Wednesday, June 29, 2011
Yakezie Carnival
Things
have been and are going to be a little quiet
around here this week since I've been
swamped with a project for work.
Please pardon the interruption to your
regularly scheduled programming (schedule?
what schedule?). In the meantime, I've
been included in the Yakezie Carnival for my
post Is
the expansion of women in professional
schools harming our economy? Since
there's not much happening here, head over
to the Yakezie Carnival to find some
other great articles.
Monday, June 27, 2011
An ode to beans
Beans
are a staple in our house but they are often
a much maligned and neglected food. In
one of my favorite childhood books, Mr.
Popper's Penguins the severity of their
financial situation is demonstrated by
needing to eat beans when trying to make
room in their budget to feed their new pet
penguin:
Convinced to add beans to your grocery bill yet? Let's say you spend $25 a week on meat. According to that Iowa State math you'd only spend $4 on the equivalent in dried beans. Over one year you could save $1,092 by switching from meat to beans. If you're buying something more pricey than hamburger you savings will be bigger. Beans are a key part of making our $25 weekly grocery budget work. For more than you ever wanted to know about bean consumption in the US check out the USDA's website where they note that beans are included in both the vegetable and meat groups of the food pyramid since they provide the benefits of both - a two for one deal!
Okay, beans are great but I have no idea how to cook them, you say. No problem. Start with canned. It's still cheaper than meat and you get all the same health benefits of dried beans for a fraction of the effort. I'll freely admit that we mostly used canned beans since they're so easy. For canned beans you can pretty much just warm them up and add spices. For recipe ideas check out Cheap Healthy Good (they're currently on a break from blogging but have an amazing recipe archive), the New York Times, or your favorite recipe website. Once you start looking there are plenty of bean ideas out there. Think soups, chili, burritos, Italian with white beans, Indian with lentils or chick peas, hummus, dips and spreads. Make sure you get beyond pinto or black beans to try kidney, cannellini, great northern, or garbanzo beans (chick peas). Personally, I don't get tired of beans.
Do you have any great bean recipes? Are they a favorite or feared food for you?
"But what worries me is the money. I have saved a little, and I daresay we can get along as we have other winters. No more roast beef, no more ice cream, not even on Sundays."
"Shall we have beans every day?" asked Janie and Bill, coming in from play. "I'm afraid so," said Mrs. Popper.The only good thing beans seem to have going for them in children's minds is the rhyme. You know, the one that ends in a giggle inducing bodily function. However, beans are a frugal cook's best friend. They're cheap at around $1 per pound dry or $.50-$1 per can and store well so you can stock up a bit when they go on sale. They're also incredibly healthy. The Mayo Clinic calls them "among the most versatile and nutritious foods available".
"Legumes are typically low in fat, and high in fiber, folate, potassium, iron and magnesium. Beans and other legumes can be a healthy substitute for meat, which has more fat and cholesterol."Beans are a great meat substitute. Iowa State lists dried beans as their most economical source of protein followed by peanut butter and canned beans. They note that a one ounce serving of hamburger might be $.25 while the equivalent serving of dried beans by protein would be $.04. When combined with a grain like rice or pasta, even if it's not at the same meal, beans form a complete protein. Dietary guidelines recommend that the average person triple their consumption of beans from one cup to three. Because of their water and fiber content beans help you feel full faster, aiding in weight loss. The fiber also has the added bonus of helping you stay full longer than meat since it's slower to digest. In one study people who ate beans weighed seven pounds less than those who didn't. Several types of beans are also high in antioxidants.
Convinced to add beans to your grocery bill yet? Let's say you spend $25 a week on meat. According to that Iowa State math you'd only spend $4 on the equivalent in dried beans. Over one year you could save $1,092 by switching from meat to beans. If you're buying something more pricey than hamburger you savings will be bigger. Beans are a key part of making our $25 weekly grocery budget work. For more than you ever wanted to know about bean consumption in the US check out the USDA's website where they note that beans are included in both the vegetable and meat groups of the food pyramid since they provide the benefits of both - a two for one deal!
Okay, beans are great but I have no idea how to cook them, you say. No problem. Start with canned. It's still cheaper than meat and you get all the same health benefits of dried beans for a fraction of the effort. I'll freely admit that we mostly used canned beans since they're so easy. For canned beans you can pretty much just warm them up and add spices. For recipe ideas check out Cheap Healthy Good (they're currently on a break from blogging but have an amazing recipe archive), the New York Times, or your favorite recipe website. Once you start looking there are plenty of bean ideas out there. Think soups, chili, burritos, Italian with white beans, Indian with lentils or chick peas, hummus, dips and spreads. Make sure you get beyond pinto or black beans to try kidney, cannellini, great northern, or garbanzo beans (chick peas). Personally, I don't get tired of beans.
Do you have any great bean recipes? Are they a favorite or feared food for you?
Friday, June 24, 2011
Debt boosts self-esteem??
There's
an article on research from Ohio State
University claiming that debt
boosts the self esteem of
young adults. These people have
clearly forgotten about the difference
between correlation and causality.
These researchers hypothesized that students would have a self esteem boost from debt because it was allowing them to accomplish great things in their lives like going to college through student loans or buying books on their credit cards. Hold on a sec, how many college kids do you know where the majority of their credit card debt was because of textbooks? It's unlikely and the researchers couldn't know what the students were buying. So they came up with an alternate hypothesis:
This explanation is a lot simpler than the researchers dual explanation of how debt improves self esteem and having three different reasons for the three different correlations by students' economic class. Occam's razor, anyone?
Do you think debt causes high self esteem or vice versa? What do you think about the OSU study?
Researchers found that the more credit card and college loan debt held by young adults aged 18 to 27, the higher their self-esteem and the more they felt like they were in control of their lives. The effect was strongest among those in the lowest economic class.Okay, they found a correlation between self esteem and debt. They can't have found causality because they were examining surveys of students. Researchers did not control who had debt and who didn't. If they had taken a large group of students, measured their self esteem, randomly assigned half to receive debt and half to be a control group then they could have measured debt's effect on self confidence. But as it is, all they know is that the two, debt and self confidence, go hand in hand. They don't know why.
