Bragging/New Frugal Generation

[ladypatriot]

First, the "bragging" part of my post: My dd-24 just completed her Master's of Library and Information Science! Top of her class, too! I'm so proud of her. Dh and I paid for her undergraduate program, but she took out a student loan to fund her master's program. She also worked two part-time jobs while going to school full-time (she was in an accelerated program, completing her master's in three semesters instead of four).

Dd has already been offered a job as a reference librarian in a branch of the Carnegie Library. She will start paying back her student loan in a matter of weeks. Did I mention how proud I am of her?

Anyway, onto the second part of my post: I have noticed that both my adult children (daughters, 24 and 20) have become much more cognizant of the economy and financial practices than I remember being at their ages. Both daughters have credit cards but pay them off each month; neither are able to save any money at the present, but at least they're not in debt (except for eldest dd's student loan).

Eldest daughter refused to buy a car and relies on public transportation; second daughter is following in her pattern. Eldest daughter is giving up her own apartment to move into a shared apartment, so that she can save money. Second daughter is preparing to return to college as a junior, and already has prepared and discussed with me her budget plan for the year. Dh and I pay for tuition and board, but she has to pay for everything else, i.e., clothes, books, entertainment, stuff for her student apartment.

Eldest dd has even asked dh and me about whether she should try to put something into a 401K or just focus on her student loan. We advised her to focus on the student loan.

Maybe it's just our kids, but dh and I feel that maybe the generation just now coming into the workforce will be more fiscally sane than previous generations. Maybe this new generation will realize the long-term value of debt reduction/elimination and LBYM. At least it's taken root in our daughters. Oh, and our ds17 is showing symptoms, too!

LadyPatriot

 

[HFWR]

First, the "bragging" part of my post: My dd-24 just completed her Master's of Library and Information Science! Top of her class, too! I'm so proud of her. Dh and I paid for her undergraduate program, but she took out a student loan to fund her master's program. She also worked two part-time jobs while going to school full-time (she was in an accelerated program, completing her master's in three semesters instead of four).

Dd has already been offered a job as a reference librarian in a branch of the Carnegie Library. She will start paying back her student loan in a matter of weeks. Did I mention how proud I am of her?

Anyway, onto the second part of my post: I have noticed that both my adult children (daughters, 24 and 20) have become much more cognizant of the economy and financial practices than I remember being at their ages. Both daughters have credit cards but pay them off each month; neither are able to save any money at the present, but at least they're not in debt (except for eldest dd's student loan).

Eldest daughter refused to buy a car and relies on public transportation; second daughter is following in her pattern. Eldest daughter is giving up her own apartment to move into a shared apartment, so that she can save money. Second daughter is preparing to return to college as a junior, and already has prepared and discussed with me her budget plan for the year. Dh and I pay for tuition and board, but she has to pay for everything else, i.e., clothes, books, entertainment, stuff for her student apartment.

Eldest dd has even asked dh and me about whether she should try to put something into a 401K or just focus on her student loan. We advised her to focus on the student loan.

Maybe it's just our kids, but dh and I feel that maybe the generation just now coming into the workforce will be more fiscally sane than previous generations. Maybe this new generation will realize the long-term value of debt reduction/elimination and LBYM. At least it's taken root in our daughters. Oh, and our ds17 is showing symptoms, too!

LadyPatriot

Someone should alert my 28yo son...

 

[crazy connie]

Congrats Mom this is awesome!

With my daughter who has a modest bit of student loans (at 3.5%) I did suggest the 401K to the max of the match. That is free money and once it passes by you never get a 2nd chance at it. She makes enough to do both and has just bought herself a new vehicle. She is committed to never financing another one. Here in Phoenix it was too hot and too expensive to re-do her AC on her old car ($2000 on a Jetta with 150,000 miles).

 

[Nords]

Congratulations, LP, it must feel great to launch them out of the nest!

As Connie has pointed out, a 401(k) with a match is usually a much better deal than paying off a student loan.

Someone should alert my 28yo son...

I had no idea so many people wanted to study library science...

 

[WhoDaresWins]

It sounds like you raised some pretty smart kids and for 3 out of 3 to be so sensible it is nothing short of remarkable. Congratulations and best wishes to the new graduate. I am happy to hear your daughter is walking out of school into a job. The Carnegie Libraries have quite a history and have been the beacon in many a community. I have an MLS and worked in the field for a number of years before taking off 12 years after my son was born. I presently work in social services.

