Don’t Rush to Pay off Your Student Loan – make a plan first

This may surprise you: you should worry more about saving for retirement than paying off your student loan. Yes, there are many bloggers testifying to how they paid off their loans, and many trying to tell you that you need to too. The frequency of such posts does not mean that they are right, or that they have factored in all that you need to for a “best use of cash flow over time” plan. In fact, paying off student loans that have relatively low interest rather than investing will be a costly mistake.

Compare student loan payoff blog posts to the many advisors who encourage paying off your mortgage. The urgency to retire your mortgage belongs to the Silent Generation, who survived the Great Depression and are risk adverse. Paying off a mortgage is usually not the way to maximize your net worth. (Watch for a post on “rent vs. buy” discussing investing and use of mortgage debt.) Furthermore, tying up so much capital in a house lacks for diversification and liquidity – you cannot sell your daughter’s room to cover tuition when she goes off to college.

How do you decide what loan to pay off when? Start with this rule:

Whenever the interest rate on debt is less than the annualized return on investments, only pay the minimum on the loans

because the investments will grow faster than using the same cash to pay off debts

The term “annualized” returns is key here, as one good year is not a good measure, nor is a recent bad year; you want the 5 or better 10 year average return.

Next, when applying this general rule to yourself, be sure to use after-tax values. You can deduct home mortgage interest in most cases, a portion of student loans in some cases, and credit card debt in almost no cases, while you can deduct your investment in your retirement plan and what you invest grows tax-free until withdrawn. Roth IRAs do not give you a deduction now, but do grow tax free and withdrawals are tax-free.

Here is a quick example: say your retirement plan is all in ETFs, so it grows at about 7% per year over time, say you have a student loan with an interest rate of 3%, because you consolidated all your undergrad loans, and it has a minimum payment of $500 per month, and say you have $1,000 per month for which you want to devise the best plan. Apply no more than the required minimum to student loan and invest all the rest, maxing out your 401(k) or 403(b) plan first, and then investing in a Roth IRA next. In 10 years, you will be so much better off than the person who used the full $1,000 to pay her student loan. What if you had a loan with an interest rate of 8%? Tough call. However, because the loan is compounding over time at a higher rate, that persuades me to apply more to the loan, provided that doing so did not give up an employer match on a 401(k) plan.

These examples are overly simple, I realize. Many of you face the quandary of student loan vs. retirement funding vs. rent or buy a home and more. I am working on that …. (Watch for a post on integrating decisions on buying a home, paying off student loans, investing for retirement and all the other issues you are likely to face.)

Steve Jobs said: “Stay Hungry. Stay Foolish” – so how does that help your career path?

Michael Simmons recalled the impact of Steve Jobs last January in Top predictor of career success 2015.

Simmons then says: “We think we understand what caused his success. We don’t. We dismiss usable principles of success by labeling them as personality quirks. What’s often missed is the paradoxical interplay of two of his seemingly opposite qualities; maniacal focus and insatiable curiosity. These weren’t just two random strengths. They may have been his most important as they helped lead to everything else … Jobs’ curiosity fueled his passion and provided him with access to unique insights, skills, values, and world-class people who complemented his own skill set. Jobs’ focus brought those to bear in the world of personal electronics.”

In the post, he quotes Steve Jobs form 1995: “Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, they just saw something.”

How does any of this relate to you and your career? Simmons reports from his 2013 interview of an expert on networks that a key indicator is being in “open networks.” He then indicates how that is beneficial:

• More accurate view of the world. It provides them with the ability to pull information from diverse clusters so errors cancel themselves out. Research by Philip Tetlock shows that people with open networks are better forecasters than people with closed networks.

• Ability to control the timing of information sharing. While they may not be the first to hear information, they can be the first to introduce information to another cluster. As a result, they can leverage the first move advantage.

• Ability to serve as a translator / connector between groups. They can create value by serving as an intermediary and connecting two people or organizations who can help each other who wouldn’t normally run into each other.

 • More breakthrough ideas. Brian Uzzi, professor of leadership and organizational change at the Kellogg School of Management, performed a landmark study where he delved into the tens of millions of academic studies throughout history. He compared their results by the number of citations (links from other research papers) they received and the other papers they referenced. A fascinating pattern emerged. The top performing studies had references that were 90% conventional and 10% atypical (i.e., pulling from other fields). This rule has held constant over time and across fields. People with open networks are more easily able to create atypical combinations.

Here is a quote that I find interesting (and can relate to):

This is challenging in that it can lead to feeling like an outsider as a result of being misunderstood and under-appreciated because few people understand why you think the way you do. It is also challenging, because it requires assimilating different and conflicting perspectives into one worldview.

And this really does ultimately get back to Steve Jobs, who said “Stay Hungry. Stay Foolish” If you have not read, or better yet, watched this, find time to do so: The 2005 Stanford commencement address Jobs – “Stay Hungry. Stay Foolish.”

Michael Simmons is a bestselling author and the co-founder of Empact, a global entrepreneurship education organization that has held 500+ entrepreneurship events including Summits at the White House, US Chamber of Commerce, and United Nations.

What we are reading – for laughs, for serious thought and discussion, and just because

She’s right: This is the Fourth Grader who Asked Obama to put a Woman on the $20 Bill, from BuzzFeed News

Technology: Musk Plots Energy Storage fix Where Utility Industry Failed, from Bloomberg

Humor: Cookie Monster, Life Coach – on YouTube

Health: A 2-Minute Walk May Counter the Harms of Sitting – Even a few minutes per hour of moving instead of remaining in a chair might substantially reduce the risk of premature death.

