Sizing Up the Mountain

Day 2 | $0 paid | $90,717 till freedom

From Here to There
I know where I want to go, but I have no idea how I’m going to get there. So first, I need to take stock of my liabilities, assets, expenses, and income. Once the map of the mountain is made, a trail can be planned and ultimately blazed.

Liabilities (Loan Obligations)
Here’s my Mount Everest:

Liquid/Semi-Liquid Assets
Here is some of my climbing gear:

  • Cash: $7,167
  • Stocks: $14,100
  • IRA: $12,235
  • 401k: $37,500

Total: $71,002

Now subtract $37,500 since I can’t access my 401k unless I get fired(God forbid). Then subtract 10% on top of 25% from that IRA–an early withdrawal fee plus the income tax imposed to liquidate the IRA.

Net Liquid Assets: $29,219

This is basically my Screw You Fund–about six months of living expenses–to be used in the event of a lay-off or an emergency.

Monthly Expenses
Here’s the weight that is dragging me down the mountain on a monthly basis:

  • Mortgage: $1,440
  • Entertainment: $1,300
  • Student loans: $1,057
  • Car insurance: $171 (edit 8-31 – typo; changed from $271 to $171)
  • Internet: $50
  • Cell phone: $85
  • Electricity: $60 to $100
  • Water: $50 to $100
  • Groceries: $330
  • Car fuel & tolls: $225
  • Dry cleaning: $40
  • 401k contribution: 10% of my salary

Total: $4,848/mo or $58,176/yr + 401k contribution

Non-Recurring/Irregular/Annual Expenses
Here’s the weight that is dragging me down the mountain on a non-regular basis. Four months (33%) into my fiscal calendar, I have the  following positions in my annual budget:

  • Medical/vision/dental: $500 budget / $260 remaining (I never get sick; $240 was used on contacts)
  • Clothing: $1,000 budgeted / $214 remaining
  • House maintenance and repairs: $2,000 budgeted / $1,465 remaining
  • Donations: $450 budgeted / ($25) remaining – oops!
  • Car/motorcycle maintenance and repairs: $3,000 budgeted / ($328) remaining – oops!
  • Gym budget: $350 / $25 remaining
  • Christmas travel: $600 budgeted / $600 remaining

Total: $7,900/yr

Summary: At my current rate of spending, I can expect to spend $66k + 401k contribution + income tax within the next year.

Income
This is the other part of my climbing gear arsenal. A reader comment from my first post asked me to divulge my income, and another reader replied that that could be grounds for termination from my current job. All I know is that I’ll never reveal my true income. However, you can get an idea of it by going to glassdoor.com and searching for product line manager in Austin.

What Does it All Mean?
I’m screwed. This mountain is going to be a #$%*& to climb.

Realized: A Huge Loss
Today I called UBS and requested the liquidation of the aforementioned stocks and IRA.

Before I went to grad school, near the peak of the market before the Great Recession, I rolled my 401k, valued at $13,675, into an IRA. The market has since tanked, and today, the IRA stands at $12,235. After the aforementioned penalties and income tax, I will get 65% of it, or $7,953. That’s a loss of $5,722, or 42%. Ouch.

Before I went to grad school, I sold off my furniture and my car. I initially kept the funds as cash, but was so excited by all finance stuff I was learning about in b-school that I invested almost all of it in the stock market…during the month of October 2007, at the very peak of the market. Yes, in October 2007, yours truly dumped $17,210 into the stock market. And today, I called UBS and asked them to liquidate those stocks. I received $14,100. That’s a loss of 18%. Double ouch.

My financial advisor–a term I use loosely since we’ve only talked four times since I started investing with him in 2007–strongly advised me against both of the moves above. I explained to him that the way I see it, I have loans accumulating interest at a rate of 3% to 8%, and funds losing value at the rate of 10% or worse.

I assured him that I knew what I was doing, but I don’t think either of us believed me. I heard him breathe a heavy sigh and imagined him on the other end of the line, shaking his head in disgust and rolling his eyes at my shortsightedness and lack of investing sophistication.