 

[Rambler]

DS had been pretty frugal for the past three years, but recently began cooking for all his friends at college. I subsidize his living expenses, and keep a watch on his account, so I had to call him up the other day and remind him that $xx amount of dollars would be going in his account every month (we started him out with some extra play money to get thru the first semester, until he found a job - which he has now done). I told him that I would not let him go hungry, and that I will not question how he spends his own money, but that he would not have any subsidies other than rent and tuition from this coming January. He immediately threw the switch and went back into frugal mode. It has been interesting to watch. Hope he is able to keep it up.

R

 

[brewer12345]

Never fear, stupid consumption will never permanently go out of style.

 

[ladypatriot]

Thanks to all for the congratulations!

Nords and Connie, initially we (dh and I) also thought the 401K would be a better idea but then decided that once dd has the loan paid off, she'll have much more money to invest which will then be matched. So, in effect, she'll have more years of investing a higher amount and match.

That was our thought, but in the end it was her decision, as it should be. And it does feel great to have one fully launched!

LadyPatriot

 

[ERD50]

Thanks to all for the congratulations!

Nords and Connie, initially we (dh and I) also thought the 401K would be a better idea but then decided that once dd has the loan paid off, she'll have much more money to invest which will then be matched. So, in effect, she'll have more years of investing a higher amount and match.

I'm not following you. If she directs additional payment to the loan, rather than to the 401K, doesn't that mean she would have fewer years invested? And she would totally miss the match during those years that she directed money to the loan rather than the 401K. Plus, assuming some raises over time, she may have plenty of extra income to put towards the 401K up to the match *and* pay the loan. But you would have missed the match years, and you can never get those back. Opportunity knocks.

As others mentioned, I would check the matching levels (you really don't want to miss out and that in any year), and, what is the interest rate in the loan? I have a hard time seeing how anything could beat investing in the 401K up to the matching level. That is free money - tough to beat.

PS - Congrats also! Your family is off to a great start!

-ERD50

 

[NW-Bound]

... maybe the generation just now coming into the workforce will be more fiscally sane than previous generations. Maybe this new generation will realize the long-term value of debt reduction/elimination and LBYM...

From Aug 3 issue of Business Week:

In 2005, baby boomers had 47% of national disposable income. They contributed only 7% of national savings.​

No wonder this nation is broke. People in this forum are a rare breed indeed.

 

[GoodSense]

Congratulations! That is excellent.

I agree with your observation that the 20-something generation has some frugal members. I just turned 30, and among my friends I can count quite a few frugal guys and gals. Maybe we are seeing how our parents' generation is struggling to retire?

 

[ladypatriot]

I'm not following you. If she directs additional payment to the loan, rather than to the 401K, doesn't that mean she would have fewer years invested?

I probably didn't explain it well. My dd's student loan carries a 6.8% rate, and we roughly calculated how much she would save in interest under a couple of paydown scenarios (varying amounts, varying time periods that she could financially manage). The amount of money she can afford to put toward paying down the loan (other than the stipulated payment) is really not that much, after all her other expenses are paid.

She had to decide whether to use that amount of money to pay down principal on the loan as quickly as possible (saving on interest) or put that same amount of money into a 401K. We didn't have access to any of the plan's portfolio information, so we were making guesstimates on current rates of return.

And once her loan is paid off, she will eventually shift that money (her scheduled loan payment and extra payment against principal) into retirement investing. So, she'll have fewer years of investing but she'll be investing at a much higher dollar amount.

She's just turned 24 and has time on her side for retirement investing. Eventually she wants to be able to afford her own place again, too; hopefully that will be possible with future pay raises.

Other people might have made a different choice, but she really wants to get out from under that loan as soon as possible. And I fully support her in that.

 

[ERD50]

But what is the 401K match? Yes, 6.8% is not a great rate on the loan, I can understand wanting to pay it off. But if the 401K matches say 50 cents on the dollar up to a point, well that is an immediate 50% return.

Unless the investment options are so terrible that they are almost guaranteed to lose money, or limited to single company stock, I sure would not want to pass up any significant matching dollars. But that does not seem to be the case as you seem interested in investing once the loan is paid. I'd go for the match until it maxes. But it depends on the match rate, but the ones I've seen were at least 50% on the first few percent, sometimes 100% (those days are probably gone forever). 50% is a BIG number, even 25% is a BIG number....

-ERD50

 

[ERD50]

Here is another reason to take advantage of the 401K match now. It may be gone after you pay down the loan:

http://www.early-retirement.org/forums/f30/they-cut-my-401-k-match-45605.html#post841971

-ERD50

 

[RunningBum]

Credit to the OP for raising daughters that are turning out so well, and asking these questions.

