Do You Practice What You Preach?
It’s so true that trying to teach a subject forces you to truly learn it. I’ve been working hard on preparing my presentation on personal finance for grad students (it’s tomorrow!) and it’s really helped me fill in some of the remaining gaps of my knowledge, particularly regarding debt acquisition and repayment. I haven’t had a lot of interaction with debt in my life, and the interactions that I have had didn’t make a big impression on me at the time. I didn’t obsess over optimizing my debt repayment strategy the way I obsessed over how to increase my retirement savings, for example. Because of my lack of personal experience with the subject I’ve always been a bit shy about giving debt-repayment advice to people – I’m much more excited to talk with them about investing, for example.
During the course of my presentation preparation, I made the following slide (it has since been cut for time reasons, unfortunately). It features what you might call my own version of Dave Ramsey’s Baby Steps, which is a step-by-step approach to building a financial footing, though it is a bit more open to interpretation than the Baby Steps are. When this slide was in my presentation, I verbally emphasized that the six steps are based on my own values and that each person will create her own version.
So this is my ‘preaching.’ Prioritize emergencies funds and retirement savings and deprioritize paying off low-interest debt. That’s not even something I expect to be applied to everyone exactly as-is, but just what I want to do for myself – or so I say.
But what is my practice?
I currently have low-interest debt. My subsidized student loans from undergrad are in deferment (essentially 0% interest rate). While they have been in deferment, we have invested the payoff money we saved. That’s worked out well for us – we’ve made a few thousand dollars even on a conservative investment. So far, we’re in line with my ‘preaching.’
However, our plan has always been to sell our investments and pay off my loans just before they come out of deferment, thus avoiding ever paying interest on them. This is not in line with my stated objectives. I have one loan at 6.8%, so paying that one off immediately is in keeping with my plan. But as the rest of the loans are currently at 1.73%, we ‘should’ keep the payoff money invested and milk that low interest rate until the loans are paid off or until the rate resets to be above 5%. In fact, I should apply for one of the various extended repayment plans to lower the payments and keep the loans around for decades.
While I think that I will espouse my preaching when it comes to a long mortgage, somehow these loans feel different. I think it’s because we have the money available to pay them off, unlike a mortgage. The math is the same but the emotions are different, and despite much waffling it seems that emotions will rule in this case.
I am a hypocrite! I can’t even follow a plan that I specifically designed for my own values and risk tolerance! What hope do I have for advising anyone else about their finances?
Do you practice what you preach, financially or otherwise? Would you keep debt around if you had money available to pay it off?
Filed under: debt, investing · Tags: debt, hypocrisy, investing, student loans
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While I haven’t dealt with debt, I have seen others who have and emotions are certainly a big factor. At the end of the day, I think if somebody is going to do something that is still prudent (even if it is not mathematically optimal), they should do it if it gives them greater emotional satisfaction than the alternative (as in your case).
As for me….I believe that people should follow their investment policy statement (IPS) to the letter. Part of the reason Bogleheads suggest writing one is to try to remove emotions from the equation when the stock market tanks -hopefully this statement was written when the stock market was not in a frenzy, and the investor wasn’t panicking or anything like that.
I decided to tax loss harvest some of my investments. My IPS says to let the proceeds of the sale sit in a bank account for 30 days, and then jump right back in. But now I’m actually planning on having it sit in a bank account for 90 days, so that I can get a bank signup bonus from Chase ($150). I rationalize this by saying that the annualized return for having $10k sit in a Chase account to get that sign up bonus is 6%, which is great guaranteed return. But it doesn’t follow my IPS. Also, my effective asset allocation would be skewed, if this $10k used to earn that sign up bonus is viewed as a fixed income asset (which I would argue it is). So I’d have to adjust my asset allocation, but I don’t actually have enough money to rebalance my asset allocation to what my IPS says.
I agree that the squishy factors like emotion (can you sleep at night? does this stress you out?) should play a role in a financial plan, alongside math. For us I don’t think it’s that we can’t sleep at night or whatever, but just that we don’t want the hassle and mental load of keeping the debt around.