My only hope now is that I see some respite in my income tax return in April.

Time to Start the Snowball
Okay, so I have $29,219 burning a hole in my pocket. Except it’s not really burning a hole because I need it if anything bad happens to me.

Ah, well, this blog wouldn’t be any fun if we didn’t completely throw caution to the wind, now would it?

I spy a loan valued at $24,891 that is just waiting to get paid off. Time to start the snowball.

The premise behind the “snowball” is that as you close off a loan, you use the money you were spending on that loan towards another loan. When you close that second loan out, you use the funds that were going to the two closed-out loans to pay down the third, and so on and so forth. So once I close off that $25k loan, I’ll free up a whopping $186/month with which I will go attack the remaining $65k.

You might ask, “Why don’t you go after the $60k loan? It has a higher interest rate than the other ones.” I agree with you, but I would need an additional $35k in cash to kill that loan, and based on some analysis I’ll finish tomorrow, it’s looking like I will accrue the cash to pay that off slowly, over time, by doing things like earning more and spending less. It will also get paid off by some things that won’t happen until a ways down the road, such as getting my bonus and my tax return. So by unloading that $25k loan instead of paying off $25k of the $60k loan, I can free up $186/month now to put to the other loans. I also get the intangible benefit of completely closing out a loan, which is an exciting stimulant. Finally, I hope to be out of all the loans in 10 months, so the interest rate argument is not quite as valid here as if I were planning on paying that loan for years and years.

Paying off the $25k loan leaves me with $4,300 in my pocket.

That’s less than a month of expenses at my current spending rate.

But Seriously, What Does It All Mean?
Okay, yes, I’m screwed at my current rate of spending and income. But that means I need to look for ways to…what? You know the drill by now. Say it with me:

  1.  Cut Costs
  2. Increase Revenue

We’ll get into cost cutting at a later point in time–maybe tomorrow. Today, I will focus on the revenue part.

Update: The Job Search
First, I am in a big transition stage in my life, as I am not only looking for an extra job or two for the weekends, but I have been looking for a new day job internally for the past month. I’m looking at roles in the pay grade above my current one. I had an interview for one today, and I walked away feeling good about it. If all goes well, I will get an offer and could get up to a 10% raise, which will certainly align with the “increase revenue” front of my attack.

On the other hand, I haven’t heard back on the weekend delivery driver job. Maybe tomorrow?

Another great job would be a pedi-cab driver in downtown Austin. If I do get the weekend delivery driver job, I can feasibly work entire weekends–delivery driver from 8AM to 5 PM, followed by pedi-cabbing from 9:30 PM to 2:30 AM.

There are so many good reasons to pursue a job as a pedi-cab driver. Think of all of the benefits:

  1. Increase revenue: I would make $100 to $300 per night in tips.
  2. Cut costs: I would not be in the bars during those peak hours, so I would save my money.
  3. Live long: I would be working out.
  4. And prosper: I would be transporting attractive drunk girls.

A man could do far worse than be a pedi-cab driver in Austin.

The only drawback is that I would have to buy a mountainbike, which I imagine would run me $500. But I guess you have to spend money to make money, right?

There are quite a few steps to becoming a pedi-cab driver:

  1. Fill out an application.
  2. Visit the DPS and purchase criminal background check.
  3. Purchase a driving record history from the DPS website.
  4. Intervew with Pedi-cab company.
  5. Drop application off at City of Austin Ground Transportation Building and get pedicab license after taking a test.
  6. Bring in mountain bike, hitch it to one of the cabs, and complete a training shift.
  7. Start riding.

Because of prior infractions, I was actually very wary of step 3 initially, and was afraid it might completely kill this opportunity. Back in October 2010, I got my license suspended for three months because I got four moving violations in six months (speeding, unsafe lane change, failure to yield the right of way, and no motorcycle license). Apparently, getting four moving violations in as many as 12 months is grounds for a three-month suspension.

What can I say? I’m an over-achiever.