ERD50 is right, she is giving up a lot by not taking advantage of a 401K match. You say that time is on her side, but you can easily find graphs that show how investing in the first x years is equal to waiting and investing for y years, where x is a vastly smaller number than y. So even putting a bit in a 401K now puts that time on her side towards retirement.

What the college loan payoff does is to enable her to more quickly get a home, and have a better rainy day account. The 401K is not too flexible, short of loans and hardship withdrawals.

So retirement-wise and long-term overall, getting the 401K match now is the better choice. That might not line up with other short and mid-term goals though.

 

[ERD50]

What the college loan payoff does is to enable her to more quickly get a home, and have a better rainy day account. The 401K is not too flexible, short of loans and hardship withdrawals.

That is a very good point. I was all set to discuss with my son the advantages of adding to his Roth IRA, esp in low income tax years. But then I re-thought that and decided an emergency fund might be a more important step for him to gain a bit more financial independence.

Won't know until after the fact if that is a good move or not, if no emergency comes up, IRA would be better. If emergency comes up, maybe it becomes a "non-emergency" due to the cash cushion.

-ERD50

 

[Bestwifeever]

Congrats to your daughter--I love librarians!!

I have to agree that she should put as much into her 401(k) to at least get as much of the matching $$ that's available. That is free money from the Carnegie, and her own contribution goes in as pretax dollars, so she will see a little benefit come tax time too every year.

She may eventually move to a library system/university library/whatever that doesn't offer a 401(k) or a match, so she should definitely make hay with it now. And time is one of the most important factors in growth of her 401(k). So imho slow down with the student loan repayments and put as much as possible into the retirement account right now.

But congrats anyway on her accomplishments and to you for raising what certainly seem to be three level-headed young women!

 

[ladypatriot]

Congrats to your daughter--I love librarians!!

Thanks! She's really enjoying her job. But when she was sixteen years old, going through her really awful "goth" period (long black hair, black eyeliner, black clothes, sullen mood, wallowing in existentialism and angst), the thought of her being a librarian would have made me fall down laughing. Now, when I see the lovely, funny, stylish, successful young woman she has becomej, I feel so blessed.

I really do appreciate the advice that you and others have offered on the 401k, but being debt-free is important to her. And we (dh and I) understand, encourage and support that philosophy.

Thanks again to everyone for their good wishes!

LadyPatriot

 

[Midpack]

Never fear, stupid consumption will never permanently go out of style.

I hope you're wrong, but I doubt you are...

 

[ERD50]

I really do appreciate the advice that you and others have offered on the 401k, but being debt-free is important to her. And we (dh and I) understand, encourage and support that philosophy.

OK, so I understand that you read and appreciated all the comments about the value of the matching in a 401K and you/she have made up your minds to pay off the debt instead. So I will respect that, and not pursue that any further.

However, in return for the well intentioned advice, could you humor me please? Could you share the details of the 401K match? I am fascinated by the power that this "siren call" of "being debt free" has on some people, and I am curious to know if it is more powerful than a full 100% match, a 50% match, a X% match up to $Y? I guess I just don't understand a "philosophy" that values what appears to be 'fewer dollars' over 'more dollars' (based on the info provided)?

If it is a low match, and poor investment choices, I can understand wanting to avoid the possible risk (even if I personally would accept the risk). But again, since you expressed an interest in putting more money in to the 401K after the loan is gone, risk does not seem to be the issue.

So that makes me curious, very curious.

TIA -ERD50

 

[harley]

OK, so I understand that you read and appreciated all the comments about the value of the matching in a 401K and you/she have made up your minds to pay off the debt instead. So I will respect that, and not pursue that any further.

But, but but...the motorboat song.

 

[clifp]

But, but but...the motorboat song.

LOL.

However in ERD defense, there are some deals that are so good that not taking them is financial malpractice. The 401K match at 50+% level is so good that you are better off borrowing the money on a credit card. (Cause eventually you can borrow the money from the 401K and pay off the card!) then passing up the deal.

I remember I had a very smart admin (she latter left Intel to study computer science at Stanford!) who wasn't taking advantage of the employee stock purchase plan. I understood her problem (single mom living in an expensive area on a admin salary) but still I was determined for her to take advantage of this deal. I told her it being better to borrow the money on the credit card deal. I eventually I said easiest way for her to double her raise was to sign up. Eventually she did and she did thank me.

Now I am not actually advocate anybody borrow money on credit card to take advantage of these programs but compared to a 7% student loan. This is a no brainer. For a person making 50K a year for a typical match 50% on the first 6%. This works out to $1500/year $125 a month. There aren't many ways for frugal young adults to save that kind of money.

