Monday, October 7, 2013

Bye-bye student loans: How we paid off $50K in one year

A few weeks ago, we made our final student loan payment. In just over a year, we had paid off more than $50,000 in student debt. As in, a home downpayment. A luxury car. A start to a new business. Or, ahem, a UC system education. (Well worth the investment, but pricey nonetheless.)

Was it easy? Heck no. We don't make six-figure salaries and live in Napa, CA where the cost-of-living - the median price of a home is currently $450,000 - is one of the highest in the country. As new parents we have new financial responsibilities, including childcare to the tune of a monthly mortgage payment. Moreover, I recently started working part-time vs. a previously full-time schedule. In a nutshell, some might think us crazy to tackle $50K of debt in a year. They may just be right.

But tackle it we did - with plenty of blood, sweat and, well, not all that many tears. It was us vs. Sallie Mae/Citibank/Federal Direct Loans and, by golly, we squashed them. It was as if we won the Super Bowl and the trophy was being debt free. I'll take that over a ring any day.

Though there were lots of beans for dinner, no cable TV, no flashy cars, no expensive nights out on the town, and no style updates to the wardrobe (ouch - that last one hurt), quite frankly it was empowering to know we could do it. It was one of the best life lessons I've had and, while I certainly don't recommend going into debt to learn the value of money, I think I'm a better person - and will be a better parent - for it.

Here are some tips on how you can squash your debts too:

  • Be a team: If you're in a relationship, you and your partner need to be in this together. Eating beans once a week wouldn't have flown if my husband wasn't equally invested in obliterating our loans. There will be times you need to cheer each other on and agree that, yep, you can go without pricey Christmas gifts this year. As with any challenge in life, paying off a large debt as a united front will strengthen your relationship.
  • Make a budget and stick to it: If you don't have a budget, tackling debt is pretty much impossible. The first thing you need to know is how much you're currently spending. is an excellent tool for this. Once you have an accounting for a month or two, look at where your money is going and decide how you should be spending (e.g. you discover your wardrobe is costing you more than your groceries).  At that point, say you you want to find an extra $500 to put toward your loans. Look at each bucket of your expenses (food, clothing, savings, etc.) and trim where you are able. Then, each month, check-in on your expenses weekly to make sure that you're not going over budget. If you are, stop spending. "Shop" from your pantry. Turn away from the tempting cute shoes. Block from your computer. Walk to the store rather than drive. Do whatever it takes to live without dipping into your bank account. (What are reasonable budgets? As two examples, we manage to live on $300 a month for groceries and $50 a month for restaurants. Not easy, but doable.)
  • Make it your number one financial priority besides retirement: Experts recommend contributing a minimum of 10% of gross income toward retirement. While we continued to do so while paying off our loans, we cut way back on our other savings goals, like buying a new house. (I should mention that before we embarked on this quest, we worked hard to build up an emergency fund. Knowing we had that cushion gave us the freedom to put our savings on hold without feeling like we were unprepared if one if us lost our job, etc.)
  • Take stock of your assets: The first thing we did when faced with $50K remaining in student loans was take a look at our financial assets and decide if we were using them wisely. For example, we had some money in stocks, a gift from our wedding, that was not allocated toward any immediate goal. We decided to sell a portion and use that to take a chunk off the top of that $50K. It was a nice mental boost that made us feel we were making immediate progress toward our goal. While that may not be the right decision, or even an option, for everyone, think about what you do have that could get you closer to your goal. It might be a car that you're making payments on (buy a used car that fits your budget instead and reallocate the monthly payments to your loan). Or an entertainment center you don't really need. Or jewelry that you never wear. Whatever it is, you can do without it (really, you can!) until you reach your goal. Sell it and put the money toward your debt. (Don't have anything that comes to mind? That's OK too - if we hadn't done this, it would have taken us closer to two years vs. one to pay off our loans.)
  • Pay attention to interest rates: Start paying off your debt with the loans that have the highest interest rates. For example, put an extra $500 a month towards the loan with the 8% vs. the 5% rate. Once you pay off the 8% loan, move on the 5% loan (with both that extra $500 and what you were spending on monthly premiums for the 8%  loan), and so on until you're done. 
  • Cut your fixed expenses: Look at all of your fixed expenses - groceries, phone bills, power bills, mortgage payments, etc. - and think about how you can cut back. For example, I called AT&T and got a $10 credit toward each bill for the year. Or, on a larger scale, I called our county property assessor and had our home reassessed. We were able to knock more than $1,000 off our property taxes. Other examples? We refinanced our house, reduced our power bill by being smart about energy use, and cut our monthly DSL expenses from $35 to $20 by changing our provider.
  • Save for fixed expenses: Don't get caught off-guard with a car insurance payment or any other large expense that you know is coming. Divide your annual payments by twelve and save that amount each month.
  • Extra money? Put it towards the loan: Get an annual bonus? Take $100 off the top to get yourself something special and put the rest toward the loan. Yes, all of it.
  • The little stuff counts: That bag of clothes with the tags still on that you'll never wear? Return it. The fishing equipment you got for your birthday that - let's be real - you'll never use? Sell it on eBay. All those little things add up for big savings.
  • Count your pennies: One easy way to do this? Check your receipts. I can't tell you how many overcharges I've caught on grocery bills - at least one mistake a month.
  • Extra paychecks: If you get paid bi-weekly, two months out of the year you will get three paychecks. As you're already used to living off of two monthly paychecks, find out when you'll see the extra ones and note on your calendar to put them toward the loan. 
  • Dual income family? Try living on one income:  If both you and your partner work, try living off of the larger income and put all of the second toward your loan.
  • Give of your time vs. your money: This is a time in you're life when you're not going to have the financial resources to give large gifts to family members or significant donations to charities. That's OK. What you do have is the gift of your time. Volunteer for the causes that are important to you. Make Christmas gifts for your family vs. buying them. Oftentimes, those are the gifts that mean the most.
  • Make due: Much of what got us through the last year was a mindset that unless we really needed something, we were not going to buy it. Besides saving money, this is a great way to recalibrate your complete way of life. By making due with what you have, you will forever shift your priorities, better manage your resources, and be able to focus on what brings you true fulfillment. (I highly recommend the book Your Money or Your Life for those who want to dive deeper into these principles). 

While we present an extreme case for paying off debt (see above-noted craziness for tackling $50K in a year), I hope that our story inspires others to think creatively about how to become debt-free. It may take a year, or five, or ten, or more - but for those committed to whittling down expenses and putting every extra dollar toward their loans, it will happen. In the long term, the money saved in interest payments and the financial freedom gained will be well worth the effort.

The last year wasn't the easiest year of my life, but I can easily say it was one of the best years. It challenged me to focus on what is important - family, friends, and a healthy, positive outlook - and leave behind concerns about status and "Keeping up with the Joneses." I learned that true happiness doesn't come from how much money you have (or spend), but from the relationships you build, the goals you set for yourself, and a glass-half-full approach to life. I learned to be thankful for what we have and not to focus on what we don't.

And, I have to say the payoff was great. Pun definitely intended.

What have you learned by tackling debt or living a frugal lifestyle?



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