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Paying off loans is fun!

It’s the beginning of a new month, and while, for most people this occasion might be fairly inauspicious, in our home it’s a HUGE DEAL! Why is it such a huge deal you may ask? It’s the start of a new budget!

At the beginning of each month Katie and I take some time to do a final review our budget from the previous month and see how we did in each category. We tally up how far under budget we were in each category, and ensure that, if we did go over in any of our categories we’ve covered those expenses from our surplus. Once we have reconciled each category we add up how much under our budget we were, zero out all the categories, and add all surplus money to the category titled “extra money to put towards student loans.”

As I mentioned in a previous post, we’re usually able to come in well below our budget. This is where it gets exciting: WE GET TO PUT ALL THAT EXTRA MONEY TOWARDS OUR STUDENT LOANS!!!

Earlier this week, through careful budgeting and spending, and some windfalls, we reached an important milestone. We finished paying off my bar study loan. When we began focusing our resources on this loan the balance was about $21,000 and the interest rate over 8%. Today, we are free. Free from the thousands of dollars we had accrued in interest, free from the hundreds of dollars that were accruing each month when we began paying off this loan, and free from the $35 we accrued in interest last month, and will never accrue or have to pay again.

A few other amazing things happen when you pay off a loan too. We budget a few months in advance so the money we had earmarked to pay the minimum on this loan in June and July went instantly towards the next loan we’ll be focusing our attention on. We were able to delete a line on our budget. We won’t ever have to think about that loan again. That expense is gone. We get all that money back forever. We get to “snowball” meaning, much like a snowball rolling and gathering more snow and getting bigger, we get to take our ever increasing surplus of money from obligations we’ve eliminated and instantly use that money to pay off the next loan we’ll be focusing on even faster.

All of these things are awesome, and make you feel good! When you pay off one loan it makes it that much more possible to pay off the next loan, and it gives you additional hope that your task of getting out of debt is possible.

I wish upon each of you suffering under the weight of student debt the same good fortune! Keep pushing, and those loans will be gone sooner than you think. Feel free to share your success stories in the comments below!

In Monthly Expenses

Yeah, but budgeting is easy when you have plenty of money…

So, my post last week sparked a few comments. One of those comments was that it’s easy to budget if you have plenty of money, but that most people in debt don’t have enough to cover their basic needs. My experience is the opposite. Budgeting is more difficult in a comfortable situation because the consequences of spending are noticed less. I think it’s much easier to budget if you’re forced to by your sparse income – and once you budget, you’ll find you have money left over to start paying down any debt you may have!

ANY adult with the ability to work full-time can cover their basic needs. I don’t care who you are. You can be a high-school dropout working as a janitor at the high-school you dropped out from and you will still earn enough money to live and support a family. It might not be glamorous, but it can be done, and I’ll show you how.

As I’ve mentioned, I’ve been blessed. I have enough to pay my loans and live within the somewhat generous budget we have established for our family. That wasn’t always the case. When we had very little income we were forced to live within a budget because a single frivolous expense would make it impossible for us to pay rent, get to work, or accomplish some other equally important task.

Last week I shared our family budget. In that post I mentioned that we could trim fat if we had to. This week I’m taking it a step further. I’ve evaluated my budget, done some math, and created a model for how tight I could trim my expenses (like if I lost my job, or some other tragic event occurred).

Below is the same spreadsheet as last week but with a new number: my “bare bones” number. If I was in dire straits, this bare bones number is how I would spend my money (and, actually, it’s a good approximation for how I did spend my money when we were in a desperate situation). I’ve also included a description of what I cut from my actual budget to arrive at my bare bones budget.

Category Monthly Budget Bare Bones Budget Bare Bones Description
Utilities  $                 215.99 $                 260.99 Added internet and phone which are currently business expenses.
Food1  $                 630.00 $                 450.00 I removed all “eating out” and a few other minor frivolities.
Fuel & Vehicle Maintenance  $                 184.00 $                   96.00 We could downsize to one car and this number reflects that.
Household Items & Miscellaneous  $                 392.95 $                 202.95 Removed allowance and babysitting.
Annual Subscriptions & Memberships  $                 107.90 $                   61.70 Removed all unnecessary expenses and memberships.
Vacations & Gifts  $                 265.00 $                     0.00 Vacations would be suspended and we’d get creative for gifts.
Charitable Giving  $                 556.40 $                     0.00 Donations would be drastically reduced.
Living Expenses Subtotal  $             2,352.24 $             1,071.64 Wow! That’s a HUGE difference.
Housing  $             1,368.74 $                 950.00 Move to a smaller home. This is for a 3-bedroom apartment in my area.
Housing Subtotal  $             1,368.74 $                 950.00
Personal Expenses Subtotal  $             3,720.98 $              2,021.64 My definition of basic needs costs $24,000/yr.

