Five Ways to Dig Out of Your Student Loan Debt

February 5, 2016  |  No Comments  |  by Stephanie  |  Make More of Your Money

dig out of student loan debt

The average student loan debt is upwards of $30,000 for today’s college grad.  How you can possibly establish solid financial footing for the future when you’re struggling to keep your head above water in the now?

Here’s a five step plan to help you dig out from under student loan debt.

Make payments no matter what. You have to make at least your minimum monthly student loan payments in order to maintain your credit,avoid fees, and hold onto the interest rate your loan offers. American Student Assistance, a non-profit group, estimates that 60% of people with student loans miss payments and let their accounts fall into delinquency.

There may be months when missing a student loan payment feels like the easier path, but keep this in mind: You’ll  find yourself in even bigger financial trouble if you miss your student loan payment. Here’s why.

  • Private student loan missed payments could be reported to credit bureaus once the payment is 30 days late.
  • Late Federal student loans may be reported to credit bureaus once they’re past 90 days due.
  • Late payments bring your credit score down (though how much depends on what your credit score was before you missed the payment).
  • Late payments on your credit history (especially recent ones) make it tough to get approved for other credit products, including a mortgage, auto loan or credit card.
  • If you do get approved for a loan with a history of missed payments, don’t expect to borrow at a low interest rate.
  • Many private student loans charge higher interest rate once you miss a payment.

Know your loan options. If you don’t know whether your student loan interest rates are competitive, do some research to understand if you should consider refinancing student loans.  Betsy Mayotte, director of regulatory compliance for the ASA says to add up exactly what you owe, and to whom so you can look into potential repayment leniency programs. Federal student loans offer lots of repayment options based on your income, along with some repayment plans designed for teachers, attorneys,health care workers, and professionals who work for non-profits. Marketplace lenders like SoFi and Lending Club also offer lending options that may help borrow for less than what you currently pay  in interest for your student loans.

Use leverage to your benefit.  You want to get rid of your student loan debt quickly, but make sure it’s your most costly burden. If your student loan rates are  4% but you have credit card debt that costs you 12% interest, for example, you’ll fare better by making the minimum payment on the student loan and being more aggressive with the credit card debt. Simply put, the credit card debt costs you more to carry–even if it’s just $5,000 and your student loan debt is $20,000.

Additionally, some of your student loan interest rate payments may be tax deductible; interest you pay on your credit card debt is not. Once you pay your credit card debt off, you’ll have free up more money to pay down student loans. Then, start using cash so you don’t charge your way back into debt.

Focus on improving cash flow. You can improve cash flow if you’re willing to work for it. There are a lot of ways to come up with more cash: Take on a second job, minimize your costs of living, and/or pay off costly debts.

Start small; identify a fixed number of additional cash you can realistically come up with each month. Let’s say it’s $200. Each month, you can choose to save it, or put it towards your most costly debt. Either way, you’re investing in your future: The emergency savings fund reduces the risk that you’ll have to charge an unexpected expense on a credit card, which could end up costing you even more when you factor in credit card interest charges. Paying down the debt gets you one step closer to reducing what you owe.

Invest in your retirement. Why would you invest in your retirement account when you need money to pay down your student loans? Three reasons: Compounding interest and the power of time, and the tax benefits associated with retirement contributions. You can put up to $18,000 a year into your 401(K) plan, or $5,500 a year into a ROTH or IRA. Both should help to lower your adjusted gross income (AGI), which could reduce how much tax you owe. Plus, whether your student loan interest payments are tax deductible is based on your income. If you’re single, you’ll have to report less than $80,000 to taxable income to claim it.

As far as the power of compounding interest, the little bit you put away each month into your retirement–especially if you invest into stocks or low cost mutual funds should grow over several years. Yes, it may take years to resolve your student loan debt. But once you do, you’ll be glad that you invested simultaneously, so you have a nice chunk of cash waiting for you.

 

Use Stock Market Dips to Get Out of (or Avoid) Debt

January 25, 2016  |  No Comments  |  by Stephanie  |  Make More of Your Money

stock market dips to get out of debt

None of us like to lose money in a stock market dip. But you can use market downturns to deal with–or avoid–debt.

