Getting to Ground Level

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If you’re in debt, its hard to make long term plans for  wealth and retirement because they seem so far away. I’m in this position where I know all the right things to do to build wealth but I can’t actually act on them because I’m still deep in the hole and need to climb out. The pursuit of financial independence starts from zero. I’m way in the negatives feeling my way through a dark and at times depressing journey to net positive, the point where my debts are eliminated.  At this stage of indebtedness, making progress requires me to make more money and put it all towards my student loans until they are completely eliminated. So I find myself having to break the rules for achieving financial independence to first achieve freedom from debt.

My debts are prioritized as:

  1. Credit cards
  2. Student Loans
  3. All other debt including mortgage

In the next few months, I will eliminate my remaining credit card debt and be able to focus on the second and most challenging liability I have, my student loans.  Paying off over $150K in 3 years requires making payments of at least $5,000 a month for the next 24-36 months.  Coming up with this kind of money is going to require some bold moves on my part. I need to find streams of income that can produce that much after they cover my expenses. For now, the only such stream of income I can think of aside from my salary is real estate.  With real estate, I can create a positive cash flow that will allow me to tackle my student loans aggressively.  So I’ve decided to purchase another property and rent it out.  All the profits from the rental property, my salary as well as my side hustles will have to be able to generate at least $5,000 a month.  But real estate is cash intensive and requires a large upfront investment.  So unfortunately I’ve had to make a few sacrifices that I wouldn’t even have considered if I didn’t have student loans. But alas, since I don’t have wads of cash lying around, I took out my Roth IRA to use it as a down payment on my property purchase. My account is now a sad shell of what it used to be :(. My goal is to replenish it once I’ve tackled a few high interest installments.  I guess I’ll have to lose out on the compounding effect until that time.

Having to withdraw my Roth IRA to buy a property has me bummed. But I’ve made peace with it. After all, a rental property will help me eliminate my loans. And once my loans are gone, it will become a source of passive income. I’ll be looking for properties to purchase and hopefully making an offer in the near future.  Once I’ve purchased a property and done a quick live in renovation, I will rent it out and begin my debt repayment journey. Here’s the plan:

  1. 0-2 month: Purchase property and make cosmetic changes
  2. 2-4 months: Rent out property and start to tackle consumer debt
  3. 4-6 months: Implement student loan method 1, transfer the first student loan balance to my zero interest credit card and start paying it off.

That’s the plan. I’ll be doing my best to stick to it. Here we go…

 

 

Student Loan Payoff Method #2

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 Cash out Refinance: This is also another method people might consider risky. Why use the equity you’ve accumulated to pay off debt instead of reinvesting it? Why reverse the progress you’ve made on paying off your mortgage? Consider this:

The condo the mortgage is associated with a property that can appreciate in value while a student loan can only be a liability and digs me further into debt the longer its around.  While its not a guarantee that properties will increase in value, they do have the potential to do so. Debt, cannot appreciate in value or benefit you in any way by hanging around longer. Between 2015 and now the value of my home has increased by $20,000 creating a significant amount of equity. In the same amount of time, the loan I had taken out to pay the cost of tuition has accrued close to $10,000 in interest.  One is providing me with equity, the other is dragging me down into the abyss.  Even though I have no guarantee that the value of my home will continue to rise, I would rather take my chances with it than continue to sink faster and further into debt.

Mortgages have a longer term and a lower interest rate.  While student loans are generally given a 10 year period to be paid off, Mortgages come with 15 and 30 year terms meaning that you have more time to pay them off. In addition, on average, mortgage interest rates are lower than student loan interest rates. At least in my case, my mortgage has an interest rate of 4.125% for a 30 year term wile my student loan average is around 6.3%.  In addition, the interest on mortgages compound monthly while the interest rates on student loans compound daily. This means that the cost associated with the interest rate for mortgages increases monthly while the cost associated with the interest rate on my student loan increases daily.

Student loans are not forgivable essentially under any circumstances, even death while mortgages are. Mortgages are backed by the house as collateral.  This means that the house could be sold to pay back the mortgage and if there is any debt that remains, it will be forgiven. This option is not available for student loans. Even if you file bankruptcy, you cannot get rid of student loans and must find a way to pay them off.  By using this method to reduce my student loans, II would be reducing the amount of debt I would have remaining in the event of a bankruptcy and making it less likely that I would have any debt remaining.

I do believe in investing. Under any other circumstances I would opt to invest any equity I take out instead of paying my debt. But student loans are the type of debt you should tackle as soon as you can because they’re literally the worst kind to have.

