Personal Finance Archives

How I Paid Off Over $50,000 in Debt with a Custom Debt Snowball

This is a guest post from Eric Rosenberg, a finance writer at Personal Profitability, InvestmentZen, and other personal finance, technology, and travel publications.

$50,000 is a lot more than I earned in my first year of work after college, but that was the debt load I faced over the three years following my graduation. Thanks to a broken-down car and an MBA, I grappled with a $10,000 car loan and $40,000 student loans in my mid-twenties. But I didn’t look at that debt as a crippling, life destroying cloud hanging over me. Instead, I turned it into a goal and a personal challenge.

The end result was paying off every dollar of debt in less than half the scheduled time.

How I Took on $50,000 in Debt

As with most young people who find themselves owing five figures, my debt came from more than one source. While I avoided the most expensive forms of debt, credit cards and consumer debt, I was not able to avoid debt altogether.

My first major encounter with loans happened shortly after graduating from college. Less than a month into my first job as a bank manager, my hand-me-down car suffered a broken water pump. The repair bill would have been more than the value of the car, so a few days later I signed on the dotted line for a $10,995 loan on a brand new 2008 Toyota Corolla. I don’t regret the decision and still drive the same car today, about ten years later, but that did leave me with a $213 monthly payment and more than 25% of my annual salary in debt.

Less than a year after that, I decided it was time to move to the next step of my education and get an MBA. I picked a great university, but with $67,000 in private school tuition alone for the program, the total estimated cost of attendance was around $90,000. I worked full-time while going to school full-time and ended up taking on about $40,000 in student loans over my time in the program.

Add that up and I had taken on just shy of $51,000 in debt in two years. I needed a car to get to work and school and I knew my education would likely pay for itself multiple times over in the course of my career, but at the time I was staring up at a massive wall of debt. I needed a plan and a route to debt freedom.

Creating a Custom Debt Payment Plan

Mathematically, the best way to get out of debt is to pay off the highest interest loan first while making minimum payments on the others. Every extra dollar goes to the highest interest loan, and as each loan is paid the “extra payment” snowballs and moves on to the next loan. Eventually, all debts are paid. This debt payment method is sometimes called a debt avalanche, a slightly customized version of the popular debt snowball that suggests paying off loans from smallest to largest.

Based on balances and interest rates, I saw that I could pay off my car loan first and be done with that completely, then focus on my student loans. All of my loans charged the same interest rate, so I focused on the two unsubsidized loans first and the subsidized balances last. This is the exact plan I followed to pay off my big pile of debt.

While my car loan required a $213 monthly payment, I didn’t want to spend five years paying for my car. I doubled my payment and put an average of at least $400 per month into my car loan. Eventually I setup an automatic payment to draw $213 from my checking every payday, which meant I was paying double every month and an extra two payments per year, with 26 payments going in per year. On my 25^th birthday, I logged into my bank’s website and paid off the entire balance exactly two and a half years early. It felt great having my car paid off in half the time, but I wasn’t out of the woods yet.

Paying off $40,000 in Student Loans in Two Years

Now that my car was paid off, I had an extra $400+ every month to use for anything I’d like. Rather than spending it on gadgets, vacations, and other wants, I focused the cash right into my student loans.

While my required monthly payment was just under $300, I got into a habit of paying $700 per month into my loans. Continuing with my custom debt snowball, I paid off the first unsubsidized loan, then the second, and so on. To make my payoff even faster, every time I received lump income from a tax refund or bonus at work, I put 100% of that money into the loans. Because I was already used to living on a budget that didn’t include those windfalls, it didn’t hurt to put them into my loans.

They fell one after another until I reached March 2012. At that point, I was down to my last student loan with a $3,690.52 balance. I raided my savings and checking to come up with enough cash to pay off the final balance in one swift blow. I logged onto the Great Lakes student loan website, clicked the button to make a payment, and selected the full payoff amount. Just like that, I was debt free.

