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debt payoff

Money Management

What to Prioritize: Debt Payoff or Saving?

What to Prioritize_ Debt Payoff or Saving_

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This is a huge conversation in the personal finance world and one that really has to be personal when it comes down to it. If you’re a Dave Ramsey follower, then you know what the answer would be. But, if you’re someone that has made your own path navigating your finances, then it can take a bit more thought.

I personally come from a view of creating long term goals and then short term goals to reach those goals. I know for me, following the baby steps just won’t get me to my long term goals. Not as fast as I’d hope anyway.

My end goal is to reach FIRE, not necessarily to retire, but to have the freedom to do whatever work I want, regardless of pay. Right now I’m stuck at my job solely because of my debt and grants I received from my undergrad and grad studies.

These are the steps I followed in order to create a plan for myself in regards to paying off debt or saving.

1. Create long term goals.

Think about big picture, where do you want to be in 20 years? When do you see yourself retiring? Where do you see yourself working? Do you have any goals you want to reach that are impacted by your financial status?

Once you know your goals and have them written out, it will make it so much easier to figure out your financial plan based on those goals. Everyone has different goals, so everyone’s financial plan should look different. This is why I don’t really agree with the baby steps. Yes, his steps work, but only if you have that specific goal in life and you’re life aligns with the steps.

For me, I had $200k in student loan debt and I’m in my 20s. You’re crazy if you think I’m putting off saving and retirement for as long as it’s going to take to pay off my debt. This is why it is so important to think about your specific goals and what helps you to reach those goals.

2. Create short term goals.

Once you have your long term goals mapped out, create short term goals to reach your long term goals. For example, my long term goal is to reach FIRE. My short term goal I am working on is to pay off my private student loans and then my high interest Federal student loans. Once that is done, I will be increasing my savings and retirement contributions, while I pay off my lower interest student loans.

You have to think about what you need to do to reach your long term goals. Depending on what your goals are, everyone’s short term goals will look different. Take the time to really think about what makes the most sense for your long term goals and don’t be afraid to change them as you get closer to reaching your long term goals. For example, originally I wanted to pay off all of my debt, but then I realized that some of my debt has such a low interest rate that it would do better in a retirement account.

You just need to make sure that your short term goals are realistic to reaching your long term goals. As you move through the process, make adjustments as necessary. Life changes and things happen that we can’t expect. It’s important to make adjustments in the ever changing seasons of life.

3. Adjust your budget to reflect your goals.

Once you have your goals written out, you need to update your budget to reflect your goals. No matter where you are in your journey, you need a budget to reach your goals. Without a budget, you won’t know where your money is going or where to send it. What I mean by this is, even if you have no debt, if you don’t tell you money where to go for investment or savings goals, it will just sit in your account. If it’s just sitting in your checking account it isn’t working for you when it could be.

Create your budget to align with your goals, I would suggest zero based budgeting to make sure you are accounting for every penny. I have Google sheet templates available to purchase, if you need help with this!

Personal finance is personal and you ultimately need to decide what is best for you.

There is a one size fits all answer for this. I am definitely not saying debt is good, but depending on the interest rate and your long term goals, it may be mathematically smarter to contribute more to investing and less to debt. You need to take the time to really think about what your goals are and what you want for your life. Once you have that figured, you can create a plan that gets you there.

Debt

A New Debt Payoff Strategy

A New Debt Payoff Strategy

This post may contain affiliate links. Check out my Disclosure Policy for more information.

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!

 

Debt

How Student Loans Impacted my Credit

Student Loans Impacted my Credit

When I graduated grad school in 2015 I had a plan in place to pay off my $200k in student loans. I had a teaching job lined up and planned to find some extra tutoring jobs to increase my income. I had just started really looking at my personal finance in the months leading up to graduation, started budgeting, created my plan, and started looking at my credit score. I always thought my credit score was my lifeline to doing anything in my future and I only assumed that with my crippling debt that my score would be horrendous. Boy was I wrong, my student loans impacted my credit, but in a way I never imagined.

Of course, my student loans did impact my score, they obviously come up, but they didn’t impact it the way I had thought they would. My assumption was that my credit score showed how much debt I had, so my score would be terrible. How could it not be terrible when I was 22 years old and had accumulated $200k in student loans? What I didn’t realize was that your credit score simply shows how good you are at managing all the debt you have accumulated, the amount you have doesn’t necessarily matter. For example, if you keep your credit usage under a certain percentage, you have a good score because it shows you are good at managing your debt. If you always make your payments on time, you have a good score because you are good at managing your debt. My score at 22 years old fell in the “good” range, which excited me because I assumed I could get it to excellent quickly and refinance my student loans.

