I applied to refinance my student loans with SoFi to cut my interest rate by 3% and pay $20,000 less in interest

Laszlo Ilyes via Flickr

Laszlo Ilyes via Flickr

I just took one of the most important steps so far in my journey toward debt freedom by applying to refinance my high-interest rate student loans with Social Finance — known as SoFi.

What is SoFi?

SoFi is a three-year-old online lender projected to make $4 billion in loans this year across a portfolio that includes refinanced student loans, mortgages, personal loans, and an entrepreneur program.

It got its start in 2011 as a peer-to-peer lender linking up recent Stanford grads looking to refinance their student loans with older Stanford grads with money to invest.

How does SoFi work?

The thinking behind SoFi expands on that original bit of crowd-sourcing and appears so simple on the surface that I’m almost annoyed I didn’t think of it myself.

The idea boils down to linking up two groups:

  • Investors sick of the low-interest rate options for their money
  • Low-risk student loan borrowers stuck in high-interest rate loans

Interest rates are so low for investors because this has been kept low in response to this being so high as the country continues to recover from this. As an example, the best rate you can get on a savings account these days is around one percent.

The borrower side is only slightly more complicated.

With nearly every other kind of loan out there, high-risk borrowers — where “risk” is determined by credit score and other factors — are charged a higher interest rate than low-risk borrowers to make up for the higher possibility that they won’t pay back those loans.

However, when it comes to student loans, low-risk  borrowers are stuck in high-interest rate loans because student loan rates are by Congress and all borrowers get the same rate. Because these loans are distributed according to need rather than ability to pay back the loans, the interest rates can end up being relatively high to account for all the high-risk borrowers in the pool. The current rate on a Grad PLUS loan is around seven percent.

The space in between the one percent investors have available to them and the seven percent that even the safest student loan borrowers pay is where SoFi works its magic.

Why SoFi makes sense for me

A few things determine how much you’ll spend on any loan, including:

  1. The size of the loan
  2. How long you stretch out your payments
  3. Your interest rate

When it comes to my student loans, I’ve been working very hard on the first couple by making thousands more than the minimums every month, but haven’t done nearly enough to combat my high interest rates.

But I should definitely try harder; even lowering my interest rate by just one percent could lower my total payments by $5,000! Let’s see if SoFi can do even better.

How to apply for SoFi

You can get a $100 refund when you apply using this link: https://www.sofi.com/refer/4/11129

SoFi’s application is purposefully simple. And any confusion can quickly be cleared up using one of the three always-on customer service media:


I personally used email to send off a few questions and was pleasantly surprised to receive a response within five minutes each time.

Just enter contact information, information about your degree, information about your job (including income), and information about your loans, and you’ll quickly be presented with this extremely informative page:


There, you can see four things:

  1. The total payments you’d make if you chose not to refinance and instead stayed on the plan you’re on. As you can see here, I’d pay $126,000 on my remaining $90,000 in loans… because compound interest hurts
  2. A choice between either a fixed or variable interest rate, and a choice between 5-, 10-, 15-, and 20-year terms. I went with a 5-year term with a variable rate
  3. How much you’ll save by switching to the plan. If I’m approved, I’ll save over $20,000 with my new loan
  4. The button to “apply now.” I clicked this :)

And that’s it. I’m excited by the possibility of lowering my total payments by tens of thousands of dollars and will report back on the results.

If you’ve refinanced your loan through SoFi or tried to, let me know about your experiences in the comments.


Three things I wish I knew in my 20s about life, turning 30, and personal finance

Don McCullough via Flickr

Don McCullough via Flickr

We put a lot of pressure on our 20s. While growing up, we imagine that our 20-something selves would seek and ultimately find personal and financial freedom, a rapidly growing career, and opportunities around every corner. But when we finally get there, those expectations often leave us disappointed and anxious about our progress — especially as we approach 30.