Anyway, I confirmed with the pedi-cab depot owner that my impeccable driving record won’t hold me back–he told me that even people with DWIs on their record can pedi-cab. I’m in the clear. Huge sigh of relief. Now I just gotta nail the interview. Since my license was suspended for three months, I had to ride my bike to work every day, a 7-mile round trip, and I built up some decent quads during that time. I will use this as the basis for my qualification in the interview. It’s tomorrow at 6 PM downtown. Please wish me luck.

More to come later, and I also hope to soon address some of the great comments that were posted yesterday.

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20 Comments

Filed under Three-Post Introduction

20 responses to “Sizing Up the Mountain

  1. “I assured him that I knew what I was doing, but I don’t think either of us believed me.”

    I literally laughed out loud at this line.

    Thanks for sharing. I’m working on my own debt snowball as well. I’m interested in seeing how everything works out for you.

  2. When you get to the cost cutting, a few of us started following that slow carb diet in the 4 hour body by Tim Ferriss. High protein, beans are dirt cheap, and with salsa it isn’t half bad. Plus we all lost a ton of weight in a span of 7 weeks! Just a thought. Good luck!

  3. No offense, but why does a guy with a Harvard MBA work a desk job and *hopes* to get a job driving a pedicab?

    I have to guess that you learned a thing or two about entrepreneurship or at least investing. That student loan debt is a relatively low interest loan. If you can take your income and roll it into an investment (of any sort) that beats your loan rate, the math says go for it.

    Also, what are you doing to spend so much ($43/day) on “entertainment”? I’m sorry, but that alone is going to force me to rant…You seem to know the price of everything, but the value of nothing (there’s an Oscar Wilde quote for you).

    Some tips:

    * Learn to enjoy cheaper eats and drinks. A six pack of tall boys costs $5. Subway is $5/meal.
    * Get a bar-b-q grill and bring your friends to you.
    * Your car + insurance is way too much, too. Sell the auto or garage it.
    * Ride a road bike everywhere. It’s fast and fun. You can also ditch your gym membership then.
    * Get a roommate or rent out your house/condo and move somewhere smaller and closer to work.
    * ONLY BUY USED ITEMS. A mountain bike won’t cost you $500 on Craigslist–that I can promise.
    * Also, you’re a adult male; you don’t need new clothes very often. Here’s my rule: if it won’t stop a girl from sleeping with you, it doesn’t matter in the big scheme of things. Girls don’t reject guys because of their shoes; they reject guys because their personalities suck. Personalities are free, btw.

    A few more tips:

    Live like you don’t have an income. You’re drowning yourself in superficiality and poor spending decisions. If you can’t control your spending habits, use a savings account and have your funds auto-deducted from your paycheck.

    There are a thousand things you can do to improve your situation. I admin your goal to pay back your student loans but there’s no way it’s going to happen with your current budget. And again, if you can put all your extra income into something with a better rate of return (like even a business), you should probably do that.

    P.S. This book has more info about personal finance: http://www.amazon.com/Your-Money-Missing-J-D-Roth/dp/0596809409 .

    P.P.S. Let this be a lesson that graduate school (and sometimes even undergraduate) can be a bad investment: http://blog.penelopetrunk.com/2011/08/29/voices-of-the-defenders-of-grad-school-and-me-crushing-them/ .

    Harvard is no exception. It’s much too expensive for the amount of education it provides. Think of how many lunches you could have taken business leaders to with $90,000. I bet one of them could have opened up doors that a degree couldn’t.

    • Jason, you’ve posted about 7 comments and I haven’t replied to a single one, so please accept an apology for my belated replies. You have mostly awesome ideas, and I’m a fan of the first three, can’t do the car since it’s impossible to commute where I live, just rented both spare rooms to a couple of people, and interesting mentality regarding new clothes… I couldn’t disagree more vehemently with you regarding Harvard being a bad investment! It was a kick-ass investment that will pay off well for the rest of my life! And thanks for the obvious comments regarding my budget and inability to meet my goals with it as-is.

      • Jason Pelker

        I was in a bad mood when I posted most of these comments (mornings aren’t my happiest moments) but know that I really do want you to succeed with your goals.

