Manage your risk and your return will be there is a lesson I was taught as a very young age.
This story is an awesome example of how Chris managed his risk. By doing so he was able to avoid catastrophe. He managed his money wisely. Now, he’s got 75k saved before he’s 30 years old!
Meet Chris
Chris completed his Doctorate of Physical Therapy (DPT) in August 2019. He was eager to hit life running. He was 26 and this was the first time he’d have a ‘big boy’ paycheck.
Unfortunately, physical therapy school costs have risen dramatically. Therefore, Chris had $220k in student loan debt from PT School.
In addition, he’d gotten married in summer of 2019 and his wife was pregnant. She was due in January 2020 was going to stop working in November 2020.
He contemplated using the 50-20-30 budgeting rule but realized it was a bad rule to build a plan around.
Short-Term & Long-Term Risk Chris Faced
Chris needed an emergency fund. When he graduated he only had $3,500 in his bank account.
With the baby due soon he wanted to have six months of expenses saved. For he and his wife, this meant they needed about $9,000.
The long-term risk centered around Chris’ student loans. He spoke to his FitBUX Coach and decided to use an income-driven repayment plan. He analyzed the difference between PAYE & REPAYE and decided PAYE was the route to go.
Therefore, the long-term risk was the tax he’d owe in 20 years. Chris used FitBUX’s IDR calculator to estimate he would owe approximately $110,000.
The Risk Most Take
Many people in a similar situation as Chris often make one or more of the following mistakes:
- They don’t save for the tax because they don’t know about it;
- If they do save for the tax they start investing aggressively;
- They know they need to save for the tax but they don’t because they rather save for a house; and
- They buy a car.
What Chris Wanted To Do
Chris wanted to save for a house. He also wanted to start saving for the tax and investing aggressively.
However, Chris used three tools from his FitBUX membership that caused him to pause and ask his FitBUX Coach what he should do
Tool 1
Chris had a 110 FitBUX Score. His Coach explained to him that his Score was low because he had a lot of risk in his profile. Plus, having a child would be adding to that risk.
Tool 2
Chris used FitBUX’s investment recommendation tool. It informed him that currently he did not have the ability to take investment risk.
Tool 3
Chris wanted to know how much home he could afford. Therefore, he used FitBUX’s home ownership technology. He figured out that he couldn’t afford a house right now. However, if he waited 2 – 3 years he’d be able to.
The Plan
Chris spoke to his FitBUX Coach and used our financial planning technology to see what he should do.
Step 1 was to save for an emergency fund. He was lucky when it came to that because the job he accepted gave him a $5,000 bonus.
Step 2 was to start saving for the tax. However, he was to invest conservatively for a year or two before taking more risk.
This plan would accomplish multiple goals:
- Start saving for the tax for when his student loans are forgiven;
- Have a good amount saved that he could invest more aggressively in two years or they can use for a house when his wife went back to work; and
- Would reduce the risk to his finances.
Avoiding Catastrophe
Everything started off good. By February 2020 Chris had $12,000 saved and his new born son was healthy.
Then catastrophe happened.
COVID hit and Chris was furloughed. Luckily Chris had his savings.
Most people in his situation:
- Lost money in the stock market because it tanked and they had to liquidate it for expenses;
- Had car payments they couldn’t afford; or
- Bought a house they couldn’t afford.
These people didn’t manage their risk and put themselves in a bad situation. Most had to take out credit card debt and pay 20% interest rates on it!
The Return Was There
Luckily for Chris, he found a job two months after he was furloughed.
The result of his plan was he did not need to use credit cards. He also did not have to sell any of his investments.
Therefore, when investments dropped in March of 2020 he didn’t panic!
His wife then was able to get a job six months later. At that point, they had a high ability to take investment risk. Their ability to take risk increased because:
- Dual incomes; and
- They had a decent amount in savings.
Instead of using the extra money to pay off credit cards, Chris was able to invest the extra money and do so aggressively.
He was able to buy stocks at a low which is obviously a major advantage.
Now 2 years later:
- His FitBUX Score is a 450;
- He has $70k in savings; and
- He is in the process of buying a house.