I paid off my student loans two years and six days after graduating from my MBA program. Had I not made aggressive payments, I would still be paying off my student loans today and would have another three years to go. Thanks to my aggressive payment planning, I have not made a payment in more than five years.

Was my debt worth it?

We could argue the merits of new cars versus used cars all day, but in my case I am still happy with the decision I made in July 2010 to buy that new Toyota. I picked a fuel efficient, reliable, compact car with money in mind, and I still drive that car today. Knowing I would likely still have the car when I had kids, I sprung for the version with side curtain airbags and every possible safety feature. While there are fancier in-dash computers since I bought my car, it’s safety features still hold up to new cars today. And I have not made a payment on the car in seven years. #winning

My MBA was even easier to measure. Just a couple years after finishing my MBA, I moved to a new company with a 40% raise. That raise alone was enough to payoff my MBA in less than five years. I can confidently say I am beyond break-even on my education, and it continues to pay dividends every day.

To me, debt is just another financial tool. If used poorly, it can lead to crushing debt, horrible stress, and years of financial agony. But when used the right way, it can open doors to amazing things. I’m happy to say I landed in the second camp.

If you are in debt today, it doesn’t matter so much how it happened. You can’t go back in time and undo your debt, so your best option is to create a plan to pay it off for good. Thanks to the debt snowball method, creating a plan isn’t that hard. The hardest part is budgeting and sticking to it, but if you do, you’ll be setting yourself up for a lifetime of personal finance success.

7 Ways Single Parents Can Save Money

By Khaleef Crumbley

Raising children is expensive and when you’re a single parent, it can seem downright impossible. Figuring out how to pay your bills while still ensuring that your child’s (or children’s) needs are met can be difficult. It is possible with a bit of planning.

You can pay your bills, take care of your kids and still have some money left over at the end of the month. Here are 7 ways in which you can save money.

Create a Budget

If you have no idea how much of your money is going where every month, your spending can quickly get out of hand. Sit down and create a monthly budget. Figure out how much you pay for fixed expenditures (such as rent and car insurance) and how much you want to stick within on other necessities, such as food and other flexible expenditures.

Once you figure these numbers out, it will be much easier to stick them, which can seriously cut down on impulse purchases. It can also be beneficial to balance your checkbook every month. This can help to make you accountable for all of your purchases and allow you to practice more conscious spending habits.

Great articles on how to create a household budget:

How to Create a Budget – Even If You Suck at Budgeting

How to make a family budget – Today’s Parent

Shop Used

Buying new can eat up a large portion of your finances, whether it’s clothing, a car, or furniture. Rather than trying to figure out how you can afford new, shop used.

Consignment sales and thrift stores are a great way to stretch your clothing budget. Not only can you find gently used (and sometimes new) clothing at cheaper prices, you can also sell the clothing you no longer wear. These types of stores are also great for buying other household goods.

There are plenty of websites dedicated to selling used items, allowing you to save a significant amount of money.

Compare Prices

Before you make a purchase, check to see if there is a cheaper price elsewhere. Thanks to the internet, comparison shopping has never been easier. You can even check for coupon codes for your chosen retailer.

What’s more, many stores will price match, whether it’s honoring their online prices in store or matching a competitor’s price. In some cases, you can still use coupons as well.

Join a Savings Club

Many grocery stores offer free savings clubs, which are designed to encourage your shopping loyalty. With a loyalty card, you can gain access to special sale prices and coupons. By planning your shopping trips around the sales of the week, you can definitely save money – as much as $40 or more per trip.

You don’t have to limit yourself to one store. If you shop at multiple stores that offer savings clubs, sign up for each store you frequent.

Pay Bills on Time

When you’re on a tight budget, it can be tempting to let some bills slide but, in doing so, you could be racking up late fees and other penalties. When you do get around to paying your overdue bills, you’re paying more than you would have initially. If possible, set up automatic payments for things such as your mortgage.

When paying your credit card bill, aim for paying about $50 to $100 over the minimum balance each month. And make sure you leave approximately 5 to 7 days for your payments to process. You should also familiarize yourself with any fees that may be associated with your bank, your credit card or your cell phone. Call each company and ask about any fees you are unsure of.