Here are three important lessons I’ve figured out since leaving my 20s that would have made the transition a little smoother.

Beware of arbitrary milestones

Throughout childhood and adolescence, I thought that turning 18 would be the age where I’d have everything figured out. When college made me ask more questions than it answered, that age became 21. Then 25. And finally 30.

In my 20s, I placed so much weight on growth and accomplishments that it was easy to forget that life didn’t end at 30. I’m now 34 and am finally realizing that I’ll never have all the answers.

Far from feeling like I’m done growing, I now find this realization quite freeing. I am trying my best, while continuing to learn and ask questions; yet I no longer worry about whether I am meeting arbitrary deadlines — particularly the ones that relate to my finances.

It’s so easy to compare yourself to other people your age who have a higher salary, have more saved for retirement, or appear to have their lives or careers more on track than we do. We forget that no two people follow the same path or go at the same pace. It’s up to you to set your own milestones and to celebrate how far you have come once you reach them.

More importantly, time only ever moves forward — never backward — so don’t spend too much time worrying if you’re missing out on anything. Live in the moment, try new things, and don’t be afraid to make mistakes.

But do set goals and strive for self-improvement

Time may fly when you’re having fun, but it flies even faster when you’re drifting aimlessly.

Life in your 20s lies in stark contrast to the rigidity of school, which has weekly assignments, midterm and final exams, and the progression from freshman to senior years to keep you advancing toward a fixed goal.

After you leave school, it often feels like the years pass by quickly without easily-quantifiable advancement. That’s a big reason why I’m into not just setting goals, but the writing good goals and good intermediate goals in particular.

With money, the same is true.

There are plenty of big things to save up for — a home, kids, and retirement — but decades can pass before you reach the next one. Without setting intermediary goals, I wouldn’t have been able to make as much progress in paying off my debt as I have. And by holding myself to those intermediary goals, I am on track to reach my long-term goals for retirement and whatever else I choose for myself later in life.

Build a strong foundation

One of the things I miss most about my 20s is how quickly I could recover physically — whether from a hard workout, a minor injury, or a late night out.

These days, I have to spend nearly as much time warming up and stretching as I do exercising, and I usually need two or three recovery days after a high-intensity work out when one used to be more than enough. And don’t ask about my knees.

Yet even as I encounter new challenges with each passing year, I know that it could be much harder had I not spent my 20s eating right and staying fit. Not only do I have a much better foundation upon which to continue to build my health, but I developed great fitness habits like learning how to shop for and cook healthy foods, and how to safely train for a race. Having to overcome these hurdles later on in life makes getting or staying fit that much harder.

The same goes for personal finance. My 20s would have been a great time to have learned to live frugally, since I didn’t mind living in cramped spaces or making do with less-than-fancy food and transport. It also would have been a great time to build up my retirement savings — with decades left to go until retirement, compound interest would have turned even tiny amounts into a huge nest egg by age 65.

Alas, neither of these were things I did anywhere near as well as I could have. Yes, I am picking up those skills now and catching up quickly with saving for retirement, but I would definitely be in a better place had I been more focused in my 20s.

Oh, and one more thing…

While we’re talking about good habits, you really should be flossing.

Five steps to stop debt before it starts

[Important to always read the disclaimer -Ed.]

Kevin Dooley  via Flickr

Kevin Dooley via Flickr

Being in debt is no joke and can literally consume your whole life if you’re not careful. Literally.

Thanks to compound interest, being in debt is like being trapped inside a snowball rolling down a snow-covered hill; by the time you manage to stop the snowball, it’s ten times bigger than it was when it started. Getting out of debt is like trying to dig yourself out of that expensive snowball with nothing more than a spoon.

If you’ve been in debt before, you’d probably agree that this is a very accurate description. If you haven’t been in debt before, I hope this  serves as motivation to do what you can to prevent it.

