Monday, May 21, 2012

Wiping Out $90,000 in Student Loans in 7 Months

(from the Wall Street Journal May 21, 2012)

[NOTE: this guy was extremely motivated to pay off his student debt asap.  He made lifestyle decisions including taking a 2nd job to do so.  Not everyone has a 6 figure salary, but the lessons still apply.  Kim Miller, CFP]
Economists are increasingly worried that many young Americans will spend coming years buried under student debt. Joe Mihalic was determined not to be one of them.
Faced with $90,000 in student debt from his days at Harvard Business School, Mihalic vowed last August to eliminate every penny by this summer. He did — three months early.

The 29-year-old from Austin, Texas, is now becoming an Internet celebrity of sorts as financial advisers and young Americans link to his blog,, which had 180,000 hits as of Thursday morning. His story is touching a nerve at a time when young Americans are more indebted than ever.

So how did he cut through $90,000 in seven months? It helps to have a low-six-figure salary, as Mihalic does working for Dell Inc. But he also recommends getting roommates, a second job (in his case, landscaping), forgoing all restaurant dining (even McDonald’s), selling all unnecessary items around the house — and getting a flask.

Mihalic said he spent months taking a flask of liquor to bars so he could continue to go out drinking with friends without running up a tab. (Be warned: this is typically illegal.) Instead of the movies, he took dates out hiking, or for bagels and coffee. He ate protein bars packed from home and walked several miles to the city, to save a few bucks on transportation, during a trip to Michigan. He got two roommates to rent out his house.
Mihalic also took steps that financial advisers typically say are a no-no: He liquidated his individual retirement account, drawing a tax penalty, and stopped contributing to his 401(k), even though his employer offers a matching contribution.

“My mentality was I want to be done with these student loans as quick as possible,” Mr. Mihalic says in a phone interview, adding: “It was an emotional decision.”

He made his last student-debt payment six weeks ago. He said he saved roughly $40,000 in interest that he would have paid had he stayed on the 15-year schedule for repayment of his loans.
He says he learned other lessons, too.

“The flask thing, it’s kind of demeaning,” he says. “The funny thing is that girls weren’t really sketched out by it…They did laugh, and I could still get their phone number. It taught me a lot — you don’t have to be this flashy dude, buying drinks.”

Sunday, May 20, 2012

Student Loan Debt

I was quoted in an article in today's Seattle Times (May 20, 2012) about financial advice for people dealing with student loan debt.

Thursday, May 17, 2012

To Roth or Not to Roth, That is the Question

We often get the question:  “I have the option of making Roth (post tax) contributions to my 401k – should I do that?  How should I decide?”

Without getting into all the minutiae of current tax rates vs. future tax rates, tax inclusive vs. tax exclusive and marginal rates vs. effective rates, the easy answer is: do some of each.

You can use the tax savings generated by the pre tax contribution to pay the taxes on the post tax contribution – and, you can arrange the mix of each so that it is tax neutral.

If tax neutrality is your objective, then the actual mix of pre and post tax contributions varies a little depending on your tax bracket.  To keep it simple, we’ll show one example using the 28% tax bracket:

Maximum 401k contribution       $17,000

Pre tax                                     $  9,884 saves $2,768 in taxes

Post tax                                    $  7,116 costs  $2,768 in taxes

Total contribution                      $17,000

Net tax cost                              $-0-

Net contribution cost                 $17,000

What if you don’t have a Roth option in your 401k?  You can use this same logic to fund a Roth IRA – the pre-tax contribution to the 401k can offset the taxes you pay to make the Roth IRA contribution.  The math is the same.

At retirement when you withdraw your funds:
·        the pre tax funds plus related earnings will be taxable
·        the post tax funds plus related earnings will be tax free
·        ALL employer matching contributions plus related earnings will be taxable (regardless if the match is to pre tax or post tax contributions)