Monthly Archives: September 2014

Step 13: Set a Goal for % of Income to Spend on Debt Repayment?

Reader AriKS asked the following helpful and interesting question:

I am a recent law grad 50(ish) days away from the end of my deferment period. I am just wondering as I plan to take my first foray into the real world and repayment what percentage of your net income you have dedicated to paying down your debt. Thanks!

First off, big BIG congratulations to AriKS on graduation and all that comes next!

I wrote AriKS a short answer, but asked his permission to post his question and a longer and more detailed response once I had the time to think about it.  He generously agreed.

Here’s the short answer to this question.  Mr. DebtFreeJD and I, at a minimum, spend 100% of my after-tax salary on my debt.  I don’t contribute to a 401K, but Mr. DebtFreeJD does.  This means that every month we aim to spend at least 62% of our net (after tax, after 401K) income on my loans.

Here’s the long answer.  We aren’t orthodox about this: some months we spend more than that, and others, we spend less.  Rather than aiming for a strict % amount, we keep some guidelines in mind when determining how much of our money we’ll spend on debt each month.  These include:

  1. All “surprise” or unexpected income goes 100% towards debt.  Do not pass go, do not collect $200.  So, for example, I received an inheritance of about $4,000 recently.  Every dime went to debt.
  2. Mr. DebtFreeJD and I keep a very large emergency fund (consisting of funds in our checking and savings accounts).  Honestly, it’s probably larger than it should be.  Regardless, if there’s too much in that fund at the end of the month, after paying our rent and credit card bills, all the extra goes towards loans.
  3. Conversely, if we have a large expense one month, we may not pay as much towards loans to make sure we maintain a balance we consider reasonable in our emergency fund.  For example, we heat our apartment with oil (cha-ching!) and so had to pay up to fill our heating oil tank.  This costs about a gazillion dollars, and we may pay less towards loans this month.
  4. In general, a big motivating force is that my remaining loans come with approximately an 8% interest rate.  This is HIGH! And so, we’re motivated to pay them off as quickly as possible.  However, everyone’s case is different.  If, for example, your employer has a 401K match (mine does not, which is not unusual for a law firm) you might think harder about making 401K contributions than I do.  Or, if your interest rate is very low, you might have more incentive to invest in stocks while paying off your loans at a slower rate.
  5. At the end of the day, sometimes paying off student loans is not really about the math.  I hate being in debt.  The first financial lesson my parents taught me was to abhor owing other people money.  I am very motivated to get rid of my loans as fast as humanely possible.  Other people may feel differently.  I’d suggest running different scenarios (like, if I contribute x% of my income to student loans, how soon will I be done?), and seeing what feels comfortable for you.
  6. In short, the real answer to this question is:

We contribute as much of our income to student loans as we can without feeling we’ll leave ourselves up a creek without a paddle if a big emergency arises, and one of us can’t work for a while.

 

We also make sure we have a sufficient amount left over to keep Dog DebtFreeJD in the style to which she has become accustomed.

We also make sure we have a sufficient amount left over to keep Dog DebtFreeJD in the style to which she has become accustomed.

 

Versatile Blogger Award: 7 Random Facts

versatile-blogger-award

Thanks Mrs. TIP! I’ve been nominated for the Versatile Blogger Award!  Share seven random facts about myself? Ok! Here goes.

  1. I love smoked oysters.  LOVE.  But Mr. DebtFreeJD thinks (rightfully?) they smell terrible, so I try not to indulge in the habit when he’s around.
  2. Like Mrs. TIP, I tried to teach myself to be ambidextrous when I was a kid.  Mostly in math class.  It turns out I’m just right-handed.  I also still can’t do long division.
  3. On the subject of elementary school, I had a long-running friendship with an imaginary horse.  She mainly appeared during gym class when I was forced to run laps (and would pretend I was galloping on said horse!) and walking to and from school (same).
  4. Mr. DebtFreeJD and I are almost exactly the same height.  For a while, he wished I was a little shorter.  And I wished he was a little taller.  But now, I think we’re happy at the same altitude.
  5. I lived abroad for two years after college, during which time I survived mainly on bread, potatoes and vending-machine hot chocolate.
  6. I wasn’t really allowed to eat junk food or watch TV growing up.  Therefore, during my college freshman year I had a cheeseburger, Cherry Coke, and fries for dinner every night.  While watching Star Trek.*
  7. I’m not really a lawyer.  Pscyh! I really am a lawyer.  But it was a long, and not-straightforward road to get here.

