As many of you know I have a day job as a Mortgage Advisor. In addition to my day job, I enjoy sharing my voice in the personal and business finance space. As of lately, I have started to reflect on the question of should someone who has college debt, first pay-off all your student loan debt and then save for a home, or should you continue to pay what you can toward your student loans, and save for a home purchase at the same time. I know what you are thinking, but you are all about Dave Ramsey and Financial Freedom and eliminating debt- Amber, how is this even an option for me to consider? Let me explain:
Debt is nasty do not get me wrong. As a general rule of thumb I would say, get rid of your debt as fast as you can. However, there are different types of debt, we as consumers, have access to in our economy. There are three types of debt; secured, unsecured and mortgage debt. An easier way to understand these debt categories is by considering the types of debt you may have in your name. Education Debt, Consumer Debt, and Equity Building Debt.
Education Debt: This debt is what the name says, it is debt that is linked to your educational journey. This could be debt that is secured or unsecured, but it is linked to provide funds for your education.
Consumer Debt: This debt is tied to a product or service that you used credit to complete the purchase This could be purchases you made on your Credit Cards, or an auto loan.
Equity Building Debt: This is debt that is taken out in your name that has the ultimate goal of building equity. There are two ways this can build equity for you, the first way is the portion of the payment that is the principle payment. These funds go to pay down the loan principle that ultimately will be available to you should the asset maintain or gain in value. The second way is if there is a growth in appreciation. If the asset the debt is tied to grows in value you can recoup this equity in the form of cash.
Now that you know the foundation of the types of debt that are accessible in our economic system. It is time for us to address the main question. Should you first pay off your debt and then save, or pay off as you can and save at the same time. According to Experian, an industry leading credit reporting agency, states "the total amount of outstanding student loan debts have reached an all-time high of 1.41 trillion. "This is a combination of 44 million borrowers, which is 69% of all students"-cnbc.com. That is a lot of people living with educational debt. In conjunction to the debt load of these students, the average annual salaries for students who graduate from a 2 year education is $41,528 and a 4 year is $47,393 in their first year of employment post graduation, according to Minnesota Office of Higher Education.
Let me break down these stats a bit further for you. If the average graduating student has $32,000 in their name with an average of 4.53% interest rate on those loans then the student has a minimum payment of $332/month to just pay the interest on this debt. With the average income being $44,000 in MN that equals ~$3,705 gross income per month.
Fast forward, to the day that the $32,000 or $64,000 total debt for a married couple is paid off by the time you are 32 years old and their income has grown 3% over the 5 years post graduation. This would convert their $44,000 each into now combined they are making ~$100,000 annually. There is now less debt and greater income for their future home purchase. However, they are now 32 years old, have zero debt, but they also do not have liquid cash for a down payment.
So what would I do with my, hypothetical student loan debt, if I was faced with these statistics? I would do the following three steps:
Step 1-Evaluate ones heart posture toward money: This is KEY! Our heart posture toward money and money management is key. If I had debt that is on a credit card, I would NOT consider the option of looking to purchase a home while still having student loan debt. However, if I only had a minimal car payment or better yet, no car payment at all and student loan debt I would then consider my options of not paying it all off yet. The reason I would look into this option, based on my heart posture, is because I know I would have the ability to maintain a healthy money-debt relationship with a new equity building debt.
Step 2-Evaluate the current market: At the time of writing this post, interest rates are almost at the lowest they have been since 2016. In addition, home values are still considered affordable compared to other states, which makes renting and owning a comparable price. With these two factors being as they are, buying now could be a great option for me considering my heart posture. In addition to the current market, the current 'First Time Home-buyer benefits' can have factors that require the qualified borrowers to have a median income that is less than or equal to the programs median income. These programs can help with getting a great interest rate.