Fortunately for me, there have also been changes in the refi laws that favor people who want to use this strategy.  Secondary mortgage buyers like Fannie Mae and Freddie Mac are willing to reduce/get rid of the fees associated with cash out refinancing provided that you’re taking the money out to pay off your student loans. They work with companies like SoFi to make these options available. You can also take out a larger percentage of your equity for this reason than you can for reasons like home improvement etc. I’m now quietly waiting for my equity to accumulate and in a couple of years, all else being equal; I will be able to use it for this purpose. My goal is to use this strategy to finish of the loans I will have remaining towards the end.

Student Loan Payoff Method #1

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In 2017, one of my goals is to start paying back my student loans. I plan on implementing my payoff strategy.  I would like to have paid at least one third of my student loans by the time I graduate so I can reduce the interest that’s been accumulating while I was in school.  Currently, my balance is hovering around $160,000. So the amount I would like to pay before graduating in May 2018 is around $54,000. Paying off my loans is going to be just like paying off my credit cards but on a much larger scale.

– Balance Transfer: If there ever was an upside to having a credit card balance repeatedly and being forced to pay it off, it’s the fact that it will help you build your credit and in turn give you a higher credit limit.  Obviously there’s a better way of building your credit and being able to have a high credit limit. But this is how I’ve gotten it. I’ve never not paid my credit card balances. My issue has been keeping them paid. So I currently have a high credit limit which I plan on using to pay off my student loans. This method is risky and unconventional but I think will actually work for me. Every time I’ve had a credit card balance, I’ve found the inner discipline to make sure I drive it down to zero. So far, I’ve gotten those balances by buying things I don’t need. Why not just load one student loan out of the 11 I have onto the card and tackle it aggressively? Here’s why I think this will work.

Many of my student loans have interest rates that are above 6%. They accrue interest daily and between September 2015 and today alone have added about $9,000 to my total balance. Student loan interest rates are compounded daily and adjust to be a percentage of the new balance. That means that the amount I owe is increasing by over 6% of the total amount (principal + interest) and not just the principal amount I borrowed. If I use the balance transfer option of my credit card, I will have the option of getting 0% interest for the next 12 months. That’s 12 months of not having the interest grow out of control! I will stop the hemorrhaging and be locked into a timeline that I have to abide by to pay off the amount I transfer. Also, for once, I’ll be doing something completely constructive with a credit card. I’ll be paying off a student loan and building my credit at the same time. I plan on tackling the loan with the most accrued interest first and working my way down.  There’s also the added fear of not letting my balance transfer offer expire before I pay off my loans and having to pay 21% interest on my loans to incentivize me. So I’m motivated by both fear and logic.

In addition to building credit and reducing my student loan debt, I would also be able to reduce my total debt to income ratio with this method. The debt to income ratio is the result of dividing your monthly recurring debt by your monthly gross income. The lower your debt to income ratio, the better because it means you’re not over leveraged.  This is important for me because I plan on investing in more properties and lenders take this ratio into consideration when they’re deciding how much loan they should approve you for. If I can reduce my DTI by a significant amount by using this method, then I can be able to qualify for a larger loan which will allow me to purchase more lucrative real estate  like multifamily properties.

Finally, the most morbid yet equally beneficial reason I’ve thought of to do this is the fact that a credit card balance is forgivable in the event of bankruptcy and death. Student loans are not. So if I have to file for bankruptcy, I know that whatever amount I have put on my credit card would be wiped out as a result. Additionally, my estate will not inherit my six figure debt in the event that I pass before paying off my student loans. Hopefully I won’t go bankrupt or die anytime soon. But I can’t discount this benefit just because its not fun to think about.

I’ll be posting about more methods I plan to implement for my payoff strategy.

 

What to do on Day 1 of the New Job

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Since I just went through this process, I figured I’d share what things to look out for when you’re settling into your salary and benefits package.

You passed the few rounds of interviews. impressed the employer enough to get a job offer. You countered the salary/benefits that were offered and settled on an agreeable arrangement. Now you’re at the office going through the on boarding process and getting bombarded by a barrage of forms! Health coverage, Dental, Vision, 401K, subsidies etc etc. It’s so easy to just focus on completing them just for the sake of doing it and not think about the implications of what you’re agreeing to. But how you set up your benefits package could literally be the difference between taking advantage of all the opportunities afforded to you and leaving money on the table.  Pay attention. Don’t play yourself.