Have an emergency fund

Life happens when you least expect it. The plumbing goes bad in your home, the car breaks down, or you suddenly find yourself out of a job. Finding the money to cover these types of expenses can be difficult if you’re not already prepared. Those who do not have the means to pay will begin to max out their credit cards, fall behind on bills, which leads to debt. While you can’t predict what will happen from one moment to the next you can try to prepare yourself for circumstances that life throws your way. An emergency savings fund is a savings account that you use for rainy days or emergencies. Like other sites, Investopedia recommends saving at least six months of income.

Create a budget

Budgets don’t have to be restrictive. A basic component of financial management, budgets provide you with a clear outline of where your money is going each month. It ensures that you don’t spend more money than you have, which, by definition, would cause you to go into debt.

These days, creating a monthly budget doesn’t mean you don’t have to sit down with a pen and paper; there are plenty of budgeting apps that you can use to keep track of your income and expenses, like Mint. You can receive alerts when you’re going over budget, when bills are due, and much more

Handle your taxes accurately

One of the biggest line items in your budget will be paying taxes, so you don’t want to mess around when it comes to your taxes each year. Filing late or worse — filing late and finding out that you owe taxes to the IRS — could get you in a lot of trouble. Interest rates and penalty fees could cause you to be in debt for years.

There are many ways to avoid this, but the safest way is to have your taxes prepared by a financial professional such as a tax accountant. Visit a few local CPA firms in your area to see who will provide you with the most efficient tax services. Having someone who is knowledgeable with tax laws and familiar with filing both state and federal taxes is ideal to ensure you’re not missing anything that could cause you to owe the IRS or state later on.

Pay credit card bills on time

Credit cards can quickly cause you to go into debt if you’re not financially mature enough to handle them. While the concept of buying things you want now and paying for them later on sounds like a great idea, paying for it later means paying interest. Credit cards can be a great tool, but it’s important to be responsible with them. Fully review credit card interest rates, and fees to ensure that you understand before accepting an offer. Another way to be responsible with your credit cards is to pay them in a timely fashion. Paying after the due date can incur more interest rates as well as late fees.

Be Mindful of Impulsive Buys

Have you ever purchased an article of clothing and six months later you still have a tag on it? Trust me, I know how tempting it can be to buy something that you really want. You work hard, so why shouldn’t you be able to? This type of thinking however can be dangerous if you’re not careful. Purchasing things without fully considering your financial circumstances can really put you in a bind. There are two ways this can happen; either you spend so much of your money on unnecessary things that you don’t have the money to pay for the important stuff, or you charge your impulse buys to your credit card and can’t afford to pay it off causing late fees and interest to skyrocket.

So how do you stop yourself from making an unnecessary purchase? Here’s a rule of thumb I live by: If I really want it, it will be there tomorrow. “Sleeping on it” is a great way to think things over before making the purchase. It allows you to review your finances, and in most cases you will change your mind.

The funny thing about debt is that while it can be very easy to get into, yet very hard to get out of. While there are instances in which getting into a little bit of debt are unavoidable, it is best to stay out of it as much as possible. By keeping the above tips in mind you are sure to have a much easier time in keeping your finances in order and staying out of debt. However, should you find yourself in debt, having the right attitude and working out a strategy to get out of debt is the most effective solution.

Five U.S. cities that are still affordable for renters and buyers

Row of colorful buildings near Tompkins Square Park in Manhattan, New York City USA; Shutterstock ID 193288700

Row of colorful buildings near Tompkins Square Park in Manhattan, New York City USA; Shutterstock ID 193288700

For every 1,000 new renters in the U.S., there are only 384 new units to accommodate them. Sure, some people might double up and room together, but hundreds will still lack options within their means. And we wonder why apartments are so expensive nowadays — high demand and low inventory are classic components of overpriced, competitive markets.

Nationwide, rents rose 3.3 percent from January 2014 to January 2015. This may not seem like a whole lot, but rents now increase at twice the rate of incomes. As a result, renters in “hot” markets now spend almost 50 percent of their income on rent (looking at you, Los Angeles).

