I was asked the other day the financial moves I wish I had done in my 20s and 30s to get ready for retirement. I thought wow, what a great question!
After some soul searching I arrived at three things I wish I had done better and three things I think I did right when I was in my 20s and 30s. In other words, where I reached the bar and where I fell short.
The common theme for my missed opportunities involved not paying attention. Call it youth, boredom, or not understanding the consequences. Each time I should have paid more attention to what I was doing. Conversely, my opportunities taken evidenced a high degree of understanding of the financial ins and outs of the course I pursued. My advice for young professionals is to pay attention to what you are doing and what you are not doing! And if you don’t understand why a particular financial move or strategy matters, seek expert financial help!
Three Missed Opportunities
1. Understanding My Student Loans: I gave no forethought to how I would pay for my graduate school education (law school and school of public affairs) other than through “student loans.” I ended up using high-cost unsubsidized student loans that increased my overall cost needlessly.
I was on my own to pay for graduate school. I worked for three years after graduating college. The financial aid criteria suggested that since I was earning a nice salary in the year before I matriculated I should have saved some of it for tuition. I hadn’t done so. Oh where did the money go? I was unable to qualify for subsidized student loans in which the government pays the interest while I was in school. I didn’t qualify for subsidized student loans for both my first and second years of grad school, because the financial aid formula looked at my earnings from the previous year which were high the year before I matriculated and even in the year I matriculated because I had worked for the first eight months (January – August). So I took unsubsidized student loans to pay for my tuition, room, and board.
My missed opportunity was that I didn’t realize that the interest that accumulated while I was in school would be added to the borrowed amount once I started repayment. I would be responsible for repaying a larger amount back (the loan amount and the accrued interest). Although I could have paid the interest while I was in school (or at least before it was added to the loan amount), I was unaware of that option. I had to pay interest on top of interest during my repayment. Needless to say, I should have paid more attention to the terms of the loan and how they worked.
This lesson is especially important for holders of private student loans because they work the same way as unsubsidized federal loans. Interest accumulated while you are in school will be added to the outstanding balance once you start repayment. Please be award of this fact!
2. Missed Rental Real Estate Opportunity: When I started grad school my Father said he would buy a small apartment for me to live. So instead of paying rent, I would pay him the mortgage expense and any property tax/insurance. He suggested after I graduated that I could repay the down payment.
At the time one bedroom and studio apartments were very inexpensive. The mortgage payment would have been less than or equal to the rent I paid. But I had no conception of being a property owner or what it would entail.
My missed opportunity was not taking him up on his offer. As I look back on it, I could have flipped it or continued to rent it after I graduated. My vision was too limited at the time. What I wouldn’t give now to have the additional wealth and income stream now that the apartment would have been completely paid off.
3. Missed Retirement Savings: As I said, I worked for three years before starting grad school. I worked at a Fortune 500 company that had a pension. When I left the job to start grad school I was given the opportunity to take the money or roll it over into an IRA. At that time, I had no understanding of pensions, retirement savings, rollovers, etc. So I took the money. I think it was $600.
My missed opportunity was that I didn’t understand that I would be responsible for funding my own retirement. I didn’t stop to think what I was doing and how investing the money would stand me in good stead in later years.
1. Power of Compounding: In my last year of grad school I qualified for subsidized student loans because I hadn’t worked a full-time job in the year prior to my last year. I didn’t need the money at the time because I was working part-time during the school year while completing my studies. My Father suggested that I take the money and invest it in an individual retirement account (IRA). So I did – correcting my missed retirement opportunity and getting a tax break in the process.
That $2,000 is now much bigger now due to the power of compounding. I invested it in a broadly diversified stock fund and have left it there. I just looked recently and the fund has averaged a 10.5% return from the early 1990s. Not a bad return!
2. Snowball Payoff Schedule: When I graduated I became acutely aware of my student loan burden. I made a schedule of the outstanding loan amounts and each minimum monthly payment. I then ordered them based on their interest rate. I would pay the higher interest rate loans off first. If two loans were at the same interest rate, the smaller one would be paid off first.
I was able to pay more than the minimum repayment each month so I used the snowball approach to paying down the debt. I paid the minimum amount on all of my student loans except for the one at the top of the list. I applied some extra to that loan. Once that loan was repaid, I attacked the next one by paying the extra money to that loan plus the old minimum payment from the loan I just paid off. The amount of money applied to the loan at the top of the list kept getting bigger (like a snowball) as each loan was paid off. I repeated the process until the loans were repaid.
This process saved me plenty of interest. In addition, it gave me a sense of accomplishment to knock off the student loans one-by-one.
3. Rental Real Estate: After I repaid my student loans I was looking for a home to buy. My realtor suggested that I buy a home with rental potential. I live in the District of Columbia, which has a very active rental market. So having been burned before, I was very much open to the possibility of rental income.
I ended up purchasing a home with a separate rental basement. The rental income pays more than its share of the mortgage. Its been a good way to pay down the mortgage. After the mortgage is repaid, the rental income will continue to come in, so it is a nice retirement income stream as well.
In sum, my advice would be to understand the ins and outs of your debt repayment, start to save early, and plan for your retirement now. It will be here sooner than you think.
This was a great read, Michael. The second of your “Three Missed Opportunities” hits close to home. While my parents did not offer to help me purchase a place during college, I was in a position to do so on my own a year after I finished my undergraduate studies at The George Washington University in DC. The regret I have is that I ended up purchasing a co-op (versus a condo) when I was ready to buy during early 2014. While I was ecstatic to own property in a great place like DC at the age of 23, I quickly became discouraged after finding out that I have to live in the unit for four years before I am eligible to rent it out, and there is never a guarantee that the co-op Board will approve the rental request. That said, I have really grown to love my unit and intend to keep it as a primary residence. In the near future, I hope to buy another property in the District exclusively to rent.