For most things, there is no one size fits all approach. Everyone prioritizes things differently based on what their needs are. But there are a few basics.

  • Spend some time on HR’s website.  You need to see what type of benefits they offer you. Yes, things like 401Ks, healthcare and dental are provided but do they have transportation subsidies you can take advantage of? Are there businesses that provide you with an employee discount somewhere you’re already a customer, say your cell phone service provider or your wholesale grocery store? Does their employee assistance program also provide free legal advice or financial planning advice? Is there tuition reimbursement for school or certification programs? Most companies do some sort of orientation that gives you a brief overview. But they don’t get into the details of what might be important to you because their objective is only to inform you that these options are available and not necessarily that you know enough to use them well.
  • While you’re on HR’s website, you should also look for any information related to the pay scale your company utilizes.  This is an immediate feedback on your salary negotiation skills because it tells you how much more your company would have been willing to pay you than you settled for. If you negotiated closer to the top end of their willingness to pay, congratulations! If you didn’t, you probably will never forget the feeling of regret you have right now and will make sure you use this information when you renegotiate your salary.
  • For the love of God, at least contribute the amount your job matches to your 401K! Ideally, you should contribute the maximum allowable amount to your 401K of $18,000/ year. Doing this not only reduces your taxable income in the short term, but it also sets you up nicely for retirement. When you start early and max out your 401K, you make compound interest work for you. If the magic doubling penny could reach such a high amount within one month, imagine what 10% or more of your salary could go up to in a matter of years. Maybe you want to ease into this and start out with a smaller amount. In this case, at least contribute the same amount as your employer is willing to match. If the employer does a 3% match, then make that your minimum. If you do this, you will guarantee that your company is providing you with the most amount of money towards your 401K plan.
  • Don’t just pick the PPO. If you’re young and relatively healthy, chances are you’re giving up a lot of money for healthcare coverage you don’t really need. Last year, I blindly funded my PPO and ended up spending $1500 more than I needed to on healthcare coverage.  How about you make those dollars work for you instead? Don’t just give your money away. Consider getting the High Deductible Health Plan and matching HSA instead. The HSA is a bank account that is funded by your pre tax dollars and can be used to pay for healthcare related expenses like co pays. It can also be used to cover expenses that are indirectly related to your health like transportation to your doctors office, contact lenses/solution, pads, sunscreen etc. And you know what else, HSAs could also be used as an investment account! They’re really just magical! You reduce your taxable income, you eliminate health coverage waste, start an investment account and get the ability to purchase some things with pre-tax dollars! Effing magic!
  • Take advantage of any other pre-tax account your employer is willing to fund. Again, this saves you a lot of money on taxes. But it also gives you an opportunity to spend less on things you already spend money on.  If your employer will let you pay for parking or public transport with your pre-tax money, sign up for the maximum. Yes, your take home pay will look like it’s less but its actually more because you have reduced a big recurring expense that you no longer need to spend your after tax money on.

There are so many other things. I could probably write about this all day. But do yourself a favor and at least start with these basics.

The Devil I Know

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Just when I had found a way to go straight, which in my case is finding a fulfilling career where I get job satisfaction and enjoyment in addition to money, the old life sucks me back in! A bit hyperbolic I know, but the idea is still the same.

The career change didn’t work out.  After weeks of trying to accommodate all the demands of my new employer to be, I found myself incapable of fulfilling their demands to their liking.  I couldn’t help but think that had I discovered this path straight out of college, I would have been successful at it. I wouldn’t have minded the salary, the restrictions and would not have had too much to sacrifice. But I’m in my late 20s now with a 6-figure student loan debt, and a mortgage both of which I want to get rid of as soon as possible. Giving up a decent salary for a job that not only pays less but also effectively forbids me from finding alternative streams of income is not something I’m willing to do.

When I returned from my first trip to China, I immediately entered the interview cycle and pretty much made my rounds at all the usual establishments. As I’ve stated so many times, professional development is one of my career goals and it factored heavily in my search for a new job. But the idea that I can change my career into financial planning, a career that not only puts me in a position to help people but also learn so much that I can apply directly to my life was more than intriguing. It’s all I ever wanted. I think it was clear that I was excited about that field too. Which is why I had gotten that far in all the interviews and also gotten a job offer in the field. But ultimately, what I had to give up was far too much for what I would have gotten.