Again, I was very wrong about my credit score and how it is used. Within one year my score fell within the excellent range, I was so excited to refinance my student loans with a lower interest rate. The time didn’t matter to me, I wanted the lower interest rate to apply more money to the principal each month. With my excellent score set I did the paperwork to apply to refinance my student loans. Originally I was “pre-qualified” for a wonderful interest rate of 5%, a HUGE improvement from my 8% loans I was dealing with. This was simply based on a soft credit pull, meaning it doesn’t impact my credit score, but they get my credit score number. So, based on my lovely “excellent” score, I was viewed as a “safe” borrower and was rewarded by a great interest rate. That is until they did the final hard credit pull to determine my definitive refinanced loan. I was quickly denied because my debt to income was too high. So even though I had an excellent credit score, partially due to making 100% on time payments, I was denied because I had too much debt.

This was a part of my debt free journey that I didn’t expect. I was making huge payments every month, well over the minimum and had my nice “excellent” credit score, but still couldn’t help myself pay off my debt quicker because I had too much of it. This is where the credit score doesn’t make sense. I stuck to my plan and have now paid off 4 of those private student loans and every time an account closes, my score drops briefly. So, as I’m lowering my debt, lowering my debt to income ratio, my score drops initially, followed by an increase. Do you check your credit score regularly? How has it impacted your debt free journey?

 

Debt

Debt Snowball or Avalanche?

Debt Snowball or Avalanche

This post may contain affiliate links. Check out my Disclosure Policy for more information.

This is something I really struggled with when I began my journey to financial freedom. When I first began I was really into Dave Ramsey and using his baby steps. It’s what started this whole thing for me. As I did more research and learned more about personal finance, I was stuck with trying to decide which method I should use to tackle my debt. There are pros and cons to each and you ultimately need to decide what is the best method for you. But, I hope this can help make your decision a little bit easier. There is also a wonderful tool you can use to figure out what the best method is for you and your debt free date, you can read a review about it here.

Debt Snowball

This is the method that Dave Ramsey always recommends, and it is a great method for tackling debt. This strategy involves listing your debts from smallest to largest amount. You focus on your smallest debt first throwing all of your extra money at that debt, the rest of your debts get just the minimum. This allows you to make traction on one account. Once you have paid off the first debt, then all the money you were putting to it goes to your next smallest debt. This continues until all debts are paid off. This allows you to experience quick wins in the beginning and motivates you to keep going once you get to the larger debts. If you are someone with consumer debt, I would definitely recommend this method because it will help you when you are first changing your habits. This is also beneficial if you don’t have a lot of debt because if you can get out of debt in 2 years or less, interest won’t really make a huge difference in the big picture of your debt payoff. The negative of this strategy is that if you have large debts with high interest rates that will take you a long time to pay off, then you will lose a lot to interest.

Debt Avalanche

The other strategy is the debt avalanche, which is very similar and follows the same system of the snowball method. The difference is that instead of listing your debt smallest to largest by amount, you list them largest to smallest by interest rate. Once you have your list, you focus on the debt with the highest interest rate first and everything else gets the minimum payment. When the first debt is paid off, you move onto the next highest interest rate. This is good for people that only have student loans and don’t necessarily need the motivation of paying off debts in the beginning. The biggest positive of this strategy is that you save money in the long run and is good for people that are going to need multiple years to pay off their debt. This allows you to save the most possible money during your debt payoff. The negative of this method is that you might not experience any debts being paid off for a little while if your biggest interest rate is your largest debt.

I personally use the debt avalanche method, which took me awhile to decide on. Ultimately, I knew it was going to take me many years to pay off my student loans of $201k and my sole motivator was paying them off fast and saving the most money in the process. Which debt payoff strategy do you use?

Money Management

Using Gift Cards to Get Through the Hard Months

When I began this debt payoff journey I was $200k in student loan debt, just starting my first year teaching, moving back home with my parents, and had no idea how I was going to manage this whole thing. I had a plan, I had a job, and I was starting to create some great side income streams. Then, the summer started. This should be the best time for a teacher, right? Wrong. No paycheck for 2 months when you have a $1,400 minimum loan payment to make each month is stressful. Of course, I had saved money throughout the school year for those two months in order to make at least my minimum. And of course I had some side hustles going on to bring in some income, but it was no where near my salary. That’s when I discovered using gift cards to get through the hard months.

Using Gift Cards to Get Through the Hard Months

When you don’t have your income like you’re used to, but you know it’s going to happen, it’s great, solely because you can plan for it. I was able to save enough money each month to cover my bills in the summer and start thinking creatively about my money. That’s the crazy thing about being in crippling debt, you start to think super creatively in order to get more money in your pocket.

About the same time I started to panic about not having my paycheck, I was also doing a huge purge of my things. I was hoping to sell some things to make some extra money. In the process, I found a TON of unused gift cards. That’s embarrassing to admit HA! I literally stashed them probably years ago and totally forgot about them. But, that got me thinking, why don’t I use these to help me in the summer?