Instead of devoting half of your income to rent, consider markets that aren’t pricing out the median income leaseholder. And for those looking toward the future, see what your options are if you eventually decide to buy.


Dallas-Fort Worth is currently one of the most affordable housing markets. At the end of 2014, Dallas renters were only spending 28.5 percent of their monthly incomes on rent — within the 30-percent-or-less rule that many financial advisers recommend. Even better, Dallas home-buyers who fall into the median income range only devote 11.6 percent of their paycheck to the mortgage. A low home value estimate of $155,700 could be the reason for affordable monthly payments.


Similar to Dallas, Philadelphia is affordable for renters and homeowners alike. Homeowners spend just 15.2 percent of their income on their monthly mortgage payments. Compare that percentage to, say San Francisco, where homeowners spend almost 40 percent of their income on their mortgage, and Philadelphians are setting themselves up to be in a much better long-term financial position. Finding a rental in Philadelphia shouldn’t be too difficult, either, because Philadelphia keeps rental costs down through new developments. The city permitted 671 new units for every 1,000 residents between 2012 and 2013, which is double the national average.


Median rent in five U.S. cities as of March 2015, data from Zillow

Des Moines

Although not a huge, bustling metropolis, Des Moines is a great option for those concerned with affordable housing. The median home value in Des Moines is only $109,800. If you were to purchase an investment property here, you’d only need about $21,960 to put down the recommended 20-percent down payment. Then, if you were able to get a mortgage with an interest rate of 3.74 percent, your monthly mortgage payment would only be around $583 per month. If you’d prefer to lease a home in Des Moines, the median rental value is around $1,113 per month – which is still incredibly low for living in a city, let alone one that is sometimes referred to as the “greatest city in the world.” For comparison, the median price of all U.S. rentals is $1,529.


You might be surprised to find the third largest city in the U.S. on this list, but Chicago renters get to live in a huge metropolis at a low cost. In the City of Broad Shoulders, renters spend 31.1 percent of their income on rent — slightly above the allocation regularly deemed “affordable” by economists, but not too far.

So why are prices so low? Part of it may stem from Chicago’s approval of a massive number of new units from 2012 to 2013, with an average of 906 new units for every 1,000 new residents. Homeowners in the Windy City also fare well, only spending about 13.9 percent of their median income on monthly mortgage payments, to pay for a median home value of $181,800.


If you’re thinking of relocating to a warmer climate, Phoenix should be high on your list when compared to its Sunbelt competitors. Miami, for example, costs lessees 44.2 percent of their monthly income for housing — significantly higher than the 30 percent affordability cap. Phoenix leaseholders, on the other hand, only pay 28 percent of their monthly income on rent.

Surprisingly, there weren’t many new units approved per 1,000 residents in 2012, so inventory hasn’t increased, but the small size and geographic positioning keep prices low. Bear in mind, however, Phoenix rents have been climbing since 2011, when the median price was just over $1,000 per month. Now, it’s at $1,173 per month. While it’s an inexpensive market now, be aware of a history that shows steady growth.

So when headlines read that no one can afford the rent — take a step back. There are plenty of options for renters to consider, and they don’t all involve moving to the suburbs or rural regions of America. Consider some of the aforementioned cities for your next move.

Frugal folks are at their best when they love spending money

By Bill Branson via Wikimedia Commons

By Bill Branson via Wikimedia Commons

I found myself talking side-hustles with a new acquaintance this past weekend, and the conversation eventually made its way to me keeping a personal finance blog.

Oh, what’s it about?

I walked her through the topics: paying off student loans, taxes, investing, frugality…

“Frugality?” She interrupted. “Is there more than one way to say, ‘Don’t spend money on stuff?'”

Ha! Not spending money on stuff is just half of frugality — and the less important half at that!

