In 2017, one of my goals is to start paying back my student loans. I plan on implementing my payoff strategy. I would like to have paid at least one third of my student loans by the time I graduate so I can reduce the interest that’s been accumulating while I was in school. Currently, my balance is hovering around $160,000. So the amount I would like to pay before graduating in May 2018 is around $54,000. Paying off my loans is going to be just like paying off my credit cards but on a much larger scale.
– Balance Transfer: If there ever was an upside to having a credit card balance repeatedly and being forced to pay it off, it’s the fact that it will help you build your credit and in turn give you a higher credit limit. Obviously there’s a better way of building your credit and being able to have a high credit limit. But this is how I’ve gotten it. I’ve never not paid my credit card balances. My issue has been keeping them paid. So I currently have a high credit limit which I plan on using to pay off my student loans. This method is risky and unconventional but I think will actually work for me. Every time I’ve had a credit card balance, I’ve found the inner discipline to make sure I drive it down to zero. So far, I’ve gotten those balances by buying things I don’t need. Why not just load one student loan out of the 11 I have onto the card and tackle it aggressively? Here’s why I think this will work.
Many of my student loans have interest rates that are above 6%. They accrue interest daily and between September 2015 and today alone have added about $9,000 to my total balance. Student loan interest rates are compounded daily and adjust to be a percentage of the new balance. That means that the amount I owe is increasing by over 6% of the total amount (principal + interest) and not just the principal amount I borrowed. If I use the balance transfer option of my credit card, I will have the option of getting 0% interest for the next 12 months. That’s 12 months of not having the interest grow out of control! I will stop the hemorrhaging and be locked into a timeline that I have to abide by to pay off the amount I transfer. Also, for once, I’ll be doing something completely constructive with a credit card. I’ll be paying off a student loan and building my credit at the same time. I plan on tackling the loan with the most accrued interest first and working my way down. There’s also the added fear of not letting my balance transfer offer expire before I pay off my loans and having to pay 21% interest on my loans to incentivize me. So I’m motivated by both fear and logic.
In addition to building credit and reducing my student loan debt, I would also be able to reduce my total debt to income ratio with this method. The debt to income ratio is the result of dividing your monthly recurring debt by your monthly gross income. The lower your debt to income ratio, the better because it means you’re not over leveraged. This is important for me because I plan on investing in more properties and lenders take this ratio into consideration when they’re deciding how much loan they should approve you for. If I can reduce my DTI by a significant amount by using this method, then I can be able to qualify for a larger loan which will allow me to purchase more lucrative real estate like multifamily properties.
Finally, the most morbid yet equally beneficial reason I’ve thought of to do this is the fact that a credit card balance is forgivable in the event of bankruptcy and death. Student loans are not. So if I have to file for bankruptcy, I know that whatever amount I have put on my credit card would be wiped out as a result. Additionally, my estate will not inherit my six figure debt in the event that I pass before paying off my student loans. Hopefully I won’t go bankrupt or die anytime soon. But I can’t discount this benefit just because its not fun to think about.
I’ll be posting about more methods I plan to implement for my payoff strategy.
Since I just went through this process, I figured I’d share what things to look out for when you’re settling into your salary and benefits package.
You passed the few rounds of interviews. impressed the employer enough to get a job offer. You countered the salary/benefits that were offered and settled on an agreeable arrangement. Now you’re at the office going through the on boarding process and getting bombarded by a barrage of forms! Health coverage, Dental, Vision, 401K, subsidies etc etc. It’s so easy to just focus on completing them just for the sake of doing it and not think about the implications of what you’re agreeing to. But how you set up your benefits package could literally be the difference between taking advantage of all the opportunities afforded to you and leaving money on the table. Pay attention. Don’t play yourself.
For most things, there is no one size fits all approach. Everyone prioritizes things differently based on what their needs are. But there are a few basics.
- Spend some time on HR’s website. You need to see what type of benefits they offer you. Yes, things like 401Ks, healthcare and dental are provided but do they have transportation subsidies you can take advantage of? Are there businesses that provide you with an employee discount somewhere you’re already a customer, say your cell phone service provider or your wholesale grocery store? Does their employee assistance program also provide free legal advice or financial planning advice? Is there tuition reimbursement for school or certification programs? Most companies do some sort of orientation that gives you a brief overview. But they don’t get into the details of what might be important to you because their objective is only to inform you that these options are available and not necessarily that you know enough to use them well.
- While you’re on HR’s website, you should also look for any information related to the pay scale your company utilizes. This is an immediate feedback on your salary negotiation skills because it tells you how much more your company would have been willing to pay you than you settled for. If you negotiated closer to the top end of their willingness to pay, congratulations! If you didn’t, you probably will never forget the feeling of regret you have right now and will make sure you use this information when you renegotiate your salary.
- For the love of God, at least contribute the amount your job matches to your 401K! Ideally, you should contribute the maximum allowable amount to your 401K of $18,000/ year. Doing this not only reduces your taxable income in the short term, but it also sets you up nicely for retirement. When you start early and max out your 401K, you make compound interest work for you. If the magic doubling penny could reach such a high amount within one month, imagine what 10% or more of your salary could go up to in a matter of years. Maybe you want to ease into this and start out with a smaller amount. In this case, at least contribute the same amount as your employer is willing to match. If the employer does a 3% match, then make that your minimum. If you do this, you will guarantee that your company is providing you with the most amount of money towards your 401K plan.
- Don’t just pick the PPO. If you’re young and relatively healthy, chances are you’re giving up a lot of money for healthcare coverage you don’t really need. Last year, I blindly funded my PPO and ended up spending $1500 more than I needed to on healthcare coverage. How about you make those dollars work for you instead? Don’t just give your money away. Consider getting the High Deductible Health Plan and matching HSA instead. The HSA is a bank account that is funded by your pre tax dollars and can be used to pay for healthcare related expenses like co pays. It can also be used to cover expenses that are indirectly related to your health like transportation to your doctors office, contact lenses/solution, pads, sunscreen etc. And you know what else, HSAs could also be used as an investment account! They’re really just magical! You reduce your taxable income, you eliminate health coverage waste, start an investment account and get the ability to purchase some things with pre-tax dollars! Effing magic!
- Take advantage of any other pre-tax account your employer is willing to fund. Again, this saves you a lot of money on taxes. But it also gives you an opportunity to spend less on things you already spend money on. If your employer will let you pay for parking or public transport with your pre-tax money, sign up for the maximum. Yes, your take home pay will look like it’s less but its actually more because you have reduced a big recurring expense that you no longer need to spend your after tax money on.
There are so many other things. I could probably write about this all day. But do yourself a favor and at least start with these basics.