So I survived my first summer without my salary and knew what I needed to do for the following summer. I saved each month for the summer so I could pay my bills and I hoarded every single gift card I received. Now, to clarify, if it was a restaurant one, or clothing, I didn’t necessarily keep it. The ones I kept were the ones that could be used anywhere, like Visa or Mastercard gift cards. And I absolutely kept Target gift cards because this teacher loves that place for back to school! So, what are the creative ways you have come up with to make ends meet when your pay isn’t consistent?

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July Debt Payoff

I started my debt payoff journey in November 2015 officially. That’s when my student loans officially went into repayment and I started throwing all of my money at my debt in order to pay it off as soon as possible. Since then, I’ve made many changes in order to increase my payments every month. When I first made my plan, my debt payoff date was just before my 31st birthday. My goal is to get that date closer and closer every month by improving my budget and increasing my income. I’m going to share with you all a breakdown of my loan payments and how I increase my monthly payment. I’m also hoping that by sharing with you all my goals, it will hold me more accountable to work towards them.

 July Debt Payoff

Income

The summer is tough for teachers, I don’t receive my normal paycheck in the summer, I’m on a 10 month salary. That means my income is strictly from my side hustles. However, I do save $300 every month during the school year, so I can afford my debt payoff on a 10 month salary. Here’s a breakdown of where my money came from this month.

Fitness Coaching: $100.00

Tutoring/Babysitting: $1,129.76

Summer School: $506.83

Ibotta: $30.50

School Year Savings: $1,500.00

Total: $3,267.09

Expenses

I save a lot in my expenses by living at home. I don’t have rent or utilities to pay each month, which saves me a ton of money and allows me to put a lot more towards my debt. My expenses here do not include my loan payments or my investment accounts. In July my expenses were $693, which includes my groceries and gas.

Loan Payments, Savings, & Investment Accounts

It might come as a surprise, but I actually contribute money every month to my savings and investment accounts. I know this is not typical for most people on their debt free journeys, but for me, while I am living at home, I am contributing $100 each month to my high yield savings account and investment accounts.

My current debt payoff date is September 2021, I’ll be 29 years old. I have been able to make significantly greater payments then I originally thought I could thanks to my side hustles. In order for this date to stay the same, I need to at least pay $3,166.71. My loan payment for the month of July was $2,473.92. This means I came in short this month, but considering I was working strictly from side hustles, I’m pretty proud of this number. This just encourages me to work even harder come September when I’ll have my salary back.

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A Review of my Favorite Debt Payoff Tool

This post may contain affiliate links. Check out my Disclosure Policy for more information.

Back in November of 2016 my debt payoff world came crashing down around me. My favorite debt payoff tool, ReadyForZero, was no longer going to be offering their tool. This tool had the works, everything I could have asked for, and it was free! I’ve spent months trying out new tools and just couldn’t find one quite like ReadyForZero and felt as though I was settling with the one I was using. Then, I stumbled upon undebt.it and my debt payoff once again feels organized and is motivating me once again. Here’s a review of my favorite debt payoff tool!

A_Review_of_my_Favorite_Debt_Payoff_Tool

Many Different Options

One thing I really like about undebt.it is that there are different options of plans based on what you want from the tool. There is a free version that allows you to input all of your debt information, a customized payoff plan based on what strategy you want to use, and keep track of your payments on your accounts. The tool updates your totals for you once you add payments and allows you to see how much debt you have paid off and when you will be debt free, my favorite part!

Debt_Payoff_Tool_3

They also offer undebt.it+, which costs $12/year and gives you access to everything that the free account gave you, and then so much more. With the plus account you are able to manage bills, get payment reminders via text message or email, an account summary emailed to you monthly, projections and stats to represent your debt payoff, and so much more!

Motivation

This tool is incredibly motivating and makes it so easy for someone new to debt payoff. Once you input all of your accounts they create different plans for you and you get to pick which one is best for you and your situation. I personally use debt avalanche because I have such high interest rates and large loans.

Debt_Payoff_Tool_1

They keep on every page you go to in the top right corner your current progress on your debt payoff. I LOVE this feature. I find it so motivating to see if the debt payoff day changes when I make extra payments and see the percentage paid off get larger.

Payoff Plan

Once you have picked your plan, they create a debt snowball table specific to your plan. I love this feature because it tells you exactly what to pay on each of your loans to stick to your plan. For someone who is new to debt payoff and not totally sure how to navigate it, this would be so helpful! I also love that your payments that you already made for the current month are in blue so you know exactly where you stand in the plan.

Debt_Payoff_Tool_2

I really love this tool and I am so happy I found it finally. What I really love about it is that the creator of this tool was just paying off his own debt and needed a tool to use and he wasn’t happy with any of them out there. I love that he took initiative to help himself and so many others pay off their debt. I personally really like this tool and found it very helpful immediately after I set up my account. I highly recommend this tool, especially for people who are just starting their debt payoff journey and could use a tool to help them get started. One downside of the tool is that they don’t have an app for your cell phone. The website does load nicely on my iPhone, but no app is currently available. What tool(s) do you use to manage your debt payoff plan?

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