If you’ve been reading my blog for a while, you’ll know I’m in a LOT of student loan debt. I had no idea what I was in for when I started taking out loans for the degree I would eventually get 7 to 9 years after I started. As Melba would say, “sometimes, it’s no easy”. But you’d also know that I’m following the Dave Ramsey method of going all out and paying off my debt with everything I can throw at it. Retirement close to follow.
Fortunately for me, I’m in a situation which allows me to make large payments on my loans. This isn’t the case for everybody though, and I recognize how lucky I am. But I also took out a little more than 2x the average person takes out in student loan debt. No bueno. Also, my situation will be changing soon leaving me with a sizeable amount of debt still to repay with less income to allocate towards it. And with the Biden administration not making any progress towards some form of loan forgiveness, it seems like it’s going to be a long haul.
So with all these financial uncertainties floating around in my life, my question is, “will I be paying off my student loans when I’m ready to retire? ” The short answer, no. Hopefully I’ll have my loans paid in full in the next few years, but this was only possible due to my circumstances being favorable to me paying off debt. I could have easily found myself in over my head with just over 100k in debt, with no plan or financial resources to dig myself out of the hole I dug for myself. Let alone the foresight to plan for my inevitable retirement.
So now that I’m in a place where I’m able to concentrate on my financial situation while making calculated decisions on how to proceed with the future of my finances, what am I going to do with the mess I’ve created? How do I move forward with what seems like an impossible task? Take a deep breathe, relax and take it one step at a time. It won’t be easy, but it’s doable. Let me show you what I’ve found.
Some Debt Resources
I’ve just started reading “I Will Teach You To Be Rich” by, Ramit Sethi on a rec from a friend of mine and it got me thinking about my situation. His book is a great place to start if you’re looking for a brass tacks way to understand your personal finances. Especially if you’re new to the world of investing and taking care of your future monetary needs. Some of the tools he introduced me to are:
This financial website has a lot of powerful tools you can use to get a handle on your personal finances. They have an array of calculators you can use to find out when you’ll be out of debt, like this student loan calculator. They also have an investment calculator as well. Helping you to more clearly map out your future by showing you how far your money will get you into retirement or while paying back high or low interest debt.
They also stay up to date with the latest news about the state of different aspects of finance. For example, they post weekly about the highlights of what’s changing with student loans. This way you can follow what’s happening with the department of education and if their decisions will effect you in anyway. All in all, a good tool to have that specifically deals with the subtle nuances of the financial world.
Doing Away With Fees
Ramit also goes into great detail about how to choose the right bank for your needs. The main takeaway for me was, pick a bank that’s not going to nickel and dime you to death. I remember having a bank account in my early or late twenties, where it seemed as though I was accruing an overdraft fee almost twice a week. And they really added up quickly at $30 a pop. This was mostly due to having overdraft protection, which I ended up using like a line of credit. No bueno.
Since then, and nearly a decade later, I’ve finally got savvy enough to switch to a credit union that not only doesn’t have overdraft protection or fees, but reimburses me for ATM fees I incur when I use a foreign bank’s cash machine. No fees while banking is something that has been long overdue. And something I’m able to appreciate all the more for having to pay the exorbitant penalties I had in the past.
Bad Debt & Credit Cards
When I took control of my finances for the first time about seven years ago and realized the mess I had made, I was more than a little concerned. I’ve said before on this blog, my credit card debt was over $20k. Add that to the rest of my loans and bills and I was just north of $100k. And what really blows my mind is, that I just stumbled my way into that massive hole. How was that even possible?
Regardless of how I got into debt, it was me who had to get myself out. I had four credit cards that I paid off in order of lowest to highest balance. This took a while. “The snowball method” was what I used and as Dave Ramsey teaches, gives you the emotional accomplishment of paying off a balance and the added bonus of adding that minimum payment from the last paid off card to the next one.
So when I started my debt free journey, I had four minimum payments to make while I was hammering away at the smallest debt. No matter which angle I look at it from, it took me a while to build momentum enough to start making real payments on my debt. I believe I started my debt snowball with my biggest payment being around $800 towards my smallest balance. Every time I paid off a card, I was able to free up the minimum payment of the card I just paid off, and dump it onto the next target.
I’m now making close to $2k payments on my loans every month. This is psychologically empowering. To see how far I’ve come from my max payments of $800. But I still have a ways to go. And now I have the past experience, as well as the habits that I’ve been building, to consistently pay down my debt. And those habits will help me to save for my future once I’m done giving my money away to other people.