In fact, the degree of panic you feel when you see that your retirement account balance has decreased is one of the most honest gut checks there is about the state of your financial life.

When a major event we can’t control happens—whether it’s stock market volatility, a divorce, a medical scare, or job loss– we feel vulnerable. Then we realize that maybe we could have protected ourselves a little more—by paying off debt, by preparing for the unknown, or spending a little less.

Consider these questions to get a gut check of current financial state. If it turns out you could benefit from getting out of debt, or managing spending a little better to avoid it, wouldn’t you rather know now?

1. Would your bank account last six months without income?

More than half of us have nothing saved to carry us through an emergency, according to data reported by MarketWatch.

 There’s no question saving is hard when you’re living paycheck to paycheck, or drowning in a heap of debt. But it becomes impossible if you delay putting money aside until a financial emergency strikes.

You will have to turn to credit cards. Or you will withdraw cash early from a retirement account. Or you’ll take out a personal loan with a crazy high interest rate. None of those are good scenarios. In fact, they all cost you so much in the long run that you may never find your financial footing again.

Take an honest look at your savings account balance. If it wouldn’t carry you through six months without a paycheck, you need to find a way to start saving.

Consider the idea this millionaire posed to Inc:

Pay yourself first. Then find a way to pay your bills.

That doesn’t mean you skip on your bills.It forces you to eliminate and minimize the expenses that you can, so you don’t keep giving yourself the short end of the stick. It puts you in control.

2. Do you vacation now, pay later?

Charge your vacations to earn credit card reward points. But don’t charge any trip you can’t pay off in full by the statement close date.

That’s typically three weeks before the statement due date, and is the only way to ensure that your balances paid in full are reflected on your credit report. (If you wait to get your statement, you already missed the date).

 That doesn’t mean you stop taking a vacation. But it does mean you’ll need to allow plenty of time to save for the cost of your trip.

If that means you skip a vacation this year to afford one the next, so be it. A staycation never killed anyone.

3. Do you consider your car’s cost in monthly payments only?

You may be able to afford a $300 car payment. But have you calculated how much you can afford if you consider the total purchase price of the car, divided by the number of payments you’ll have to make until you own it outright?

This math is not completely correct, but for the sake of a simple example, picture this:

The car’s stick price is $25,000.

You can afford to pay $500 a month for the car.

You’ll have to pay $500 a month for 50 months to own the car outright. That’s a little more than four years.

(Remember that does not consider any repairs/maintenance).

Not willing to pay that much for more than four years for a car? Shop around for one with a lower ticket price.

4. Do you know when you’ll be out of credit card debt?

Credit card debt is one of the worst expenses to have, because it’s completely unavoidable. It also grows into a terrible beast until you take control of it.

To do that, you have to know how long it will take you to get out of debt with your current strategy. Plug the numbers on each of your credit card statements into a free credit card debt payoff calculator and know where you stand.

Tiny adjustments—like adding an extra $50 payment to your highest interest credit card each month—can put a huge dent in your debt. The more you do that, the more cash you free up to pay even more. (The same practice applies to student loans, too).

You may not have your credit card debt paid off for years. But you will have a plan. That’s your power.

Only then can you reduce the kind of vulnerability you’ll face when an unexpected financial event happens.

Using a Debt Calculator to Pay off Post-Holiday Debt

January 4, 2016  |  No Comments  |  by Stephanie  |  Make More of Your Money

debt calculator

 

If you used a credit card to finance your holiday purchases and don’t have the cash to pay your balances in full, now’s the time to form a plan for how you’ll dig out of holiday debt. (Or any debt you’re ready to shed, for that matter).

Despite the many apps and budgeting software tools that now exist, a debt calculator is one of the most effective tools you have at your disposal. With it, you can plan your debt payoff strategy based on what you owe, and what it costs you. Plus, it’s completely free, and requires almost no financial literacy on your part.

Here’s a step by step guide to using a debt calculator to pay off your debt.