What’s more important than not spending money on stuff

Folks at large often think that frugal people are cheap-o’s who love money and hate spending it. But I would argue that frugal people are at their best when they love spending money.

Maybe it’s worth backing up here.


Upon reaching adulthood, I realized that the universe of things I could buy was pretty expansive. If I wanted to buy a grocery store birthday cake and eat it for dinner, that was possible! Cool gear was just a bank-account-emptying debit card swipe away. Luxurious weekends of expensive shows and buying the bar all over Austin? Why, that’s an experience so I could doubly buy that.

This could have gone on forever, if not for a big shock forcing me to visualize myself, much later in life, a penniless hobo, dying alone in a gutter… unless I made some changes. For me, that shock came upon finishing school and doing the math to find the total of all my debts was half-a-million dollars.

From over-spending to hating spending

This precipitated the next phase of my spending life. I chased frugality, but over-corrected and focused on buying as little as possible. Of course, I still had to eat, but felt guilty about any “want” I had the nerve to spend money on, and felt uneasy about every “need” I purchased, questioning whether it could be done without.

Needless to say, this quickly led to frugal fatigue.

When your focus is on not buying stuff, every purchase you say no to feels almost like somebody taking it way from you.

Imagine being at a candy counter with a chocolate bar in your hand. Then, imagine that frugal inner voice saying, “You don’t really need that.”

The healthy balance

So if not spending money on stuff is the less important half of frugality, what’s the second half?

Nowadays, I’m making peace with spending.

Rather than focusing on the things I horse myself not to buy, I focus on the things I love buying — for me this includes making good food, traveling to new places, or an earlier retirement.

When I focus on buying what I love, I don’t feel deprived of enjoyment when I say no to things I don’t prioritize. Saying no to the meaningless stuff means I can actually buy more of what I love.

Buy what you love!

May 2015 net worth update — the month of $6,000 gains, barreling toward worthlessness

Good morning and welcome to May!

April 2015 was a big month as far as life goes. With the engagement still fresh, my new fiancee and I were invited to lots of small celebrations out to drinks or dinner with friends and family, taking us to restaurants and bars all over New York City, and even into New Jersey and Massachusetts. But would all this celebrating derail my (our?) personal finance goals?

We also started exploring all of the small and wonderful ways our lives are changing by joining them together, including starting to figure out the money aspects. We discussed everything from how we’ll set up joint accounts, ways to pay for the wedding, and even which were the important conversations we should be having. If you’re into that sort of talk, it’s all over at Adventures in Frugal.

Meanwhile, here on Debt BLAG, the beginning of the month is when I take a look at the cold, hard numbers of my net worth — broken down into debt and retirement savings. I treat this as a very important part of my debt payoff because while coming up with new ways to think about money is important, it doesn’t mean a whole lot if my debt and retirement numbers aren’t getting any better.

If you’re looking for a new tool for your personal finance wood-shop, tracking your net worth on a monthly, quarterly, or even annual basis would be a pretty neat addition.

For now, let’s look at my numbers.



It looks like I had a pretty big month.


I’ve felt the urgency to get out of debt since I started this blog toward the beginning of 2013, but the idea of starting a new life with someone was great motivation for paying off $2,400 in debt this past month. This allowed me to continue what has so far been a very consistent 2015 for debt payoff after I was all over the map in 2014. Check out this graph:


Yes, I might have had some bigger months in 2014, but I know which year I’d rather have.

Some people hit the gym hard to lose weight before their wedding. In 2015, I’m working hard to lose debt :)

Retirement savings

$3,600 is a nice increase for one month. I can say I was only partly responsible for it. Yes, I make sure to contribute enough to get all of my employer’s 6% match and yes, I put I’ve put a lot of thought into my allocation, but this past month’s big gain was largely due to getting lucky with the stock and bond markets.

When added together with my debt payoff, my net worth increased by $6,000. That’s the third-biggest monthly gain since I started keeping track!

