Balancing Debt Payoff and Saving for Retirement

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Ok so obviously I have a ridiculous amount of debt that will keep increasing for at least one more year (thanks grad school!!). While I plan to tackle this debt aggressively over the next few years, I also need to save for retirement at the same time. So, if all my money’s going to my student loans, how will I save anything? Here’s how I’m planning to tackle it starting 2017.

  1. Start by making large payments (about $2500 from my monthly salary, plus bonuses, tuition reimbursement, rental income and tax returns) to the high interest, high balance student loans (there are 3 of them averaging $23000) While I do this, I’ll be able to contribute 10% of my pre-tax income to my 401K and get a 6% match from my company. Contributing 10% of my income would only reduce my paycheck by about $200. I can live with that. If I stick to this plan then I’d be able to pay two of the loans in one year and the third loan in the first six months of the following year (mid 2018).
  2. Delay finishing school by a semester to take advantage of an additional year of tuition reimbursement from my job. So, my initial plan was to take courses in the spring, summer and fall semesters and finish school by the end of 2017. But then I thought about it. The $5250 in tuition reimbursement I receive from my job is for the year. So once I use this money to pay down the spring 2017 tuition, I will not be eligible until 2018 and will have to pay for Summer 2017 classes out of pocket (or loan). Why spend money I don’t have when I can just wait one more semester and get another $5250 towards my tuition? Β So my plan now is to take spring 2017, fall 2017 and spring 2018 courses and graduate in 2018. I will spend summer 2017 paying off the loans I already have and working on my real estate business.
  3. Once I pay off the three high balance loans and get the crazy interest rates under control, aka a year and a half, I plan to increase the 401K contribution to the maximum allowable amount (currently 18000 but subject to increase). I will also contribute $3250 pre tax to my HSA account (see blog about ppo scam). Β Up to 6% of my 401k will continue to be matched by my company and I will be in a lower tax bracket because my pre-tax income will be lowered by the total amount of 401k+HSA contributions. I will continue to pay off the remainder of the loans at a less aggressive level ($500 less than the amount I would be paying in the first year and a half).
  4. I will put the $500 I take away from paying my student loans towards a Roth IRA. The Maximum annual contribution to this account is $5500 so I plan to max it out every year starting June 2018. I also found out that you can contribute to your Roth IRA up until the time you file your taxes for the year so I plan to give myself from June 2018 to March 2019 to contribute to my 2018 limit. I will continue to contribute $500/month towards the Roth until I’m over income.
  5. According to my schedule, I will get my student loans under control (only subsidized low interest loans remaining) by the end of 2019, at which point I will start contributing towards an index fund. Can’t wait to witness the magic of VTSAX! I’ve been reading a lot about it and think it’s the best stock investing vehicle for me. I’m not gonna pretend to know anything about picking stocks. I’ll just invest in the economy as a whole. I also plan on buying 4 properties during this time with a mortgage. My plan is to keep moving and buying these properties as a primary residence which will allow me to put 5% down instead of 20%. Moving might be annoying but doing this a couple of times would help me reach my goals a lot faster. So by January 2020, I will have paid off over $100k in student loans, maxed out my 401K and HSA for two years in a row, maxed out my Roth IRA for a year, purchased 4 properties and started an index fund!!

Yes, I know. Very ambitious and probably impractical. I plan these things out and usually life gets in the way. I have to spend a crazy amount on one expense or the other, I don’t make as much as I think I would or something to that effect will probably happen. I will also be upset and temporarily discouraged by it. But I’ll get back on the horse and keep it moving. If I can accomplish 80% of these goals by my 30th birthday, I will have laid some serious wealth/FI foundations for myself.

Steps I’m Taking for the Undertaking Step 1: Know thy money

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When you have such a large amount of student loan debt, its difficult to figure out where to start. My student loans are currently hovering around $120,000 but they will go up when I register for the next semester and two more times after that. All in all, by the time I’m done amassing these loans, I will owe close to $160,000. Keep in mind these are individual loans, since I haven’t refinanced them to get one giant loan. So by the time I’m in my last semester, I’ll have a total of 14 separate loans. I chose to do that but that’s another discussion for another post. Now that I’ve resolved to pay off these debts by 2020, the problem is creating an optimal strategy to go about doing that. How do I hit this moving target? How should I prioritize? When should I start paying? Should I concentrate on paying one loan at a time or pay a certain amount to each loan? I had so many questions. So yesterday I sat down and created an inventory spreadsheet that contained all my financial obligations, bills I pay, debt I owe, money I’m putting aside etc. Β The objective of the spreadsheet is to figure out exactly how much I can allocate for this task. I pretty much mapped out what I stated in the previous post. Here are the steps I took.

Spreadsheet Tab 1, Income Allocation– This sounds super formal but its just me figuring out how much money will be taken out of my paycheck every month based on my tax bracket, 401K contribution, health insurance cost, other miscellaneous costs. In the year 2017, I’ve decided to contribute 10% of my income to my 401K. I will also be switching to a high deductible health plan (HDHP) during the next open enrollment period and open a pre tax health savings account (HSA) for my medical expenses. This is intended to increase my contribution and reduce my costs, but to also decrease my taxable amount. In the spreadsheet, I started off by subtracting 10% of my income from the total amount for 401K contributions.I then used the following formulas for the rest of the withdrawals and deductions.

  • Healthcare under HDHP = I got this formula from the open enrollment packet I received from HR. Β I used this formula for Medical, Dental and Vision.To calculate the amount that will be taken out per paycheck I used:
    • Premium x Percentage of the premium I’m required to pay (for me this is 30%)
  • Federal Income Tax = Formula courtesy of the IRS
    • (Incomeall pretax deductions-$18550 amount determined by IRS) x 15% of the result+ 1855
  • State Income Tax = Formula courtesy of the state comptroller’s website
    • (Incomeall pretax deductions-$3000 amount determined by State) x 4.75% of the result +90
  • Social Security = Formula courtesy of Google
    • (Incomeall pretax deductions) x 6%

I divided these numbers by the number of paychecks I receive in a year (24) to figure out how much I will have taken out from each paycheck. I know these are already provided on pay stubs everywhere. But the point of doing this was to figure out how to pay the least amount of taxes and contribute the most to my 401K. By doing this, I figured out the exact amount I need to put in my pretax accounts to grow my 401K and lower my taxes without drastically reducing my after tax income. Implementing these decisions makes a big difference in how much money I can put towards retirement. But what was surprising was how little it affected my monthly income. Even after increasing my 401K contribution from 2% to 10% and reducing my healthcare premium by signing up for HDHP instead of PPO, my monthly income only goes down by $125.14. I saved so much pre tax money but I won’t have to live off of rice and beans! Yay!