Gather the hard numbers. Compile all of your credit card statements and take note of two key pieces of  information on each statement: The total balance owed, and the interest rate each card charges. Create a five column list that includes:

  • The name of the creditor (ie, Chase Freedom card)
  • The minimum payment due
  • Total balance owed
  • Interest rate associated with the card
  • Payment due date.

Sort the list so that the card with the highest interest rate is on top. The credit card with the second highest interest rate should follow, then the third highest, etc.

Total the sum of what you owe.  Add the total amount of your debt. It may not be what you want to see and quite frankly, it may give you anxiety. But you need to know exactly where you stand, in order to plan your way out of debt.

Figure out what you can afford to pay.  Check in with your budget to calculate your monthly take home pay.  Write down all of your fixed costs. These are essentially those that are unlikely to change significantly, in the short term. (Think utilities, car, house, and student loan payments). Then, create a list of monthly expenses that could be eliminated or reduced fairly easily (assuming you are willing to make some lifestyle adjustments). This will usually include costs like phone/internet, cable, gas, groceries,  gym memberships and miscellaneous expenses like entertainment, and travel.

Play around with some different payoff scenarios to see just how long it will take you to get out of debt, based on how aggressively you plan to pay your balances down. Subtract your monthly take home pay from your fixed expenses. In theory, this is how much you could pay to debt each month, if you were willing to eliminate many unnecessary expenses. Using that number, subtract your unfixed expenses total. This is what you currently have left to pay towards debt, assuming you do nothing to change your current budget and spending.

Consider the difference in the two numbers. Are you motivated enough by the thought that you could have a lot more money to pay off debt than you realized (which ultimately becomes cash flow), if you make some changes to your budget?

Plug the numbers into a debt calculator (CNN offers a free version that’s easy to use). You’ll get a sense for how long you’ll be in debt, based on what you pay each month. Like knowing the sum total of your debt, understanding about how long it will take you to get out of it based on what you pay can be a depressing view. But it’s the first step to financial freedom. Only when you know where you stand can you can decide how and when you’ll get out of debt.

Maximize the Value of Your Debt Payments.  Despite what debt consolidation services promise, there are but three ways to get out of debt:

  1. Reduce expenses so you can put money towards your monthly debt.
  2. Make more money
  3. Maximize the value of every dollar you put towards your debt balances by tackling the most expensive debt first. Revisit the list you created in step one. If you pay as much as you can towards the first creditor on your list, regardless of the balance owed, you’re tackling your priciest debt first. Though you’re still making the minimum payment due on your other cards, this is the quickest way to put a dent in the debt, because you’re eliminating that which costs you the most.

Learn how to use credit cards responsibly. Cutting up your credit cards will not make debt go away. Freezing credit cards doesn’t remove spending temptation (especially now that you can store your credit cards in a website, or pay using your mobile wallet). Closing credit card accounts won’t help your credit score; it can actually lower your credit score.

So what does help manage credit card spending? You. More specifically, your behavior, and your financial attitude.  Just as a dieter who successfully loses weight will gain it back if they fall into their old habits of mindless eating and not exercising, so will a person who pays down credit card debt but doesn’t change their financial lifestyle.

Consider the personal “triggers” that got you into debt in the first place. Do you tend to avoid thinking about money because it makes you feel vulnerable? Do you spend to resolve stress? Do you live beyond your means to keep up with social pressure? These are all common reasons for spending. But all can be resolved if you understand what leads you to spend. When you can be aware of the factors that lure you into bad spending decisions, you can proactively take control of your financial life.

Take Charge of Your Own Debt Consolidation

October 14, 2015  |  No Comments  |  by Stephanie  |  Make More of Your Money

debt consolidation

Debt consolidation loans might sound like an easy way to get out of debt. But there’s no need to pay someone to lower your debt, when you’ve got all the tools you need to do it on your own, starting now. (Plus, let’s be honest. The money they’d charge you to consolidate debt could go to alot more useful things–like paying if off).

Here are four no “bs”  ways to kick start your own debt consolidation. Whether you make a goal to tackle one of these a day, a week or a month, I guarantee you will emerge at least one step closer to being debt-free.