 

If you’re an adult, and you make less than $24,000 a year, you’re doing it wrong. Stop, take a moment to reevaluate your life, and start applying for jobs. Unskilled laborers make more than $35,000 a year. If you don’t believe me go to indeed.com, search “unskilled labor” and filter by “full-time.” This is the bottom rung of employment in our society.

But, being intelligent people who are motivated to work hard, you can (and will) do better than this. If you have a college degree, there are any number of jobs you can get that will pay you $45,000 a year. And, if you have a professional degree, you can find a job making at least $65,000 a year.

So, let’s say you’re an average American. You have a modest mortgage that costs you about the same amount monthly as my bare-bones budget, you have $16,750 in credit card debt, $29,000 in car loans and $50,000 in student loans.2 Can you escape your situation? YES!

If you live on $24,000 a year and you make $45,000 a year (assuming that $50,000 earned you an undergraduate degree), that gives you a surplus of $21,000 a year (assuming you have 3 kids like me and between credits and tax rates you pay very little or no taxes). What shall we do with that surplus?

This being a blog primarily about student loans, let’s start with those. Let’s say you refinance your $50,000 in loans at 4.5% and are satisfied with a ten-year repayment. Your monthly payment will be $518.19. This leaves you with ~$1,231.81 a month to pay down your credit card balance. If you are diligent in putting all of this remainder towards your credit card debt, that $16,750 will be gone in 16 months (assuming a terrible 18.5% interest rate). Then you’ll be able to put all of your surplus towards student loans! If you began putting all of your surplus towards student loans at month 17, you will have all of your loans paid off by month 42. That’s only 3 ½ years of living poorly to have the rest of your life to live like a king! Would it suck? Yes. Would it be worth it? That’s for you to decide.

This brings me to my last point. How much money you make really doesn’t ma… WAIT!!!

I forgot car loans!

No, I really didn’t. A car loan is almost never necessary. Sell your financed car, use the money to pay off your loan, and either buy a cheap and reliable used car, a bus pass, a bike, or just walk.

There are plenty of alternatives to financing an expensive car.

As I was saying. How much money you make really doesn’t matter. All that matters is how you choose to spend the money you do have. How we spend our money comes down to what we all personally value. I value relationships with my wife and children and paying off my student loans. That’s why, in my budget, I’ve allocated money for dates, excursions and vacations. I’ve done the math and decided that I’m willing to spend another year getting out of debt to redirect money to those activities.

When someone says they “can’t get out of debt” what they’re really saying is that they value their current lifestyle more than financial freedom. That’s ok if they do. But, now you know exactly how to tell them what their alternatives are. There are always going to be reasons given for why a budget like the above won’t work for someone in their specific situation. However, the benefits of financial freedom are worth making your best attempt.

Next week we’ll talk about something fun. Windfalls!

1 For a family of five, if you earn less than $37,000 a year you’re likely eligible for full SNAP benefits. If you need assistance with food, check out the USDA’s SNAP eligibility page. If your employer doesn’t cover health insurance and your income is $45,000 there are some excellent options available. I was able to find good healthcare plans for $1,050 per year through healthcare.gov for a family of five.

2 Source: https://www.nerdwallet.com/blog/average-credit-card-debt-household/

In Monthly Expenses

Our Family Budget

Apker Family Budget

Since I began writing this blog I’ve had a lot of people ask me; “How are you going to pay off $350,000 in student loan debt”?!?

Fair question.

The shock inherent in that question hasn’t even had the benefit of full information. Our plan is to (hopefully) be free from student loan debt within five years (more on how this is possible in future posts)!

“What”?!? “No WAY”! “You’re either crazy, getting a TON of help from family, or insanely wealthy”!

I assure you that we’re not getting any help, we’re not insanely wealthy, and we’re not doing anything TOO crazy.

I will admit that both Katie and I have very good incomes, but more important than that, we try to live well within our means. To do that, we faithfully adhere to a family budget.

First, a little background.

There was a time, not very long ago, when we were really poor. Like, not able to pay the rent, buy groceries, clothes or other necessities poor. That period between the end of law school and the beginning of my MBA program forced us to push the limits of how little we could spend to survive.

We never ate out, we cooked a lot of meals with superfood staples (lentils and rice are cheap, healthy and delicious), and we limited every other expense as much as we could. At our tightest we were sustaining four people spending less than $1,750 a month living in Portland, Oregon. For reference, our rent at the time was $1,275 a month. We were spending less than $500 a month for everything else (full disclosure, we were relying on government assistance for health care and food).