That is a great idea to write an investment plan in advance. You’re pretty close to keeping yours, but I guess it’s supposed to be a no cigar situation? Three months doesn’t really seem much longer than one, but I suppose any deviation that turns out poorly is apt to leave you kicking yourself. We don’t mess around with detailed investing, so our ‘plan’ is just to DCA 15% into our diversified funds and leave it alone. 🙂
It’s supposed to be a no cigar situation, yeah. Rationally three months isn’t much more than one, and I’m still earning money on it. Honestly, I’m more concerned about a possible slippery slope of breaking my IPS than anything else.
Yeah, that would be my main concern as well. I guess you can edit your IPS to have exceptions for minimum rates of return on risk-free investments? Though as a living document I’m sure it’s better to edit when you don’t have a deviation/decision in front of you. 🙂
Yea that would be a good idea. Maybe something like a couple percentage points greater than the current best risk free investment. Though as you pointed out, editing during a decision does seem problematic =P
Thinking about it more though, I think the most important reason to have an IPS is to not act emotionally during a market downturn. Which isn’t what’s happening right now, so I don’t think it’s that terrible to do this. Of course, it just comes off as me making excuses to not follow my IPS =P
I think I would be with you on paying off all of the student loans at once. I do like how Dave Ramsey puts it though- If you had no student loan debt and a smaller savings account, would you take out a loan at 1.73% to invest at a long-term interest rate of 7-8%? Probably not.
I don’t agree with all of his points, but I do like that explanation.
I like DR’s reframing as well, though in some cases I answer “I would if I were in that situation!” It shouldn’t be different, but taking out debt for some actual reason feels different than just getting a signature loan or whatever. Like I would fully support taking out low-interest car debt if you have the value of the car invested – more so than taking out debt if you don’t have the money on hand! But then, why wait for those ‘opportunities?’ I think that’s DR’s point. Would I borrow money on a signature loan at 2% to invest? Nope. Maybe the car feels different because it’s kind of doubly collateralized? Like, if your investment tanked at least you still have the car to stand for the debt?
Well, we paid off my subsidized loans rather than putting them into deferment in graduate school, but that was mainly because I was worried that if I put off paying them, my parents might decide not to pay them off and I felt guilty about taking their money to pay them off and investing it instead. DH’s student loans were high interest and unsubsidized so there was no reason not to pay them off ASAP.
We also paid off a 0% interest credit card right away because I didn’t want to end up forgetting to pay and hitting all the back interest and other nastiness that credit card companies will hit you with if something goes wrong with a teaser rate.
We did hold on to an auto loan when the CD rate was higher than the interest rate on the loan.
There’s a hassle factor and a mental accounting factor on top of the optimization. And the difference in earnings between the two choices probably isn’t actually enough to worry about.
Also, I think my risk factor is a bit different when it comes to losses/obligations (debts) and comparing different gains. So if a CD pays more than a debt, I will invest in the CD, but if we’re talking about an uncertain stock market, I may prioritize the debt, depending on the interest rate. Low interest debt for me is <3%, not <5%, which is why we pre-pay the mortgage instead of completely maxing out our retirement funds.
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I agree the hassle factor is important, as well as a proper accounting for risk (which I don’t actually know how to do). A CD with a higher rate than a car loan really does seem like a no-brainer. How did you come to determine that 3% is your distinguishing line between low-priority and high-priority debt repayment?
It isn’t always 3%. Right now it is because I don’t think safe interest rates (CDs) will hit 3% in time to make it worthwhile to not pay off my mortgage/other potential debts. I also couldn’t get debt cheaper than 3% most places, so I wouldn’t be able to arbitrage using 3% debt. Maybe if I got a car loan special deal, but we won’t be buying a car for a while. I don’t see them hitting 5% (like they were when I was in grad school!) for quite some time. Not that I can forecast the future.
In terms of what I tell people, I’m a good economist and am always like, “…but YMMV. Here are the costs, here are the benefits, you decide. You can’t decide? Here’s my somewhat arbitrary suggestion.”
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That’s a good way to approach answering questions.