*If you are concerned by the lack of . . . um . . . nutrients during my college and immediate post-college years, rest assured: these days I eat a more varied and healthy diet.

Loans and the Law: The Bankruptcy Code

I’m not ashamed to admit my nerditude – I kind of love the law.  I went into lawyering for that reason.*  I DO NOT love my loans, but I’m certainly spending a lot of time thinking about them these days.  I’m going to combine those two interests into a weekly column on DebtFreeJD: “Loans and the Law!”**

Excited yet?  Well, you should be – I have bunch of posts in the hopper, including on interesting student loan-related lawsuits, pending Congressional bills, and how the modern-day student loan system came to be.

Let’s turn to our first topic: the modern bankruptcy code.   I knew vaguely that student loans weren’t dischargeable in bankruptcy, but never actually read the portion of the bankruptcy code that said that.  You can read the code yourself if you like (and it’s worth taking a gander) but here’s the highlights:

1. The bankruptcy code lists a bunch of categories of debt that can’t be discharged in bankruptcy, including debts for money obtained by fraud, “domestic support obligations,” debts caused by the debtor killing someone while driving drunk, and debts incurred to pay fines or penalties imposed under Federal election law.  So if you have student loans, for the purposes of the bankruptcy code you’ve got some things in common with drunk drivers, people who don’t pay child support, people who break election law, and fradusters.  Interesting, right?

2. Now, for the part we care about: the bankruptcy code says you can’t discharge the following:

unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for–(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Have your eyes glazed over yet?  Well, as I read it, this just means that you can’t get rid of a qualified student loan debt by declaring bankruptcy unless it “would impose an undue hardship on [you] and [your] dependents” to have to pay the loan.

3. As far as I can tell, the “undue hardship” caveat is unique to student loans – it doesn’t apply to any of the other categories of non-dischargeable debt.  Also, the bankruptcy code doesn’t define “undue hardship.” I haven’t read the legislative history here, but sometimes Congress deliberately leaves room for judges to fill in gaps in laws.  Could that be going on here?  I can envision a conversation between Congressmen (or women) going something like:

Congressperson A: We need to make it so people can’t rack up a bunch of loans, and then declare bankruptcy right before they starting making $$$$.

Congressperson B: But what about people who took out student loans and then run into really tough situations and just can’t pay them back?  What do we do about them?

Congressperson A: Yeah.  But how do we draft a law that sensibly distinguishes between the two?

Congressperson B: I’ve got no idea.  Let’s let the judicial branch figure it out. They’d be best able to evaluate individual debtors as a case is on-going.

Congressperson A: Brilliant!

4. If that is what is going on here, the judiciary could in theory have a big impact on the student loan industry by defining “undue hardship” broadly – or narrowly.  If “undue hardship” is defined very broadly (i.e., I’d just rather not pay them so I can have money for a cruise next year!), the student loan industry is probably going to tighten up its standards for lending.  But if “undue hardship” is defined very narrowly (i.e., only if you are totally disabled and will never work again) the student loan industry has less to worry about, because it can pursue you for outstanding loans forever.

Is one outcome better than the other?  What do you think?

*Which is, in my opinion, the only reason to go to law school.  Incurring a bazillion dollars in loans because you couldn’t think of anything better to do after college is, in my not-so-humble-opinion, foolish.  But I digress.

***Disclaimer: THIS IS NOT LEGAL ADVICE!!!!  I’m not a bankruptcy lawyer, and I don’t litigate student loans lawsuits, or anything related.  In sum: #1 I couldn’t offer competent legal advice on this even if I wanted to and #2 I don’t want to and am not offering legal advice.  Lawyer hat is off, blogger hat is on. So don’t rely on anything I say in these columns to make decisions about your own life – but DO think of these as conversation starters on interesting topics.

Step 12: Take a Walk During Lunch

Every person who has ever worked in a 9-5 job* has faced the following dilemma:

Buy lunch out or eat bagged lunch?

This in my head was often reframed as:

Buy exciting lunch and get rejuvenating walk or remain stuck at desk eating boring lunch?

