XRAYVSN

Johanna’s Take:

Rationale:

Let’s look at the parts to this week’s indulgence

The positives:

* It’s “only” $7,000

* You’re young enough to make up the money if you need to save more

* You don’t have children yet – costs less than with a large family

* Don’t have plans to retire early

The negatives:

* Your savings rate is only 6% on earnings of $225k – what’s up with that?

* You have $154k in student loans.

* You don’t have children yet. Difficult to know the impact of college tuition for 2 or 3 children on your retirement plans.

Assumptions (I will use conservative estimates wherever there is an uncertainty.)

* 6% average long-term returns on savings (Assuming no emotional mistakes in upcoming bear markets and corrections)

o You are currently on track to have < $3M at retirement

o Potential saving for college and parental support would reduce

* Average inflation

* You retire in 33 yrs.

* You can pay off your business debt without compromising your earnings

* No private school tuition

* No significant financial assistance for other family members

* No disabilities or premature deaths; reasonably good health

Additional commentary

On the face of it, it is difficult not to approve a request to pay cash for a $7k trip on $225k of income.

However, I’m adding the following thoughts:

* The elephant in the room is your 6% savings rate.

* If your low rate of savings is due to out-of-control spending and other treats (multiple vacations come to mind), I’d recommend you address the problem before rewarding yourselves with a Hawaii adventure.

* On the other hand, you’re only 32 and you’ve saved almost $100k – not bad at all.

If your current low rate of savings is due to your focus on paying down student loans and increasing home equity, and you have plans to replace debt payoff with retirement savings in the near future, I’m more comfortable with the trip.

* I also recommend you rethink your priorities – is it really in your best interest to reduce your mortgage and school loans and sacrifice saving for retirement?

Recommendations:

* Set a goal of increasing savings rate to a minimum of 15% within a year.

* Refinance your student loans, if you haven’t already done so.

* Don’t let extras bloat the cost of Maui beyond your budgeted $7k.

* You indicated there may be a need for future parental support. I realize this is expected in some cultures but do your best to balance those expectations with plans for growing your family and the cost of education.

Verdict:

Yes, with the above reservations.

Enjoy Hawaii with your family and return home resolved to take a fresh look at your finances and, if necessary, adjust your spending and saving priorities.

Aloha!

Xrayvsn’s Take:

There are a couple of points I want to make before I reveal my decision.

Johanna did an excellent summary of the finances above and gave valid concerns along with assumptions that made her lean the way she did.

When I paid extra towards my student loans and mortgage I treated that amount as part of my savings total.

I classified these expenditure as such because by paying down extra to these two entities, I was reducing my overall interest payments and was actually getting a better rate of return than had I put it in a savings account.

So unlike Johanna, I did not give the benefit of the doubt that these POTENTIAL contributions could explain a very low savings rate as I would have already included them in that number.

With that in mind, the low savings rate of 6% and the high student loans remaining ($154,000) were two big negatives weighing on my mind.

Given the high income provided ($225k) there is some disconnect between what is coming into the household and what is exiting.

Even if this submitter lives in a worst case scenario high cost of living/high state income tax area such as California, the take-home pay should be almost $12k/mo.

I reached out to the submitter and got the following additional information: monthly student loan payment and mortgage payment were approximately $2,000 each ($4,000 total).

Even being generous with a $3,000 month living expense above the debt service costs, that would leave a $5,000/mo surplus or $60,000 a year for a potential savings rate of 27% (this can go much higher if there is indeed geoarbitrage factors at play).

This is quite a difference from the $13,500/year 6% savings rate that is currently being achieved and raises concern that this may be a high-spending household as something else must be accounting for the money exiting.

(The additional liability submitted I did not factor in because as was later stated it was related to the business (and debt service for this should be appropriately placed on the business ledger).)

I also caution along the lines of thinking it is “only $7,000.”

This train of thought can lead you down the path to financial ruin in a hurry.

Many a time I justified spending on something I really should not have had because the overall amount was relatively low but added up quickly if not kept in check.

I know all work and no play makes Johnny a very dull boy, but no one said it had to be in an exotic destination in order to have fun.

I would much rather see an effort to curb down on the more expensive luxury trips and perhaps do a much more budget minded getaway.

The savings gained from a less expensive vacation can then be used to pay down debt and/or increase savings to a more respectable amount (15% a year should be a MINIMUM goal).

Unless this particular trip is to celebrate a SIGNIFICANT milestone such as a 10 year anniversary, I am going to go against Johanna’s decision in this one and say….

Verdict:  DENIED

There you have it.

Aloha Maui in this case has one meaning for Johanna and another for Xrayvsn.

via GIPHY

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