Should I pay down student loan debt or start a business?
Hi, I am 32 years old and have student loan debt of $100,000 and I make $70,000 per year. I have about $30,000 in retirement investments, with no other debts. I am married, no kids, but looking to have kids in the next year or two. I wanted start a business so I can work from home as a mother. Is it wise to leave my day job with so much debt? My husband makes about $65,000 per year, we have free health insurance, and the only debt he has is the mortgage.
Hi! So glad you wrote to us. My colleagues offer great advice, and I’d like to add few thoughts. I love your idea of arranging your life to be able to care for your kids yourself as much as possible. I was able to stay home with the kids for 4 years, and after that I had flexible, non-demanding jobs during their growing-up years. Our two kids are now 30- and 27 years old now, and making that choice to put them first was the smartest thing I ever did. My husband was completely behind this decision, both emotionally and financially…and he didn’t divorce me later, either, for a new “trophy” wife, ha ha. Well, at least not yet – but we’ve made it 35 years, though, and I’m a pretty good cook, so I think we’re ok! So that plan worked for our family, but the financial risks when a person (usually a woman) makes that decision can be very negative and detrimental.
I realize that your plan is to work from home, and in today’s “gig” economy with all its remote work possibilities, that desire is more realistic than ever before. However, starting a business is usually very time-consuming and capital-intensive; it’s unlikely that your new business will be profitable in its first year and even less likely that it will generate income even close to the $70K you are currently making per year. So you and your husband will want to make sure that you can live and continue to live comfortably on $65K per year rather than $135K in case you don’t bring in any income for a year or two or more. That’s a huge drop in income; you might want to try a month or two of living on that amount of money and see how it feels, trying to imagine how it would be with another human being added to the mix.
You’ll have strong incentive to try to make that planwork because if you are like me, you are NOT going to want to leave the kids with other people while you go to work. My husband faced a layoff when our second child was two, and we made the decision for me to go back to work. Even though I got a job just half a mile away, could come home at lunch, and was able to afford a caregiver who came to our house, it was awful to be away from the kids every day and entrust their care to someone else not me.
So if you find you are able to live on less, that will give you more courage to consider this plan. Another thing to think about is if you might be able to telecommute or work remotely or continue your current job in a part time status after you have kids. Do you have skills that will let you work from home for another company or your current employer rather than starting your own business? That option would minimize your time away from the children you are going to have.
Also, you will want to make sure your hubby is “in” – if he wants you to keep earning that $70K per year or if he isn’t happy about the self employment thing, it will be hard to make a go of it. Consider too that if you take time off from working to start a business, you won’t be putting in money to your social security account or a 401k, which could hurt in the long run if your marriage and/or business don’t work out and you’ve missed out on years of earning and years of gaining experience that will help you get continually higher responsibility and higher paying jobs. I don’t mean to be a kill joy here but that reality has negatively affected the long term financial well being of many women.
So in answer to your specific question about whether you should pay down debt or start a business, maybe what you could do is for two months send your whole paycheck to pay down your student loan principal and live just on your husband’s salary. That two-month trial will accomplish both goals and give you a window into how it might work in the future.
So excited for you as you think about becoming a parent. It’s been the best experience for our family, and I hope you’ll enjoy it just as much. Best wishes to you!
Start the business, because you will be full of regret later if you did not try. You could do well to work with a financial advisor that specializes in clients who are startup and small business owners. The following are some things to consider.
1) Get the student loan interest rate as low as possible.
2) There is a high rate of failure for startup businesses, can you bring down your family budget to live within (or as close as possible) to your husband's salary? This is really important. Also, don't forget to include family household expenses with a baby. Home-based businesses tend to require low startup costs, doesn't mean you shouldn't do a budget for the business as well.
3) If possible, don't quit your day job yet. Can you plan and develop the business in your off time in preparation for a launch? The idea is to build your business as close to the point where you are ready to generate revenue before you quit.
4) Has your business strategy been validated? Is there a market for your product? Have you sought input and responses from other people? Have you tested your ideas on others? Do this validation journey before you quit your job, otherwise, you are not ready to start a business.
5) A small business can be very selfish, it will demand your time. Can you give it the utmost focus and attention? Consistency of effort is key to startup success.
6) How powerful is your dream for this business? Will it engage your Tiger-Mom sensibilities and get you to fight and fight and fight for its success at all cost? Never give up, never surrender? Get knocked down and then get up again?
I wish you luck and good fortune!
Kudos for your spirit of entrepreneurialism and grit. Without knowing a lot more information the answers to your scenario would be best found from discussions with professionals such as a Financial Planner, Career Coach, Business Consultant and Accountant. Here are some ideas to help you make the wisest decision for your life.
Are you currently spending less than you earn? A new business owner usually earns a lot less in the first 3 to 5 years than their previous salary. If your husband’s income can provide for most of your needs, then you already have a great start, but for most of us that is not the case. Coming up with a realistic budget is important. I like to compare clients’ budget numbers to their tax returns factoring in savings and changes in debt to see if they are accurate. (Example, Client believes their budget is $6,000+ a month, but after an analysis it is closer to $7,200 over recent years.)