Step 3-Evaluate my budget and how I am saving: Reviewing my hypothetical budget given the above statistics - Income of $3,000 monthly net minus $1500 for rent, $333 interest toward student loans, $250 groceries, $200 misc/lifestyle, $100 auto loan, $150 utilities, $200 for 3-6 months saving, $200 bonus toward student loans. $150 auto insurance & misc. This would allow me to still save, pay down my loans and live comfortably. Of course double these if you are married and have joint income.
If I was to wait until my debt was paid off and the average income I am making pushed me outside the 'first time home-buyer' programs available. If this were to happen, I might end up with a higher interest rate on my 30 year home mortgage than the average amount I was paying on my loans, which would be a net negative benefit for my net worth. Rates are good right now allowing one to possibly have a net gain as they prioritize their spending. However, they might not always be this good. If you are contemplating buying now or continuing to pay off your loans. I would recommend you going through the Evaluation Steps above to determine if purchasing while moderately paying off your loans is an option that fits your financial story best. However, if you can not honestly trust yourself with Step #1, this will not be a wise decision for you.
Lately, Payton has been extra expressive about her wants. She notices what others have and does not shy away from saying, "Ugh, I want what they have...why don't we have that?" These comments cause me to cringe quite a bit because I know we have more than we deserve and our kids are extremely blessed. I feel like I have margin to learn how to better communicate what it means to appreciate what others have, while not forgetting the extravagance of all we already have. It could just be me, but I feel as a society we have margin to learn this concept. I do not feel like it is just a 7 year old topic of discussion, rather a societal conversation. What I am learning is that society grooms our minds to believe we need to have a consumer mindset. One that encourages discontentment and discourages thankfulness and patience. The first step, I believe to not engaging with this mindset, is to notice when we are discontent or laking thankfulness. Step two is naming the discontentment or comparison and then, lastly checking our hearts and the source of the discontentment.
Discontentment is an active voice in our everyday lives because of the constant data exposure we have fueling our minds both consciously and subconsciously. I have decided to make it an objective of my everyday to counteract these voices with a voice of thankfulness. This has been challenging because it means I have to notice when to speak it, believe what I am speaking and then speak it out in humility. This is no easy task, however I am motivated to do it, because I am really unmotivated by the repetition of Payton's inquires.
In addition to noticing and naming the spaces of discontentment we have in our lives. It has also been healthy for our family to discuss our financial goals and how we are going to accomplish them. Another comment Payton defaults to when she is trying to gain our attention and we have stepped away for a quick phone call is, "You are ALWAYS working!" Although, she feels in that moment that we are ALWAYS working this is an exaggeration. Spencer and I have the privilege to flex our schedules and often work from home. Although he puts in more than 40 hrs a week, the hours are very flexible and unconventional. We are both home, present and actively engaging together, with the kids. With that being said, we have had to be clear on when it is work time, and when it is play time. This has been an adjustment, but having the kids around us while we work and setting healthy boundaries has helped our kids understand hard work=money which=security, adventure and opportunities. It also allows us to teach them to be thankful for the flexibility we have.
One of our 2019 goals for our family was to find a family activity that we all could enjoy together that was outside the home and one that could grow with us. I was blessed with a family growing up that taught me a lot through experiences and I desire the same for our family. After several months of brainstorming ideas, we landed on purchasing a family JetSki. We live within 3-10 miles of 4 great fishing, tubing and cruising lakes and the size of a JetSki seemed very practical for our wants. After intensive research we found the ideal JetSki to fit our families goals. Although, we started discussing this purchase in March we were patient until we found the best option for us. Before we purchased we; saved up the cash for the purchase, found an incredible deal on the purchase, had reviewed the pros and cons of the purchase, and had an exit strategy incase the purchase was not the best for our family.
This purchase was a teaching opportunity for our children and for us. We all needed to be patient and content. We all had several conversations about the JetSki. They knew we were actively pursuing it, they came with us to look at it in person, they sat on it, pretended they were riding it. They reviewed For Sale classifieds for options. They knew that hard work and constant savings was going to result in accomplishing our goal. Teaching that it is best to be content with what we have and that our approach is the best approach for our family is a VERY hard discipline to teach, but I am thankful this is the approach we use because the gratitude of Payton and Elliot after their first ride was priceless.
