Kyle Zwiren
When my sister and I were little our mom watched old movies with us. One movie in particular that I remember was the old Nutty Professor starring Jerry Lewis (not the remake, sorry Eddie!). My recollection of the Nutty Professor is that he was a genius who only focused on one subject, seemingly unfazed, while chaos ensued in every other area of his life.
Just imagine if your clients handled their finances like the Nutty Professor – focusing on one area at a time with disorder elsewhere. When it comes to paying off student loans, we want our clients analyzing multiple angles like our old law school professors, instead of behaving like the Nutty Professor!
Debt is often emotional, and people may want to erase their debt before considering other uses of their money. That is not an optimal strategy, but don’t take my word for it, let’s let the number tell the story...
Take a typical recent law school graduate, we will call her Sarah, with $150,000 in student loans, paying 6.5% on a standard federal loan repayment plan. Sarah would have a monthly loan payment of $1,703.22 for ten years.
Alternatively, another recent law school graduate with the same $150,000 loan, let’s call him “Savvy Stu,” read my article last week and decided to use “good” debt to his advantage. Accordingly, Stu refinanced his loan to 20 years, and was also able to lower his interest rate to 6% in the current interest rate environment. Stu’s monthly payment is $1,074.65, which now leaves him a monthly difference of $628.57 to save and invest.
Sarah and Stu both earn 6% growth on their investments. The difference is that Sarah invests $1,703.22 monthly for ten years, only after her loan is paid off. Stu invests $628.57 monthly for 20 years – the difference in his monthly loan payment – while concurrently repaying his loan.
This Sarah vs. Stu scenario is demonstrated on the chart below. Stu actually ends up with slightly more money after 20 years because he lowered his interest rate. More importantly, Stu had substantially more money throughout the entire 20-year period, particularly in the first 10 years.
While Sarah focused on paying off debts before considering other opportunities, Stu maintained liquidity throughout. If an opportunity or emergency presented itself during these years, Stu would be prepared while Sarah would not be. And, if Stu really wanted to, he could pay off the loan balance with his saved money around the same time Sarah finished paying her loan.
A Financial Architect analyzes the interrelatedness of money decisions, rather than taking one at a time in a vacuum. Understanding this relationship allows us to identify efficiencies, with the intention of creating more wealth.
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Want to talk to Kyle about student loans or other topics featured in The Economic Blueprint? Email him at kzwiren@ financialarch.com or call him at 248-482-3622.
Kyle Zwiren, J.D. works with Financial Architects, Inc., an independently-owned company located in Farmington Hills. Kyle and his team serve attorneys and other professionals to help them design financial plans in line with their goals and based on optimal efficiency. Kyle practiced law prior to becoming a Financial Architect and left the practice to follow his passion.