Only the oldest of those studied – those aged 28 to 34 – began showing signs of stress about the money they owed.
These researchers hypothesized that students would have a self esteem boost from debt because it was allowing them to accomplish great things in their lives like going to college through student loans or buying books on their credit cards. Hold on a sec, how many college kids do you know where the majority of their credit card debt was because of textbooks? It's unlikely and the researchers couldn't know what the students were buying. So they came up with an alternate hypothesis:
“Obviously, they are probably using credit cards for multiple purposes. Along with education spending, they could be using credit cards to pay for non-essential items. They may feel good about their debt only because it allows them to buy the things they want without having to delay gratification.”That seems a bit more reasonable to me. But there's a strong class factor in the correlation between self-esteem and debt:
Results showed that those in the bottom 25 percent in total family income got the largest boost from holding debt – the more debt they held, both education and credit card, the bigger the positive impact on their self-esteem and mastery.I'm thinking that not only did these researchers jump to causality when all they had was correlation, but that they also jumped to the wrong causality. My bet would be that debt doesn't cause higher self esteem, but that higher self esteem encourages students to take on more debt. It would be a stronger correlation in the lower family incomes because these students have the least chance of paying off their debts. You have to be ballsy to take on debt when it's more than your family's annual income. You don't have to be confident or have high self esteem to take on debt if your family has a high income because you have a big safety net.
Those in the middle class didn’t see any impact on their self-esteem and mastery by holding educational debt, perhaps because it is so common among their peers that it is seen as normal. But they did see boosts from holding credit-card debt – the more debt, the more positive effects.
On the other hand, the study found that young adults who came from the most affluent families received no boost at all from holding debt. “The wealthiest young people have the most resources and options available to them, so debt is not an issue for them,” Dwyer said.
This explanation is a lot simpler than the researchers dual explanation of how debt improves self esteem and having three different reasons for the three different correlations by students' economic class. Occam's razor, anyone?
Do you think debt causes high self esteem or vice versa? What do you think about the OSU study?
Thursday, June 23, 2011
Your home is an investment... whether you like it or not
Your
home is an investment.
There. I said it. Call the
personal finance blogging police to take me
away. Buying a house is the biggest
purchase most people will ever make and it's
foolish to not view it as an
investment. Sure, as an investment
your home is extremely illiquid but just
because something is illiquid doesn't mean
that it isn't an investment, it just means
that we value its return less highly.
I'm not saying you should be banking on your house appreciating significantly; there's little historical evidence for big returns. This Case-Shiller chart puts growth of homes at 40% over 111 years. 40% sounds great but it's a .3% annualized return, significantly less than what you can get from a CD or t-bill. Some people might be able to beat the market with houses just like others have had some success in beating the stock market, the advantage being that real estate is a less efficient market and insider trading isn't illegal. But for most people the average returns are about what you should expect in the long run and having a single house considered as a major portion of your portfolio would leave most people woefully undiversified. No, your home is an investment in keeping a roof over your head, keeping you warm and dry, and buying is just one way of financing that comfort.
When you buy a house you're basically buying out your housing costs for the foreseeable future. (We're going to ignore utilities since you'll be paying them in either case) So let's say you're renting. Your rent is $700 a month and you're pretty happy with the place but you want to consider buying a house. If you were a completely rational consumer you would say "hmmm, buying instead of renting basically pays for my housing costs for perpetuity. A nest egg of $140,000 would do the same for me right now with a 6% return." A portfolio of $140,000 at a 6% return will yield you the $700 a month you need to pay your rent. In other words, all other things being equal (which of course they aren't), your house shouldn't cost more than $140,000 since otherwise it would be a better deal to rent. To be totally accurate you'd also look at funding maintenance, property taxes and additional insurance costs of your house and add them to the purchase price along with the transaction cost. So if you think these will add up to, say, $5000 a year then you should add $83,000 to your purchase price since that's what you'd need to fund those expenses at a 6% return. So you'd compare your $140,000 nest egg for renting against the price of the perspective house plus your $83,000 maintenance and tax nest egg.
Another way to look at it, if you're getting fancy, would be to take the net present value of all your rent payments and use that as your housing payment. The NPV of 20 years of your $700 rent payments is $104,747. Oh no you say, we really should be considering 50 years. Okay, that's $140,800. Remember the further in the future it is the less valuable it is so extending your time horizon has a diminishing effect on something's NPV. Again, you'd want to repeat this process for maintenance and taxes and add that to the purchase price of the house to be comparing apples to apples.
NPV versus a "nest egg" really should work out to about the same thing if you use the same rates for both. It's just a different way of looking at the same thing. This is really all rent versus buy calculators do, you can just do it yourself now. Comparing your house to a "nest egg" is also valuable because it allows you to see the flexibility that renting can buy and the true cost of your current housing situation. This can be a powerful tool for any expense in your life. Like spending an extra $50 a month on utilities to keep your house at the perfect temperature requires a nest egg of $10,000 with a 6% return. To some people that sounds like a great bargain to others $10,000 is totally worth setting the thermostat a little higher in the summer and lower in the winter.
The key takeaway here is that purchasing a house based solely on what you can afford is not a rational way to buy a house and in some cases it's stupid. You don't go to the mall and say "well I think I can afford to buy a $1,000 shirt since I bring in $5,000 a month and on my credit card over 30 years that shirt will only cost me XYZ per month and I'm comfortable with that based on some rule of thumb my personal shopper told me about how much debt I can carry." Most people will compare their options and have an idea of what they should be paying for a shirt based on their other options and will buy the item they think will be cheapest in the long run. (Again, all other things being equal and of course they aren't) You'll consider a few brands. One might be cheaper and you'll have to replace the shirt more often, but you might pay for quality and buy a higher price upfront to avoid the series of payments you'd have to make replacing the cheaper shirt.
Okay, to be totally accurate you'd have to take into account the appreciation rate of your house in your NPV calculations and comparison to renting or other houses, but I haven't since that rate historically hasn't been particularly high or consistent and you'd have to sell the house altogether to realize it. This is a super oversimplified analysis, however it illustrates the same point that a more complex analysis would just with less obfuscation. Your house purchase is as much as an investment as a dividend yielding stock bank rolling your rent. Terming your house a home and explicitly not an investment is not going to help you financially.
