Richard Levine/AlamyWhen paying off student loans, tackle those with the highest interest rates first.
If you ar! e tired of having student loans hanging over your head, welcome to the crash course for debt elimination. Our syllabus is simple, the course objective has been plainly stated and grading will be based on a pass/fail basis. Let's begin.
What's the rush? You may be wondering why we have defined such a short period of time to pay off a substantial debt. After all, The Institute for College Access & Success says the average student loan balance was $29,400, which is based on the latest data available for the class of 2012. With a supersized debt of that magnitude, you need a lot of time, right? Yes, but a lack of urgency can encourage complacency, and with time the debt will grow even larger.
This may light a fire: Calculate the amount of interest you will pay by only making minimum payments on your student loans. If you can't put your hands on the statements for your loans, check the National Student Loan Data System to retrieve your loan infor! mation.
It's quite likely you'll be surprised by the big! number you discover. You might even find you'll be paying as much interest on your loans as the original principal amount.
Putting a short fuse on the debt bomb will inspire a significant financial turnaround. Once you retire the student loans, imagine the boost to your cash flow. You might even feel affluent for a change. With those monthly payments gone, you can focus on buying a home, saving for retirement, paying for a wedding and all the other good things in life. No student loan debt means you can kiss Sallie Mae goodbye. You'll feel like a different person, with less stress and real financial freedom.
Debt limits options. While the task may seem insurmountable, consider the Harvard University alum who paid off $90,000 in graduate school debt – in seven months. Joe Mihalic is a supply chain manager in Austin, Texas now, but three years ago he was deep in debt and desperate to get out.
"I simply felt an overwhelming feeling of bein! g trapped," Mihalic, author of "Destroy Student Debt: A Combat Guide to Freedom," wrote in an email. "I felt that the debt was severely limiting my options, and I realized I would never be truly free unless I became debt-free."
By committing to a frugal lifestyle and squeezing every bit out of his annual salary, which was less than the balance on the loans, Mihalic accomplished his goal of rapid debt reduction.
"I didn't start feeling weighed down by my debt until my self-esteem finally reached a level where I didn't need to constantly spend money to feel good about myself," he writes. "At that point, the negative feelings associated with my debt were greater than the positive feelings associated with consumption. Only then did I seek out a life of frugality and living below my means."
A cash budget is key. And consider Jackie Ritz, a Paleo diet aficionado from North Carolina who blogs at ThePaleoMama.com. She and her husband paid off $50,! 000 worth of debt in 10 months.
"We sat down one night and wrote down all of our debt, including our student loan debt, which was the most baggage," she wrote in an email. "My husband had carried his student loan debt the past 15 years, and we wondered how long we were going to let that debt keep following along with us. So in order to have financial freedom we knew we were going to have to be more aggressive in paying the student loans down and turn our minimum payments into the maximum amount we could manage in our budget."
Ritz adds that sticking to a cash budget was the key.
"During this time, we made a budget for all our expenses and used the 'envelope system'," she explains. "You place the week's worth of money in your envelopes and when the cash is out, it's out! This was probably the hardest part of it all since we were so used to swiping our debit or credit card without even thinking about a budget."
A prerequisite. There is a prerequisite to this course. It is Payin! g Off Your Credit Card Debt 101. As much as you would like to rid yourself of the burden of college debt once and for all, if you have substantial credit card balances, they must be attended to first. The interest rate you pay on credit card debt is likely to be twice as much -- if not substantially more -- than what you pay on student loans.
When you do tackle the student loans, pay off those with the highest interest rates first. That will save you money and allow each payment to reduce more principal. And before sending in a substantial payment to a lender, call first. Ensure the payment will be applied to the loan's principal – not to interest.
Extreme debt reduction. In order to abolish $30,000 of student loans within three years, the payments will total $923.57, based on a 6.8 percent interest rate for 36 payments. You can nerd the numbers for your own debt situation. The strategy will be a combination of increasing your monthly income w! hile reducing your monthly expenses to come up with the extra ! cash.
The most common tactics used by extreme debt reducers include:
- Reduce housing expenses by downsizing, moving back in with the parents or finding roommates. Housing is commonly the biggest monthly expense and the cutback that can provide the biggest boost to cash flow.
- Create a strict budget, and stick to it. Cut out any unnecessary expenses, and look for ways to save money anywhere you can. Quit the gym and work out at home, stop buying bottled water, eat out less, etc.
- Get a side job or two. Consider getting an off-the-books job for extra cash: deliver pizzas, bartend, waitress, etc.
- Milk the miles from your existing car instead of buying new. Or if you're part of a two-car household, sell one and consider becoming one-car commuters.
- Reduce recurring expenses. The Ritz's canceled their cellphone plans and signed up for prepaid phones, which lowered their $160 cellphone payment down to $60 per month.
- Sell stuff you don't need for cash. A few ideas include cars, furniture, dishes, toys and more. You can host a garage sale or sell your items online on Craigslist or eBay (EBAY).
Debt reduction is more a matter of commitment than circumstance. The timeline you choose depends on the strength of your determination.
Hal M. Bundrick is a certified financial planner and former financial adviser and senior investment specialist for Wall Street firms. He writes about personal finance and investing for NerdWallet.
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Interest rates are low, but that's no excuse to accept 0.01 percent interest rates on your savings. Just a little shopping can find you many FDIC-insured savings accounts paying as much as 1 percent in interest, usually with no fees and easy availability to your money through electronic funds transfers. Compared to the near-zero rates that uninsured money-market mutual funds and other alternatives pay, high-interest savings accounts are a much safer way to save.