I was willing to give up my real estate business. I actually acted on this decision and put my license on inactive status per their recommendation.  I also made peace with the fact that I will have to get their authorization for every property I would purchase from now on.  I gave them my guarantee that I would not look for investors in their client base. I never wanted to do that anyway. I value control over my projects way too much to involve other people in them. In addition to these, I was willing to even put the China venture on hold. I was going to sell everything at a discount to some store owner and be done with it if it meant I could have a shot at a career in this field. These were essentially all of their demands.

But then I did something that they did not like at all. I tried to negotiate. I had gotten a job offer in my old field that included various benefits and thought I could leverage that to get them to pay for some of my tuition. A lot of companies provide money to go towards tuition expenses for their employees.  So in the middle of me giving up everything, I asked for this one thing. I wanted them to pay for the remainder of the tuition I would have to pay. They did not like that one bit. The response I got was not just a no, it was more like ‘how dare you?’ Well, I did not like that either. I would be paid half of my old salary, left with no way to make any side income and now I can’t even get a basic expense covered? At this point, I had enough.  The ‘how dare you?’ email was followed by another email in which they pretty much suggested that maybe I should just take that other job offer because I’m negotiating for things that I want and that is not something that’s encouraged at the organization. It gave me a pause; If they’re treating me this way before I even start to work for them officially, how will they treat me once I get in there?? What will my life look like getting paid peanuts and trying to stretch my funds to cover everything? Can I even live under these conditions without a side hustle? Can I afford a career change that demands so much? The answer was no. No, with a six figure student loan debt, a mortgage, and this much ambition, I cannot take up a career that will essentially have me Oliver Twisting for the foreseeable future.

So I went back to the dark side, I responded to the offer letter with a counter offer. I requested an increase in the salary they had offered and benefits related to tuition reimbursement. I also requested a guarantee that there will be a discussion related to increasing my salary to match my credentials once I have completed my studies and graduated with my MBA.  They were willing to negotiate. So now, with the potential to earn a high income once more, I have created a plan to tackle my debt and the F.I. goals are back on track.  The basic idea, no matter how complex the methods are is to increase income, reduce expenses, pay off debt with the surplus, then acquire assets.  I have a detailed plan. But I’ll save that for the next post.

No Labor Side Hustles

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If you’re anything like me, broke millennial with bills and a mountain of student loans that sometimes keeps you up at night, you can’t afford to not have one. I venture to say that even if you were a well funded, no student loan and no mortgage having magical mystical being, you need a side hustle. People with debt need one for the obvious reasons; to get out of debt and enjoy a life without money worries.  For the ones with no debt, the reason might be less obvious but just as pressing. Just like you would need to diversify your portfolio when investing in stocks, you also need to diversify your source of income and not depend on one source.  My logic is that if anything is possible, there is a chance that it will happen. Losing a well paying job is possible, especially in the world of “at will”.  If you had been relying on that one job to sustain you, then you’re in for a nasty surprise.  The only way to ensure that you will have some sort of income despite the circumstances is to have more than one source of income.  The problem is that side hustles are often perceived as something labor intensive, time consuming and generally difficult to get. But I’ve found that there are ways you can have a side hustle without selling your labor or spending too much of your precious weekend hours somewhere where you don’t want to be.  While a part time job at a local business might be the easiest way to get a side hustle, there are other ways that you can make a significant amount of money. Here are the ones that I’m trying currently.

  1. Filling out surveys about consumer products- There are sites like focuspointeglobal.com and others that will pay for your opinion as a consumer. Depending on which survey I participate in, I can get monetary compensation or free products that I usually use, which in turn will save me the money I would have spent purchasing it.
  2. Content writing- Part time content writers are paid roughly $15-$20 per hour for their work on posts for sites. So a 20 hour work week can get me $300 (minus tax) or more, x 4 and I got a way to pay all your bills without dipping into my paycheck.
  3.  Translation services – I know everyone can’t do this since there’s a clear requirement of a foreign language competency here, but if you do know a foreign language, please make use of your knowledge and get compensated.  I provide translation services for a local university project and get compensated about $16/hr for a 10-20 hr work week. I don’t even see this money. It goes straight to paying off my debt in the order I’ve decided to pay it off (Credit card then Student Loans, then mortgage) speeding up the process by leaps. If you don’t know any foreign languages, don’t despair! You can also do this with tutoring etc.
  4. Get a roommate- I love my roomie! Because she’s a good person but also because having her slashes my housing cost in half. My mortgage and condo fees total about $1300. I rent out my spare bedroom to a young professional like me for $650 and voila! I’ve cut my costs in half. This is not quite a side hustle in that it doesn’t require me to do anything to generate revenue. But it does serve as another source of income.

