A New Debt Payoff Strategy
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When I first came to the realization that I had $201k in student loan debt, I immediately hit the Internet to learn how I could manage this absurd amount of debt on a teachers salary. All things about finances came up, zero based budgeting, debt pay off plan, Dave Ramsey, the list goes on and on.
It was overwhelming, but while reading article after article, I slowly created a plan to tackle my debt. I wasn’t as overwhelmed by the process because I saw how others had done it. I knew I wasn’t alone in this and could tackle this debt.
That was 3 years ago and I swore by the debt avalanche method for the last 3 years. If you don’t know what the debt avalanche or snowball is, check out my post here to learn what these two methods are. Both methods are great and ultimately you need to decide what works for you.
Now that I’ve paid off $102k of my debt, I’m beginning to experiment with my finances a bit more. I have more wiggle room in my budget to get creative with my strategy and I’m definitely a lot more confident in my financial decisions.
The first change I made in my plan to pay off debt.
I refinanced my private loans. This isn’t for everyone, but after paying off my debt for 3 years, I wanted to see if I could save money in interest by refinancing. I refinanced with Earnest (use my referral link and get $200 when you refinance) and lowered my rate to 4.97% and shortened the life of my loan to 5 years instead of 20 years. If you’re considering refinancing, check out my steps to decide if refinancing is right for you.
Yes, refinancing gave me a higher monthly payment on my private loans, but it is saving me money in interest every month and throughout the life of the loan. When I refinanced, I continued using the debt avalanche method, which meant my focus account was now a federal loan I have. This is when I began to really think about my future.
My new strategy to pay off my debt.
Lately I have been really thinking about my future. In all aspects really, my career, my living arrangements, etc. This has made me think more deeply about my debt payoff strategy. I have made the decision that I want to start looking at places to live so that I can move out of my parent’s house next summer. This will obviously slow down my debt pay off, unless I can find ways to increase my income.
My plan is to now focus on paying my debt with the highest monthly payment, which would be my private student loans. The reason I am doing this is because when that is paid off, it will free up $865/month in my budget to throw at debt, or afford living expenses that I will be adding to my budget. It also makes more sense since my federal loans have so many more options for me, especially being a teacher.
Once this debt is paid off, I will be moving onto my federal student loans and switching back to the debt avalanche method for these. The reason I will be switching is because those loans don’t have individual monthly payments, they are all wrapped up in one monthly payment. This will allow me to focus on one loan at a time based on the largest balance and highest interest rate, saving me more money in interest in the long run.
Remember: Personal finance is personal.
I preach this all the time, personal finance is personal. What I do may not be for you, but it works for me. The important thing to remember is that we are all working towards reaching financial freedom and a stepping stone to do that is to pay off all debt. It’s important to evaluate and change our plans as our lives change, which is exactly what I am doing. How have you changed your plans as your life has change? I’d love to hear about it in the comments!