If you have been making larger than required monthly payments on your student loans temporarily drop to the minimums to squeeze down your monthly budget. You may be able to defer payments or apply for reduced payments with lower income, but this is generally a bad idea because of added compounding interest. Credit card or other high interest debt should be paid off as quickly as possible. In your case avoid utilizing these to get your business started.
Do you have an emergency reserve of 3 to 6 months of your current needs? For starting a new business consider an additional 1 to 2+ years of minimum needs of your share if that income. This does not include your business startup and operational costs before you make a profit. Hypothetically if your income needs to contribute $2,000 a month that is at least $24,000 in added emergency reserves.
Could you start your business on the side? Assuming there isn’t a conflict with your current employer starting now has a lot of advantages. The mistakes and new ideas that will be crucial to your success are better learned now while you have regular income and before you have children. This could be practice for spending less, building your startup costs & emergency reserves, and if there is money left paying down your student loans. It will also give you a taste of how demanding the new business is. If you can handle two jobs now, having young children and your own business is probably a realistic goal.
Is your husband on board with this idea? It is tempting for each of you to imagine the story of you working from home with the kids while making a good income. Some childcare will probably be necessary even if it is only part time. Emotional support for your children and your new business are going to be very important. I don’t want to divert you from your goals but planning for these kinds of issues now is much better than sweeping them into the shadows of your busy schedule to grow and fester. If each of you understands and agrees that this may be a long and difficult journey that is worth the risks and rewards, then your new venture is more likely succeed without it being at the expense of your family.
Life is messy. The majority of small business owners I consult with do not have all their planning together before they take the entrepreneurial leap. The more prepared you are the better your shot at success. Know that a lot of small businesses fail or have limited success. A new business can be a roller coaster ride of joy and fear.
Good hunting in your new venture! Happy to discuss your story in more detail.
David Nash, CFA, CFP®
If you plan to have a financial peace for both of you, then treat all debts as a joint one. Tackle those debts together. Before you do anything, make sure that you set aside 6-month living expenses as an emergency fund and save it in a checking account. I know the interest rate from a bank is ghastly, but when emergency rises, the last thing you want is not able to access to an account immediately or be punished with a penalty for the withdrawal.
You both have very good earnings, thus have a game plan to first pay off your student loans. If the rate is too high, shop around from a private sector to lower the rate for a short-term. Let’s be laser focused on paying off the student loan and see if the time horizon of 5-year is a reasonable goal. If your employer does not match your retirement deferrals, then skip funding the retirement plan temporarily and put all money towards student loan. If the employer does offer the matching, continue to fund the retirement plans.
This is also a time to test-run your budding business from home. Any money generated from this side job should go straight to the student loan. Just make sure you pay the quarterly tax payment for any income you earn from this new business. If the husband joins you and gets a second part-time job to help you with the student debt, you know you have a long-term partner who’s there for you.
Only when student loans debts are paid off, you can resume all retirement funding or fund it with the maximum allowed each year. The next task is to pay down your mortgage bi-monthly, instead of once per mo. In doing so, you will own your home free and clear in half the time.
Lastly, don’t forget the baby’s education fund. As soon as the student loan is down to zero, you need to start a 529 plan for the child. Being debt-free means commitment and sacrifice, and I wish you the best.
This is a tough question to answer without understanding all the other variables in your life and I have no idea what industry your business would be in, how quickly you could get it off the ground, or what sort of long-term earning potential it would provide. I think now would be a good time to reflect on what your priorities are. Do you want to get the debt squared away above all else or is having kids more important? If you have kids, you'll need to take a fair amount of time away initially to take care of them which could put a large financial strain on the family if you're paying a mortgage, student loans, and your increased living expenses from the kids on only a $65k/yr salary. Do you want to be starting a business while trying to care for a newborn? If I were you, I'd sit down with your husband and do an in-depth analysis of your finances. Take a look at your current living expenses and estimate what that will look like with kids. What does that look like on only $65k/yr with your student loans and a mortgage as well? If you did start your own business, how much income would you need to replace and how quickly? The last thing you want to do is quit your job, have a kid, and start a business only for it to severely harm your financial situation or put you in even more debt with more stress and strain than you need. I would not touch your retirement accounts unless it's a very last resort. If you take money out of there you'll not only pay ordinary income tax on the proceeds, but you'll also have to pay a 10% penalty on top of drastically impeding the progress you've already made. This would be highly ill-advised, especially with kids on the horizon. Perhaps you can start your business on the side while keeping your current job and get your business built up to the point you can quit your job and still be financially stable and paying off your student loans before you have kids? This may mean pushing it out a few more years, but if you really need to be financially fit for kids before you have them or you are only doing yourself and your kids an enormous disservice. I'd highly recommend sitting down with a financial planner and figuring out what needs to happen in order to make both these goals of yours (kids and a business) a healthy reality.