1. Letting your savings earn virtually no interest. -
Banks still try to get customers to pay more for less, with one recent threat to charge fees for basic deposit accounts if the Federal Reserve cuts interest rates further. But many online banks not only offer fee-free options on their checking and savings accounts but also pay interest, and many have extensive fee-free ATM networks or reimbursement arrangements. If your bank follows through on threats to raise fees, taking your business elsewhere is your best move.
2. Paying big fees to banks for simple accounts. -
Bankrate reports that the average credit card charges around 16 percent in interest. That's a guaranteed money-maker for the banks that issue cards, but a big loser for those who carry balances on their cards. With many cards offering promotional interest rates as low as 0 percent, using them to get rid of high-interest cards is a no-brainer move and can help you pay your debt down faster.
3. Hanging onto high-interest credit cards. -
Mistakes on your credit history can keep you from getting a loan that you want to buy your next home or car, but they can also have consequences you'd never imagine. Increasingly, insurance companies, apartment rental agents, and even prospective employers order copies of your credit report to see if you're financially responsible. Be sure to take advantage of your free credit check at the government's annualcreditreport.com website to make sure the three big credit-rating agencies have everything right before mistakes come back to bite you.
4. Letting credit report errors cost you money. -
Payday loans have gotten more tightly regulated recently, but banks and other financial institutions still offer ways to let you get quicker access at your cash -- for a hefty fee. Resorting to short-term money fixes can land you in even more problematic situations down the road, because those solutions often create debt spirals from which it's hard to emerge unscathed. Set up an emergency fund instead and be prepared in advance for the money woes that life throws your way.
5. Being impatient to get at your cash. -
Interest rates have risen during the last half of 2013, with a typical 30-year mortgage carrying a 4.5 percent interest rate. But many homeowners still carry higher-interest mortgages from before the financial crisis. Now that home prices have risen, you might be able to refinance for the first time, and many homeowners have used lower rates to cut hundreds from their mortgage payment or shift to a shorter-term 15-year mortgage to pay off their debt faster.
6. Paying too much for your mortgage. -
Too many people never update their insurance coverage to deal with changes in their coverage needs, whether it comes from changes in family status for life insurance, health conditions for health-care or long-term care insurance, or even what types of property you own for homeowners' insurance. Don't wait for disaster to strike; check with your insurer or agent to see if your current coverage meets your needs.
7. Having the wrong insurance. -
In the past, investors had to pay hundreds or even thousands of dollars just to make a simple stock purchase. Now, though, the rise of discount brokers, low-fee index funds and exchange-traded funds, and freely available investment news and advice have made it silly to spend large amounts to get access to the financial markets. If you're still paying your broker too much to invest, look into alternatives that can help you avoid cutting serious money out of your retirement nest egg.
8. Getting charged too much to invest. -
Everyone likes a tax break, and one of the best ones for you to use involves making contributions to a tax-favored retirement account. By putting money in an IRA or 401(k), you can reduce your current taxable income and save on your taxes while also preparing for the future. With 401(k)s, your employer might even chip in a bit on your behalf. Even when times are tough, finding even small amounts to save can put time on your side and make a big difference down the road.
9. Skimping on your retirement savings. -
Many investors found out the hard way this year that bonds aren't as safe as they thought, with some major bond funds posting double-digit percentage losses in 2013. Despite those losses, bonds still carry substantial risk in 2014, with many calling for imminent interest-rate hikes that would erode their value further. Even now, bond rates are so low that they don't compensate you much for their risk.
10. Betting too big on bonds. -
In contrast to bonds, stocks have soared in 2013. That has some investors finally piling into the market for the first time since 2008 and 2009, while others remain shell-shocked from the massive losses they incurred back then during the financial crisis. Even with the Dow Jones Industrials (^DJI) and other major market benchmarks near all-time record highs, it makes sense to have some stock exposure in your portfolio. Just don't go overboard in the false belief that gains of 20 percent and 30 percent will happen every year.
11. Betting too big -- or too small -- on stocks. -
If you pay full price for just about anything these days, you're paying too much. The rise of deep-discount stores has led to falling prices at stores and shopping malls. Moreover, online tools like coupon sites, daily-deal offers, discounted gift cards, and cash-back credit-card deals can cut your costs as well. With all these tools, you won't find many situations in which you have no chance of getting a bargain on the items you want.
12. Paying more than you have to when you go shopping. -
In the past, many young adults focused on getting into as strong a college as they could, figuring that their degree would pay them enough to make up for the costs they incurred. With college graduates facing a more challenging job environment than ever, smart students are thinking about college costs before they make a decision on a school. By maximizing financial aid and looking at lower-tuition schools with nearly as strong educational quality, you can avoid creating a big debt hole that you'll struggle with for years into the future.
13. Ignoring the financial aspects of college education. -
If you don't have a will, a power of attorney for financial and health-care matters, and an advance directive to tell medical professionals whether you want certain life-preserving measures taken if something happens to you, then you're putting your family at risk. Many people don't have even these basic estate-planning documents, but getting them in place is easier and less expensive than most believe. Get your affairs taken care of in 2014 and save your loved ones some big future hassles.
14. Not planning for worst-case scenarios. -
Resolving to be more financially astute and to avoid common mistakes will help you get your finances in order more quickly. These tips should give you more money to help you meet all your financial goals.
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Source : http://www.dailyfinance.com/2014/05/05/how-to-pay-off-student-debt/