More importantly, it’s given me some very good momentum toward reaching my goal of breaking even — that is, having a net worth of $0 by bringing my debt equal to my retirement savings — by the end of 2015.

In fact, if every one of my months was as strong as my April, I’d get to $0 by the end of summer!

That said, it’s probably safe to say that every month will not be as strong as my April — but I can try my best!

And that’s what happened to my personal finances this past month. What inspired you in April?

Here’s why I pay extra every month on my 4% mortgage


Wally Gobetz via Flickr

A 4% interest rate may seem low — especially when I have 7 to 8% student loans to pay off — but here’s why I choose to pay off my mortgage just as aggressively.


I own an apartment that’s pulling in more rent every month than its expenses — including mortgage, insurance, taxes, and maintenance.

After I put enough cash in the business checking account to cover three months’ worth of those expenses — think of it as an emergency fund for the rental property — I started using the extra money to pay off the mortgage.

Still, with high-interest rate student loans and a growing retirement portfolio, I’ve started to wonder if there’s a better way.

The temptation to pay extra on a mortgage

As with any loan, once you start to look at the break-down, the temptation to pay extra on your mortgage is huge.

As an example, suppose that I was toward the beginning of a mortgage which had the following very reasonable terms:

  • Amount: $100,000
  • Interest rate: 4.125%
  • Term: 15 years
  • Monthly payment: $746

I thought I had a low interest rate, but then I got that first statement in the mail telling me that $344 of my first $746 payment — almost half! — was going to pay for interest. Moreover, that statement would also tell me that I would pay $34,000 in interest over the life of my loan, meaning my once reasonable $100,000 mortgage would cost me a stifling $134,000 in total! That is, it would cost me that much… if I didn’t start paying extra.

These are big, scary numbers!

And so, despite the low interest rate, my pay-off mentality took over: after a year or so of putting that extra $300 a month into a rainy day account, I shifted to using it to pay off the mortgage and have been doing so ever since.

But money isn’t everything; what about the intangibles?!

Sure, trying my hardest to avoid $34,000 in total interest might save me a little bit of money, but is that the only reason?

Definitely not!

Having a home paid off could also mean I’d have less of a chance of losing it in bankruptcy.

But the main reason to pay off a mortgage early is the emotional benefit. Just think how much better I’ll be able to sleep at night knowing that I have a mortgage completely paid off.

I bet there’s no feeling like it!


A vulnerability on IRS.gov could let crooks steal your info and your refund; here’s how to stop them


Gal via Flickr

A few weeks back, I was helping my fiancee complete her taxes and we found ourselves short a couple needed numbers from prior years.

We turned to the IRS website for her old returns expecting it to be difficult, but were surprised at how little information she needed to enter to access very sensitive tax data.

It turns out I wasn’t the only one who noticed.

In a recent article, computer security website Krebs on Security says criminals may be able to sign up as you on Irs.gov and access your personal and tax data, using nothing but freely available Internet search engines.

Sign up for an account at the IRS website

Before you read any further, head to the IRS website and sign up on their Get Transcript page here:


After years of bad experiences trying to pay traffic tickets online or access a Thrift Savings Plan account, I was expecting another struggle with a confusing government website. But this was definitely not the case; both my fiancee and I were able to create accounts within minutes.

It was, perhaps, too easy.

Sometimes, too easy is a bad thing

The potential  security flaw lies within how the IRS verifies your identity. As laid out on this page, you’ll need to provide some personal information:

  • Name
  • Social Security Number or Individual Tax ID Number
  • Date of birth
  • Filing status
  • Mailing address

And you’ll have to answer some:

  • Third-party verification questions

If a criminal manages to find, steal, or buy your personal information, the last hurdle are these third-party verification questions — sometimes also called knowledge-based authentication (KBA) — which take the form of questions about your current and previous addresses, the size of loans you’ve taken, and dates you opened those loans.