Is purchasing a house an investment? Why or why not?
I'm not saying you should be banking on your house appreciating significantly; there's little historical evidence for big returns. This Case-Shiller chart puts growth of homes at 40% over 111 years. 40% sounds great but it's a .3% annualized return, significantly less than what you can get from a CD or t-bill. Some people might be able to beat the market with houses just like others have had some success in beating the stock market, the advantage being that real estate is a less efficient market and insider trading isn't illegal. But for most people the average returns are about what you should expect in the long run and having a single house considered as a major portion of your portfolio would leave most people woefully undiversified. No, your home is an investment in keeping a roof over your head, keeping you warm and dry, and buying is just one way of financing that comfort.
When you buy a house you're basically buying out your housing costs for the foreseeable future. (We're going to ignore utilities since you'll be paying them in either case) So let's say you're renting. Your rent is $700 a month and you're pretty happy with the place but you want to consider buying a house. If you were a completely rational consumer you would say "hmmm, buying instead of renting basically pays for my housing costs for perpetuity. A nest egg of $140,000 would do the same for me right now with a 6% return." A portfolio of $140,000 at a 6% return will yield you the $700 a month you need to pay your rent. In other words, all other things being equal (which of course they aren't), your house shouldn't cost more than $140,000 since otherwise it would be a better deal to rent. To be totally accurate you'd also look at funding maintenance, property taxes and additional insurance costs of your house and add them to the purchase price along with the transaction cost. So if you think these will add up to, say, $5000 a year then you should add $83,000 to your purchase price since that's what you'd need to fund those expenses at a 6% return. So you'd compare your $140,000 nest egg for renting against the price of the perspective house plus your $83,000 maintenance and tax nest egg.
Another way to look at it, if you're getting fancy, would be to take the net present value of all your rent payments and use that as your housing payment. The NPV of 20 years of your $700 rent payments is $104,747. Oh no you say, we really should be considering 50 years. Okay, that's $140,800. Remember the further in the future it is the less valuable it is so extending your time horizon has a diminishing effect on something's NPV. Again, you'd want to repeat this process for maintenance and taxes and add that to the purchase price of the house to be comparing apples to apples.
NPV versus a "nest egg" really should work out to about the same thing if you use the same rates for both. It's just a different way of looking at the same thing. This is really all rent versus buy calculators do, you can just do it yourself now. Comparing your house to a "nest egg" is also valuable because it allows you to see the flexibility that renting can buy and the true cost of your current housing situation. This can be a powerful tool for any expense in your life. Like spending an extra $50 a month on utilities to keep your house at the perfect temperature requires a nest egg of $10,000 with a 6% return. To some people that sounds like a great bargain to others $10,000 is totally worth setting the thermostat a little higher in the summer and lower in the winter.
The key takeaway here is that purchasing a house based solely on what you can afford is not a rational way to buy a house and in some cases it's stupid. You don't go to the mall and say "well I think I can afford to buy a $1,000 shirt since I bring in $5,000 a month and on my credit card over 30 years that shirt will only cost me XYZ per month and I'm comfortable with that based on some rule of thumb my personal shopper told me about how much debt I can carry." Most people will compare their options and have an idea of what they should be paying for a shirt based on their other options and will buy the item they think will be cheapest in the long run. (Again, all other things being equal and of course they aren't) You'll consider a few brands. One might be cheaper and you'll have to replace the shirt more often, but you might pay for quality and buy a higher price upfront to avoid the series of payments you'd have to make replacing the cheaper shirt.
Okay, to be totally accurate you'd have to take into account the appreciation rate of your house in your NPV calculations and comparison to renting or other houses, but I haven't since that rate historically hasn't been particularly high or consistent and you'd have to sell the house altogether to realize it. This is a super oversimplified analysis, however it illustrates the same point that a more complex analysis would just with less obfuscation. Your house purchase is as much as an investment as a dividend yielding stock bank rolling your rent. Terming your house a home and explicitly not an investment is not going to help you financially.
Is purchasing a house an investment? Why or why not?
Wednesday, June 22, 2011
Eat slower? Spend slower!
Prevailing wisdom in the health world is
that most people should eat more
slowly. Slowing down, savoring
every mouthful and putting your fork down
between bites has been shown to help you
loose weight, feel full sooner in your
meal and it probably doesn't hurt your
enjoyment of what you're eating either.
There are all sorts of tactics that have
been developed to help people eat slower and
thus eat less like eating with chopsticks,
holding your fork in your non-dominant hand,
having an interesting conversation while you
eat so you spend more time talking between
bites, counting to 30 before taking another
bite, or chewing a minimum number of times
before swallowing.
Why can't we do the same thing in our financial lives? If you can get yourself to spend at a slower rate you will spend less overall and will be able to save more. It seems pretty logical to me that if you can draw out a purchase you might get more enjoyment out of it. You also can also delay additional purchases by stretching what you already have to last a little longer. Research has shown that delaying consumption can increase the amount of happiness you get from a purchase and that several small purchases can bring more happiness than one expensive one which runs parallel to the idea that you my eat less if you eat several small meals a day. There's general research about how you can spend your money more effectively to be happy, but what specifically can we do to slow down the rate at which we spend?
You can try putting physical distance as a barrier between you and spending. I try not to drive during the week and it's about a quarter of a mile to anyplace where I can spend money. So most of the time the only buying that gets done during the week is crucial stuff like groceries, toiletries, or public transit money.
I've heard of many people having a daily spending limit and a mandatory waiting period for large purchases beyond the limit that scales up with price. That directly postpones consumption and spending potentially in a big way since it's proportional to the amount you want to spend.
I sometimes find that making a single small purchase will satisfy my need for spending for quite some time. For example, a few months ago I felt like my work clothes were all not in great shape and I'd need to replace all of them. I went to the mall, bought one shirt and was done. I haven't been back since and have been making do with what I have which wasn't as bad as I feared. Similarly, when I have a huge craving for dessert I'll sometimes take my SO with me to a small store that sells single chocolates for $.30 and the craving will be satisfied for a few days.