Shop around for banks that charge no fees, or at least less than what you are currently paying. You may even be able to get your credit card company to lower your interest rate.

Some parents may find themselves in a shortage of cash. Here are some helpful articles to help with that situation:

Should you borrow from family or friends? – Money Advice Service

Installment Loans with Bad Credit up to $5,000 – I Need a Loan

Plan Your Meals

While it can take some time, sitting down to plan your meals for the week can help you to then plan your shopping trips. This can help you to stick to a list and avoid buying what you don’t need.

Planning can also help you to make the most of what buy. For instance, if you roast a chicken, you can make chicken salad out of the leftovers, and have lunch ready for the next day or so. The leftovers also make great sack lunches for the kids when they go to school, rather than having them buy lunch.

Another trick to help you save money is to double your favorite recipes. This way, you have one ready for dinner on the night you make it and you can freeze the second one to eat the following week. This will allow you to take advantage of sales and can help you to save time on a night when you may not be able to cook.

Start a Savings Fund

One of the biggest keys to help you save money is to actually set money aside into a savings fund. Allot what you can each month, even if it’s only $20. Over time, this money can really add up. You are not limited to a savings account. You can set the money aside into a college savings fund for your child or into a retirement account. Use whichever method works best for you and your family.

Raising your kids on one income sounds like a frightening concept but, it is entirely possible. Taking the time to sit down and plan can go a long way in making sure that the bills are paid and everyone in your household is comfortable.

[This post was brought to you through a partnership with Sandy Matthews.]

Handle Yourself as a Business for True Personal Finance Success

By guest

This is a guest post by Eric Rosenberg, a full-time freelancer and blogger at Personal Profitability. Eric writes about personal finance and entrepreneurship at InvestmentZen, his own blog, and other sites around the web.

If you have trouble managing your money, you are not alone. Millions of people struggle every single day with paying the bills, keeping their accounts straight, and having enough leftover to save for an emergency, let alone retirement.

If this sounds like you, why not take a step back and look at your finances through a different lens. If you treat your finances like a business, and yourself like a financial analyst, you may be able to better identify your financial strengths, weaknesses, and put together a plan to enjoy financial success for years to come.

Create Personal Financial Statements

Every business tracks its financial health using financial statements. If you search for your favorite large company’s annual report on Google, you can find its financial statements posted online. To get an idea of what these look like, stop in and check out Google’s latest annual 10-K report here.

Of course, we don’t need to put together a 100+ page detailed report, just a simple one will do. The three primary financial statements you’ll want to look at are the Balance Sheet, Income Statement, and Statement of Cash Flow.

Balance Sheet – The balance sheet is a snapshot of everything you have and everything you owe in one place. Subtracting your debts from your assets, you can find your net worth.
Income Statement – The income statement shows how much you earned and spent over a specific period of time.
Statement of Cash Flow – The statement of cash flow shows how much money came in and where your money went in terms of spending and investing.

If you want to learn more about personal financial statements, check out my guides here.

Diversify Your Revenue

If a company earns a significant portion of its revenue from a single customer, that is called “revenue concentration risk.” It is a risk because a problem with that one customer can completely bankrupt a company or destroy a product line.

For example, GT Advanced Technologies went bankrupt after losing its biggest customer in 2014. GT Advanced Technologies was a primary supplier to Apple for iPhone glass screens. When Apple changed suppliers, it destroyed the entire company’s business.

What would happen if you lost your primary income source tomorrow? For most people, that is a full-time job and losing it would mean a serious hardship. By diversifying your income and investing your time in side hustles, you are in much better shape to withstand a sudden change in income.

Maximize Profits

The root of business is earning a profit. Earning a profit requires earning more than you spend. Businesses and individuals can both utilize a budget to help plan for this goal. A budget isn’t something to restrict your spending, it is about planning and understanding your spending.

