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. 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. 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
- (Income–all pretax deductions-$18550 amount determined by IRS) x 15% of the result+ 1855
- State Income Tax = Formula courtesy of the state comptroller’s website
- (Income–all pretax deductions-$3000 amount determined by State) x 4.75% of the result +90
- Social Security = Formula courtesy of Google
- (Income–all 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!