize the true financial ramifications of our move right away. When I did, the reality was startling. Below is an approximation of what our average budgets would have looked like before the move and after the move, until my wife was able to find a new job.

Before the move, with both of us working, we had had so much money left over after our required expenses that we didn’t ever feel we had to worry or tell ourselves no. We were saving into retirement accounts, and I would usually pay a little extra on each car payment, but we did not have a detailed debt repayment strategy. Now, with the move and loss of income, our minimum expenses were greater than my income alone could support. Selling our house was obviously something we were working on and would alleviate a lot of the burden, but until that happened, we would be burning through the small savings we had accumulated.

Our initial plan was to rent the cheapest apartment we could find in the new town while we waited to sell our house, then turn around and buy another house in the new town, where houses were much cheaper. By the time we bought another house, my wife would have found another job, and we would have no problem qualifying for another mortgage and would then just pay whatever penalty was necessary to break the lease on our apartment. At least, that was the plan at first.

The apartment we ended up moving into certainly met the criteria of cheap. Looking back I can think of a lot of positive things about the apartment, but while we were living there it wasn’t as easy to do so. Lest anyone make the same mistake I did, don’t ever rent an apartment sight unseen in a town you aren’t familiar with. There is a reason that specific apartment complexes are cheaper than other nearby apartments! Although my wife is a prolific photographer, I searched and searched through our archives and couldn’t find any pictures of this apartment other than this picture of the condition the front doorframe was in when we originally moved in.

As it turns out, the door had been kicked in (probably by police), shortly before the previous tenants moved out. This certainly didn’t scream ‘home sweet home’, but since we still had a mortgage to pay on our old house and had just cut our household income in half, this was about all we could afford for the time being.

Long story short, we were extremely lucky to be able to sell our house in about 3 months. In that time, we had burned through pretty much all of our savings as well as a small relocation allowance, and Christmas bonuses. We ended up selling the house for the exact same price we had bought it for a year before, but realtor commissions ate up what little equity we had.

My wife also had a harder time than we expected finding a new job. Not only was it hard to find something in her field, or that paid as much as she had been making before, but it was simply hard to find any job. After several weeks of searching, she ended up working a retail job 45 minutes away for $10/hr for a month before a new friend we had met put in a good word for her to get a temp job nearby, paying $12/hr. I know this was difficult for her, not just going from making >$50k/yr to $12/hr, but also going through the humbling process of searching for a job when seemingly no one was hiring while in previous job searches she had usually had luxury of deciding between multiple job offers.

With a house sold and a new job for my wife started, we were settled into the new town. Now it was time to figure out how to pay for a new house (and get out of the dungeon apartment), and grad school that would be starting in just a few short months.

 

Our Debt Accumulation Journey (part 2)

In my last post, I left off at a major turning point in our lives. Just a few months after purchasing a home, we decided to accelerate our plans for me to attend grad school. We had accumulated over $250,000 in debt and were trying to figure out how we were going to pay for school, with a price tag approaching $100,000 just for tuition. On top of that, I was primarily interested in attending a specific school over 1,500 miles away.

I was extremely fortunate that my employer at the time had a very generous tuition reimbursement program ($10,000 per year) and I was trying to figure out a way that I could maximize that benefit. There were some Universities near where we were living at the time, but for a variety of reasons I did not want to attend any of them if I had other choice.

So naturally, I started to look at my options. My employer at the time had a national presence, and I started to look at locations I could potentially transfer to that were located near Universities that met the criteria I was looking for in an MBA program. I was looking for top 20 ranked schools that offered evening courses, with strong employer connections for recruiting in my preferred area (Finance). From there I went about identifying managers in the different cities where I would be able to work and asked around in my office for anyone who might know any of them. After learning about the different areas and offices, I reached out via e-mail to some of the branch managers with the hopes of opening a dialogue that could land me a position if one were to open up. My thought was that this would be something that would happen a year or so down the road, if at all.

To my surprise, the first person I e-mailed, quickly responded and after a brief conversation, mentioned that he was going to have an opening in the near future, and to stay in touch. Within a matter of weeks, I was offered a position in my #1 location, nearby my top choice for school to attend, and was given 3 weeks to get there. This happened entirely via phone and e-mail and so just like that, I accepted a lateral job transition across the country in a place I had never actually been.

Because I had sold my car in favor of public transit, and the new city did not have reliable public transportation, the move required the purchase of a 2nd vehicle. Of course, we hadn’t saved anything really for this, so we borrowed another $14,000 for a car. This represented the all-time peak of our indebtedness, both in terms of total amount owed as well as number of different loans.

Thus began a new adventure with my new job in a new state, with the hopes of getting a new graduate degree.