You can guess what the obvious choice was.

Once I started getting serious about my loans, however, $buy $lunch $out . . . was out.  Boring Desk Lunch was the only option.  But, like so many of my problems, this one turned out to be A Failure To Think Intelligently rather than An Intractable Obstacle That Cannot Be Solved.

It used to be that I would spend about 30 minutes picking up lunch: walking to desired lunch location, waiting for said lunch to be made, waiting in line to pay, and returning to office to eat it at my desk.  Now I have a 1-1 replacement: eat lunch at my desk, and go for a thirty minute walk.

And the thirty minute walk kicks the butt of my previous Operation Buy Lunch routine.

Here’s why:

#1  This is what my thirty minute walk looks like:

View from a Lunch Walk

Ok, I’m spoiled rotten.  I do actually work in the downtown of a city – I swear!  However, this is right around the corner.

#2 Stretching my legs in the middle of the work day (under trees!) is like hitting the rest button on my brain.  And boy do I need it – by lunch time, emails and telephone calls have already been flying fast and furious for a bunch of hours, my to-do list has almost always grown, rather than shrank, and I’m starting to forget where I put my brain.

#3 I feel just a tiny bit guilty for sneaking out in the middle of the day.  It’s like eating the last piece of bacon before Mr. DebtFreeJD wakes up.  And as we all could guess, that makes the bacon more delicious.

# 4 Really.  This is what my walk looks like.

Really. Downtown in a real city!

In conclusion, who the heck would pick spending money on the Chinese lunch buffet over this?  Not me!

*My job, alas, is definitely not 9-5, but the same principle applies.

Step 11: Get a Bike (and Ride It!)

Here is my favorite thing about getting serious about paying off debt.

The bicycling.

In late May, when I decided the debt had to go, I started looking around for a bicycle.  I wanted to drive less, having a correspondingly lower gas bill, and to get some frugal exercise (i.e., no gym fees).

I had these thoughts around 9am on a Saturday morning.  Around 3pm on the same Saturday, I ran into my downstairs neighbors.  Here’s the conversation we had:

Friendly Downstairs Guy: Hey, we’re moving out! You want any of our stuff?

Mrs. DebtFreeJD: Nah, thanks.  Unless you have . . . a bike?

Friendly Downstairs Guy:  …  *Walks into his apartment and walks back out.  Throws me a bike key.*  Here ya go! It’s the red one locked up to the fence outside.

It was meant to be, apparently.  I am now the proud owner of a red, somewhat rusted mountain bike.  It’s not in fabulous shape.  Also, because it’s a man’s bike, I can’t ride it to work if I’m wearing a dress or skirt.*

Here are the absolute best things about riding it:

  1. It’s great husband-wife bonding time.  Mr. DebtFreeJD and I like to bike around together on the weekends for fun and exercise.  We often have fabulous chats on these trips.  Sometimes, we’re not talking but just enjoying each other’s company.
  2. We do our weekly grocery shopping this way. This keeps food purchases to what can be carried on the back of a bike, which is totally enough for two people.
  3. Biking back from parties at night. First, you can drink a bit and feel fine about riding your bike.**  Second, I love riding my bike at night.  LOVE.  It’s peaceful and beautiful and I feel kind of cool whizzing around our city on a bike after night falls.  This is special because lawyers don’t get to feel cool that often.
  4. My calf muscles look totally amazing.
  5. I’m burning calories.  Excellent, since I get approximately zero other exercise other than walking Dog DebtFreeJD.
  6. We have gotten to know our city in a way that we wouldn’t if we drove in a car.  Obviously, when you bike there’s no big box between you and the city.  And you can stop and take a long look at interesting things.  By comparison, it’s usually frowned upon if you coming to a screeching halt while driving a car as you shout: “Mr. DebtFreeJD, look at that weird half-tailed squirrel!!!”
  7. You don’t have to park your car when you arrive.  Enough said.
  8. Being outdoors.  I spent a lot of time in my office hunched over a computer.  Spending my free time under the sun (rather than under florescent lights), moving my legs around (rather than stuck in an office chair) is pretty much the best thing ever.

In short, although this post is an Ode to the Bicycle, I feel like I could write an entire book on it. GO BIKES!