It is important to focus on both revenue and expense when budgeting. Don’t look at your income as a fixed number, look at it as something you can grow through hard work and focus. If you do well at your job, you can get a raise. If you do well with a side hustle, you can earn more. That is key to growing your wealth.

On the other side, do focus on big wins for your budget. Saving a few cents here and there is great, but finding recurring costs to cut and major expenses to avoid will have the most meaningful impact on your finances.

Be Your Own CFO

If you can stay focused and treat your finances like a business, you are essentially acting as your own Chief Financial Officer. Mastering your bank accounts, credit and loan accounts, and taking an active role in growing your income while cutting expenses will be hugely helpful in the long-term.

Even if things seem too tough to handle today, creating your personal financial statements will show you where you need to focus to live the life you want. Whether you want to travel more, save for retirement, or just want to feel more confident when dealing with your money, treating your finances like a business is the way to go.

Ignorance of Financial Realities Is a Major Concern

By Khaleef Crumbley

They say there are two certainties in life; death and taxes. Whether the word certainty applies is a moot point but there are some realities in the USA today that appear to be unavoidable, and miserable retirement for many is on the list.

A recent study of 1,000 people over the age of 18 identified almost 60% happy at their ability to enjoy a comfortable retirement because of their ability to save sufficiently. With life expectancy rising, many can expect to live twenty years or more after retirement, so it is a challenge to have a large enough fund to do that. A common way to calculate how big a fund you will need is to take 4% per year of your fund’s total as your potential annual spending.

These 60% are arguably far too optimist when average savings in society today are analysed further. Only half actually knew how much they would have in their fund when they retired. While Social Security benefits help support retirement they are far from sufficient for a comfortable retirement; no, very far!!

Statistics reveal that the average annual spending of a couple who has retired is around $45,000 with benefits paying up to half of that depending on the couple’s working history. It means that a couple need around $500,000 in their fund if the 4% rule is applied.

Too few Americans have anything like this and many of them are of an age where it would be impossible to accumulate that amount, simply because of time. With the chances of hitting the jackpot one in many millions the reality in the USA is extremely disturbing. It is not helped by other facts that have been revealed by further questioning in TIAA’s Lifetime Income Survey:

Of the 1,000 people surveyed around 400 stated that they were saving only 10%, often less, of what they earned each year towards retirement. That 10% is only the starting point on widely-acknowledged advice that recommends rising up to 15 and then 20% in later years.
Almost 30% admitted they were not saving anything at all. Surprisingly half of them said they had no worries about retirement so there is a clear issue here.
500 or so said that their first financial goal was to create a monthly income for the years of retirement yet almost as many did not appear to have any idea or plan about how this could be achieved.
There was a feeling that spending would drop by a quarter once they retired. There are some obvious savings on commuting as an example but what about increased medical bills that many face as they get older? There is a counter argument to spending. When people have more time on their hands it is likely they actually will spend more as they do on holiday during their working lives.

Those Americans that understand the conflicting evidence within this survey can act to improve their futures but time is a constraint. The number of Americans keeping a proper budget is just in excess of 30% if a Gallup poll of 2013 is to be believed. It is an essential part of good financial management.

Debts need to be reduced, especially expensive debt such as that on credit card balances. Personal loans are a cheaper way to organize your finances and can be used to pay off card balances by regular instalments which can be entered within the budget.

Living to a budget takes self-discipline though not necessarily sacrifice. You have to be realistic or you will be discouraged when preparing your budget. There is the chance of savings on utilities, insurance and telephone with comparative websites doing much of the research for you.

The aim behind living to a budget is saving each month towards the future. You will know how you stand at any one time and that clearly helps you make good decisions about every aspect of your life. There is nothing wrong in getting expert advice as well.

The good news if there is any is that the younger generation appear to understand the limitations of the Social Security System and are prepared to do something about it. The bad news is that older people don’t and time is not on their side.

Budgeting is Hard, But Here Are 8 Tips to Make It Easy!

