David Staub: Prioritizing Debt over Investing
This week we have David* who went from spending $12,000 every month to $6,500, and is on track to pay off 50% of his debts by mid-summer! He sheds light on why he opted to pay off most of his debt before investing in the stock market and drops some great takeaways on understanding your spending, value, and a fool-proof setup for your money.
Occupation: Founding Software Engineer at Startup
Salary Range: >$100,000, also contracts on the side
Location: Venice Beach, CA
Big Expenses/Debts: Student Debt ($1000/month payment, $400/month after CARES Act), Credit Card Debt ($4300/month payment)
Private student loans and credit card debt will be paid off by July 1st, 2020 (Total pay off between both will be about $70k for student debt over 4 years, starting in 2015 and $25k for credit cards starting in January 2020)
Monthly Expenses: Rent: $1300, Transportation: $300-500 ($0 after COVID19), Health (Insurance and Prescription): ~$350, Food: $500-$600, Eating Out: $250-500 ($0 after COVID19), Subscriptions: ~$75, Taxes: ~20% of total gross income, Miscellaneous: This can vary quite a lot so not worth specifying a specific number
Kavya: Tell me a little bit about yourself! Where does your philosophy around money come from?
David: I graduated in 2015 from Penn State. What I have ended up realizing is that neither high school nor college teach you very much at all about money, and particularly value, which is the larger lesson. And so, neither are worth going to until you have an understanding of value and what you aim to get out of the experience.
I was building an equity crowdfunding platform to expose non-accredited investors to a new asset class, and this idea further perpetuated there. Many argue that one of the plights of everyday people is their lack of access to investment opportunities. If anything you need to take away the ability for non-accredited investors to invest in things because they just don't know what they're doing. There are also people out there who want to take advantage of them. All of this was my incentive for learning a lot of personal finance and subsequently, how the world works, financially.
I've read a lot on the topic and one of the big core takeaways is that it has a lot to do with your circumstances. For example, how much debt are you coming out of college with? If you don't have debt, then following a principle of your expenses should be no more than 60% of your income after taxes. Everything else should be between investment and savings. You should generally have at least 6 months of expenses saved up.
Following these principles, even for software engineers who have a good income, would lead to a lot less disparity. I only kind of realized a lot of these things in the last two years.
I came out of college with $100,000 in debt, which is now around $48,000 ($37k federal). So I really come from a place of prioritizing paying off debt. All of my debt is above 3% (interest rate), and the average interest rate is around 6%, with some student debt being as high as 9.25%. So with that in mind, you have no business investing, especially with that kind of interest rate. You're better off paying off the debt first and go from there. Given special circumstances such as the recent passing of the CARES Act, the 0% interest rate and forbearance make it possible to prioritize paying off federal debt much later than everything else. These special circumstances don’t come around too often but it does mean that I will be investing as soon as I pay off the private loans in July of 2020.
If you have stuff that is under 3%, you can begin to consider not paying it off immediately. I've gone back and forth about this over the last few years and I think my conclusion is it really does come down to your personal situation.
I think a good starting point is to keep your expenses around 60% regardless of how much you make. If you come to the conclusion that you can't do that, then you either need to spend less or you need to make more.
Kavya: Thanks for sharing! There's a lot to unpack there so I'll start with when was the first time you thought about personal finances and had the need to take action? Was it during college or post-college?
David: Thinking about it and taking action are very different things. I started thinking about it closer to the end of college. Until then it was just a suspended reality, where I didn't worry about how much I was borrowing and I focused on college and exams and stuff. Towards the end of college, things started to dawn on me.
However, in terms of my actions, they were not appropriate either. I went from spending $600 a month on rent at Penn State to $2400 in downtown Palo Alto. That itself was 80% of my income ($36K) and it was very aggressive. It's not what everyone does, but I've seen similar patterns in recent graduates who were making $120K but most of their money is going towards rent. The people who end up doing well in their later 20s are the ones who have their parents hold them back from doing stupid shit like that.
Kavya: What was the first step you took towards figuring out your finances? When was it? Was it at the end of the 6 month grace period after graduating from college or much later?
David: I didn't take things seriously even when I had to start paying off my debt. I also made the decision to travel and go $12K into credit card debt in 2016. I only started making a conscious effort in my personal finance at the beginning of 2018, nearly 3 years after graduating.
Kavya: What was the wake-up call for you, that moment where you're like, "I have to get things in order!"?
David: It had to with the day-to-day stress. It was terrible, I didn't understand how I was making a decent amount every month, around $4K in 2015/2016, but I constantly felt like I was giving away all my money and that I would not be able to pay for things.
