5 Ways to Tackle Debt While Federal Student Loans Are Deferred
Federal student loans have been deferred since March 2020. That is two full years of your loans not accumulating interest. If you haven’t been tackling your debt head on, now is the time. As jobs are restored and payments continue to be deferred, you’ll be able to make the dent in your debt that could change your life. Here are 5 ways you can reduce your debt.
Continue Making Payments
Payments on federal student loans were initially paused as we were facing the pandemic head on and millions of Americans lost their jobs (or were seeing a reduction in hours). Now that employment is up, you should really look at your finances to determine if you can afford to start making your monthly payments again, even if they aren’t required.
By making payments, you are putting more of your money at work since your loan isn’t accruing interest each month. Your entire payment will be going towards the balance, making it easier than ever to pay off that loan.
If you can’t afford to make the entire payment, assess how much you can afford. It’s easier to start adjusting to what life looks like with that new expense before it’s actually required to allow yourself some room as you are testing your payment affordability options.
Pay More Than Your Minimum
Really ask yourself, can I afford more than the minimum payment or do I just not want to? If you are barely scraping by, without excessive spending in areas like restaurants, clothing or vacations, then maybe the minimum payment is all you can do right now. Be ok with that! As you have time, start to look at how you can increase your income.
If you can afford to pay extra, how much extra are you able to pay each month? This will be determined by your existing income and expenses but a budget can help you answer that question. I like to use this Debt Reduction Calculator spreadsheet from Vertex 42 to see when you can be debt free, allowing you to play with different monthly payment scenarios. This might be the exact tool you need to get motivated to pay extra on your debt.
Focus on High Interest Debt
If you have debt with higher interest rates than your current federal student loans, you may want to think about tackling that debt first, utilizing the avalanche method. Use the calculator above to assess your options. Using money earmarked for your student loan payment to pay extra on another debt will allow you to reduce the principal on the high interest debt, allowing you to pay less interest over time.
This will only be your strategy during the deferment period but if history repeats itself, extensions of this grace period will continue to happen.
Adjust Your Budget
Whether you are struggling to make a payment or trying to calculate how much you can afford to pay towards your debt, a budget can be a helpful tool to answer all your questions. The 90-Day Expense Tracker in this free Ditch Debt Bundle will help you to figure out where the heck your money has been going. From there, you can decide if you need to tighten the belt in areas of excessive spending or eliminate spending in areas of habit or convenience.
Remember, following a plan to pay off debt can be as aggressive as you want and it doesn’t last forever. I followed an intentional semi-aggressive plan to become debt free and while 20 months seemed to last forever, it still included vacations, happy hours, weekend festivals and home repairs. Paying off debt can happen in tandem to enjoying life.
Increase Your Income
At the end of the day, sometimes we just have to increase our income. Take a look at your free time and decide if a side job is necessary to tackle debt. This doesn’t mean working every weekend at a job that pays barely above minimum wage. Get creative and truly work smarter, not harder. Utilize your hobbies, skills, certifications, previous experience and network to find work that will pay you what you’re worth.
Once you have additional income coming in, don’t waste it. Make a plan to use that money to pay off debt, save for a large expense or increase your emergency fund.
While working with clients to become debt free, the problem I often see isn’t that they don’t make enough money. It’s that they don’t have a plan for their money and they don’t give every dollar a job.
Ready to Ditch Debt? Three Steps to Pay Debt Off Quickly
Having debt is no fun. Not only is it another bill siphoning money out of your paycheck, but you have to pay extra on top in the form of interest. Sometimes debt is unavoidable, emergencies do happen, or maybe you have debt but are ready to pay it off! Here are three steps to ensure your debt gets paid off quickly so you can spend that money on something a little more fun than a payment.
Know Your Numbers
In order to make a plan to tackle your debt, you’ll want to know your numbers. What are these ‘numbers’ I speak of? You’ll want to know four things; the interest rate, minimum monthly payment, debt balance and any promotional offers such as zero interest for the first year.
When we know these numbers, we can use a debt calculator to see how long until we are debt free using scarios with various monthly payment options. You can see how long you have left if you continue to make minimum payments, pay an extra $50 a month or pay an extra $300 a month. Testing various monthly payment amounts might be the motivation you need to pay off your debt for good!
Here is a tool by Vertex42 that I love to use (scroll down to download in Excel or Google Sheets) and I have a video here explaining how to use it.
Choose a Non-negotiable Payment Amount
Once you have decided on a payment amount that works for you, make that number non-negotiable in your brain and your budget.