You could put everything you want on a wish list if online shopping is your thing. If you know you can always find it later it may be easier to put it aside for a while. Plus with an online wish list maybe someone will buy that book, scarf or tool for you and you won't have to spend any money at all.
There's also tons of talk in personal finance blogs about how many people spend less if they only spend cold, hard cash instead of using a credit or debit card. Research has shown that people are more reluctant to spend if they carry bills in large denominations. Maybe you can slow your spending by only carrying one $20 bill. Just be careful once you break it.
What are the tricks you can put in place in your life to slow you spending? Do you think this can help you spend less and still feel satisfied?
Why can't we do the same thing in our financial lives? If you can get yourself to spend at a slower rate you will spend less overall and will be able to save more. It seems pretty logical to me that if you can draw out a purchase you might get more enjoyment out of it. You also can also delay additional purchases by stretching what you already have to last a little longer. Research has shown that delaying consumption can increase the amount of happiness you get from a purchase and that several small purchases can bring more happiness than one expensive one which runs parallel to the idea that you my eat less if you eat several small meals a day. There's general research about how you can spend your money more effectively to be happy, but what specifically can we do to slow down the rate at which we spend?
You can try putting physical distance as a barrier between you and spending. I try not to drive during the week and it's about a quarter of a mile to anyplace where I can spend money. So most of the time the only buying that gets done during the week is crucial stuff like groceries, toiletries, or public transit money.
I've heard of many people having a daily spending limit and a mandatory waiting period for large purchases beyond the limit that scales up with price. That directly postpones consumption and spending potentially in a big way since it's proportional to the amount you want to spend.
I sometimes find that making a single small purchase will satisfy my need for spending for quite some time. For example, a few months ago I felt like my work clothes were all not in great shape and I'd need to replace all of them. I went to the mall, bought one shirt and was done. I haven't been back since and have been making do with what I have which wasn't as bad as I feared. Similarly, when I have a huge craving for dessert I'll sometimes take my SO with me to a small store that sells single chocolates for $.30 and the craving will be satisfied for a few days.
You could put everything you want on a wish list if online shopping is your thing. If you know you can always find it later it may be easier to put it aside for a while. Plus with an online wish list maybe someone will buy that book, scarf or tool for you and you won't have to spend any money at all.
There's also tons of talk in personal finance blogs about how many people spend less if they only spend cold, hard cash instead of using a credit or debit card. Research has shown that people are more reluctant to spend if they carry bills in large denominations. Maybe you can slow your spending by only carrying one $20 bill. Just be careful once you break it.
What are the tricks you can put in place in your life to slow you spending? Do you think this can help you spend less and still feel satisfied?
Tuesday, June 21, 2011
Round up of features
The Carnival
of Personal Finance came out a little
late last week so it's only fitting that I'm
a little late in linking back. They
featured my post on Why
Student Loans are the Worst Kind of
Debt. Thanks to Revanche for
hosting!
I'm also late in mentioning my guest post over at Mom's Plans on how to afford your child's college education. If you've come over from there welcome! Drop me a line if you have comments or something you'd like to read about.
More timely, the Festival of Frugality just came out over at Debt Free by 30. My post on The graduate student lifestyle was featured there.
I've also got a guest post up at Early Retirement Extreme talking about my long term goal of becoming financially independent and how an MBA plays into it. If you've come over from there welcome! Drop me a line if you have comments or something you'd like to read about.
Finally, I was included in the Yakezie Carnival at Not Made of Money with But don’t take my word for it…. Mortgage debt.
And in case you're sick of hearing from me here are a few posts I liked from the carnivals:
I'm also late in mentioning my guest post over at Mom's Plans on how to afford your child's college education. If you've come over from there welcome! Drop me a line if you have comments or something you'd like to read about.
More timely, the Festival of Frugality just came out over at Debt Free by 30. My post on The graduate student lifestyle was featured there.
I've also got a guest post up at Early Retirement Extreme talking about my long term goal of becoming financially independent and how an MBA plays into it. If you've come over from there welcome! Drop me a line if you have comments or something you'd like to read about.
Finally, I was included in the Yakezie Carnival at Not Made of Money with But don’t take my word for it…. Mortgage debt.
And in case you're sick of hearing from me here are a few posts I liked from the carnivals:
- How to Overcome Frugal Fatigue at Cool to be Frugal
- How Far is Too Far to Live Debt Free? at Minting Nickels
- If It Feels Good Do It: Maybe Strategic Defaults Aren’t So Bad After All at Len Pezo
- Are Experiences The New Stuff? at Financial Uproar
Why I'd rather take out student loans than dip into my 401k
As I
get closer to the point where I have to pay
my fall bill, I'm running and re-running the
numbers on how much and how I can pay.
The good news is that I'm fairly certain I
can
pay
for my first year including living
expenses in cash. The bad news is
that I'm facing an estimated $25,000 gap in
my expenses for next year based on my
current assets. There are many ways I
could fund that gap without having to take
on credit card debt (thereby protecting and
maintaining my high credit report
score) including potentially a
combination of working more, living on less,
withdrawing funds from my Roth IRA, taking
out student loans or withdrawing money from
my 401k But I know one thing for sure.
I'm leaving the 401k money alone. I'd
rather take out student loans than raid my
401k.
Let's run the numbers. Assume I can save $4,500 from my internship or work next summer towards my bill for next year making my outstanding gap $20,500. The amount saved isn't important, it just makes the numbers work out nicely since $20,500 is the limit on Stafford loans for one year. I can either fund the $20,500 gap through either student loans or my 401k.
So let's compare the two. First, if I use student loans, I'll be taking out subsidized and unsubsidized Stafford loans. These are Federal loans and generally have some of the more favorable terms available to grad students.
The table above shows the break down of the two types of loans, the interest rates while in school and after, and the balance at graduation. So the assumptions around the student loan funding option are as follows:
I'm assuming that I can pay off the student loans in three years after graduation which seems conservative enough. The payments and interest paid are calculated around that assumption.