        Although I disagree with a lot of the choices you’re making along the way, I nevertheless commend your efforts and the guts it takes to publish your trials. Don’t give up–your story is inspiring to a lot of readers.

      • Regarding your note below–cheers man, don’t change. Keep the critical feedback coming. I’m far from perfect and I’m letting everybody know it.

  4. Kyle

    270/mo on Car Insurance? Have you shopped around for a better rate, or considered selling off your car for something that would both gain you cash and be cheaper to insure?

  5. Arti

    Oh my god. Good luck!

    I followed Ramit Sethi’s tweet to your blog. You sound like a really smart guy that has worked out all the possible options you have for paying down this debt, and the strategy you have sounds great. It is doable, it especially sounds like you have the brains to do it, and you’ve inspired me to snowball my own debt. I had $30K in debt, which is down to $14K since 2008. I’ve considered a few strategies, but this inspires me to step it up.

  6. Doris

    Good luck! I’m also trying to erase my massive student debt. I’ve already paid off 70K in one year, so you can totally do it! 87K more to go…

  7. Reid

    My only question is how in the hell do you get away with <$100 in electric in Austin, TX in the summer? Mine is at a minimum $150 in Cleveland, OH and I am a complete tight-ass when it comes to running the AC, for a place that is probably (based off your mortgage) smaller than yours.

    • Naw, it’s actually closer to $150/month. That said, it’s automated, so I never really touch it. 85 when I’m at work and the gym for 10 hours a day, 76 when I come home, 78 when I’m asleep. And for a couple months out of the year, it stays off. Stay cool in Cleveland!

  8. Zeona

    @Jason I’m sorry, but it sounds like your personality sucks. Lay off the guy! There is nothing wrong with having style and wanting a certain quality of life. At 28, I’d hope that he would be past the age of tall boys and eating fast food. Yes he may have been excessive at times, but that’s how one learns. Mistakes have to be made.

    Also I agreed with his bike purchase. Obviously you’re not a bike guy, because you would know that a $500 hybrid is actually pretty low end. He’s a smart guy who weighed out the quality vs. Cost and determined that he would be saving himself expenses in the long run. Although I think he probably could have found a better price online, he already stated that he needed it immediately.

  9. @Zeona Quality of life = experiences, not stuff. You don’t need to spend money to have experiences, either.

    It sounds like you’re a shallow enabler who is projecting your own inability to wrangle your budget on someone who wants to pay off $90,000 of debt in one year. He’s already proclaimed his priorities, and they don’t include continuing to spend $43/day on entertainment. I’d say that tallboys and backyard grilling out are definitely in his future (he is in Texas, after all).

    ************
    Inexpensive mountain bikes on Austin’s Craigslist portal: http://austin.craigslist.org/search/sss?query=mountain+bike&srchType=A&minAsk=100&maxAsk=250
    ************

    @Zeona You know very little about life or money and that’s okay. But the author has a long road ahead of him and he won’t make it if he listens to enablers like you. A wasteful lifestyle couldn’t pay off $90,000 of debt in a lifetime.

    The only way he’s going to reach his financial goals is by being incredibly careful with his purchases, while increasing his income exponentially compared to any investment he might make. At $120/weekend for pedicabbing, a $500 bike (plus can rental fee) doesn’t make a lot of sense, especially if the goal is to pay back that huge loan in less than 12 months.

    There are better ways to make money, and definitely less expensive ways to spend money on a bike (or anything else) that might be a waste of time anyway.

    More great financial health resources:
    * http://www.getrichslowly.org/blog/
    * http://www.iwillteachyoutoberich.com/
    * http://manvsdebt.com/
    * http://www.mint.com/blog/

    The authors of these blogs know more about overcoming financial difficulties/growing wealth than I ever will. I suggest everyone interested in debt reduction and improving their lives subscribe to them immediately.

  10. Your blog is absolutely hilarious. I’m about to take on a mountain of debt myself starting INSEAD this year. I’m sure I’ll be in your shoes post-grad and be sifting through your blog for ideas! 🙂

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