The current generation of young optometrists, professionals, and graduates from college have a better grasp and handle on their personal finances and are more aware about the personal responsibilities that they have for their own financial future.
They realize that their own financial independence and stability is going to be entirely or largely their own, personal responsibility.
Optometrists face a typically bigger challenge due to the extra years of education required, the higher cost of that education (and resulting student loan debt), and the options on how to address those debt challenges are very often not clear.
In our first of three articles on this topic, we looked at what the numbers would look like to get aggressive with a debt repayment option, or implement what is commonly called a debt snowball and eliminate your debt in the shortest amount of time possible. We also looked at the opportunity cost of this method and what it meant in lost savings for our recent optometry grad.
The other side to this coin is to look at the outcome of someone that decided they were going to start saving as much as they could for retirement from the day they got out of optometry school.
They decided to do this because someone once told them the power of compounding interest and how it can be your biggest ally when you’re young or enemy as you get older when it comes to building wealth.
Taking the scientific method to heart, let’s keep as many variables from our previous example constant as we can and only change what we have to change.
Our new grad optometrist has recently graduated with $200,000 in a 30-year, federal consolidated student loan at 6.8% and is making $100,000 as a W-2 employee of a practice.
We also wanted to make sure we’re accounting for the partner we all have in our lives, and that’s the bill from the IRS that comes on an annual basis.
|Average Federal Taxes (18%)||(-) $18,000|
|FICA & State Taxes (7.65% FICA + Ave 5% State)||(-) $12,650|
|Net Income||$69,350 ($5,779/mo)|
Now let’s first look at the numbers behind the consolidated student loan and the total cost for that part of the equation with just making the minimum monthly payments:
Our first article talked about the debt snowball and we demonstrated how putting $2,500/mo towards our loans would allow us to be debt free in just under 9 years, but at that time our investment portfolio would still be a big goose egg (or zero, if you’ve never heard that metaphor).
So let’s see what our investment portfolio would be worth if we were to invest the $1,196.15 difference between our debt snowball amount ($2,500) and our minimum monthly payment.
We must first talk about investment location before going into the numbers, though, because the tax nature and treatment of those investment returns will impact the outcome.
The specific tax implications are beyond the scope of this article, but we’ll look at the hypothetical vehicles that will be used:
|Order of Priority||Type of Account||Monthly Investment||Annual Amount|
*The 401(k) may not be available if your employer has not implemented a qualified retirement plan like a 401k. In that case, this investment amount would be invested into a taxable investment account without the tax advantages of a 401k. This illustration also does not include any potential employer matches, which would also impact the outcome.
If we plug those variables into a calculator and assume an 8% average return on our investment, we determine that the future value of that hypothetical plan would yield us $1,782,693.45.
Seems like a lot of money, right?
It is. Until you build inflation into the equation.
Inflation is the small, incremental, steady increase in prices that occur in economies.
Adjusting that number for inflation at an average rate of 3.5% and that $1.7 million dwindles down to $883,676.14.
Why do I bring this up? Why should this matter?
It comes down to the subtle but very real difference between money and currency. Money is simply a dollar amount, a value. Currency are the goods or services that can be exchanged for that money.
As we see, with inflation, the currency value of our portfolio is lower than what the original math told us.
The delta between your total interest paid and the amount that you’ll have in your investment account is $614,290.14. A decent portfolio and nothing to balk at, certainly.
But unlike the future value of your student loan interest that you’d be paying, this is money that you will have at the end of the plan. The student loan interest that you’ve paid out is already gone and is lost wealth building opportunity or resources as well.
The takeaway from this is that while you were able to create a sizable portfolio in 30 years, you also lost out on an even higher amount of a portfolio because you had part of your income (which is your greatest wealth building tool) earmarked and assigned to student loan payments for 30 years!
This appropriation of funds indirectly contributed to your lower portfolio value at the end of your payment plan…and without the time needed to catch back up!!
In addition, the other unknown variables of “life” such as a spouse, kids, vacations, family obligations, etc can very quickly derail an investment plan and intention.
This leads into the psychological variable and factor of investing, a topic that can (and will) be the subject of future articles.
We are much more obligated to stick to a plan if someone else is calling the shots, such as our lender, and “invest in ourselves” through a combination of an intentional debt reduction plan while not at the total sacrifice of not investing until your debt free.
This topic is worth investing (pun intended) the time, energy, and resources to make sure you know which situation is best and aligning yourselves with the resources and tools to help you stay on track for your goals.