Second, I have the option of withdrawing funds from my 401k. However, I'll pay a penalty of 10% on that money as well as having to pay income tax on it. So I'll have to withdraw more than $20,500 in order to have $20,500 left after taxes and penalties to pay my expenses.
So I'd have to withdraw $29,286 from my 401k to fund the $20,500 gap in expenses.
Okay, we've outlined two options and some assumptions. Let's further assume that I'd either put money in my 401k or use it to pay my student loans. I'll ignore the fact that you contribute pre-tax to the 401k and use post-tax money to pay student loans. We're also ignoring the tax deduction for student loan interest. So how does this play out:
At the end of the day the student loans win by a long shot. With the assumptions I've made I come out over $11,000 ahead by taking out student loans instead of dipping into my 401k savings. This difference would be higher with better investment returns and if you account for contributing pre-tax money into your 401k instead of using post-tax money to pay student loans. Assuming I'd contribute twelve times the monthly student loan payment to my 401k isn't accurate; I'd likely contribute around 50% more than that to the 401k to see the same effect on my available cash. On the other hand, student loan interest paid is deductible, but I'm only paying about $2,300 in interest over the life of the loan. So overall I'm probably underestimating the benefit of taking out student loans instead of withdrawing money from my 401k.
The big caveat here is that most MBAs will be leaving their employers before starting school and could roll their 401k money into an IRA which has much more favorable terms for withdrawals used for qualified educational expenses. I won't be, however, since I have a solo 401k and may be able to contribute to it a bit while in school and (hopefully) won't need the funds either way. We know that obtaining a masters of business administration can get expensive, but there are at least some reasonable options.
What would you do in this situation?
Let's run the numbers. Assume I can save $4,500 from my internship or work next summer towards my bill for next year making my outstanding gap $20,500. The amount saved isn't important, it just makes the numbers work out nicely since $20,500 is the limit on Stafford loans for one year. I can either fund the $20,500 gap through either student loans or my 401k.
So let's compare the two. First, if I use student loans, I'll be taking out subsidized and unsubsidized Stafford loans. These are Federal loans and generally have some of the more favorable terms available to grad students.
|
Loan type
|
Amount
|
Origin. fee
|
In School
|
Rate
|
Bal. at grad
|
|
Sub. Stafford
|
$8,500
|
1%
|
0
|
6.8%
|
$8,585
|
|
Unsub. Stafford
|
$12,000
|
1%
|
6.8%
|
6.8%
|
$12,936
|
The table above shows the break down of the two types of loans, the interest rates while in school and after, and the balance at graduation. So the assumptions around the student loan funding option are as follows:
|
Student Loans
|
|
|
Gap
|
$20,500
|
|
Interest Rate
|
6.8%
|
|
Balance at graduation
|
$21,521
|
|
Monthly payment
|
$662.54
|
|
# of payments
|
36
|
|
Total interest paid
|
$2,330
|
I'm assuming that I can pay off the student loans in three years after graduation which seems conservative enough. The payments and interest paid are calculated around that assumption.
Second, I have the option of withdrawing funds from my 401k. However, I'll pay a penalty of 10% on that money as well as having to pay income tax on it. So I'll have to withdraw more than $20,500 in order to have $20,500 left after taxes and penalties to pay my expenses.
|
401k
|
|
|
Gap
|
$20,500
|
|
Federal tax rate
|
15%
|
|
State tax rate
|
5%
|
|
Penalty
|
10%
|
|
Withdrawn from 401k
|
$29,286
|
|
Investment return
|
6%
|
So I'd have to withdraw $29,286 from my 401k to fund the $20,500 gap in expenses.
Okay, we've outlined two options and some assumptions. Let's further assume that I'd either put money in my 401k or use it to pay my student loans. I'll ignore the fact that you contribute pre-tax to the 401k and use post-tax money to pay student loans. We're also ignoring the tax deduction for student loan interest. So how does this play out:
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
||
|
401k
|
Retirement accounts
|
$70,000
|
$44,914
|
$47,609
|
$58,416
|
$69,872
|
$82,014
|
|
Loan balance
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
|
|
Net
|
$70,000
|
$44,914
|
$47,609
|
$58,416
|
$69,872
|
$82,014
|
|
|
Loans
|
Retirement accounts
|
$70,000
|
$74,200
|
$78,652
|
$83,371
|
$88,373
|
$93,676
|
|
Loan balance
|
$0
|
$20,500
|
$21,521
|
$14,828
|
$7,665
|
$0
|
|
|
Net
|
$70,000
|
53700
|
$57,131
|
$68,543
|
$80,708
|
$93,676
|
At the end of the day the student loans win by a long shot. With the assumptions I've made I come out over $11,000 ahead by taking out student loans instead of dipping into my 401k savings. This difference would be higher with better investment returns and if you account for contributing pre-tax money into your 401k instead of using post-tax money to pay student loans. Assuming I'd contribute twelve times the monthly student loan payment to my 401k isn't accurate; I'd likely contribute around 50% more than that to the 401k to see the same effect on my available cash. On the other hand, student loan interest paid is deductible, but I'm only paying about $2,300 in interest over the life of the loan. So overall I'm probably underestimating the benefit of taking out student loans instead of withdrawing money from my 401k.
The big caveat here is that most MBAs will be leaving their employers before starting school and could roll their 401k money into an IRA which has much more favorable terms for withdrawals used for qualified educational expenses. I won't be, however, since I have a solo 401k and may be able to contribute to it a bit while in school and (hopefully) won't need the funds either way. We know that obtaining a masters of business administration can get expensive, but there are at least some reasonable options.
What would you do in this situation?
Monday, June 20, 2011
Is the expansion of women in professional schools harming our economy?
I
thought we had a great discussion about women
in blogging and management last week
and I loved hearing everyone's opinions in
the comments. I'm hoping we can expand
on that discussion with today's post.
There's a fascinating OpEd piece in the The New York Times that analyzes how women differ from men as doctors and how our increasing percentage of women med school students impacts our supply of doctors long term. I encourage you to read it since the author is much more articulate than I will be in summarizing and it frames the discussion and problem quite well that I'm mentally digging through here.