DogDebtFreeJD says: HURRAY BIKING!

DogDebtFreeJD says: HURRAY BIKING!

*Er, at least I shouldn’t wear anything but pants while I’m on it.  Unless I want to run the risk of displaying my underwear to all our neighbors.  However, sometimes the choice is: be late to work, or let the neighborhood know how pale my upper legs are.  I will leave it to you to guess what my decision is on that.

**Although I’m not drinking right now.

 

Step 10: Drink Less Booze

While we weren’t exactly living the high life before, Mr. DebtFreeJD and I definitely indulged from time to time in a drink or two.  We had a favorite neighborhood wine bar, and our fridge was usually well-stocked with some interesting craft beers or a nice bottle of wine.

That, alas, is over until DEBT-FREE-MAGEDDON!

I.e., hopefully by next summer.

Even after we got serious about paying down my loans, drinking continued, although in smaller and cheaper amounts.

This September, I decided I’d give it up entirely for a month.  I’d fallen into a bad habit of having a beer or a glass of wine before bed most nights.  I wanted out, and the easiest way to break that habit (I figured on the basis of absolutely no scientific evidence) was to go cold turkey for a while.

Here’s the run-down:

  • It’s definitely cheaper.  Booze (at least in all the forms I’m willing to drink) is much more expensive than my other guilty habits, which are hot chocolate, soda, tea, tea, tea, and more tea.
  • It’s good for my body.  NPR tells me that laying off the sauce for a month is good for your liver and your blood glucose level.  Not regularly, but occasionally, when we’d go to a party I’d have one too many. I’m old enough to get rotten hangovers: that’s gone also.  Yet another example of how saving money has immediate benefits that have nothing to do with more bucks in the bank!
  • It’s satisfying to drop a bad habit.  I found myself really missing my nightly glass of wine or beer.  I’m therefore extra glad I gave it up, since I was clearly dependent on it.  Plus, self-control is hard, and it’s an accomplishment (at least for me) to be able to successfully stop a bad habit in its tracks.  I find myself contemplating another similar experiment next month: maybe no more sugary drinks?*
  • Everyone thinks we’re expecting.  There, I said it.  When you’re a married lady of a certain age (e.g., the around 30 group) and you suddenly start saying “Water for me, thanks” when the waitress comes around at a bar and asks if anyone wants something to drink, you get a lot of knowing looks.  Therefore, I’ve had to come up with a stock excuse.
  • Parties and work events are a little bit awkward: It’s just a little bit tough to be at a party or a work event (or a restaurant with friends) and skip the booze.  And by that, I mean I feel like there’s a little hurdle to jump over to tell the bartender that you’d like a soda or a water when everyone else is getting beers, or to be standing around with water while everyone else has a huge glass of wine.  I know, I know: world’s tiniest violin. But heck, Mr. DebtFreeJD and I are trying to pay off many many tens of thousands of dollars of loans in a short period of time.  I can jump a tiny hurdle in pursuit of a much bigger one!

All, in all, I say success.  Booze-less September (at least so far) is a win.  

*Tea you will have to pry from my cold, dead, fingers to get me to quit it, because life is simply not worth living without it.

Update: Debt Repayment

I should have posted this at the beginning of September, but hey, we’re kind of close.  How’s debt repayment going?

Pretty good. Here’s the stats:

Starting debt: $125,933.50

Current debt: $67,850.72

Debt paid off: $58,082.78

Progress, progress.

Study Break: Shiny Objects

I recently read “Shiny Objects” by James Roberts, who is a marketing professor at Baylor University.  The book is about why people buy things they shouldn’t — written by someone who studies selling things.

It was good, and has lots of interesting tidbits about why people buy things they can’t afford.  I think my favorite section, however, was the couple chapters he spent discussing the evolution of the American Dream.  Dr. Roberts defines this as “a chance for men and women of all races and nationalities, from even the lowest rung of the economic ladder, to attain their fullest stature.”  The book lists a couple of stages in how the American Dream changed from the founding of our country to today:*

Era of the Protest Work Ethic 

This is the founding of our country – and of the American dream.  Hard work and frugality aren’t just virtues designed to get you ahead and save you money: they’re an important part of religious and spiritual beliefs.  At this time, certain Protestants believed that those folks who were “predestined” for salavation or “the Elect” could be told by their work habits and financial success.  More on this from Wikipedia.