Wait, both of you are in 100% commission jobs? Is that hard? How do you do it? These questions I have received from acquaintances who find out for the first time I am a Loan Officer and Spencer is a Real Estate Agent. Honestly, it is not a concept I think much about, or consider it a challenge because it is all I know. I grew up in an entrepreneurial family. My parents owned a Landscaping Company, which meant we were also 100% commission. Growing up there were a lot of discussions around finances. My parents made it very clear, if we do not have the cash, we would not be getting x y or z. My parents were and still are very wise with their money. With confidence I can say, my knowledge of money started at a very young age observing their financial behaviors. In my life, it is true that what I witnessed was what I became.
Today Spencer and I are living a life that is dependent not on punching a clock, but on our own aspirations. We wake up each day, wondering where our next lead will come from. There is no guarantee and there is no magic ball we can rub that will tell us when our next bonus will be granted. This is what being an entrepreneur is. It is a lot of not knowing! However, there may not be a lot of knowing, but there also is a lot of flexibility and personal voice.
This morning, while Spencer was prepping Payton's school lunch and I was struggling to open my eyes and drink my morning coffee. I muffled, "Babe, whats your schedule today?" With a quick reply he said, "I am going to take the morning and be home with you and Elliot. I have been gone so much this week, I think it will be a good idea!" I was ecstatic, although I kept my cool and simply responded, "oh that is great, but are you sure we are okay?" Being 100% commission takes teamwork and self-discipline. I am constantly checking in with Spencer with the key question, "Are you sure?" His responses are always so comforting. There has not been one day in our 7 years of Real Estate that his answer has been anything but, "Yes, Babe, I am sure!"
Is it hard? ABSOLUTELY-I would be joking if I told you that being an entrepreneur was easy. 7 years ago when Spencer left his 9-5 job as an athletic recruiter we had no idea what we were getting ourselves into. Not only was he stepping into Real Estate, which is a difficult market to break into, but he was doing it with a pregnant wife by his side. We had a crazy amount of support, but much of me thought, these people have got to be crazy. Are they aware that I am going to have a baby in a few months, and he has NEVER DONE THIS BEFORE! It was not like he was going to sell golf clubs, these are houses. But, we did it and here we are 7 years later and we made it. Actually, we did not just make it. We have flourished. Being an entrepreneur has been one of the most challenging opportunities, but also one of the greatest blessing for our family.
How have we done it? Here are few quick tips on how we manage to survive on a 100% commission income:
CLOSE THEN CASH
We do not spend our money until it is deposited in our bank account. This is a huge one. In Real Estate and Lending our deals are never final until our checks are processed after closing. This is a tough one to get use to with the ease of credit cards. However, I believe it is a key mindset to build from. No money is spent on a today purchase with money from tomorrow.
We talk a lot about where we are at with our personal and business boundaries. We review our pipeline and cross reference our capacity on a weekly basis. I am fairly tolerant of the exceptional adjustment to our boundaries, but rarely do we go outside of them. A few of our boundaries are built around our cash reserves, our family time, cell phone use and childcare needs.
CLIENTS OVER PRODUCT
We prioritize our relationships over our commissions. We know that our industries are popular industries. It is accurate that everyone knows someone who is either a Realtor or a Lender. However, we have found that being friends and supporting our community as if we worked a 9-5 job is a winning approach. We prefer to have authentic relationships instead of sales relationships. Approaching our industries with the mindset of people over product has helped us stay focused on why we do what we do. It is about our clients, not about the commissions we earn from their transactions, It is a mindset that has allowed us to succeed as a 100% commission family.