Even when I doubled my salary by better understanding the value of my work, I was noticing how I didn't have a safety net and still felt like all my money was just going away. At that point, I was like I need to be more intentional about this stuff because if I'm not, no one is going to be.
Kavya: What did you do next?
David: Read. There were a few things going on then, it wasn't just personal finance I was trying to get better at. I started to dedicate roughly 3 months at a time to a specific topic. The goal wasn't to have the problem solved within those months, so much as it was to have a system in place that would gradually help me. One of those topics was personal finance.
I started reading things like Richest Man in Babylon, I Will Teach You How to Be Rich, Medium articles, etc. I also talked with friends about what they were doing and watched YouTube videos that outlined more complex principles. At first, as I learned a lot about investing, I felt like I needed to be investing too because it felt time-sensitive (and it is). As I learned about the typical percentage returns, it made no sense for me to be investing my money as I needed to be paying down my debt.
This generally applies if you have bad debt above 8%. If that is not the case, you should be using the money you have after taxes and expenses to invest half and save the other half. You’ll never be able to beat compound interest + time. If there is anything that will make you very rich (or very poor), it’s compound interest.
By the end of those 3 months, I had a system down where I was like okay the reason that I have a problem is that I'm spending $12,000 a month and only making $10,000. So I implemented this meticulous system of spreadsheets, which I still use to this day, to get things under control. By doing that for 6 to 8 months, I was able to go from spending $12K a month to $6500, and that included taxes and payments for credit cards and student debt. It also allowed me to live in Venice Beach and go out and stuff.
The problem is that I see people around me that are making a fraction of what I'm making and seemingly living a similar lifestyle and I just don't get it. It just doesn't make any mathematical sense to me. I guess you could call me a hater.
I also read, on a different 3-month stint, about global finance and macroeconomics of countries and companies which put a lot of things in perspective. My work with the SEC and FINRA also put a lot of things into perspective as far as how much human psychology can be an issue.
Talking about personal finance is really stigmatized. I think that's one of the worst things about our culture is that we don't feel comfortable because it's a point of shame, but what you don't realize is that most people are like you, or worse.
It's very beneficial to talk about these things, I think especially for software engineers, you end up having to put your ego on the back burner for a bit to face your vulnerabilities about things you don't know.
I think one unintended consequence of going through this meticulous process, was that even in situations where I was down to the last thousand dollars (was on the job hunt for months), it gave me a sense of control.
Even just the knowledge of “this is the day I will run out of money,” really put everything into context and helped me see more clearly and understand where to spend my time. People would look at me like "How are you so calm right now?". I would say, “because I know that today I’m not broke. I know that on this day I will be broke.”
If you don't have that, then you're very liable to make dangerous decisions for yourself. That sense of control was incredibly helpful. Even if you're not going to sort out your financial problems instantly. For instance, my debt has taken me almost 5 years and the remaining federal loans will likely go until 2025 but the short term gain is that I have this notion of control over my situation. It's not an immediate feeling of control, it comes gradually but I think a lot of the stigma comes from that feeling of a lack of control.
Kavya: Can you talk a little bit more about the meticulous process you kind of went through? What does tracking your expenses look like?
David: I started out with some basic spreadsheets and then I moved to QuickBooks Self Employed. I also tried Mint but none of those really worked for me. There were some features that worked, others that didn't, and features I needed that just didn't exist.
Ultimately, I just created my own system. What do I care about? How much is going out and how much is coming in. I also want to categorize things on a personal and business level.
For each month, I have 3 spreadsheets. One is a general overview, where I project how much money will be spent and be coming in for an upcoming month with dates. The second spreadsheet is personal expenses, as they are happening and the third one is for business expenses, as they are happening.
I currently sit down once a week for an hour, on Sunday, logging and categorizing everything. At the end of the month, I do the same thing and I see the comparison between how much I thought I'd spend versus how much I really did spend and where I spent that money. Are these expenses I can decrease or behaviors I can change?
Kavya: Has this system helped you out beyond being able to see where all your money is going?
David: Recently, I negotiated my salary up. Before then, I was trying to figure out what I should even negotiate it up to, what would be a significant bump? I projected how much would be significant by taking in paying off my debt and considering my monthly expenditure. This showed me that if I didn't negotiate up by at least 20%, it wasn't significant.
I'm also looking forward to this summer when I will have paid off all of my private loans and credit card debt. I'm excited to experience what it's like to maintain the income but have none of the expenses due to bad debt. The remaining $500/month after September (assuming no further forbearance or canceling of student debt) to pay everything off by mid-2025 won’t really be something that I think about as it will just be on autopay. The ability to say that makes me excited and gives me an incentive to struggle a little in trying to accomplish paying off the debt sooner. The system helps me decide if it's worth driving Lyft, for instance, to pick up an extra $1-2K. I know what I would be giving up, but is it worth it?
