Tuesday, October 02, 2012
One Month of Less: Day 2: Digging out from Debt
My student loans come due this fall, and that has me thinking a little more frequently/seriously about managing debt. I'd welcome any tips (verbal or monetary). Digging out from debt is a huge task, and for me it's intimidating. Obviously, something that will not be completed in Day 2. My first step in the process is to get organized and make a plan.
I've read some about the debt snowball, David Ramsey's method, good debt and bad debt, repayment plans, refinancing, on and on and on, and come to this decision: Debt is expensive. I do not want to have it forever.
I'm not a financial planner, but this is the current method to my madness.
First, I made an Excel spreadsheet to do all the math for me. You can see my setup below (with the numbers deleted, since my mom is my main reader and I don't want to give her a stroke). If you're curious how much I actually owe, let me say that it is a lot. If I financed my student loans for 30 years, the payment would be about equal to our mortgage payment on the house we're hoping to buy. Or, if I financed them for 10 years, it would be the equivalent of buying my engagement ring. Every month. For 120 months. Does that make you feel better about yourself? Moving on.
The headings read: Account, Rate, Minimum Payment, Balance, High Balance, and % Paid off.
At the bottom, let Excel do the math for you by entering some simple formulas. To total a list of numbers, type =SUM( and then highlight the list of numbers you want totalled. Press enter.
For the percent paid off column total, the formula is =(total high balance-total remianing balance)/total high balance. You can type the cell location or click the cells where your total high balance/total remaining balance are located. For example, my formula looked like this: =(E24-D24)/E24. Select the total % paid off cell and then click on the "%" button at the top of your screen. Next, hover your mouse over the bottom right corner of the total % paid off cell until your cursor turns into a plus. Click here and drag up highlighting all the cells in the % paid off column (except the heading) to apply this formula to the whole column.
Next, enter all your information into the chart. List all the accounts you owe money on in order, with highest interest accounts at the top of the list. Remember to include credit cards, auto loans, student loans, medical bills, and your mortgage. Fill in the rest of the chart.
What debt to pay down first: The concept of a "debt snowball" is that you pay the minimum payments on all accounts, but target one debt at a time by dumping all your extra money into that payment. Once you have paid off your first target account, use the money you would have spent on that payment to attack the next. Ramsey suggests you gain momentum by beginning with targeting your smallest debt first and snowballing from there. This could be satisfying because you get to pay off an "easy" account first. However, I chose math over psychology and will be paying off my highest interest accounts first, because I'll will save more money in the long run with this method.
Some other tips for managing debt:
- Make sure you understand the repayment options available on your student loans. With my loans, I can change payment plans without a penalty. The different plans include 10 year, 30 year, income based, and graduated. I also got a rate reduction for signing up with their autopay program.
- Remember that you can call your credit card company to ask that your rate be reduced, or ask that they waive late fees. When I lost my wallet at a restaurant, my online scheduled credit card payments didn't go through and I got charged late fees, but I called in and the company waived them! I've also had it before where I just plain forgot to pay ... and they waived that one too!
- Our Realtor pointed out to us that whether you finance for 15yr or 30yr mortgages, you can pay ahead of schedule with no penalty. This means that if you finance for 30 years and make payments as if it's a 15-yr, you will only be out the slightly higher interest rate for a 30 year mortgage. However, you have more flexibility if something comes up like a holiday, an emergency, or kids.
Anyone have debt management tips they'd like to share? What about saving vs. paying down debt? Anyone imagining what my hands would look like wearing 120 engagement rings?