Some will say those numbers are impossible. I’ll have you know that it’s certainly possible, it’s just not that much fun!

I look back on this time as a tremendous blessing in disguise. If we hadn’t been forced to live as frugally as possible, we may never have learned how inexpensively one can live if one really tries. Now that we’re focused on paying back loans as quickly as we can we’ve upped our budget enough to give us a little more luxury. Though we’re still living very inexpensively we feel spoiled because we have so much compared to what we did have. Perspective is everything.

For those who haven’t had the luxury of poverty to teach you how to budget, this lesson will be harder to learn. Self-imposed restrictions can be difficult. But, like a healthy diet or exercise plan, it will be worth it!

Given our lofty goals and our focus on frugality, Katie and I have decided to share our budget with each of you. As you look at the expenditures for each category keep in mind this is the most we’ll ever spend in a month. Just because there’s money left in a budget category near the end of the month doesn’t mean you can spend your money on worthless things. Money remaining in a budget category is not “permission” to spend. Budget categories are guidelines that should only be reached when something out-of-the-ordinary occurs.

As you get used to living within a budget it doesn’t feel like a restriction. You become free from the impulse common in our society to “have things.” I’ve found that having things has rarely made me happier, but the additional time with my family during inexpensive outdoor activities and the health which comes from avoiding fast food are very valuable. We try hard to stay well below our budget in each category, each month.

Staying below our budget is a fun game for us. The less we spend, the more money we get to put towards our highest interest student loan! As we reconcile our budget at the end of a month, and see how many hundreds of dollars we are under our budget, it provides a rush. That rush makes all of the decisions to monitor the thermostat, skip a meal out, or bike instead of drive, worth it.

With that, here are the numbers.

Category Monthly Budget Description
Utilities  $                 215.99 Includes electricity, gas, water, sewer, garbage.
Food  $                 630.00 All food expenses, regardless of the source.
Fuel & Vehicle Maintenance  $                 184.00 Gas for cars, regular maintenance and savings for repairs.
Household Items & Miscellaneous  $                 392.95 Household items, expenses for children, everyone’s allowance, babysitting.
Annual Subscriptions & Memberships  $                 107.90 Insurance, YNAB, iCloud, Amazon Prime, AAA, credit card fees, etc.
Vacations & Gifts  $                 265.00 Saving for Christmas and Birthday gifts, and for family and couple vacations.
Charitable Giving  $                 556.40 Includes tithing and other donations.
Living Expenses Subtotal  $             2,352.24
Housing  $             1,368.74 Mortgage and HOA.
Housing Subtotal  $             1,368.74
Personal Expenses Subtotal  $             3,720.98

 

It’s important to note this is a high-level overview of our budget for introductory purposes. I’ll follow up with more information on how we’re able to stay within the budget amount in each of these categories in future posts.

Again, I want to make it clear that these are our maximum expenses per month. We (all five of us) easily live on less than this, and we don’t feel deprived at all. We feel rich! I mean, look at the “Vacations and Gifts” category, the “Annual Subscriptions & Memberships,” and “Charitable Giving”! All of those are things we could easily do without, or drastically reduce, if we were forced to. And, I know what you’re thinking. “That food budget: six-hundred and thirty dollars a month”? “They must be super high-rollers”!

We are. We eat out like six times a month on that luxurious number. A goal of ours is to go out less frequently on date nights and put another ~$50 a month towards student loans.

That household and miscellaneous number? There’s definitely some fat we could trim in there.

And really, as Katie and I were reading this just before we posted it we were like “we spend THAT MUCH, we can do better than that!”

If we were really ambitious and Spartan, we could lower these numbers. If we didn’t have student loans to contend with, we could easily live on less than $40,000 per year without too much sacrifice. And, if (when) we pay off our mortgage, we will easily come in under $25,000 per year in living expenses.

Faithfully adhering to this budget is integral to our ability to pay off our student loan debt. If we didn’t live on a budget, we wouldn’t have enough surplus to make the payments mentioned in the previous post.

This isn’t a pipe dream, these are real numbers and anyone can do it. If you currently have and adhere to a budget, I challenge you to look for ways to trim fat wherever you reasonably can. If you don’t currently have a budget WHAT THE CRAP ARE YOU WAITING FOR!?!? Go sign up for Mint or YNAB right now! Seriously…I’ll wait…

If you’re committed to paying off your student loans, or if you just want to live better for less, I highly recommend checking out the sources of both information and inspiration listed below! Also, please feel free to share your comments, I’d be happy to answer any questions you may have.