You’re not a hypocrite because you gave yourself an out, right at the top left of the slide! The “every situation is different” disclaimer: it actually matters.
Your presentation sounds like it will be FAR more useful and detailed than the one I went to early in grad school. It was supposedly for med students and grad students, but hosted at/by the med school, so there was definitely an assumption that much of the audience would be living off loans. It was basically, “here is how to make a budget that keeps you from spending more money than you have available each month.” I was very unimpressed – I’d been hoping for some grad-student-specific advice on things like retirement savings, or how to balance long-term savings with school-related costs you might have to shoulder (e.g. conference travel). Yours sounds way, way more useful for those who have the “spend less than you earn” thing down by now.
Thanks! The slide above is one of the most applicable and without it I’m afraid the presentation is a bit less useful and more philosophical. But I’m going to get into the material verbally for sure as there was a submitted question right along those lines.
I’ve been to PF presentations like that around my university as well. It makes no sense to me to lump grad students and med students into the same financial category, either while in school or after! I’ve kept my presentation super-focused on what stipend-receiving grad students can do while in grad school to gain financial traction. I hope the advertising has been clear enough that no one outside of that category comes and is disappointed or bored!
Thanks for your support!
We’re planning on paying off our mortgage, so, ya, if I had the funds, I would pay off debt. I’ve run the numbers and know that strictly on a numbers basis I’d be better off keeping the debt around, so I acknowledge this is an emotional decision. That being said, I don’t think I’ll regret it when the mortgage is gone when we’re 35.
Emily @ Simple Cheap Mom recently posted..The Seduction of The Second Car
No, probably not! We probably won’t regret paying off the student loans, either. I’ll have to keep my eyes off what the market is doing for a few months, maybe, in case it jumps up!
I say that I would want to keep a long mortgage, but since I’ve never had a mortgage I don’t really know! Maybe I’ll have some emotional weight in there that I don’t expect as of now.
What is your reason for paying off your mortgage quickly?
Well, you can preach what works best for most people while still personalizing your own finances.
For example, thanks to health problems, we eat way too much convenience food. I would tell my readers that I absolutely don’t recommend it. But it’s something we have had to accept and move past.
I think as long as you’re transparent with your own situation, you can still in good conscience tell people to do as you say, not as you do.
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But I was trying to say what would work for ME! And then say that everyone else would have to edit for their own situations. I guess it goes to show that I don’t know my own self very well, or at least that somehow a (theoretical) mortgage feels different than a (real) student loan.
Since you highlight that personal finance is personal, what you’re doing with your own debt is completely justified because maybe it just works for you. 🙂 Besides circumstances change all the time. Sometimes I tell my friends I want to save the environment, but then I go invest in index funds which contains large oil and energy companies. I think it’s difficult to live a life free from hypocrisy, but as long as we don’t do it all the time then it’s okay.
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That’s a good example. I have some hypocrisy in environmental issues as well. I was just researching SRIs the other day though…
I don’t think you’re a hypocrite, rather, you’re navigating a path that makes the most sense for you given your specific circumstances. Plus, I’d probably do what you’re doing if I had student loan debt–I like the idea of paying things off! Although we don’t actually plan to pay off our current mortgage in any accelerated manner. Our interest rate is so low (3.8%) that we’d rather invest our excess cash. All that to say, you give great advice regardless of whether or not you follow it to the letter.
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3.8% is a sweet interest rate! So why don’t I think 1.8% is sweet enough?? 🙂
Everyone should do so, especially those who are in authorities of the subject. This is for the reason that it adds to their credibility ‘coz people, who seek financial advice, are most likely those who can tell if someone is lying or telling the truth. For those who are in this profession, you’d better be practicing what you preach so that people would just trust you completely and easily apply your advice to get out of debt.
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I guess I should be more flexible in my preaching, then!
[…] I went back and forth over the decision. Emotionally, it would be more gratifying to be rid of the debt so we can move forward in our life with a clean, debt-free slate. Mathematically, it’s quite likely to be more advantageous for our net worth to keep the low-interest debt and investments. […]