Kavya: As you see changes month to month in your spending, do you set limits for yourself?
David: I originally tried to set limits, but it didn't really work for me. Say you reach the max for "Eating Out" by the middle of the month and someone invites you out to Chipotle and it's a potential business opportunity. Are you going to say no to that? No, I'm absolutely not going to do that.
What I will do instead is the following: “Last month, I spent $1400 on eating out. Why did I do that? Oh, because I was traveling. Why didn't I set up Freshly for where I was traveling? With freshly I spend $500 a month, so I could have easily spent $1000 less. However, I didn't take the time to just change the address to where I was going. That's a conscious decision which if I had taken I wouldn't have eaten out as much.”
One of my friends suggested I stop doing Freshly and just go for canned foods because I would spend $200 a month and be able to survive. For me, that's thinking in the wrong direction. First of all, doing so would have a detrimental effect on my health, which I'm not willing to compromise. Secondly, the difference of $300 is something I can afford and if that $300 did matter every month, then I just need to be making more money. The proper question is how do I do that?
Kavya: You mentioned how you have been prioritizing paying off your debt before any other investments. What is your methodology for where your income goes? Is it paying off your debt and then putting the rest towards expenses? Do you have any other investments or savings?
David: The gateway to investment for me is Roth IRA. It's a stupidly good deal, there's no reason not to do it, and it's ~$16 a day to max it out for the year ($6K/365).
However, with the goal of paying off my debt, I'm not putting any money into my Roth IRA, at the moment. Instead, I'm choosing to put it towards my debt. As soon as I get to the halfway point with paying off my debt this summer, I will use dollar-cost averaging to max out my Roth IRA through the end of the year.
All of my expenses are either necessary costs to keep up my desired standard of living, or they are debt or taxes. There's nothing else right now, but my entry point to investment is the Roth IRA.
Kavya: Did you have to make any big lifestyle changes or sacrifices to bring down your expenses?
David: I think the most significant one was food. It's a category where I could very easily spend $2-3K a month on but by switching to something like Freshly, I now spend $500 and I don't even have to cook.
The other big change was rent, where I realized the expensive places didn't have significant enough differences to make the bump in the rent worth it. $2500 places just didn't make sense and if I did want to splurge I would at $1800 if the differences were big enough. This mentality specifically applies to the pay-off period. In July, I plan to move into a 1 bedroom apartment which will likely run $2-2.5k (let’s hope we have a mortgage crisis).
Taxes were another big one where, as you make more money, the marginal tax rate makes you pay more money. So being very intentional about business expenses versus personal expenses has helped me pay only ~20% versus being taxed at a 35% rate. Obviously, businesses still pay taxes. However, they do so differently than individuals.
Kavya: For people who are scared about making the wrong financial decision, such as opening up an account or a new credit card and messing it up, what is your response to that? There's a lot of friction to start, with some of it rooted in fear and some of it rooted in lack of knowledge.
David: That's a very good point and it's something to definitely be concerned about. By no means do I have the ultimate system or anything. It's very much a work in progress. I'm going to answer this with regard to expenses and investing, individually.
With expenses, it's more straightforward. Outline the behavior of the last 2-3 months and see what patterns emerge. Reflect internally on how you can change them or how you can be more mindful day-to-day. Don't be afraid to overspend. You're identifying a pattern and attempting to change that pattern and that's not going to happen overnight.
You can, however, get better every single day at understanding why you are spending money online shopping all the time or why you're going out to eat all the time. You can gradually get better at that. You shouldn't be afraid to make mistakes but you should understand that you're working towards a better outcome. If you end up going from $3000 a month on food to $500 a month, over the course of 6 months, that’s amazing!
If you do want to continue spending how you are, you have to be ready to make sacrifices in other areas. For me, automatically transferring out money for fixed expenses like rent, has helped me know how much money I truly have to work with.
With investments, you have to be ready to lose the money that you put in. If that’s not the case, you shouldn’t do it.
First of all, max out your Roth IRA before you do anything. For a lot of people, that's a good goal because putting away ~$6K every year is a good amount of money and can be challenging. Some people might not even reach that, but that should be your first priority. Secondly, if your company matches for a 401k, consider doing that.
You also want to consider, how much do you have leftover at the end of the day. If we're talking about a few thousand or a few hundred bucks a month, you don't really have to go further than a Roth IRA or a 401K.
