planning « Accountant by Day

11Nov/1113

Plans for a debt-free life

Earlier this week, I announced my plan to pay down ALL of my student loan debt in the next year. My plan is to pay off $1,000 each month for 12 months, starting in December.

I had been on the fence about whether I should invest more, or pay off my student loans faster. My student loan debt has an interest rate of 6.5% - high enough that I can't be sure that stock market gains will be higher, but still low enough that buying stocks could eventually pay off a higher amount.

The other problem with paying off debt is losing the ability to use that money.

If I paid only $185 to my student loans each month (the minimum payment), I could save the rest of my $1,000 ($815) and use those savings in a few years as a down payment on a house. After 12 months, I would have saved over $9,000, and could easily put 3.5% down (FHA requirement) on a lower-cost home here. Having $10,000 in student loan debt wouldn't really hurt my chances of getting a mortgage, since it's considered a "good" debt, and because it's not high enough to really worry the bank. Check out this article from Thousandaire here for a really good explanation of why paying off student loans isn't automatically the best option.

I would keep paying $185/month for the next 9 years, but I'd have a house and being paying that off over time.

Paying off my loan now is for emotional reasons. If my loan is paid off by next year, then I feel like I can really *start* feeling financially savvy then. How can I say my finances are in good shape when I've still got this big debt hanging around? I also won't have to think about the loan when making decisions about how to allocate my money.

What I will do when I'm Debt-Free!
(This portion of the post is part of my entry to the $500 Enemy of Debt competition, sponsored by Life Insurance Finder the life insurance comparison experts. If I win the $500 prize, it will go straight to the student loan balance.)

Start saving in earnest for a 20% down payment on a home. The savings will go much more quickly when there are no student loan payments eating away at my cash flow.
Visit my high school friends on a regular basis (they're a $300 plane ticket away.)
Plan out some international vacations over the next few years
Move apartments! (Well, that may happen before I'm debt free . . .)
Well, let's not get overboard here, since I will also need to focus on saving for retirement!

What will you do when you're debt free, or what did being debt-free allow you to do?

Tagged as: debt, future, planning, student loan 13 Comments

7Nov/114

Time for the student loans to die

I hate to think about the fact that I amassed all of my student loan balance in one year, but have something like a 3-year plan to pay it off.

To be fair, thanks to the student loans, I could put some income into mutual funds at the very bottom of the recession, and I think this will pay off in the future. However, this has been a big part of why I haven't been paying my loans off faster now - I'm scared I'll miss out on big market gains if I don't keep up with my dollar-cost-averaging method as the economy continues to struggle.

But I've decided I'm tired of having this debt. I make payments of $525 each month towards my loan now. I put $300 into a Roth IRA and $200 into an individual investment account each month. (Plus about $330 into a 401(k) including my employer match.)

Starting in December, I am going to make a payment of $1,000/month to my student loans. They should be GONE by the end of November 2012. I have reduced my monthly retirement contributions to only $100/month to my Roth, and I am keeping the $330/month to the 401(k).

Essentially I'm lowering my investments by $400 and increasing my student loan payment by $475. So I'll have to find an extra $75/month for payments. I think this will help tighten up my budget and help motivate my not-spending, as well as motivate me to blog more, since it's a potential source of income.

For November: I accidentally made my usual extra payment for November last month. This month, I am making a $940 payment. On December 1st, my loan balance should be about $11,300. So if I pay off $1,000/month, I should make my next payment next November.

As for my "extra" cash each month that I've been saving up - what do you think I should do with it? I've saved about $970 since I started counting this in July, which brings my total cash balance/emergency fund to $2,440. Should I keep adding to this, or is this enough for now, and I should direct any "extra" to paying that much more of my student loan each moneht?

Tagged as: budget, planning, student loan 4 Comments