I know, I know you all want your tax return because you deserve it. What if I was here to tell you I thought that was not a statement of the wise? Did you know that your tax return that you receive back from the Government is money that you could have kept in your pocket?
Here is the deal, I am going to let you in on a little secret, the Government does not want you to know. Your dollars you earn through out the year and then get back in your tax return is you actually giving a small interest free loan to the Government. Once your paycheck has the deductions taken out of it, they shuffle the funds around for their use and then they decide, based on a tax code what portion to refund to you after you file your taxes.
It is not a sobering thought to consider, I know. However, you have options:
HIRE A PROFESSIONAL
REVIEW YOUR PAYCHECK
Be an advocate for your financial story. You are the author. If you are frustrated with the outcome of this years tax return, or the outcome is a shock to you. It likely means you are uneducated about your financials in some capacity. Get in the know by hiring professionals who can help educate you and prepare. You need to be your own advocate and pursue your own destiny. Wealth with not happen to you. You need to strategically pursue it.
I received our new Health Insurance Premium statement today and for the first time in 3 years our premium went down by $82 dollars! On the year that is just under $1000. If I were to invest that $1000 into a low yield investment account at 5.2% return for 35 years. My $1000 would be just under $6000 dollars. Yes, $82 a month does not seem like a lot, but when recognized over a large duration of time, $6000 to me is worth celebrating. If I choose not to invest the $82, this increased cash flow for our monthly budget now allows for Payton and Elliot to do a few more outings to the local Community Center, or enroll in a soccer camp. I like to celebrate anytime I am able to see a savings in our budget and receive the for the same quality of service.
Not only do I review our Health Insurance Premiums, but once a year I will go through our reoccurring subscriptions and determine if they are still necessary for our family. This year here are a few that I reviewed and how I determined if they were worth keeping or canceling.
At the conclusion of my bill pay and subscription audit I was able to save us just under $200 dollars in cash flow per month. I have not determined yet where I will allocate this extra cash, but I am excited to see the new opportunities we will have going into 2019.
Can you believe we are under two weeks until the new year? I can remember sitting down with Spencer creating a check list of all the goals we had for 2018. Now I am looking at the check list and am astonished at how fast the year has gone. I can confirm the older I get the faster the years go by, anyone know how to slow down time? As I look back on the year I am reminded of how much I enjoy setting annual goals. It helps me to organize my WHY. A few of our 2018 goals were:
The second goal that had the greatest impact on our family was my job transition. When I set my goal to become a Licensed Loan Originator it was because I knew I could leverage my knowledge to benefit everyday consumers with one of the largest decisions in their lives. Our kids caught my WHY. They were the sweetest, they would ask while I was studying, "Mommy, when will you give money to people for their houses?" They understood all the hard work and adjustments we were going through had a purpose. Although, I know they do not fully understand what I do, I know they know my love for what I do. My WHY has always been to bridge the gap between financial fear and financial knowledge. Yes, there is a lot to know about finances, but that does not mean that fear has to be part of the learning.
For 2019, I have a goal to help 24 everyday consumers understand their financial situation from a holistic approach and to see one of their goals become a reality. I believe that finances are part of our everyday life and our everyday decisions are shaped by how we view and handle our finances. If you are setting a goal in 2019 to purchase a home, refinance an existing property or increase your investment portfolio. I would love the chance to journey with you through the process.
Who is with me, financially waiting is hard? It is unlike any other waiting. We wait for our pizza to cook, or our airplane to depart, but waiting to spend money is different.
Why? Because society has allowed us to access Debt. If we don’t want to, we don’t have to wait.
I am not here to tell you to run from Debt, but rather for you to pause and ask yourself these 4 questions before you swipe, slide or click for your next purchase:
AM I BEING PATIENT:
IS THIS AN EMOTIONAL DECISION:
AM I JUSTIFYING:
WILL I BE PROUD TOMORROW:
"Creating a budget has been the greatest tool in our marriage!"-Amber