1. Laser focus your effort on reducing your most expensive debt first.  Your most expensive debt is the loan that has the highest interest rate, not the one with the highest total amount owed.

I repeat: The highest interest loan you have is the one you focus on as your top priority to get out of debt. Have an extra $20 because a friend paid you back? Got an extra $50 for watching your neighbor’s cat? Put it toward the debt that costs you the most.

This example is admittedly not a perfect mathematical calculation, but it’s an idea we can all grasp quickly, so humor me: If you’re paying your credit card a 15% interest rate to carry a balance and you pay an extra $70 this month to it, you just got a 15% return back on that money.

Put in meaningful terms: If you’re willing to charge items on your credit card to earn a measly 1% in rewards or apply for a store credit card to save 10% on a $50 purchase, why would you forego a chance to get 15% back on your money?

2. Investigate how you might reduce your debt. If you carry higher interest credit card debt but have a good credit history overall, you may be able to pay off debt sooner by transferring a higher interest credit card balances to a low or no interest credit cards.

You might also be able to score a lower interest rate by calling the credit card company and requesting a lower rate, especially if you’ve been a customer in good standing for several years. You may qualify for a low interest loan through a peer to peer marketplace lender like Lending Club, or Prosper that gives you cash you can leverage to pay off the debt that costs you more.  If you’re drowning in student loan debt, you may be able to secure a better interest rate through an alternative lender like SoFi. Or you may qualify for a repayment plan that’s offered through the Federal government, for some student loans.

3. Find some way to make more money. There are two ways to make more money: Spend less to free up cash you can use to pay off debt, or make more money. In a perfect world, you’ll do both.

Let’s get the excuses out of the way first: I’t’s not easy to make more money when you’re stuck in a fixed salary job or when you work full-time, or when you’re divorced or you have kids who cost you money in order to even leave the house and work to make money.

But rest assured, when there is a will to get out of debt, there is a way.

Cruise right past your mental excuses and give yourself the financial freedom you deserve–even if that means taking it on the chin for a hot minute if need be. Personally, I walked dogs on my lunch break from my full time job for two years for $10 a bucks a pop to get out of $15,000 in debt when I was in my twenties. I love animals and I love exercise, but let’s be real. I didn’t do it for the love of either. I just wanted to get out of debt that badly! (I was also going to grad school and training for a marathon at the time. I was busy, but I made the time because getting out of debt and feeling financially stuck was something I so desperately wanted).

On days that I was ready to lose it and accept that it was my destiny to be poor, I kept myself focused on the goal at hand. The second I paid off that last credit card bill with all the extra money I generated, I stopped dog walking. But those two dog walking years remain one of the smartest things I ever did.

There are tons of ways to make money online now and if you find a gig that works for your life and pays you well enough, go for it. But with the online marketplace being so flooded with people calling themselves freelancers and consultants, I’ve personally found that most of the “virtual gig” sites pay so poorly you’re better off to find a  side gig the old fashioned way.

Do not over complicate the issue. You don’t need to spend money on a website, you don’t need to take meetings with clients. You really don’t even need to do research. Figure out something that gives you complete control in the sense of when you do the work, where, for how much, and for how often. What could do with your time that will cost you little to nothing in effort and gas money? Go do it.

We all have skills someone is willing to pay for whether it’s watching a cat, cleaning an office space a couple of nights a week, or picking up someone’s dry cleaning. It’s not your passion and it’s not a long-term career. It’s a means to get out of debt!

4. Stop filling the wrong need. When you’re desperate to get out of debt, that’s what you need. You do not need a new shirt, no matter how little it costs. You may not need to take taxis or your car when you could walk or take the bus. You don’t need a new smartphone. You may not need to watch cable when you could stream that same show on your computer for free. Or maybe you do.  What you need is for you to decide–but you have to make choices and concessions somewhere to get out of debt. If you continue to spend a strategy and discipline for how you separate needs and wants, the best debt consolidation plan–whether managed yourself, or with the help of a financial professional–won’t work.

Whatever path you choose, debt consolidation is nothing more than a basic barter and trade. As long as you’re disciplined enough to put the money you make or save–either by earning it, finding a lower interest loan or cutting expenses–and put it immediately to your debt, you will save money and make progress.