Happy budgeting!

http://www.mrmoneymustache.com/

http://www.getrichslowly.org/blog/

http://earlyretirementextreme.com/

 

2 In Monthly Expenses

So! You had $350,000 in student loan debt. Tell us about that…

So! You had $350,000 in student loan debt. Tell us about that…

Ok, I will.

First, apologies for the hiatus. I made the choice to have knee surgery over the holidays to allow for maximum downtime. Even though it was nice to have downtime, surgery still sucks. And between recovery and catching up in other areas of my life, blogging had to be put on hold.

And, I’ll be honest, I struggled with whether or not to share as much specific information as is contained in this post. However, after a lot of thought, I decided to be open with my information. The reason I wanted to be specific is because, as we go through this journey of debt repayment I don’t want to take any shortcuts. When I say that I’m paying off almost $350,000 in student loan debt in less than five years people are skeptical. I must either be rich or living in abject poverty. I’m neither of those things. The more you know about how I’m doing this, the more confidence I hope to instill in others that they can do it as well.

Now, back to the subject at hand: debt. Or, more specifically, our plan for paying off a whole ton of it quickly!

In August of 2016 we hit our debt high water mark of $342,568. “Wait”! “You said $350,000”! I know, I know. I rounded up for ease of comprehension and a little dramatic effect. Close enough though, right?

We had been on income based repayment for a few months to qualify for a home loan, and we were putting all of our “extra” money at this point towards our lowest-balance, highest-interest loans. In August we refinanced all of our student loans that had interest rates of over 5.5% using So-Fi (more about refinancing in a future post). The balance of the refinanced loans was $300,976.11.

Because we’re planning on paying off these loans within the next five years (seriously), we opted for a variable rate which started at 2.94%. Since August the rate has moved a little, both up and down, and we’re currently paying $2,943.90 per month to So-Fi. If we continued to pay the minimums on this loan we’ll pay it off in 10 years.

But, we’re not planning on paying the minimums!

First, we need to deal with some of the remaining $47,500 in loans.

The largest of these loans was a “Bar Study Loan” from Discover. In March of 2011 we were out of money and the job market was still bleak. It was at that point I decided to take the Bar to avoid, or at least have a good answer to, the question “did you take/pass the bar”? We borrowed $13,000 to cover living expenses for 4 months and pay for my bar study course. This loan was at a rate in the neighborhood of 8%!

We were barely making ends meet for years after I took (and passed!) the Bar. Over the years, as this loan was in deferment, it ballooned. I just checked how much I’ve paid, and how much we currently have as our remaining balance. On this loan, to date, we’ve paid $8,581.89, and our remaining balance is $10,823.62. Meaning, by the time we’ve paid off this loan, the $13,000 we borrowed will have become about $21,000! OUCH!!!

The minimum payment on this loan is only $134.88 a month, but if we paid this loan at this rate, we’d be in the poor house forever.

This loan was technically a private loan, so we couldn’t refinance it when we consolidated our other loans with So-Fi. This loan is offender number one on our list, and we’re throwing every extra penny we have at it to pay it off as quickly as possible. Our goal is to pay off this loan before the end of 2017. However, we’re confident that as we focus all of our energy towards this loan, we’ll see the balance fall more quickly than we expect (more on outperforming expectations in a future post).

The remaining loans aren’t nearly as onerous. We’ll likely wait until after our So-Fi serviced loans are repaid before we tackle these.

In brief, these loans are:

  1. A $15,500 loan we took out to pay for my MBA at an interest rate of 5.5%. We’re currently making monthly payments on these loans of $297.70.
  2. Two small loans from undergrad with a balance of $3,682.20 at an interest rate of 1.4%. These loans aren’t even keeping pace with inflation but at some point I imagine having them around won’t be worth the annoyance they cause and we’ll pay them off. The monthly obligation is only $50.
  3. The remaining ~$7,500 is from a small loan I was able to take out during law school called a “Perkins Loan.” These loans are relatively low interest (5%) and have a few other special provisions attached which made them slightly more valuable to keep than refinance. The monthly payment on these loans is $63.64.

So, when you add all this up, the monthly minimum obligations on all our outstanding student loans is $3,494.12 for a ten-year repayment.

For many, the idea of carving $3,500 a month from their current spending may seem impossible. Though Katie and I are both in good work situations currently, we’re by no means rich. So far we’ve been able to meet our monthly obligations relatively easily, often with a fair amount to spare and apply towards our Discover loan.

How, might you ask, are we able to do this?

I’m glad you asked!

In one word: spending. Or rather, the lack thereof.

Next week I’ll give you a breakdown of our monthly budget and how we’re able to make numbers like this work (Spoiler Alert! It’s because our monthly living expenses are much less than our monthly expenses for student loans).