Essentially, there is a limited amount of funds for residencies, creating a bottle neck and limiting the number of doctors we can field. Women are applying for these in record numbers since they're attending medical school in record numbers. Women now compose 48% of medical school graduates, but the American Medical Association has survey data indicating they work, on average, 4.5 hours less per week and see fewer patients than their male peers. So as we move towards a more gender balanced field of doctors we are likely seeing doctors work less. The OpEd rightly points out that this is a big problem since we face major doctor shortages in key areas. This problem is compounded since women disproportionately enter many of the areas of shortage and in addition to working fewer hours they are also more likely to work part time and take a leave of absence.
So assuming we can't significantly change the number of doctors created each year, which the OpEd suggests is a fair assumption since residencies are federally funded and we all know about the budget deficit, and we need more patient services than we have, we have to ask if doctors can be used more efficiently or if they can be more productive. And since we're facing this shortage it begs a question around if training women doctors is the most efficient usage of our limited training resources since the productivity of women doctors is significantly lower than male doctors.
Please note that I am not advocating any changes to how professional schools or medical schools select their students. I think the more voices and diversity across all metrics we can get in these professions, representing different points of view, the more productive and effective the profession will be. However, I do think this area is deserving of examination and discussion since it's the only way we can work to develop ideas to improve the situation.
I've heard similar sentiments before. I have a friend that attended Princeton who in private confided that he wished the school would go back to being all male and thought the institution would have more impact that way - the female students were not nearly as professional minded as the male students and their career services office found that a large percentage of them did not work full time more than a few years out from graduation. I have a female friend from Texas who resented her female classmates to some extent because, as she put it, they were in college to get their MRS (Mrs.) not a degree for real career or profession.
We have, as a society, have come a long way in the inclusion of women and we still have a long way to go when it comes to some areas (glass ceiling anyone?). Certainly bringing women into the workforce has created a major increase in economic productivity and has brought new ideas and methodologies to market. However, these sentiments above are less than three years old and have some basis in fact as the survey data from the American Medical Association shows. So here's the question: if women are making up a larger and larger percentage (though still not 50% in many cases) of students at our professional schools but aren't as productive as men are we losing out economically as a society?
The number of spots in residency programs is limited by the federal government and the number of students who can attend top programs in business and law is limited as well. I would guess that business and law school graduates have similar trends to medical school graduates with women leaving the work force at a higher rate or contributing at a lower rate (time-wise) than men. In this context what is the best way to allocate our limited educational resources? How do we account for the wide standard deviation in productivity within a gender? There are plenty of women who are more productive than the average man in their profession and there are plenty of men who are less productive than the average woman, eliminating hard and fast rules. How can we encourage women to be more economically productive and meet their needs for work life balance in a cost-effective way? We also need to note that commitment to family and work life balance isn't limited to women. We're also seeing more stay at home dads or fathers adapting their work schedules to spend more time with their children just not in nearly the same numbers or to the same degree as women.
I think this will be constant and growing issue over the next decade. Baby boomers with more traditional demographics are retiring or will be soon and so the new demographic with more women will become a larger force and more prominent. We're also, as previously mentioned, seeing more women attending top professional programs. This Wall Street Journal article puts the Harvard Business School class of 2013 at 39% women and Wharton's at 45% which is an enormous gain from ten, much less twenty, years ago though still not the 50% that would be truly representative. I, personally, am a little worried that women's continued interest in work life balance and significant deviation from men in the number of hours and years they are willing to work might reverse some of these gains. Why would Wharton, Princeton, or any other school or company continue to select women if they spend less time in the workplace? There is public sentiment to support inclusion of women, but I don't know if it's enough to overcome either women's own preferences in how they work or other societal pressures on them to be the primary caregiver to their children. Do you think that the workplace values the contribution of women enough to adapt to their needs?
Okay, wow, that's a lot isn't it? I certainly can't wrap my head around all the implications, but I would love to hear your thoughts.
There's a fascinating OpEd piece in the The New York Times that analyzes how women differ from men as doctors and how our increasing percentage of women med school students impacts our supply of doctors long term. I encourage you to read it since the author is much more articulate than I will be in summarizing and it frames the discussion and problem quite well that I'm mentally digging through here.
Essentially, there is a limited amount of funds for residencies, creating a bottle neck and limiting the number of doctors we can field. Women are applying for these in record numbers since they're attending medical school in record numbers. Women now compose 48% of medical school graduates, but the American Medical Association has survey data indicating they work, on average, 4.5 hours less per week and see fewer patients than their male peers. So as we move towards a more gender balanced field of doctors we are likely seeing doctors work less. The OpEd rightly points out that this is a big problem since we face major doctor shortages in key areas. This problem is compounded since women disproportionately enter many of the areas of shortage and in addition to working fewer hours they are also more likely to work part time and take a leave of absence.
So assuming we can't significantly change the number of doctors created each year, which the OpEd suggests is a fair assumption since residencies are federally funded and we all know about the budget deficit, and we need more patient services than we have, we have to ask if doctors can be used more efficiently or if they can be more productive. And since we're facing this shortage it begs a question around if training women doctors is the most efficient usage of our limited training resources since the productivity of women doctors is significantly lower than male doctors.
Please note that I am not advocating any changes to how professional schools or medical schools select their students. I think the more voices and diversity across all metrics we can get in these professions, representing different points of view, the more productive and effective the profession will be. However, I do think this area is deserving of examination and discussion since it's the only way we can work to develop ideas to improve the situation.
I've heard similar sentiments before. I have a friend that attended Princeton who in private confided that he wished the school would go back to being all male and thought the institution would have more impact that way - the female students were not nearly as professional minded as the male students and their career services office found that a large percentage of them did not work full time more than a few years out from graduation. I have a female friend from Texas who resented her female classmates to some extent because, as she put it, they were in college to get their MRS (Mrs.) not a degree for real career or profession.
