Student Loan Update – April 2017

higher-education

When I graduated in May of 2017, I chose not to think about my student loans. It was a hot humid day but people traveled from different states to come see me complete another milestone. I was juggling full time work and a part time MBA program right when my husband was settling into a new job. I had a lot to be thankful for and a number of people were proud of me. The Department of Education was going to grant me 10 years starting in December 2015 to agonize over student loans but I was never going to get another graduation day.

I picked up my diploma after the ceremony and I sat in the front seat of my husband’s car running my fingers on it back and forth as my parents sat in the back. I was pretty impressed with myself. Not in a gloating kind of way but more so in a “I actually did it…” Almost as if I couldn’t believe it.

The next day, things went back to normal and I decided that the honeymoon period with the diploma was over. Real world responsibilities required me to know what my balance was and what my monthly payments were projected to be. It was nothing that I could not afford but it was painful. Over $350 a month a and $40k+ balance. I could get a whole new car with that! I devised an aggressive pay down plan as follows:

  1. Start paying immediately rather than waiting for the grace period
  2. Apply all raises to the monthly payment and all bonuses to the balance
  3. Apply all tax refunds if any to the balance

3 simple steps. The toughest part was the discipline of not eating out as much as we would have liked and not splurging at the mall. However, 23 months later, that plan has worked so well that I am dancing for joy.

Capture

In case you are having trouble reading the small font, this says:

Current balance $11,641.17 & Due date 7/18/2020

While there are no guarantees, these numbers indicate that I am likely on track to finish paying the debt off by the end of the year if all goes as planned. That will be 8 years ahead of schedule. This is more than I could ever hope to achieve. When I said I was determined to pay and save myself an astronomical amount of money in interest, I was not joking.

I am grateful for the discipline I have that allows me to focus on long term independence goals rather than instant gratification. I’m also thankful that I have a supportive husband who understands my goals and can see my vision for our family. Some people would have valued the high life over a debt free life and it could have been a source of friction. Instead, he trusts my judgement and is happy delaying a little bit of gratification in favor of peace of mind.

Dear DOE, thank you but no thank you. I will decline your offer to take a 3-year hiatus from my obligation. You’re going to collect these payments and you’re going to like it. But better yet, you will set me free.

 

Advertisements

Debt vs. Savings: What to Prioritize

playing-with-the-building-blocks-of-the-cloud-getting-iaas-right

Two of the building blocks of personal finance are saving money and paying off debt. Everything flows from these two principles. You can’t invest, start a business or retire if you are not saving and/or you are crippled by a mountain of debt. In an ideal world, we’d be maxing out our 401k and crushing our debt, getting ever closer to eliminating them every month. Alas, we live in the real world with tons of responsibility and a finite amount of money to work with. So how do we prioritize?

While the exact answer might vary from person to person depending on their respective situation, the steps we use to reach the appropriate conclusion are the same. To make it easier, I will eliminate the variables in a hypothetical situation by using myself as an example.

Currently, I have 3 savings account: one is a CD where I get the best return I’m going to get in this interest environment. It pays me 1.25%. The other one is a money market account that pays 0.05%. It’s not as lucrative as the CD but my money is accessible with few penalties. However, money markets have an important restriction. While you can deposit money any time you want, they cap how many times per month you can withdraw before you incur a fee. It’s a fantastic tool that forces you to keep your hand out of the honeypot. But life happens and we sometimes need to access money more often than we want to. That’s where my regular savings account comes in. Hold on to your hat folks, this return might blow you away: 0.01%. I’ll try not to spend it all in one place. If you’re wondering what this has to do with anything, be patient…

The debt that is currently the biggest thorn in my side is my student loan debt. As much as I would love to keep fattening up my savings, the interest rate on that debt is 5.16%. That means, for every hundred dollar I chose to add to my savings (let’s assume we’re talking about the CD since it offers the best rate) over paying off my student loans, I am getting a return of 1.25% that is costing me 5.16%. That puts me in a whole of close to 4% annually on that $100. Of course, student loan interest is tax deductible if you itemize (which I do), but you don’t get all of it back. The IRS caps it at $2,500 gradually decreasing it as your income goes up until it disappears. So we’re talking a saving of 1% to maybe 2%, and I’m being generous, which will then net you a negative return of almost 2% and we aren’t adjusting for inflation.