When I was paying off my student loan I promised myself that before restaurants, clothing or vacation, I made my extra payment on my student loan. This was so that I could have them paid off by the date that the debt calculator gave me without things popping up and ruining the plan.
To help buffer the budget during this phase I waitressed a few nights a week on top of my day job. I say this because it allowed me to have more money for things like vacation and restaurants. Without that extra income I would have had to reduce spending on those areas quite a bit.
Whether or not you have to reduce spending in certain areas while you are paying off debt will depend on your income and your cost of living. Maybe you have a great income you just need to streamline a bit. Or maybe you don’t have a high income and taking on another job isn’t possible right now, that’s ok you’ll just have a ‘debt free’ date that is a bit further out.
Use the Snowball Method
If you have multiple debts that you are trying to pay down, you should use the debt snowball method to focus on one debt at a time. By focusing all of your extra dollars on one debt, you can make a larger dent in the balance and ultimately pay all your debts off more quickly.
For example, I had multiple student loans I was making payments on. By using the snowball method, I threw my entire ‘extra debt payment’ amount, that non-negotiable payment you have from above, at the debt with the smallest balance. This was on top of my minimum payment. Once I paid off that debt, I focused the minimum payment from the paid off debt along with my non-negotiable payment towards my next smallest loan. I continue the process until all debts are paid.
For the longest time I was trying to pay extra on all of my debts but I wasn’t seeing progress, I was losing motivation and I would quit. With the snowball method, my non-negotiable payment actually increased as time went on. Not because I was making more money, but because I was getting better at budgeting. As I saw my balance dwindling, I was becoming more motivated and started eliminating other expenses from my budget to focus every possible dollar towards my debt. This is how I was able to pay off more than $46,000 in 20 months.
How Paying Off Debt Allows Me to Say Yes More
Debt comes in all shapes and sizes and it’s so normal we don’t even see how it affects our daily lives. When we choose to look at debt as something that consumes our monthly incomes, we can start to see how we ended up as a paycheck to paycheck nation. By paying off debt I have more flexibility in my income to say yes to things that make me happier, and you can too!
We have to reframe our thinking around debt
We all know debt isn’t necessarily a good thing and we are taught to try to avoid it, but do we actually avoid it? Maybe you take out loans for college because you can’t foot the bill with cash (who can) or your car is about to take the turn for the worst and you need an upgrade. It’s so normal to have payments in this country, I often don’t think we understand what we are actually signing up for.
When we think about ‘avoiding debt’ I don’t want you to just think of keeping your credit card balance as low as possible. I want you to think about anything that will require a payment in the future, even if it is 0% interest.
Payments can be a means to getting something that we want or need, but do we understand how these payments really affect our everyday lives?
Debt payments hold your income hostage
A ‘no big deal’ $200/month payment might not seem like a lot when you are signing up for it but I want you to think about it this way. If someone offered to send you a $200 check every month for the next three years, would that make you happy? What would you do with that money? How would it change your life?
When we think about debt as ‘is this something I can afford right now’ we are missing out on asking ourselves ‘how would this extra money per month change my life?’
When asking clients this same question, I often hear they would travel more, take a lower paying job that they have a passion for or build up their savings for early retirement.
The opportunity cost of debt is not being able to go after the things that truly matter to you, because you frankly can’t afford to!
Having more income means you have more flexibility
My partner Derek was recently approached by his company to take a job in the Pacific Northwest and to be honest, if we would have had debt there is no way we would have been able to make it work.
We said heck yes! without knowing if I was going to be able to keep my job. We said yes knowing that I was going to lose all of my side hustles which added a lot of income to our house each year. But we said yes because we knew that if we had to we could live off one income for a period of time and still be ok.
Maybe making a move halfway across the country isn’t what you would do with flexibility in your income but would you keep your same job? Would you buy a larger house? Would you finally upgrade your car that has been on its last leg for three years now?
Staying on budget to maintain happiness
While not having debt made the decision to move that much easier, it also wouldn’t be possible without staying on some sort of a budget. I know I lose a lot of people here but hear me out. When we overspend we go into debt. When we go into debt we bring those monthly payments back into our lives. Sticking to a budget allows us to afford our monthly expenses, save for irregular or unplanned items and reach our long term goals.
So here’s some homework for you. Add up all of your monthly payments, and yes ‘good debt’ counts such as your car, that couch you just financed or your student loans (you can exclude your mortgage).
