This is a guest post from Jenn of Will Save for Travel
If you’re a couple that wants to travel the world – from eating croissants in Paris, then enjoying the beaches of Hawai’i -you’re just like us! Unfortunately we have student loan debt weighing us down. In 2017 we decided we had enough of debt holding us back from the things we wanted most! These simple financial freedom tips have helped us out, and they can help you too.
Why Pay Off Your Debt & How To Get Rid Of It
Debt costs us financially and emotionally. Every day interest is added to your debt, making it bigger and bigger. Paying off your debt will help you towards financial freedom so you can do the things you love, instead of working to pay off debt.
If you’ve just been paying the minimum payment on your debt, or ignoring it all together, it’s time to put it all on the table. Literally. Sit down with your significant other and discuss ALL of your debts, even the small ones. After you see the whole
situation, you’ll need to decide what your next steps are.
There are basically two ways to pay off debt: the debt avalanche and the debt snowball.
The Debt Avalanche
The debt avalanche makes the most sense mathematically. List all your debts from highest to lowest with their interest rates. Figure out which one is costing you the most interest. Let’s say you have three debts to pay off, one student loan and 2 credit cards. Debt A is your student loan that sits at $20,000 and 6% interest. Debt B a credit card is $5000 at 19.99% interest and Debt C a smaller credit card balance of $1000 at 19.99% interest.
|Debt A – Student Loan||Debt B – Credit Card #1||Debt C- Credit Card #2|
|Interest Charged Per Day||$3.29||$2.74||$0.55|
To calculate the daily interest charge:
Principal balance X (annual interest rate / days in a year)
$20,000 X ( 6% / 365 )
$20,000 X 0.00016438
For the debt avalanche to work, you would pay the minimum balance on every debt and make any extra payments on the debt that is costing you the most money. When debt A is paid off, start paying off debt B, until that is gone and then debt C. When one debt is paid off, whatever the minimum payment was, make that payment on the next debt monthly, this will speed up the process and reduce the amount of interest you’ll pay overall!
The Debt Snowball
The debt snowball method was popularized by Dave Ramsey, and works on a more emotional level. You list your debts from lowest balance to highest, and pay off the lowest balance first, while still making minimum payments on the others. In the
example above you’d pay Debt C, then B then A. The idea is that by getting a quick “win” by getting rid of a debt you’ll be more motivated to keep going. Paying off 3 debts seems more manageable when you’ll be down to 2 fairly quickly. You will pay more interest in the long run, but this is the best method if you think you might give up easily.
Budgeting For Debt
No matter which you choose, the avalanche or the snowball, you’ll need to make more than the minimum payment on your debt. This may involve reworking your budget in order to have some extra money! I definitely believe in making a budget
every month. I used to try to make a budget that would work in any situation but it just won’t work!
At the beginning of every month my husband and I sit down and talk about what we’ll need to buy that month – gifts, clothes, or if the car needs an oil change, etc. – and fill out the budgeting worksheet I made. If you get a regular salary you’ll know how much money you have to work with, if you’re like us, and your income varies, we make an income goal that’s realistic. At the end of the month if we have money leftover I put that directly onto the debt to pay it off even faster!
The most important part about budgeting is it has to be balanced, meaning you can’t spend more then you make, and one category shouldn’t be taking up your whole budget.
On average your budget should break down like this:
- Housing 25-35%
- Transportation 10-15%
- Utilities 5-10%
- Food 5-15%
- Debt 0-15%
- Saving 10-15%
- All else 25%
Why You Need To Save While You’re Paying Off Debt
You might think the best thing to do is throw all your money at your debt, but by putting off investing, potentially for years, you are significantly decreasing the amount of compound interest you will earn over time. I would recommend investing 5-10% of your income while you’re paying off debt, and then bump it up to 15-20% after your debt is gone. Waiting 5 years could mean a loss of hundreds of thousands of dollars by the time you are ready to retire.
How To Do This As A Couple
As a couple it’s so important to work together. We made a goal to pay off our debt in two years or less (hopefully less!) and are working together every month to create a budget. We talk about our priorities and where we tend to overspend. One of the things we do is dream about what we’ll do with all that extra cash once we’re done using it to pay off debt!
The Ultimate Goal: Financial Freedom
Financial freedom is being able to enjoy life without worrying about money. You don’t have debt, you have adequate money set aside for emergencies and your retirement plan is on track. Maybe you have passive income so you don’t have to work; maybe you become a digital nomad and work from wherever you are. Or you can change jobs to do something you love. Financial freedom looks different for everyone, but the goal is the same: no money stress.
About the Author: Jenn Neilson is a personal finance and travel blogger at https://willsavefortravel.com, sharing fun travel destinations and helping people have their cake and eat it too by being financially free you’ll have more money for the things you love to do.