So what do I prioritize?

  1. Having an emergency fund: This buys you peace of mind and keeps you from falling into debt when tragedy strikes. How much you need depends on your particular situation. But I recommend a minimum of 6 months.
  2. Saving for retirement: The most important part of saving and investing for retirement is time. The longer you save, the more time that compound interest has to work in your favor. Also, the more time you have to recover from dips in the market.
  3. Paying off high interest debt: My student loan debt at over 5% is in stark contrast with this loan I took out for an energy efficient central AC which is a 0% loan. I am in no rush to pay that off. If they want to extend it 10 more years, I’ll take it! However, I am very aggressive with my student loan debt where I send every extra unexpected funds to Nelnet. Whether it’s a raise, a bonus or a tax return check, it goes towards my student loans. I have paid off over $23,000 in the past 18 months and I have no plans of slowing down until it’s gone.

While your situation might be different, for me, this is the least expensive and most sensible order in which I can allocate my funds. If I do anything else, I am not maximizing all of my dollars. Have you taken the time to consider if your debt repayment plan and your savings strategy are optimized?

The 7-Step Guide to Healing Your Credit

score

Before you read this post, I encourage you to take a look at the previous blog that talks about what makes up a credit score. You will have a better understanding of how the steps that I am recommending will impact your score every step of the way.

Welcome back! Now that you know what makes up a credit score, I hope you’re ready to fix yours.

A capitalist society is a consumer driven society. Few people are as consumption driven as Americans. Unfortunately, many of us aren’t patient enough to wait until we can afford the luxuries of life before we decide to indulge. As a result, we overextend ourselves, borrowing our lives away to keep up with the Jones’. However, as various entities we do business with begin to put increasing value on credit history, we are starting to wake up to the fact that things need to change.

But before they change, we must right the wrongs of the past. So it is no surprise that credit repair has become big business. The other fact about the credit repair industry is that they are preying on low-income consumers. What if I told you that with a little bit of guidance, patience and a whole lot of discipline you could repair your own credit score for free? Well you can and I will outline all the steps below.

The following list is a guide for how you can repair your credit or keep your credit score high if you already have good credit.

  1. Pay on time – Pay all of your bills on time, every time. Verizon, T-Mobile, Comcast can all send you to collection and ruin your credit. While you want to prioritize things like your mortgage so you aren’t homeless, don’t think there is a company out there that you owe money to that doesn’t have the ability to report you to all 3 credit bureaus.
  2. Pay down your balances aggressively – Your outstanding debt balance, especially on revolving lines of credit (i.e. credit cards) negatively impact your debt usage ratio (how much of your available credit line that you are using). Therefore, your score will benefit  greatly from you paying off your balance due and not just the minimum payment.
  3. Do not apply for credit – If you read the previous article that I linked above, you will know that hard inquiries (shopping for credit vs. “soft” inquiries marketing/promotional inquiries) on your report adversely affect your score. Additionally, those inquiries remain on your report for about 2 years.
  4. Pay, don’t shift– Do not move your debt around. I know someone who spent nearly 3 years moving their credit card balances to 0% interest promotional cards until she was no longer getting those offers. This does not eliminate your debt. It just helps you avoid interest for a period of time while you’re paying a balance transfer fee as a percentage of your owed amount. It is costing you money to still carry the debt. Ignore those promotional offers as they only benefit the company that you’re moving to, while you continue to be in debt and your score continues to suffer.
  5. Don’t close good accounts – If you have accounts in good standing with little or no balances, especially if they are aged, keep them open. They help establish your history and offset negative information on your credit. However, you have to be able to resist the urge of using the card or credit line. You are NOT required to use your account to have good credit.
  6. Be patient – Time heals all wounds. Inquiry “wounds” 2 years. Delinquency “wounds” 7 years. Bankruptcy “wounds” 10 years. As you work your tail off to show improve the data that shows up on your credit report going forward, there is not much you can do about ACCURATE adverse information. However, all information, good or bad goes away eventually. This is why it is important to remain consistent once you decide to make a change. Once the bad information falls off, you want to make sure that new bad information doesn’t rear its ugly head as it has a 7 year shelf-life.
  7. Fight – Remember how I said you can’t do anything about accurate information? That is not the case for incorrect information. If someone has the same name as you, or their social security number is 1 digit off from yours, or if you were the victim of identity theft, you don’t have to be punished for an error or a thief. The law says that you have the right to fix errors on your credit report and you should absolutely exercise that right.