How much money are you sending to debt each month? How would your life change if you were able to keep that money? What would you say yes to if you got to keep more of your paycheck each month?
If you are up for an exercise that goes a little deeper into this work, I encourage you to download my free 90-Day Expense Tracker tool to see just where you’re sending your money each month. It’s really eye opening and helps you highlight areas you can reduce your spending as you are starting out.
Remember that one tiny change or step forward can lead to big things! Let me know how it goes and as always, email me with questions or when you want to celebrate your wins!
Bouncing Back After #livingmybestlife
Keeping up with the Joneses is expensive. Spending excessive amounts of money on going out to eat, a quick trip up north or that thing at Target adds up quickly and is a major reason Americans struggle with debt.
I am here to tell you that overspending just by a little in a handful of areas may be the reason you are carrying a balance on your credit card.
According to an article in usatoday.com, “Groceries are the number one reason why people carry a balance.” One explanation for increased credit card debt is that we put everyday expenses on credit cards, when we once used to pay for these items in cash. Dealing with other debt payments, we are strapped for cash at the end of the month, unable to pay the full balance on our cards.
Here are some tips to get ahead of your credit card debt after you had a couple months of excessive spending:
Look at your spending and figure out which categories caused you to not make your payment in full
Determine a spending limit for all your budget categories and make sure it adds up to less than your monthly household income
Use that extra money to pay extra towards your credit card balances
Check your spending before each purchase to make sure you haven’t hit your category limit
Make sure you are not spending just to qualify for rewards or card benefits, you can do this once you get your balance back to zero
If your credit card balance is not manageable, but you would be able to pay it off within a year, look at consolidating onto a new card with 0% APR.
The thing to remember is that consolidating to a new card or rolling the debt over with your mortgage does not solve the problem at hand. Be sure you are proactively creating a spending plan before each month and really sticking to it. By following a plan each month you will be able to ensure you have money extra to pay down debt.
49% of Americans Are Concerned, Anxious or Fearful
According to Marketwatch, 49% of Americans are “concerned, anxious or fearful about their current financial well-being.” The not-so-funny thing is that this study was before 1) the coronavirus, 2) a potential recession and 3) record breaking unemployment rates.
This is almost half! Why do we continue to live life with debt if it is causing us so much pain? Ost of us don’t see a way out. It has become so normal in our society we truly start to believe there is no other way.
One roadblock when trying to get out of debt (which means living on a budget) is that you become an outsider. You start to have doubts that your friends will think of you differently, that people might think you are poor or that you can’t do fun things anymore. And the fact is that all those things can’t be further from the truth.
Aligning your spending with what you value most in life (vacation, a bigger house, fancy restaurants) is the best thing that you can do for yourself. Because you will be truly happy.
Don’t let what others “might” think of you as something that is stopping you. Being in debt shouldn’t be how you live your life, doing what makes you happy should.
This Is Why You Might Be Broke...
Are you confused at the end of each month because you know how much money you make, and there should be plenty to cover your bills, but then POOF - it's gone before you even knew what happened? Unfortunately, I think we can all relate to this one! I promise I won't harp on the importance of a budget in this post, even though that would tell you exactly where your money is going.
My guess is on subscriptions! And not only subscriptions themselves, but the mentality that the purchase doesn't effect anything. How many things are you "subscribed" to each month? I'm not talking about magazine subscriptions like the good old days. I'm talking about Netflix, Hulu, Disney Plus, Amazon Prime, Bark Box, Spotify, all the beauty boxes, Dollar Shave Club, Stitch Fix, Hello Fresh and the ever so popular wine club -- the list can go on FOREVER.
This is where your money is going. $5 here, $15 there, you don't even notice each individual transaction but by the end of the month your paycheck is out the window. And it is not each tiny service that is making you broke, it is the mentality that these things don't have any effect on your money.
I'm not saying you can't have these these things, some of them save you time, increase your mental health, allow you something to look forward to during quarantine. I get it! But do me a favor, go through your bank statements for the past month and write down your subscriptions. Do you need them ALL? Are you paying for something you barely use? Can you find a free version? And before you sign up for the next new thing, take a second, see how it is going to fit in your life and determine if there is something else you need to give up to account for this new cost. Small changes like cancelling some of these services can free up money to put towards things you truly love.
How Much Extra Should I Be Paying on My Student Loans?
This is a fun question because when I start digging deeper into your finances as a coach and I tell you how much you can afford on paper - the jaws drop! We have been trained to think that if we are making our minimum payments we deserve a pat on the back - because we did it! Right? We didn't have an adjusted payment, we aren't in forbearance, we made the payment. Well, sorry, but no.