It’s not easy, but it’s really that simple. You do not need to be a financial guru (or hire someone who claims to be) in order to consolidate your debt.

 

 

 

5 Warning Signs to Get Out of Debt Before It’s Too Late

August 20, 2015  |  No Comments  |  by Stephanie  |  Make More of Your Money

recite-1uqbz0n

Most people have some kind of debt–whether on a credit card, student loans, an auto loan, or a mortgage. And not all of that debt is a problem. But when your debt climbs to a point that far outweighs your income, starts to lower your credit score,  puts you in jeopardy of missing monthly payments and keeps you up at night, it becomes a problem that’s tough to solve.

Yes, there are debt consolidation options, private loans, and other financing options to get out of debt, but unless you’ve got a really generous neighbor willing to lend you some cash, no debt relief option that comes through a third party is free.

So what’s the easiest way to get out of debt? Spot the trouble signs before it snowballs. Here are five surefire signs you’re in the debt danger zone–and how to manage your growing credit card balances before it’s too late.

Debt Warning #1: You’ve taken advantage of low interest balance transfer offers–but barely made a dent in your credit card debt. Low interest balance transfers offers aren’t inherently bad. They can help you eliminate credit card debt faster than you would by making monthly payments on a high interest rate credit card, and probably at a lower cost. But for that low interest rate to work to your advantage, you must commit to being aggressive about your debt payoff strategy.  That’s because most low interest balance transfer offers are valid for a limited time only. During the low interest rate time period, the monthly payments you make  will help you gain some momentum in paying off your credit card debt–but you have to make as big a payment as you can afford during that time period. Otherwise,  most of the credit card balance you transferred will remain when the low interest period ends. It could be subject to  as much interest (or more) than it was you were before you made the transfer–and you’ll stay on the credit card debt treadmill.

Debt Warning #2: You spend about 20% of your income on debt. Whip out your calculator and log in to your online banking: What’s 20% of your monthly take home pay? Does your non-housing related debt (like credit card monthly payments, car and student loans) add up to more than that number? If so, start managing your debt before it’s too late. That means pay way more than the minimum on your highest interest rate debts, limit your monthly spending–or find a way to make more money. It’s really that simple.

Debt Warning #3: You’re using  more than 30% of your available credit. Your credit card company has given you a $10,000 credit line; why not use it all? I’ve got plenty of reasons. For starters, your credit line and what you can afford are two very different things. According to MyFico, your credit balance compared to available credit shouldn’t exceed 30%. For a cardholder with a $5,000 card limit, for example, that means should never charge more than $1,500–even if you pay it off in full at the end of the month.  Once you use more than 30% of your credit, your credit score could be lowered, and you may find competitive loans harder to come by. Basically, it tells lenders you’re living beyond your means, and you’re a greater risk. Do the math, see where you stand and if you’re over the 30% limit, change your habits.  To boost your credit score, pay your creditors before the statement close date; your lower balance will get reported to the credit bureaus. Then, stop using credit for new purchases altogether until you’ve paid down the balance. Not only will it “self correct” any tendencies to overspend, you’ll make more progress in getting your debt utilization back in check.

Debt Warning #4: Your credit card balance is bigger than the one in your savings account. Yes, deposit interest rates suck. But your savings account isn’t a place to make money; it’s a place to invest in the uncertainty of your future. If your debt is greater than what you have in a liquid savings account, it’s time to spend a little less and save more.

Debt Warning #5: You won’t look your debt in the eye. Don’t want to open your credit card statements when they arrive? Avoid a budget or adding the total cost of your debt like the plague? I’m willing to bet you have too much debt. Like most things in life, we tend to know more than we think. You know when you’re overextended. Forget about what brands are in your closet, or the car you drive compared to your friends. Money should not keep you up at night. If it does, take control. Figure out what you owe, what you own, and what you can really afford in order to feel good about your financial security. What you see might not be a positive picture at first. That’s okay. It takes small steps to make big progress. The more steps you take in the right direction, the further you move from the wrong one.