The difference between starting the 401K match today instead of 3 years from now is in the neighborhood of 25K to 35K of todays dollars solely because of the free match.

At least 80% of the time when people ask for financial advice on this forum there isn't a clearly right or wrong answer. Should we/relative invest in a variable annuity in our 401K/IRA and should we take advantage of the 401K match are the rare examples where there is a right or wrong answer. Actually I think ERD is being very tactful in his request.

I appreciate that Dave Ramesy, Suze Orman and such are correctly telling a debt addicted society to get out of debt. But LadyPatriots daughter sound like they don't have the disease. They are ready for understanding debt 201, which explains debt is not per se bad or evil, merely a tool. A classic example is borrowing money for college. Lady's daughter in particular and society in general are better off by kids borrowing money to get their degree rather than working at Malls/McDonalds etc trying to save up money to pay cash for college. A 23 year old has a lot more years of being able to use her college degree than 35 year old.

Now I appreciate that parents need to let go and let kids make their own mistake, but I don't think that 401K are source of emotional conflict, like advice about boyfriends, apartments, tatoos, pets, clothes etc. Frankly, I wish my parents had known this stuff it would have saved me some money.

 

[ladypatriot]

The purpose of my original post was to share the good news of my dd's achievement, and to suggest that young adults, having experienced this recession early in their lives, might have a greater awareness of economic issues and a more frugal financial perspective. I thought perhaps others might share their observations of financial behavior in young adults.

Although I appreciate the spontaneous sharing of advice on 401k contribution vs. student loan repayment, that's not why I posted, nor did I at any time ask for such advice.

Some decisions are not based solely or strictly on numerical equations. We believe our daughter's decision is the best one for her, based on her situation, her character, and her future goals. And that's really all I'm going to share about that decision.

Thanks again to everyone who offered their good wishes for my daughter.

LadyPatriot

 

[harley]

LOL.

However in ERD defense, there are some deals that are so good that not taking them is financial malpractice. The 401K match at 50+% level is so good that you are better off borrowing the money on a credit card.

I know. Personally I agree with you and ERD about the finances. But LP has made it clear that they choose a different option. I'm not laughing at ERD (much ), I'm laughing because I've been there so often. You can't change people's minds. at least not through repetition of an argument. They have to do it themselves. I learn slowly, but I learn. You've got to respect other people's choices. Otherwise, you'd all have to do what I think is best. Of course, the world would run so much smoother then.

By the way, LadyPatriot, congratulations to you and your daughter. I'm a longtime patron of libraries, and the world certainly needs more hardworking and intelligent librarians. And if they are young and attractive, so much the better.

Seriously, congrats.

 

[ERD50]

I know. Personally I agree with you and ERD about the finances. But LP has made it clear that they choose a different option. I'm not laughing at ERD (much ), I'm laughing because I've been there so often. You can't change people's minds. at least not through repetition of an argument. They have to do it themselves. I learn slowly, but I learn. You've got to respect other people's choices.

I understand, harley. I tried to make myself clear when I said I respected that she didn't want any further challenges to her position, but I was still interested in the numbers behind the decision (which she did not provide ). Perhaps some people thought I was not being honest with that statement. Maybe this explanation will help:

As clifp stated so well (I will comment on that post more fully later), a good 401K match comes about as close to a right/wrong decision as you can get. Why am I so interested in why people turn away free money? Here is why - suppose a friend or family member mentioned that they were turning down a 401K match. I would want to know how to approach them to present the information in the best way, to get them to understand the benefits of the 401K match. This forum provides some "practice" for that, we get lots of views from lots of different people. So these discussions not only challenge my own thinking, but help me develop ways to best present the facts to someone in the same position. I am honestly trying to understand the thought process behind their decision, so that I might more effectively counter it in the future.

Sure, at some point you give up (as I did with LP), but if you truly care for someone, you want to give it your best shot to get them to see the light. It is for their own good. If I ruffle a few feathers here with comments like I made, I'm sorry, but I honestly believe that the net effect is positive. I have to be true to myself, and what I know to be fact. A match is free money to those who accept it, it is as close to a free lunch as we can get (paid for in part by those who refuse it).

But, but but...the motorboat song.

Aw c'mon... I said "However" not "But"! Doesn't that sound so much better?

BTW, LP - often times a post starts out one way, and forum members note something else of interest/importance buried in there. Often the side topic is more useful than the original comment/question, or takes on a life of its own. Sorry if I offended, I tried my best to phrase my responses gently, it's always hard to tell how posts are received w/o the inflection and body language and real-time feedback of a face-to-face conversation.

-ERD50