Krebs’ issue with the IRS reliance on KBA is that it can easily be defeated with information crooks can easily purchase wholesale in the seedy cyber-crime underbelly, search for with publicly accessible websites (similar to Bing), or — if they’re patient — just with random guessing.

To find out just how easy it could be, Krebs put it to the test with the help of Nicholas Weaver, of the International Computer Science Institute at the University of California, Berkeley (Go Bears!), who found that just by searching on Spokeo and Zillow, he was able to accurately answer three out of four questions. And, like he said in the article, for the last question “you don’t need to guess blind either with a bit more Google searching.”

And once a criminal creates an account in your name, they can see your prior W2s, prior returns — in other words, everything they would need to wreak havoc on your personal finances including the ability to fraudulently file your taxes next year with a big refund sent straight to their criminal hands.

So what can you do?

You can sign up at the IRS website here: http://www.irs.gov/Individuals/Get-Transcript.

Sure, no method will ever make your personal information impenetrable, but at least now, you’ll have your password standing in between a criminal and your tax records already available on IRS.gov. Moreover, if a criminal tries to sign up as you after you’ve already done so, they’ll get this error message:


And if they click “retrieve your User ID” on this screen, it will only give them the option to send your ID to the email address that you registered with previously.

More generally, you should take steps to safeguard your personal information and use the free sites I’ve mentioned in a previous post to monitor your credit.

Good luck!

Sources: Brian Krebs. “Sign Up at irs.gov Before Crooks Do It For You.” Krebs on Security, 15 March 2015; and the Internal Revenue Service

A big tax refund is still, for most, a very good thing because of the permanent income hypothesis (or breakdown thereof)


Helen Haden via Flickr

It’s April 17 here in the U.S. meaning that the tax deadline has come and gone.

If you’re like most Americans, not only did you get a pretty big refund — $2,800 was the average the last time the IRS checked — but you’re pretty happy about it too. A Bankrate survey found that a majority of respondents would prefer to receive a refund rather than breaking even or having to cut a check to the IRS come tax time.

All this is still the case despite years of advice from journalists — including here and here — and all the finance experts in your life, telling you the rational reasons why a rational taxpayer absolutely shouldn’t want a tax refund.

But perhaps the real problem is that this advice fails to take into account how real people actually act instead of theorizing their shortcomings away.

By looking into the practical effects of an infrequently cited economic concept (exciting!) we might see these refund-seekers to be pretty rational after all.

Why getting a big tax refund is supposed to be a bad idea

The thinking is based on a couple economic concepts.

The simpler of these two concepts is the time value of money.

Read even a bit of the literature on the topic and you’ll almost certainly hear your tax refund referred to as an interest-free loan (Including in the two articles I linked to earlier). The math is pretty simple here; had you adjusted your withholding by submitting an updated Form w-4 to your employer, you could have traded the $2,800 refund you received in April 2015 for $233 every month from January to December 2014. Had you saved every last penny along the way and stuck that in a saving account to earn interest, you would have ended up with an extra $20 come April 2015. Had you invested that money in the market, you might have ended up with hundreds in extra money.

While rarely mentioning it explicitly, this explanation also depends on an economic idea called the permanent income hypothesis (Or the nearly identical life-cycle hypothesis).

Generally, the hypothesis predicts that a rational consumer will base his or her current consumption on permanent income — that is, a combination of their current income and their expectations for future income.

Specifically, because the size of a tax refund is a largely predictable one-time surge in income, a rational consumer would not change their spending habits whether they got all of it in April 2015, or received it in small chunks spread out from January to December 2014.

What the theory gets wrong when it comes to refunds

The problem is that, in practice, taxpayers treat refunds differently from money distributed to them throughout the year.