These are all steps you can take on your own, for free. I hope you find the information useful and that the credit repair business has just lost another customer.

Student Loan Update – September 2016

8

Boy, has it been a while since I’ve blogged. It’s been a really busy summer for my family, and while some of our activities haven’t all been fun, these past few months have been really good for us, both on a personal and financial level. As I previously mentioned, we were working on getting our solar panels up and running and I have good news on that topic, but today, it’s about the thorn in the sides of millions of degree holders: Student Loans!

I decided that now would be a good time to do an  update as I am 3 months shy of the 1-year anniversary of when my loan went into repayment and 3 months past the 1-year anniversary of my graduation from Business School. I have been super aggressive about paying my loans as well re-amortizing my balance to update my minimum monthly payment and it has paid off. Here are the results.

12/18/2015 (initial terms) 3/29/2016 9/27/2016
Monthly Payment  $                  395.00  $                         305.00  $                         290.00
Principal Balance  $            39,748.00  $                   27,301.00  $                   24,656.00
Repayment terms 120 months 114 months 109 months
Interest Rate 5.41% 5.16% 5.16%

Monthly Payment: I have decreased my monthly payment by over $100/month in less than a year. I am free to continue making the $395 payment, however, the extra now goes towards paying down the principal which will save me a bundle on interest. It is particularly important for me to save money on interest (besides the fact that it’s good money habit), as my income rises and my ability to deduct the interest phases out. In addition to interest savings, if I run into difficulty and I need to redirect those funds elsewhere, that’s fine!

Principal Balance: That’s good old discipline and self-control at work. Every windfall whether it was a tax return, bonus or raise, it was directed to making payments in excess of principal. That’s a nearly 40% pay day and an average payment of over $1,600/month! Has it been easy? No, but I will reap the rewards 10 folds when I’m free in less than 2 years.

Repayment Terms: That’s how long my loan servicer planned for me to take to repay them: 10 years. I don’t think so. Besides a loan securing tangible, real assets, I will never have a decade-plus loan. I have not only cut my monthly payments, I have cut down on my official repayment time! The original terms were predicting I would be making my last payment in December 2025. The extra payments I made in as of March 2016 had cut that estimate by 3 months and put my final payment in September 2025. And that’s the servicer’s estimate, not accounting for any additional payments I might make. I’ll let you in on a little secret: we’re less than 6 months away from “tax season”, what do you think I’ll do with any refunds I may get?

Interest Rate: This one is easy and I can’t take any credit for it. By setting up automatic payments for the minimum amount due, they give you a discount of 0.25%, which will save me a bit more money over the life of the loan.

I hope your debt repayment plan is on track, and if you’ve fallen off the wagon, don’t worry. Better late than never. We’ve all stumbled.

You’re on Notice

 

long-term-unemployed

It wasn’t too long ago that I talked about the importance of never getting comfortable with your level or source(s) of income. I’m a big promoter of always seeking different income streams as well as seeing how you can get raises. Your ultimate goal should be to be in control of an amount of income that covers your cost of living. That’s true financial independence. That way, if you continue to work, you are working because you want to and you can stop at any time. Most importantly, if you’re involuntarily out of work, you’re not likely to be homeless in 3 months.

I also talked about my experience using a Bank of America ATM with a remote teller (Teller Asssist), and the potential threat they pose to many retail banking jobs.

Here it is: CNN is reporting that within the next 10 years, 30% of bank jobs could be obsolete. Very alarming.