It's also important to consider what you are willing to spend time on. I, for instance, have no interest in spending a whole day trying to time the market. I think that's an important thing to come to a conclusion on.
I'm personally choosing to spend time on a real estate venture with my father, which is not going to pay for at least six months. It's outside the realm of things I've mentioned but I'm also only doing that because I have access to that opportunity.
Investing begs the question of risk tolerance, and that also takes in your current situation, your family's finances, and much more.
Kavya: If you could kind of give one piece of like actionable advice for like a college student, what would it be? What do you wish you knew in college that you know now. It's another version of that.
David: Spend some time to start learning your spending patterns. Start with the past two to three months and compare it to how you feel about your standard of living. Ask yourself, is the lifestyle I'm imagining for myself possible? What kinds of income do you need to be living that life? Allow the answers here to guide your decisions regarding your opportunities. These decisions might be what to study, what field to pursue, or whether to cook or order your next meal. Question what you're studying now, how is that going to help you realize the life you want? You can't answer any of these questions without understanding yourself.
Take the time to learn about yourself, financially, and get uncomfortable. Become comfortable with the parts of you that are not perfect. No one's going to do this for you. The thing is you're going to eventually have to do it, it's just a matter of how much money are you prepared to lose before you do it?
Kavya: Have you changed any of your financial behaviors due to COVID-19's impact on the economy? Have you changed how you are paying off debt due to the cut in interest rates?
David: Given that my federal loans have gone into forbearance, I will pay off everything else and begin investing/saving in July. I have no plans to pay off federal loans beyond the minimum payment required starting in September (unless they delay further). I’ll be focusing on my knowledge of the tech industry to invest in companies that I think will perform well. I’ll still be focusing on that housing project with my dad.
Kavya: What credit cards do you own? Why did you get those ones?
David: I have two credit cards, one for personal expenses and the other for business expenses. For business, I use Chase Sapphire Reserve (at the time, it was the best credit card on the market as far as travel is concerned, I work remotely and visit family a lot).
For personal expenses, I use Capital One Quicksilver and that's simply because it was one of my first cards, it offers cashback on purchases. I recently tried AMEX Gold for personal expenses, but didn't like AMEX and left. I do not recommend using charge cards for people new to credit cards, particularly cards with AMEX who tend to be inflexible when it comes to their rules and restrictions. I will likely seek out a different credit card for personal expenses this year. Not sure what it will be at the moment.
Regardless of who you are and what you do, you need to be making purchases via a credit card. If you're bad with credit cards, do yourself a favor and get good, quick. The benefits, both short and long term, are invaluable.
Kavya: How much of your income do you save annually? Can you break it down amongst different financial vehicles?
David: My "Rainy Day Fund" never has any more than 6 months worth of expenses in it ($30k). Based on my professional skills, the current market, and my age, I believe this to be reasonable given a need to be more open to risk in your 20s and early 30s. At these times, by investing, you get access to compound interest that you will never be able to make up for in the future.
For your readers that want to minimize time spent worrying about money and assure that they're "doing the right thing," the base goal is simple: accrue 6 months of expenses in the form of savings and max out your Roth IRA. Don't think about other stuff until you have that because you should only invest money that you can lose and until you have those two, you can't afford to lose money.
Kavya: What tools/apps/services do you use to manage your money?
David: I have built my own tools to track my finances month-to-month, I spend an hour a week reconciling my finances (largely logging and categorizing expenses) as I don't find existing tools sufficient. I also have my own tools to project my financial goals.
Credit Karma: Generally speaking, my experience with all Intuit products has been pretty poor but I do enjoy Credit Karma (which I believe is now owned by Intuit).
Privacy: If you'd to control how much a source can charge you per month (think subscriptions and stuff), setting up a virtual card via Privacy is a great way to do so.
Kavya: Any resources you recommend?
I Will Teach You to be Rich by Ramit Sethi: The perfect entry book for almost anyone interested in learning more about personal finance. I've read quite a few books on the topic, ranging from super basic to very complex and I still think that this book has shaped my thinking more than any other resource. I don't agree with everything Ramit says but I don't have to. If you haven't read it already, I recommend you stop reading what you're reading now and start this. Bring a highlighter.
Google Sheets: A great way to start playing around with your budget. You don't need fancy tools to tell you how much you're spending, just open your bank account and google sheets and get started.
Most personal finance blogs only share stories of the people who have it all under control, save 50% of their income, and retire early. While that is impressive, some of us want a career and some of us just need our almond matcha latte every morning. However, we all still face the same woes when it comes to managing our personal finances. MoneyStories is a series of interviews with young professionals and recent graduates sharing their stories on how they have and are navigating their personal finances.
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