Thinking about finances when your starting out can seem scary. Sometimes you feel like just pretending these expenses aren’t there, but it is actually not so bad when you take it step by step.
First things first, chances are you have some student debt if you went to university. I know my student debt felt really overwhelming, but it made me feel so much better to sit down and make a plan.
Creating a Debt Repayment Plan
1. Know How Much You Owe Each Month – when you’re entering the world of repayment, you should first consider your required repayment number. This number is non-negotiable and you must pay it off every month. Otherwise you will default on your loans and that is just not good, don’t do that. Sometimes it’s possible to apply for Income based repayment. This is a way to ask your Loan Servicer to take your income level as a consideration to make your required payment amount lower.
2. Decide How Much You Can Afford – once you know how much you have to pay, figure out how much you can pay. You are going to want to pay back as much as you can each month. It’s going to be incredibly tempting to just pay the minimum so you can spend more money on a nicer apartment or eating out, but don’t. Paying off your loans as early as possible will let you have these things and more in the future, and most importantly, save you a ton of money. Think of it this way: every dollar more you pay, is one less dollar that is going to increase your interest owed.
3. Choose a Repayment Plan – when choosing a repayment plan, it’s important to know what’s most important to you. There are 2 routes you could take for repayment: The Snowball Plan or The Avalanche Plan. Remember you will still have to make any minimum payments on all accounts no matter which plan you choose. You take the amount you decided you could pay each month on loans and pay off the minimum requirement on each loan, and then all remaining goes toward one account that you focus on. The Snowball Plan: You focus on the loan with the lowest balance. This method is good if you need to keep your motivation up by getting the satisfaction of paying an account off. The downside to this plan is you will end up paying more in interest. The Avalanche Plan: You focus on the loan with the highest interest rate. This method is the one that will result in you paying off the least amount of interest overall. The downside to this one is you won’t see accounts hitting zero as fast. I chose Avalanche for my repayment plan because I cared more about saving money than seeing the little accounts hit zero. I still get that enjoyment from seeing my most daunting account get lower each month. I actually have a really helpful Excel sheet that can help you see the difference in each of these plans. (Download below) You enter each of your loans, their interest rates, and then you can select which plan you want to view, and it will show you the amount of interest you’d pay and when you’d have each loan payed off. I found this little tool to be the most comforting when I was first looking at my loan situation. I got this form from Financial Advisor, Robert Moritz in Indianapolis. I’m sharing it with you with his permission. If your looking for someone to help you with investments, retirement planning, or other financial advice; look him up and schedule an appointment. Here’s his website. Don’t feel shy about telling him I sent you.
4. Set Your Loans on Autopayment – Once you know how much you’ll be paying each month, and where you want that money to go; set your loans on autopayment. Some repayment servicers will give you a little rate reduction for setting your loans on autopayment. It will also help make sure you don’t miss a payment. Don’t just set it and forget about it though. You should keep an eye on it to make sure nothing has changed, make sure you have enough money in the account it’s pulling from, and it gives you the chance to see your balance going down and get that little sense of accomplishment.
Most importantly do what works for you, these are more like guidelines anyway.
*Disclaimer: I am NOT a financial expert nor should this be received as professional advice. Always take the advice of a professional over mine.
This is part of my Getting Your Finances in Order in Your 20’s series.