Language: 20 Common Phrases Even the Smartest People Misuse, from The Muse

Comedy: Penn Jillette’s Big Dumb American Crush on Howard Johnson’s, from Eater

How to Be Emotionally Intelligent – What makes a leader? Knowledge, smarts and vision, but also the ability to identify and monitor emotions and manage relationships. From the NY Times

Comedy: The Man Who Makes the World’s Funniest People Even Funnier. As comedies become increasingly improvisational, they need an editor like Brent White to sew them together. From the NY Times- Quote: “Sometimes you just create a joke out of nothing.”

How Music Hijacks Our Perception of Time, from Nautilus – Quote: “The Royal Automobile Club deemed Wagner’s Ride of the Valkyrie the most dangerous music to listen to while driving.”

What Is Your Purpose? We need to forge new ways to seriously discuss the deepest questions in life with modern tools. This is a start. From the NY Times

What we are reading this month – hope you find something interesting about which you did not know (which will make for an interesting discussion when you tell others)

Exploring Why Some People Get Fitter Than Others: A new study in rats adds to a growing body of data about how and why bodies respond so differently to exercise.

The Brain’s Empathy Gap – Can mapping neural pathways help us make friends with our enemies? Quote: “Here, as in Ireland, otherwise-reasonable people could not bring themselves to consider the opposing side’s perspective, and as a result could not muster compassion for their suffering.”

The Best and Worst Fonts to Use on Your Résumé.

A Racy Silicon Valley Lawsuit, and More Subtle Questions About Sex Discrimination. Women can find themselves caught in a double standard at work, needing to promote themselves and yet not appear too pushy. As David Streitfeld, who is covering the trial for The New York Times, wrote, men at the venture firm essentially told Ms. Pao: “Speak up — but don’t talk too much. Light up the room — but don’t overshadow others. Be confident and critical — but not cocky or negative.”

Conan O’Brien’s history-making Cuba mission: ‘Make them laugh’ – LA Times.

Lake Michigan is So Clear Right Now its Shipwrecks Are Visible From the Air | Smart News | Smithsonian.

Karen, an App That Knows You All Too Well – An interactive app from the British art group Blast Theory is part story, part game and leaves its users feeling distinctly uncomfortable.

What Part of ‘No, Totally’ Don’t You Understand? (how “no” means “yes”)

Formula 1 aerodynamics will make grocery stores more efficient.

Start-Up Blends Old-Fashioned Matchmaking and Algorithms. Like most start-up founders, Ms. Kay and Ms. Tessler saw a problem in a market they knew well, one that wasn’t caused by a lack of technology, but by too much. The problem was cost-effective dating and the market was love. After starting a group dating company, the founders shifted course with the help of user feedback.

Charm Offensive. Millennials Are Horrible at Being Charming Online – Slate.com

Allan Turing and the Apple. Some have said that the Apple logo is a tribute to Alan Turning, as he took a bite of an Apple when he committed suicide.

5 Things Every Young Person Should Know About Retirement – You’ve got time, so use that time well!

If you are young, you’ve got time, and if you use that time well, you may even make up for the possibility of no pension and no Social Security benefits.

1. You won’t have what your parents had – no pension and no social security. Millennials are the first post-war generation to face retirement with virtually no pension. Fewer than 7% of Fortune 500 companies offer pension plans to new hires. Also, the way that the Social Security system is currently funded, there will be no reserves by 2033. Social security benefits are paid to retirees from the tax withholdings of the current workforce and also from the Social Security Reserves. Once the reserves are depleted, it is estimated the tax revenues the collected at that time will only be enough to pay out three quarters of the scheduled benefits. There are measures Congress could take to head off this eventual depletion, like changing the benefit formulas, raising payroll taxes or increasing the cap on taxable wage income. Until any changes are actually implemented, don’t count on any benefits!

2. Learn how to save and spend – now! It’s never too late to adopt good spending and saving habits, and the sooner you do it, the better. The more you can set aside that is invested now, the better off you will be. Also, avoid accruing any high interest rate debts. You can make your coffee at home if that is what allows you to max-out contributions to your 401(k) plan, especially if your employer matches what you contribute. If you do not have employer-sponsored plan, open a Roth IRA or even a traditional IRA. It’s a lot easier to put money aside now than it is to play catch-up in your 40s. And you can set up auto-debits so the investments are made as soon as your paycheck hits your bank account – keeping it out of your shopping slush fund!

3. We’re living longer, healthier lives. Longer, healthier lives are good, but they also require more investments at retirement. If you hit the Social Security full retirement of 67 now, the Center for Disease Control estimates you will live to around 86. That’s 19 years of retirement that you need to fund. But, if you are younger, living a longer, healthier life, then you will likely live longer, requiring more funds, unless you choose to work later in your life.

4. The good news is you have time. The Center for Retirement Research at Boston College suggests that, by setting aside money at age 25, you will need to save only about 10% of your annual income to retire at 65. If you wait to save, the percentage you need each year increases. If you wait ten years, starting at age 35, your target savings increases to 15%. Wait until you’re 45 and you’ll need to save 27% of your annual income. Imagine if you were 55 today and wanted to retire at age 67? The message is: don’t wait!

5. You also have great resources. With smartphone apps and do-it-yourself trading services, investing is more accessible and less costly than ever. Also, there are more affordable investment products available like ETFs (see our post), so you avoid high fund manager fees. Saving on fees means more to grow for your retirement. Over the course of 40 years, those fund manager fees add up to real money.

In sum, start saving now. Set up a simple portfolio and adjust it as you go along. The time you’ve got now will reward you later!