We have, as a society, have come a long way in the inclusion of women and we still have a long way to go when it comes to some areas (glass ceiling anyone?). Certainly bringing women into the workforce has created a major increase in economic productivity and has brought new ideas and methodologies to market. However, these sentiments above are less than three years old and have some basis in fact as the survey data from the American Medical Association shows. So here's the question: if women are making up a larger and larger percentage (though still not 50% in many cases) of students at our professional schools but aren't as productive as men are we losing out economically as a society?
The number of spots in residency programs is limited by the federal government and the number of students who can attend top programs in business and law is limited as well. I would guess that business and law school graduates have similar trends to medical school graduates with women leaving the work force at a higher rate or contributing at a lower rate (time-wise) than men. In this context what is the best way to allocate our limited educational resources? How do we account for the wide standard deviation in productivity within a gender? There are plenty of women who are more productive than the average man in their profession and there are plenty of men who are less productive than the average woman, eliminating hard and fast rules. How can we encourage women to be more economically productive and meet their needs for work life balance in a cost-effective way? We also need to note that commitment to family and work life balance isn't limited to women. We're also seeing more stay at home dads or fathers adapting their work schedules to spend more time with their children just not in nearly the same numbers or to the same degree as women.
I think this will be constant and growing issue over the next decade. Baby boomers with more traditional demographics are retiring or will be soon and so the new demographic with more women will become a larger force and more prominent. We're also, as previously mentioned, seeing more women attending top professional programs. This Wall Street Journal article puts the Harvard Business School class of 2013 at 39% women and Wharton's at 45% which is an enormous gain from ten, much less twenty, years ago though still not the 50% that would be truly representative. I, personally, am a little worried that women's continued interest in work life balance and significant deviation from men in the number of hours and years they are willing to work might reverse some of these gains. Why would Wharton, Princeton, or any other school or company continue to select women if they spend less time in the workplace? There is public sentiment to support inclusion of women, but I don't know if it's enough to overcome either women's own preferences in how they work or other societal pressures on them to be the primary caregiver to their children. Do you think that the workplace values the contribution of women enough to adapt to their needs?
Okay, wow, that's a lot isn't it? I certainly can't wrap my head around all the implications, but I would love to hear your thoughts.
Friday, June 17, 2011
But don't take my word for it.... Mortgage debt
Paying
off your mortgage early is a perennial
sources of debate on personal finance blogs
and taking out a mortgage in the first place
is also debated, though to a lesser extent.
I've never had a mortgage, but I've also
never purchased a house. My SO and I were
approved for a mortgage while house hunting
before I decided to attend business school.
Our plan was to put 20% down and ensure that
our 15 year, fixed-rate mortgage payment
would not be higher than the rent we'd paid
in the past including insurance and taxes.We
didn't consider a 30 year, the expense of
the interest over the life of the loan would
have been too expensive for our taste.
Though we might have been able to pay cash for a house since we were looking a small town with low house prices, we didn't want to since it would have made us highly illiquid. Going cash would have also been essentially sinking all of our non-retirement life savings into an old house in a small economically depressed town. My net worth would have been very concentrated in real estate, 50% of all of my assets in one property. So to maintain liquidity and diversification we'd decided to leverage debt to the tune of 80% of the purchase price over 15 years while considering the option to prepay depending on the other investment opportunities available to us.
That was our decision, based on our circumstances. We decided that a mortgage was the right decision and that prepaying it wouldn't necessarily be. But you don't have to take my word for it, here are some other bloggers' takes:
Get Rich Slowly has has reader question on paying off your mortgage today (no, I came up with this post idea all on my own.....). JD's take basically boils down to guaranteed returns are good, do what feels right for you. As JD notes in today's post GRS has covered the topic before but with a little more complexity. He argues that prepaying has more benefits the earlier you do it.
That is exactly the point that MoneyMamba rants on in Mortgage Math Lesson: A Myth that Shouldn’t be Repeated. JT has also written about this before if you want more clarification on his point that paying off your mortgage isn't the best way to go.
My Money Blog has a review of the question that covers a lot of the tax issues and proposes a possible strategy.
MoneyNing has a reader write in that sounds a lot like me and my SO when we were looking at buying. The conclusion? buying in cash has a ton of perks but leave yourself plenty of breathing room.
Pinyo at Moolamy covers mortgage prepayments for rental properties with two reader questions but doesn't go into much detail and neglects to consider the tax implications which can be really key when looking at rental property cash flow and gains.
The Wisdom Journal gives five reasons to accelerate your mortgage payments.
Financial Samurai won't be paying off his mortgage until he retires. His reasoning centers around liquidity and cash flow.
Yes, I am Cheap has a video about Why You Should Invest and Not Pay Off Your Mortgage Early.
Budgeting in the Fun Stuff gives a great background on her house situation, mortgage and strategy and reasoning on prepaying her mortgage.
Mr. Money Mustache takes a different tactic, advocating that you should use "springy debt" as your money cushion (emergency fund) and put the rest of your money towards paying down debt.
MoneyReasons has very realistic and pragmatic reasoning on why paying off your mortgage early is better than investing. Hint: many people might not actually invest the money they're keeping out of their mortgage payments.
So that's ten different bloggers' opinions on the subject of paying off mortgages early. You certainly don't have to take my inexperienced opinions on this one and can form your own.
And for some different thoughts see
How about you? Paying down your mortgage early or investing instead? Anyone out there doing cash-only for buying a house?
Though we might have been able to pay cash for a house since we were looking a small town with low house prices, we didn't want to since it would have made us highly illiquid. Going cash would have also been essentially sinking all of our non-retirement life savings into an old house in a small economically depressed town. My net worth would have been very concentrated in real estate, 50% of all of my assets in one property. So to maintain liquidity and diversification we'd decided to leverage debt to the tune of 80% of the purchase price over 15 years while considering the option to prepay depending on the other investment opportunities available to us.
That was our decision, based on our circumstances. We decided that a mortgage was the right decision and that prepaying it wouldn't necessarily be. But you don't have to take my word for it, here are some other bloggers' takes:
Get Rich Slowly has has reader question on paying off your mortgage today (no, I came up with this post idea all on my own.....). JD's take basically boils down to guaranteed returns are good, do what feels right for you. As JD notes in today's post GRS has covered the topic before but with a little more complexity. He argues that prepaying has more benefits the earlier you do it.