Most of the jobs I mentioned above don’t require any labor (unless you count typing) and allow me to make between $600-$650 a month. While all of them don’t consistently make me the same amount of money, they do make me enough to cover a significant portion of my monthly bills which I have reduced now to $2,000 (Including my mortgage). In a good month, I probably won’t have to touch my paycheck, and it can go straight to paying off my debt! My goal is to have about 3 more reliable side hustles so I can increase the amount I will pay towards my student loans.

Shanghai Pt. 3

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It’s all in the name of F.I.

Thursday was a day full of pivots, reality checks and tough pills to swallow. It was the most productive day of them all in no small part because of Sharon.  I had met her on my first trip to Shanghai when she worked as a tour guide.  She was charming, charismatic and an effective communicator. Once I discovered the existence of this market, I contacted her and informed her of my plans to take on this venture.  She was just as excited about it as I was and that’s how I knew I found a person I can work with.  From the first time I pitched the idea to her, she took it seriously and was willing to make concrete plans with me.   We met on Thursday morning and headed back to the market.  The night before, I had to rethink everything including the quantity of things I planned to bring back. The reality was that I would be lucky if I could get 50% of the items I planned to buy back to the United States with me. I’m not lucky. By the time we made the bulk of our purchases, the weight of the items we bought was about 10 kilos or 22 lbs.  I had to scale back and reduce the amount I’ll be able to bring back once more. I started out thinking that I’ll be able to bring 500 scarves, and 100 accessories, was forced to lower this number to 1/2 by Wednesday, and then down to 100 scarves, 40 robes and 60 small accessories.  I was not doing well on this front. I did however finally improve my bartering skills significantly.

It’s all a matter of who has the most leverage. So I had a few things going for me.  The first one was the day and time. Thursday morning is not really the busiest time for shopping. Most people come to this market on the weekends. That meant that customers are in short supply and vendors are willing to negotiate. The second one was the fact that I was there to buy in large quantities. Buying in bulk meant I can negotiate some sort of bulk discount. It also meant that the vendors did not want to lose me. They could more than make up for the “loss” of giving me a discount by marking up their price for the tourists that come along. Third and probably the most important was that I went there with a local. I’d negotiate the price down to 20-25% of it’s original price and Sharon would come in and insist that I pay even less. It was such a boost to my confidence. The vendors would protest and we would start to slowly walk out of their store until they begrudgingly call after us.

We were done right at the beginning of rush hour traffic and raced to the subway to avoid the crowd. The train wasn’t jam packed like it was on Monday but had a good amount of people. We boarded and took our bags back to the hotel. There was no way I could reduce the weight to be less than the allowable amount. I had already purchased a carry on and packed it full with some of the things I purchased. And I literally only packed 3 days worth of clothes. But the weight limit was still high and by the time I was done packing it, it felt like I had packed a corpse.  When I left on Friday, I realized that I should have just purchased a second luggage I can check in and filled it with the remainder of the stuff.  Prior to me having to pay the overweight fee, my total cost for this venture was about $3,000 including:

  • $1,500 for flight, hotel and stay
  • $1,300 for purchasing merchandise to sell
  • $200 for other costs including a small payment I made to Sharon for her time and labor

Unfortunately, the overweight baggage cost me an additional $200 bringing my grand total to $3,200. This is not sustainable.

The whole idea of this trip is to start a side business that will create another stream of income for me.  Yes, I’m buying at a relatively low cost and plan to sell the things I bought for profit. But I’m losing the money I saved on buying my merchandise on transporting it here. So I’ve decided to make a few changes to reduce my cost of doing business.

  1. I’m hiring Sharon to manage the purchase and shipping. I will pay for the cost of merchandise, shipping and compensate her for her time and labor.  Since she’s gone to the stores with me, she’ll know what my preferences are. I will also be sending her a list of the things I want to purchase. Doing it this way will certainly be lower than the cost to travel over there and bring it myself while making sure these items are still curated by me.
  2. I’m doing my research and buying in bulk ahead of the season. Prices are lower when the items are purchased in larger quantities. So I plan on purchasing at least 100 of each item I plan to have available at once to take advantage of that.
  3. While pop-up shops have been the least costly way of making in person sales, I’m going to have to consider other ways of distributing the merchandise including providing it to boutiques wholesale and creating a website to make my items available for sale 24/7. The latter is already underway.

This was an educational trip.  Even if the idea fails as a business, I would have learned so much from this whole experience that I would not have learned in class. If this works out, I would have combined two things I love, travelling and finding new ways to make money.