Now I have one credit card that I treat like my debit card. I only spend what I know I can pay off at the end of each month, aka what I’ve budgeted for. I cash in on the rewards they give me for using their card and thanks to Ramit’s advice, set my card up to pay my statement balance automatically at the end of each month. So I don’t accrue any interest on purchases made. It’s been working well so far, but I’m ready to cancel my card if things change for the worse. I’m done paying high interest rates and would happily go to an all cash system.
The Plan AKA Getting Out of Debt
So now that I have my finances and spending habits under control, what’s the plan? Well, not a whole lot has changed. I’m still planning to pay off my loans first, throwing everything I have at it. Financially it makes the most sense for me. Until I’m down to zero owed, I’m still paying interest which would be about the same amount I’d be gaining on any investments I’d start. I may switch my loan to a bank with a lower interest rate, but for now, they’re in forbearance due to the COVID relief plan. So until May, 2022 I’m not paying any interest. Bonus!
So if I’m paying my student loans aggressively, as was the plan since the start, I’ll be able to fund my retirement accounts more fully, sooner. With my current plan, I’ll have my loans paid off in about four years and I’ll be putting close to fourteen hundred towards it each month.
And as I’ve learned with my previous experience of paying down credit card debt, using the snowball method, I can then use those same tactics to start paying myself. First, setting up my emergency fund of six months expenses, and second, maxing out my ROTH IRA contribution and putting any overflow into my 401k through my employer. I’ve built the healthy habits paying off my debt, now it’s time to use those newly acquired skills to make sure I’m taken care of in the future.
And Don’t Forget to Budget!
Above I glanced over a few of the accounts I’ll be using to fund my future. But if you’re like me, and most Americans, you have no idea what these accounts are. Or what it means to contribute to them. I’ll be covering some strategies and the accounts I’ll be using in my next post. But for now I’d like to focus on just how important it is to get on a budget and check in with it and how well you’re sticking to it at least once a week.
The $700 Whole Foods Run, AKA I’m going to the grocery, be right back
This was something I said a lot. There’s a Whole Foods about a mile from my house. So inevitably when I would run out of something, I would head down to Whole Foods to pick it up. But while I was there grabbing whatever ingredient I was low on, I would also use this opportunity to pick up a few other impulse items. Candles and essential oil were high on my list of impulse buys (I’m looking at a wooden box full of oils as I type).
Everything was going pretty smoothly until I realized one month, when I was adding up my grocery budget from the previous month’s expenses, that I had spent about $750 on groceries alone! But the real icing on the cake was that this was the second month in a row that I had gorged on my food budget. No bueno.
There were a few contributing factors as to why I was so over on my food budget consistently. One of them being, going to Whole Foods three times a week to be sure. I have nothing against Whole Foods. Their products are high quality and I agree with their values and commitment to organic foods. But I can just as easily get most of the products at its more reasonable counter part, shout out to Market Basket, for less cash. This just makes good financial sense.
Re-asses Your Routines
Since my realization of how far I was straying from my food budget, I’ve made a few changes to my routines. First and probably most importantly, I’ve stopped frequenting Whole Foods until I’ve paid off my student loans. As I’ve said, I like the store, but as Dave Ramsey puts it, I’m broke. I can’t afford to shop there.
Second, I shop twice a week at the more reasonable grocery store in my neighborhood. Whose selection is amazing and matched only by their prices.
Third, I’ve upped my food budget. I was trying to live off of $200 dollars a month when I first wrote my budget. This was nearly impossible. Upping my spending in this category allowed me the freedom to buy what I needed without feeling defeated every time I would inevitably go overbudget.
And finally, I also check in with my budget once a week. Usually more, to see how I’m progressing in the different areas of my spending. This is a step that is crucial in keeping yourself accountable for sticking to your budget. For instance, it’s the 9th of the month right now and I only have enough for one big shop left. So I know that I need to rely on the food I already have in my pantry to help stretch my grocery budget a little farther.
Wrapping Up By Checking In
These quick check ins are invaluable to helping you stay on track with your budget. So set a plan, follow through and check in frequently. Next week I’ll be covering some strategies to help you navigate the waters of retirement. Though I’m not a professional, these are just my opinions of what I’d like to do to plan for my retirement. It seems a little scary and overwhelming at first, but once you understand the basics, you’ll see there isn’t much to it. And if you can develop some healthy savings habits, you’ll be well on your way to a comfortable retirement. Peace : ) and thanks for reading.