By Ruddigar Simpson

[The following post has been brought to you in conjunction with Credit Sesame.]

Sticking to a specific budget is not always easy. From holiday spending to emergencies to everyday purchases, the household budget can easily fall to the wayside. If this sounds familiar, you’re not alone. Simply relying on willpower and discipline for your budgeting is hard.

What really works is automating what you can and getting smart about where you spend your money. Here are 8 tips you can try to help yourself stay on track.

8 Easy Budgeting Tips You Can Use TODAY

Use an App to Track Spending

If you already have your phone in hand, why not download an app to track all of your spending? Many banks offer free budgeting tools, based on debit card transactions. Log in to your account and take a look.

Free apps like Mint can also show you exactly where your money goes, separating transactions by category in easy to understand tables and graphs. You can visually see where you spend too much and make adjustments.

Auto-Pay Your Bills

It can be tempting to pay a bill late in order to buy something else. However, putting bills first by auto paying them can eliminate that temptation and keep you on track. Even if you normally pay your bills on time, it is easy for one to slip through the cracks. Then you might think you have more money than you do, and you could get hit with late fees and service interruptions.

Schedule an auto-payment date that works for you and sign up for electronic receipts (a notification or an email that the transaction occurred).

Automate Savings

Set up your direct deposit so that a portion of each paycheck goes straight to savings before you even see it. You can do this through your employer’s payroll service, or through your bank. If you manually deposit your pay, it’s up to you to put the allotted amount into savings each time.

Save on Entertainment

Do you have expensive cable service but you rarely have time to sit and watch anything? I used to spend around $100 per month on cable but switched to Netflix for $10 per month. You can also pick up movies, magazines and books at the local library for free rather than buying or renting them.

Also, check your local newspaper, the coupons that arrive in your mailbox and online deal sites for free or low-cost concerts, movies, and other events. A little bit of effort can lead to huge savings and an easier time budgeting.

Plan Meals

Food is often one of the most frequent, necessary, and expensive items in the budget. The temptation to swing through the drive-through can be strong. If you’ve already got a delicious dinner planned at home, the temptation is easier to resist. You can, of course, eat out sometimes. But it should be the exception, not the rule.

Google recipes. Start on your favorite recipe site or by typing in the ingredients you’ve got on hand, followed by the word “recipe.” (If you’re on a tight budget or new to cooking, we love this free cookbook.) Buy staples in bulk (olive oil, butter) to save money. Shop according to a list, not whim. Another word of advice: don’t shop when you are hungry or stressed. The key is to experiment so that you find recipes you and your family like.

Save on Gas

Gas is another expense you can cut down on by planning ahead. First, get the cheapest gas in town by downloading an app like GasBuddy that lets you search the city you live in for the best prices. Then think out all the errands you need to run and how you can do them most efficiently during the week.

When you know where you need to go, use Waze to find out about any problems on the road so you don’t find yourself stuck in traffic or taking a detour. Don’t forget about carpooling with friends when it makes sense. There’s even an app for managing your carpool schedule!

Negotiate Services

Are you paying monthly fees for your phone, car insurance, credit card interest, and bank accounts? In our competitive market, companies frequently change their offers and run promotions. They want to keep existing customers, which gives you leverage.

When paying my monthly phone bill, I asked about getting a discount on my services and learned they offered 15% off for AAA members. Just by asking I cut over $20 from my monthly bill.

Also, check your credit report to find out if you have improved, as better credit can help you get better rates, especially for products like insurance and credit cards. Credit Sesame is a great resource for getting free credit report cards.

Create Goal-Oriented Savings Accounts

Lastly, if you have a specific goal you want to save for like a vacation, the down payment on a house or an emergency fund, you can make that goal more tangible with a goal-oriented savings account. Put a name on the account and separate it from your other savings. Goal accounts can be strong motivators.

Sticking to a budget, repaying debt, and saving money can be hard, especially if you have never done it successfully before. Don’t get down on yourself about it. Instead, take action using tips like these to support your efforts and relieve some responsibility from your willpower.