That is exactly the point that MoneyMamba rants on in Mortgage Math Lesson: A Myth that Shouldn’t be Repeated. JT has also written about this before if you want more clarification on his point that paying off your mortgage isn't the best way to go.
My Money Blog has a review of the question that covers a lot of the tax issues and proposes a possible strategy.
MoneyNing has a reader write in that sounds a lot like me and my SO when we were looking at buying. The conclusion? buying in cash has a ton of perks but leave yourself plenty of breathing room.
Pinyo at Moolamy covers mortgage prepayments for rental properties with two reader questions but doesn't go into much detail and neglects to consider the tax implications which can be really key when looking at rental property cash flow and gains.
The Wisdom Journal gives five reasons to accelerate your mortgage payments.
Financial Samurai won't be paying off his mortgage until he retires. His reasoning centers around liquidity and cash flow.
Yes, I am Cheap has a video about Why You Should Invest and Not Pay Off Your Mortgage Early.
Budgeting in the Fun Stuff gives a great background on her house situation, mortgage and strategy and reasoning on prepaying her mortgage.
Mr. Money Mustache takes a different tactic, advocating that you should use "springy debt" as your money cushion (emergency fund) and put the rest of your money towards paying down debt.
MoneyReasons has very realistic and pragmatic reasoning on why paying off your mortgage early is better than investing. Hint: many people might not actually invest the money they're keeping out of their mortgage payments.
So that's ten different bloggers' opinions on the subject of paying off mortgages early. You certainly don't have to take my inexperienced opinions on this one and can form your own.
And for some different thoughts see
How about you? Paying down your mortgage early or investing instead? Anyone out there doing cash-only for buying a house?
Thursday, June 16, 2011
Business schools, demographics, and reach
The Wall
Street Journal reported recently on how
Harvard Business School's incoming class
demographics are changing. The article
analyzes the recently released data on HBS's
class of 2013 and compares it to
prior years. The two biggest trends are more
women and fewer financiers. Harvard's
dean of admissions has obliquely confirmed
that some of this trend is deliberate, but I
imagine not all of it is and I'm thinking
about the reasons and ramifications.
The percentage of students with finance
backgrounds peaked with the class of 2011,
the students in that class would have been
applying in late 2008 and early 2009 when
their industry was being decimated. It
makes sense that many of these students were
seeking refuge from the carnage or are
looking for a change of industry. I
would bet, though I don't have any data,
that the applicant pool for the class of
2011 had a bumper crop of applications from
those with a finance background. As
the financial crisis has subsided this
effect will have also faded, causing a lower
percentage of people with finance
backgrounds to apply. Harvard Business
School is also probably looking long-term;
since they had so many finance-related
students accepted in 2011 and 2012 they will
likely want to course correct a little to
ensure that their alumni stay relevant to
all industries. Consulting has seen a
similar trend probably for similar
reasons.
The number of students in technology and manufacturing has instead grown to take the place of finance and consulting. I think this is a very strategic move on Harvard's part since quantitative easing and devaluation of the dollar may help to improve the viability of manufacturing in the US and technology continues to be a major force in our economy. I'm thinking that this shift helps to bring Harvard Business School a little better into alignment with the economy as a whole - 32% of your students coming from a finance background feels very out of whack if you're trying to affect change in business as a whole.
If business schools are trying to increase their institutional reach than I think it makes sense for them to diversify the industries and demographics represented by their student body since it broadens their alumni network and pushes their methodologies into more companies, industries and regions. However, by localizing where your alumni are they may have a better chance of reaching the critical mass needed to create real and lasting change. Harvard may not be as significantly swayed by the latter point since they graduate around 900 students a year, more than many other business schools.
Do you think business schools' admissions are motivated by the impact the school can have further down the road? Nominally these schools are selecting for the best potential leaders of their generation and are grooming them to be even better. Certainly selecting the best and gaining wide exposure improves the visibility and value of their brand and would cause more applications to come in. Do great leaders just come disproportionately from finance? Somehow I doubt it. I'd love to see profiles of applicant pools to go with this data and I would have appreciated if other industries, the public sector, and nonprofits were shown as well since they compose a significant part of our economy and employment.
What do you think causes changes in business schools' demographics? How does this change the impact they have on our society?
For more thoughts around the trends behind Harvard Business School's class of 2013, check out MoneyMamba's article on Harvard predicting a manufacturing rebound. He beat be to the punch on posting about this and takes it in a different (and more interesting) direction!
 |
| Wall Street Journal graph showing changes in industry over time. |
The number of students in technology and manufacturing has instead grown to take the place of finance and consulting. I think this is a very strategic move on Harvard's part since quantitative easing and devaluation of the dollar may help to improve the viability of manufacturing in the US and technology continues to be a major force in our economy. I'm thinking that this shift helps to bring Harvard Business School a little better into alignment with the economy as a whole - 32% of your students coming from a finance background feels very out of whack if you're trying to affect change in business as a whole.
If business schools are trying to increase their institutional reach than I think it makes sense for them to diversify the industries and demographics represented by their student body since it broadens their alumni network and pushes their methodologies into more companies, industries and regions. However, by localizing where your alumni are they may have a better chance of reaching the critical mass needed to create real and lasting change. Harvard may not be as significantly swayed by the latter point since they graduate around 900 students a year, more than many other business schools.
Do you think business schools' admissions are motivated by the impact the school can have further down the road? Nominally these schools are selecting for the best potential leaders of their generation and are grooming them to be even better. Certainly selecting the best and gaining wide exposure improves the visibility and value of their brand and would cause more applications to come in. Do great leaders just come disproportionately from finance? Somehow I doubt it. I'd love to see profiles of applicant pools to go with this data and I would have appreciated if other industries, the public sector, and nonprofits were shown as well since they compose a significant part of our economy and employment.
What do you think causes changes in business schools' demographics? How does this change the impact they have on our society?
For more thoughts around the trends behind Harvard Business School's class of 2013, check out MoneyMamba's article on Harvard predicting a manufacturing rebound. He beat be to the punch on posting about this and takes it in a different (and more interesting) direction!
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