That minimum payment will cost you tens of THOUSANDS of dollars in interest that frankly, you can't afford. Nobody can! In most situations you should be able to pay double (at least!) on your loan to get rid of it! There are a lot of financial calculators online, I like Unbury.me, that help you play around with various extra payment amounts to find out just how long it will take you to pay off your debt.
Give it a shot, it's really motivating to see if you pay just a little extra each month, the number of years you can knock off the term of your loan!
Keep Paying Your Federal Student Loans While They Suspended, Here’s Why
Right now you are not required to may a payment on your federal student loan, sounds great right? Wrong! If you are still employed, or your household can afford to make your monthly loan payment, you should continue to do so. And, this may sound crazy but, pay extra!
Think about it this way, normally you have interest tacked onto your loan each month. So when you make your payment, some goes to the loan and some goes to interest.
Right now, with your payments, 100% of it is going directly to the principle! That means that every penny you are sending to your lender is paying down your debt.
Of course, if you are worried about making rent or buying groceries you should hold off. But, if you are one of the lucky ones, hit it hard!
Reader Question: What Is the Best Thing to Do With Savings? Invest? What Kind of Account Is Best to Have It In?
A: This is a great question and it depends on the type of savings you are referring to! Let's assume you have no debt for this example. Your emergency fund should be in a separate account from your primary checking and it should be accessible. The point of this money is to get it when you need it so make sure it's in an account that doesn't require minimum balances or a specific amount of time that it has to be in the account. The purpose of this money shouldn't be to be making money so don't worry about the interest rate. You may see better rates with online banks, be sure you have a card to access the money.
With all of that, additional savings should be going into a Roth IRA. Personal finance coaches don't give investing advice so I would recommend you speak with a financial adviser on other account types. I would avoid single stock options if it was me.
If you don't have an emergency fund or you have debt, this should be your priority. Set aside $1,000 for each person in your household first. After that, work to pay off all your debt. Once your debt is paid, save six months worth of living expenses for your emergency fund. And that brings us back to the top!
Hope that helps!
What to Do With Your COVID Stimulus Check
So, this stimulus check. What about it?
First off, check out this link to see the details on how much you may be receiving. Amounts vary but are up to $1,200 for individuals and $2,400 for those filing jointly (with $500 per child also in the mix). If you are behind on child support you won't be seeing a check. You will receive this money via direct deposit or a check in the mail, depending on your last filing method.
What should you be doing with this money? I can tell most of you that the answer here won't be to spend it. There are a few easy scenarios to cover but if you think your situation is a little more unique you can always reach out.
If your job is stable, you are not worried about lay-offs or reduced hours, this money should go towards any debt you may have. Let's say you don't have debt, then it should go towards your savings. If you have a five month emergency fund you can always invest or, my personal favorite, make a donation to an organization that is doing some good right now.
If you are at all questioning your employment then it should go towards your necessities and any leftover funds should go straight to savings. What are necessities? Rent/mortgage, gas for your car, food and utilities. Netflix? Nope. It's only $8.99/mo - nope. Getting food to go because you can't stand to cook anymore? Nope. Birthday gifts for friends because you feel bad they are stuck at home? Nope. Nope. Nope. You lost all or some of your income, it's time to save every penny you can.
Be safe and be smart out there!
This Is What Debt You Should Pay off First!
Debt, a lot of people have it but no debt is good debt. Hear me now, I will say it again. YOU DON'T WANT DEBT.
Ok, now that we got that out of the way, if you do have debt and you are trying to get rid of what, where do you start? Reminder, no judgement, I was there too with a scary amount of student loans, but I am here to help.
Ok first, we want to list all debts from largest to smallest. I also like to put the interest rates next to them because it might effect things.
After we list all our debts, we are most likely going to pay the smallest debts first. This is snowball method, you can also use the avalanche method which is where you pay off the highest interest rates first. Back to paying off the smallest, this helps with creating easy wins as you pay them off. If it takes you a year to pay off one debt (let's say it's your largest), a year is a long time before you get a win in your journey. Too long and it's hard to keep up momentum.
With that, if you have a $300 credit card bill that is at 25%, we gonna get rid of that.
Back to the plan, once you pay off your first debt, that money then rolls into your payment for your next debt, and so on. And that's it! Easy right? Stay on track, remember your why and life will be grand on the other side.