In 2005, I had 50K in the taxable stock market. How did that happen? We got rid of DH’s debt really quickly by living on beans and rice (more accurately, potatoes and marked down produce). Then we lived like regular graduate students and kept our expenses low. Finally, we saved up the money we would have spent on rent for two years from when we were resident assistants. That’s where the big money came in.
This post isn’t about how we got the 50K though. I’m not actually sure how much we put in (I don’t have the cost-basis information at hand), though I’m fairly sure it was less than 50K (probably more like 36-40K, because that’s what we saved on rent). This is what happened *after* that 50K.
In 2005, I got a real job that allowed me more room to save for retirement than I could use. That meant I stopped putting money in the taxable stock market and put it all in tax-advantaged funds. So that 50K from 10 years ago is a point-in-time snapshot. It’s all in index funds and ETFs (mostly the S&P500 and Nasdaq, with a little bit of the Dow– essentially your three major ways of measuring the market). Earnings are all set to DRIP. I haven’t added anything to it, I’ve just let the money ride.
10 years later (as of this writing), that portfolio is worth $126,000. That is double and a half. 252% of what it was 10 years ago. That’s including the worst recession since the great depression. I just let the money ride all the way through (even/especially during the dark time when it dipped below 40K).
Contrast that with DH’s unsubsidized student loans at 8.5%. He owed 10K (quite a bit more than he actually borrowed). If, instead of paying those loans, he’d deferred them during graduate school, he would have owed $15,227.95 at the end of that deferment. That’s a 50% increase. If he had followed their suggested payment schedule after that, 5 years from now with his last payment he would have paid a total of $26,992.80 on that 10K loan. That’s a ridiculous cost for borrowing money.
I can’t even comprehend credit card levels of interest, which average around 15% and can get much higher. Just that 8.5% student loan had me literally hyperventilating when I found out about it.
The downside of high interest debt is that it takes money away from you without you getting any benefit from it. It puts you in a precarious situation because you have to make those payments (or go through a lot of heartache and hassle to get them deferred or negotiated down via bankruptcy)
I was running through the thought exercise about whether or not we could live in Paradise on just DH’s take-home salary (something we’re not doing next year) if we sold the house and the answer is that after the big expenses rent, daycare, health insurance, and retirement, we would have about $1050 left to spend on everything else, from car insurance to riotous living. Currently we spend 2-4K on everything else. That would be a pretty big cut. But… we have a lot of money saved. And that money is making money. We could stop contributing to retirement at this point and we might still be ok, so long as we picked it back up after the daycare expense was gone. We could undrip our taxable stocks and that would bring in some income. We have a cushion that would last us until I found work.**
We’d be ok. And although having this cushion/buffer/etc. did take hardship and sacrifice early on, having killed the debt and invested a bunch means that money is now working *for* us keeping us from having hardship and sacrifice now.
High interest debt takes money away from you without giving you anything in return. Investment gives you money without you having to do anything to earn it. Make your money work for you. Sacrifice and save early so you don’t have to sacrifice more later. And early can mean today, because today is always earlier than tomorrow.
Compound interest is amazeballs. Unsubsidized debt sucks potty words.
Have you experienced the joy of compound interest or the drain of high interest debt? How did you get there/how did you get out?
**Not that I have *any* plans to quit my job! But I did have this horrible worry that I would get squished by a semi truck while biking to work next year and DH would have to fend for himself without my half salary. Then I remembered that he’d also get 500K from my life insurance plus funeral expenses from my work insurance which should tide him over until he decides which city he wants to move himself and the children to after the year is up (oddly, he refuses to make that hypothetical decision now and says I’m worried about unlikely events because I’m stressed about the move!). So the exercise was moot.