Expectations of a tax refund may encourage saving

A study by Nicholas S. Souleles found that for each additional dollar of refund received, the average taxpayer increased consumption by the significant, but still pretty small amount of 18 cents, with the overwhelming majority of that added sensitivity being focused on the purchase of durable goods (such as refrigerators and bicycles). Souleles suggests that the reasoning behind this may be premeditated — taxpayers who understand their own limitations with self-control purposefully and rationally withhold too much in taxes so that they might be able to save up. (Source: Nicholas S. Souleles. “The Response of Household Consumption to Income Tax Refunds.” The American Economic Review, 1999.)

Taxpayers who receive large refunds may be more likely to save it than if they received it in smaller flows throughout the year

Richard H. Thaler points to several studies (including Japanese workers who save more of semi-annual bonuses, and Israelis who save more of restitution payments) that imply this outcome, which he explains as mental accounting on the part of consumers, concluding that “small gains relative to income, will be coded as current income, and spent” while “larger gains will enter the assets account, where the [marginal propensity to consume] is lower.” In other words, the larger the windfall a consumer receives, the more likely they are to save rather than spend it. By extension, you’re more likely to save more of one big lump sum you receive in April than smaller flows throughout the year.(Source: Richard H. Thaler. “Anomalies: Saving, Fungibility, and Mental Accounting.” Journal of Economic Perspectives, Winter 1990.)

A super-majority of taxpayers plan to use their refund to boost their net worth

This desire is echoed in consumer sentiment; only 3% of Bankrate’s survey respondents plan to splurge on something similar to a vacation or shopping spree, while 26% plan to spend it on necessities, including food and utilities. Encouragingly, A whopping 67% of taxpayers receiving a refund plan to use it to pay down debt, save, or invest.


Now, let’s be clear; the optimal outcome is to receive no refund (or even to owe money) and to save every last extra penny you get during the year in an interest bearing account.

But if receiving a big refund at tax time helps you spend less throughout the year and encourages you to put more of it toward debt or retirement savings, then that sounds like a pretty solid silver medal to me.

Enjoy your weekend!


April 2015 net worth update — HUGE life event and I’m FINALLY free of six-figure debt


sung ming whang via Flickr

March was an amazing month for me. It was relaxing, adventure-filled, and hugely eventful.

But it’s tough to measure whether those good vibes from a huge life event had the same impact on my personal finance goals. Let’s take a closer look.

The numbers

Here’s what I did with money this past month:


What I’m proud of:

The most important number is definitely the change to my net worth. At the start of 2015, I set an ambitious goal to erase my negative net worth of -$47,000 by the end of the year.

By taking advantage of the 401(k) at work, living frugally, and paying down debt as much as possible, I’ve made huge strides toward this goal; Just three months in, I’m already 37% of the way to zero.


However, as silly as it may sound, I’m most excited about finally getting my student loan debt to less than $100,000. Yes, it’s a completely arbitrary milestone, but five figures feels a lot more manageable than six figures.

What challenged me:

I spent almost half of March traveling, which brings with it the temptation to spend. Thankfully, I was able to limit my spending by:

  • Buying tickets far in advance and paying with frequent flyer miles whenever possible
  • Staying for free with family or in inexpensive but spectacular AirBnB lodging
  • Eating like a local (i.e. buying from markets and grocery stores rather than defaulting to touristy restaurants every time)
  • Choosing activities that were free or almost free

In the end, I spent about the same amount while traveling as I would have spent if I were home in New York (though this may say more about the high cost of living in New York than how thrifty I am).

Lessons I learned:

I re-affirmed a long-held belief that a journey is often more important than its destination. In two weeks, I went on more hikes than I had in the last two years, and each time, I found that I appreciated the waterfall, volcano, or hidden beach at the end of the route much more for having taken the slow, hard path rather than a shortcut.

There’s a personal finance metaphor buried in there somewhere, I’m sure. Perhaps I’ll find that the collected lessons I’ve learned along the way in paying down this debt will be that surviving through the tough times will feel just as satisfying as reaching that $0 balance.

And perhaps not :)

How was everyone else’s March?