These are routine repetitive jobs that we could anticipate being replaced. They are customer service jobs that provide an experience as well as a service. Well, I used one of these machines, and I got the experience. The woman on the screen was sufficiently pleasant and helpful for me to not care that we were interacting on camera rather than in person.

Technology has done it: using machines to provide services that could only be delivered in person. If you have a lower skilled job, this should be your wake up call. Save, invest and set yourself free from the bondage of debt. Otherwise, you might find yourself with a negative net worth an no income.

Your Friend’s Reality

reality

This is a story about a girl* who travels with her husband, eats out, has parties, wears nice jewelry and gets her nails and hair done regularly. She is a college graduate, who works full time, owns 2 cars and has the 2.5 kids. Certainly, she’s living the American dream. She lives in a nice apartment. Who says the American Dream requires owning your own home? Well, as long as you don’t want to buy a home that is.

Would you think she is still living the dream if she was living in that apartment as a result of financial limitations? In that case, I’ll clarify things for you. That nice apartment is cramped. She doesn’t want to live there. But she can’t afford to move because the $30,000 in combined debt is too high relative to her income to qualify her for a mortgage. Did I mention can barely afford the apartment? Sure, she pays her rent regularly, but it’s financially taxing. I should also mention that she can’t afford to move. How do you downsize from a 2-bedroom apartment for a family of 4 and a pet?

If you find yourself envying the social media version of your friend’s life, stop. Until you see their net worth and their monthly cash flow, take what is presented with a grain of salt.

(*This person is not theoretical. She’s real. These issues she faces are things we discussed.)

Every Little Bit Counts

8

If you had a $1,000,000 in cash, I bet you’d consider yourself a millionaire, correct? Well what if I swiped $5? Or even $1? Would you still be a millionaire? You’d still be pretty rich, but not quite the text book definition of a millionaire.

The point I’m trying to make with this illustration is that every penny counts. People often fall into the trap of thinking that “It’s just a dollar, it’s just $10, it’s just $20.” Meanwhile, the reality is that a million dollars or even a billion dollars is a collection of $10s, $20, $50s, etc. Before you can think big, you must learn to think small. You can’t reach $100,000, and are even less likely to reach $1,000,000 if you’re not keeping your eye on your $1s.

Mind Your Bucks

This is what I like to refer to as “minding my bucks”. I keep track of every dollar spent whether it’s a $3 coffee or a $10 lunch because I know it adds up over time. I have made some relatively small changes in the past 2 years that have not materially impacted my quality of life but have managed to save me a bundle. Some can be easily quantified, others, not so much, but they all make financial sense and my only regret is not getting around to them sooner.

  • My husband’s hair grows very fast. He used to go to Supercuts twice a month for $17 and would tip $3. I cut his hair now. Savings $480 a year.
  • We used to eat dinner out once a week, averaging $50 per bill. We’ve cut back to  once a month. Savings $1,800 a year. We get an additional 10% cash back by targeting the restaurants that gives us bonus rewards (I talk about those in this post). This can get us additional savings of up to $60 a year.
  • If we’re going anywhere together, we take my car (he drives an SUV), which gives us 14 miles more per gallon (34 mpg v. 20 mpg). Our local BJ’s gas station charges $1.89/gal which translates to $24 in savings on a 600-mile round trip to visit family in NYC. If we go 4 times a year, that’s $96.
  • We take advantage of my husband’s employee discount for our BJ’s membership. While the membership usually costs $50 a month for 12 months, his job allows him to get the membership for 16 months and paying only $40. If we annualize the cost, that saves us $20 a year.
  • We canceled our gym membership after we move to our new house. The previous owners were not able to move their full size gym in time before the closing, leaving us with a total body weight training system. We also now have a 1.5 acre lot which will be useful for cardio in warmer weather. Savings, $240 a year ($20/month Planet Fitness).

Total savings: $2,696.

We didn’t become hermits. We didn’t start dumpster diving. We aren’t depriving ourselves of anything we enjoy. In fact, some people might argue that we haven’t made enough cuts. We still have cable, unlimited data plans, etc. We just made some minor adjustments to save ourselves close to $3,000. Is there room for you to find a couple thousand dollars in your budget? What would you do with an extra $3,000 a year?