The Trouble With Loans

This past week, I had the occasion to travel to Baltimore for a mathematics conference, a lively event (no, I'm not joking — I'm sure a great number of you rank mathematics conferences, on an excitement level, at the level of conferences attended by funeral directors) attended by some four thousand, and held at the Baltimore Convention Center. While there, I pulled myself away from the assemblage for a short time in order to visit a good friend of mine who also doubles as my financial adviser. We discussed my net worth, and while we noted that my educational debt remained a problem, I had nonetheless taken steps to remedy this, and the financial plan he presented has given me the guidelines I need in order to eliminate this debt, and be "in the black," in a relatively short period of time. During the course of our discussion, we also agreed that I should take advantage of certain aspects of the Bush tax relief plan, such as the lifting of the ceiling on Roth IRA contributions from $2000 per annum to $5000 per annum by the year 2006. All in all, my time with him was time well spent. In the interim, I have taken the opportunity to reflect on my past missteps in the financial realm, and on the myth of tax relief in general. What follows is a summary of those thoughts.

In hindsight, I know now that I should have never applied for a Stafford loan, and should have instead reworked my budget so as to live within my means. This is a tough admission to make, particularly in a public forum, but I do so in the hopes that those who intend to pursue graduate study immediately upon completion of their undergraduate work (and in so doing enter graduate school without much, if any, capital) do so with clarity of thought as well as a willingness to discipline themselves financially. For my part, I was fortunate enough to receive fellowship money in addition to my stipend as a graduate assistant, but instead of investing the fellowship funds while learning to live on my meager income (as my even-poorer friends in the history department were able to do), I foolishly consumed the extra money I received, and then, once the fellowship money ran out, decided (even more foolishly) to take out loans in order to maintain my standard of living, telling myself that there was nothing to worry about, as the loans were low-interest loans that could be paid off at my leisure once I graduated. Today, I am paying the price by way of a smaller level of discretionary income, reduced purchasing power, and ultimately, less net worth. It just goes to show that even someone with the intellect to do mathematics can be dumb enough with their finances, if they choose to be. I knew how costly my behavior could be in the long run, but I refused to exercise temperance, deciding instead to not delay gratification, to "live for today." Let my words serve as a cautionary tale.

On the other hand, the taxes under which we all suffer, either directly through income, payroll, or sales taxes, or indirectly by way of the increased costs of goods and services due to burdensome regulations, reduce the net worth of each one of us, to the extent that lawmakers in Washington, D.C. exercise inordinate power in determining what each one of us is worth. Not only does this influence significantly increase the time needed to pay off debt, it inhibits us from accumulating a great deal of wealth we would otherwise have access to. Thanks to the diligence of my financial adviser (as well as the benefits of a hard-learned lesson regarding the virtue known as frugality), I am still on track to retire from the mathematics profession (but not from work altogether) sometime in my early sixties, and to live a comfortable existence for many years thereafter. However, the wealth I will have accumulated by then will only be a fraction of what I would have had were it not for the tender ministrations of our self-professed masters in Washington. To illustrate my point, were I to invest today $10000 of the money that the federal government takes from me in an account bearing 6% interest, I would have, roughly, an additional 1.1 million dollars on hand at the age of sixty-five (I am thirty years old). Just think, if you have not already, of how much extra capital each of us could accrue were it not for government intervention! My small example illustrates the point nicely.

So in summary, I recommend the following. Most of you are already doing these things — my advice is to those who are or would be blockheads with their money, or who have been foolish with their income and regret it:

  • Make a budget and stick to it. At first it may seem painful to do so, in light of how you may have lived in the past. However, it's not nearly as painful as the alternative!
  • Strongly consider hiring a financial adviser and have him (or her) go over your finances with a fine-toothed comb. The money you spend on this person will be worth it in the long run. Of course, not all financial advisers are created equal (I was fortunate in this regard), and you may want to go it alone. All I can say is that, even as someone who could "run the numbers" himself, it's nice to have an expert do the heavy lifting for you, and be able to give you a month-by-month plan of attack for debt elimination and investment growth that nails everything down to the cent.
  • Even if you decide to retain a financial adviser, do your homework. This means poring over your financial plan, asking your adviser plenty of questions, and reading anything else you can get your hands on regarding the management of one's personal finances. With regards to this last detail, the matter of "trusted sources" is paramount in deciding what to peruse. Certainly, most if not all of what you read on and will prove profitable, and there are other sources of information as well. Your adviser, as well as others whose opinion you implicitly trust (when speaking of one's finances, "implicit" trust is a requirement!), can help you in this matter. Let us not forget the proverb, "In the multitude of counsellors there is wisdom."

Best wishes to each of you in your pursuits of wisdom and financial security. Indeed, pursuit of the former is likely to guarantee the latter.

January 22, 2003