How the West Was Won

Quickly, however, people started taking short-cuts to achieving the American Dream.**   One of the most popular attempts to get-rich-quick was the California Gold Rush.  If you – like me – were taught to call this the California Gold Rush of 1849, we’ll put this down as one more thing learned in elementary school that turned out not to be quite true.  The gold rush actually lasted almost a decade.  At its height, the streets of San Francisco were almost deserted.  Unfortunately, most people who participated in it would have been better off sticking with hard work and thrift, rather than selling everything they owned to buy a shovel and a ticket to California.

The First “Sell Lots of Stuff to Lots of People” Era

Then, the Industrial Revolution came along, and with it, the need to sell all the stuff that was being produced.  Since ordinary people could suddenly afford to buy lots more of these cheaper goods, it made sense for the first time to try to advertise to lots of them at the same time.  The Sears catalog comes out.  So do brand name products.  And people start buying things on installment plans.

A few years later, people start being able to buy CARS! due to the “Fordist Deal.”  Henry Ford had the ground-breaking idea that his cars should be cheap enough that the people who worked on his assembly lines could buy them.  This required: (a) making his cars inexpensive and (b) paying his workers enough.  People start mortgaging their houses to buy cars.  There’s even more advertising through the innovative new medium of television.

Depression

Then, like all good things, the party came to an end during the Depression.  The book sees this as a time when the American dream was defined – and distilled down to its core.  Specifically, the American dream was distilled into the “Four Freedoms” discussed by FDR and pictured by Normal Rockwell:

According to Dr. Roberts, the painting of freedom from want was the most popular.  It’s worth thinking about what is NOT in the painting:

Though the plattered turkey is large, no excess or ostentation can be found in the painting.  Over-the-top holiday decorations are noticeably absent, as is the holiday food orgy typically found in America today: only a bowl of fruit and celery adorns the simply appointed table, and everyone is drinking water.

Post World War Two

After taking a few years off during the Depression, consumerism comes back, stronger and better than ever.  Buying things is seen as the antidote to Communism, and people do a lot of it.  Especially of homes, in places like Levittown.  Somehow, homeowner gets equated with the American Dream.  And in addition to buying homes, people start buying lots and lots of newly invented technologies to put in them, like televisions!

1960s-1970s

Then, in the ’60s, people start questioning whether buying lots of stuff was really the right thing to do.  Even with all those questions, however, people did not stop purchasing stuff. Credit card usage became widespread.  In the 70s, buying things got more difficult, as there was soaring inflation and tons of unemployment.  At some point, President Carter gave a speech saying that one solution might be that people should stop buying things they couldn’t afford.  Dr. Roberts suggests the country reacted by electing President Reagan.

“Dot Bomb”/2008

We’re getting close to the present day – and the invention of the internet.  With the internet came a second gold rush – this one for technology stocks.  Lots of people poured a lot of money into .coms – until the bubble burst in 2000/2001.

That bubble, however, had nothing on the 2008 housing bubble explosion.  Remember how owning your own house became equated with the American dream in the 40s and 50s?  According to Dr. Roberts:

But like all dreams, eventually you wake up.  And what we awoke to was a financial cataclysm to rival the Great Depression.  The American Dream had become the American nightmare.

This all was definitely food for thought.  I’m still digesting what I think about this picture of American history.  But one thing that stuck with me was: people over time have had lots of different ideas of what the American Dream means.  At one point, it meant amassing money to prove you were favored by God.  At another, it meant owning your own home.  It has meant everything from trying to get rich with gold nuggets to trying to make it big in xxxx.com.

I don’t think any of these things really capture what the American Dream means to me.  For me, the American Dream is the opportunity to use my own head and my own heart to achieve what I want to in life.  And that’s not owning a lot of stuff, or getting rich.  It’s being sufficiently independent to trod my own path, rather than society — OR LAW SCHOOL DEBT — choosing one for me.  How about you?

*Some of these titles for the different stages I made up myself, with apologies to the author.  Some of them are his own.

**I am skeptical that there was ever an era in U.S. history – or in the history of any other country – where “get rich quick” schemes weren’t common.  See, e.g., El Dorado.