In our “Money Mic” series, we hand over the podium to someone with a strong opinion on a financial topic. These are their views, not ours, but we welcome your responses. Today, Senior Editor Laura Shin tells us how she got her student loans and credit cards paid off, and how it felt.
In May of 2008, I graduated from journalism school with a master of arts, new friends from around the world ... and a decade's worth of student loan debt.
I was lucky in that my student loan was, due to a hefty scholarship, “just” $20,500. I was lucky in that my parents paid for my much more expensive undergraduate education and that they paid my living expenses while I was in grad school. I was lucky in many ways, but in one way I was deeply unlucky: I had somehow managed to reach my mid-30s without having a clue how to manage my finances.
My journey to the final loan payment I made in February was filled with so much fear, shame and, above all, anxiety, that when my colleagues at LearnVest suggested I write this piece, I didn’t want to.
I didn’t want the world to know that I’d spent the first two years of the loan payments in a fog of confusion about how to get rid of this debt, or that I’d racked up almost $8,000 in credit card debt, and I had to pay that off too, or that the way I got rid of the debt was by freakishly and obsessively tracking how I spent every dollar. I didn’t want to reveal these things to future editors or to people in the well-to-do, achievement-oriented communities in which I grew up.
But given how many ways I went wrong on my way to becoming debt-free, I thought my own tale of “how I did it”—that is, paid off more than $20,000 in student loan debt within three-and-a-half years—could help LearnVesters and the 37 million Americans with student loan debt get there too.
How I Made a Mess of My Finances
My predicament had nothing to do with bad parenting: My sister, who was raised by the same people, has always handled money well. Purely because of my here-and-now personality, until about two years ago, my basic philosophy toward money was, “Have it, spend it.” I also had no concept of a separation between “I want that” and “I’ll get that."
As recently as April 2010, I didn’t have a savings account. When I was in college, I remember that my bank told me to get a savings and a checking account, but I never fully understood why savings even existed since, if you actually wanted to use the money, you needed to take it from checking. So when I got my first job in New York, I opened only a checking account and put “all” my money in there. I put “all” in quotes because I lived paycheck to paycheck, not thinking there might be a time when money wouldn't come every two weeks.
As recently as April 2010, I didn’t have a savings account.
So in spring 2010, two years after graduating, I had a good job and made good money for a writer, but I was digging myself a credit card hole that would, by September, reach $7,500. (The culprits: Gilt Groupe and New York City boutique shopping, a three-week trip to India, constant dinners and drinks out with friends, my book addiction and God knows what else.)
See why I hesitated to tell you—and the world—what a money mess I was? But if someone as far gone as I was can pull her finances together, then so can you.
When Things Started to Turn Around
In April 2010, when I was $6,500 in credit card debt and $18,432 in student loan debt, I read an article in The New York Times about female-focused personal finance sites. (That was how I got hooked on LearnVest, long before I worked here.) In September, after my trip to India, I took a personal finance workshop, where I learned about this fabulous tool. It was called a budget.
It worked just like the LearnVest Budgeting Tool. You take your monthly income, subtract your monthly expenses such as rent, utilities, etc. Then you do this magical thing: You put some money in savings and keep it there to watch it grow. Next, you make a payment toward your debt or, in my case, payments since I had the student loan and credit cards. As for the rest? That’s what you live on.
I figured out that, depending on how fast I wanted to pay my loan and amass savings, I had to live on between $190 and $240 per week. In cash.
Planning My Spending
I immediately stopped all credit card spending except for items I could only buy online. I unsubscribed from Gilt. I stopped getting drinks almost every night. I stopped buying every single thing that looked good at the grocery and the farmers' market (I love to cook) and instead started planning out my meals so I only bought what I needed for that week. I even started looking up restaurant menus online and choosing my meal before going out so I knew how much I would spend.
In essence, I started “planning” all my spending.
This is how it worked: I took out the amount I had to spend that week from the ATM, and if I had to buy something with my credit card online, I immediately returned that same amount in cash back to my checking account. I started a Google spreadsheet that tracked every single dollar I spent so if I spent over my limit one week, I knew how much less to spend the next. Similarly, if I underspent one week, then the following week, I knew my how much bigger my budget was.
The sheet also tracked money I hadn't even spent yet: As soon as I made plans for the next week or the next month, I would mark on that future day a dollar estimate of how much that activity might cost, i.e. "Birthday dinner, $50," so that when I got to that week, I already knew I had that much less for other spending. It also kept me, when the night finally arrived, from being tempted to have another drink I hadn’t planned on.
How My Financial Picture—and Life—Started to Change
Not everyone in debt may need to be as obsessive as I was, but since I was trying to undo more than a decade-long habit of buying myself whatever I wanted whenever I wanted, I needed to be hyper-vigilant.
I am not going to lie: Living on this budget had an impact on my social life. But I had fallen in with an international crowd at grad school, so coincidentally, at the same time I was trying to go out less, the last of my grad school friends moved back to their home countries, so my social life naturally became less active.
I had already made some balance transfers so my credit card debt was no longer accruing interest, but for one card, the 0% period was going to end in January 2011, and I didn’t think I would be able to pay it off by then. I was getting heart palpitations just thinking about interest growing on my already sizable debt.
That Christmas, I got a gift from my parents—several thousand dollars they said I should put toward my student loan debt. I’m sorry, Mom and Dad, but the truth is, I used it to help pay off that credit card. (As I type this, tears actually spring up because it really hurts me to tell the world that I lied to them.)
But thanks to that gift and the five months I had spent being really diligent about my budget, by February 2011, I was free of my credit card debt. I had even saved enough money to take a trip to Mexico with 15 of my grad school friends.
Finally Paying It Off
I began to use plastic again, but I stuck to my weekly budget—and I ramped up the student loan payments. By this point, my student loan debt was just over $15,000.
You're Not Alone
Want to talk to other readers trying to pay off their loans? Head to the Student Loan Debt conversation in LV Discussions. SHARE
Around the same time, I got a new job—at LearnVest—and increased my freelance income with a new regular writing gig. (Increasing your income, whether through a raise or side income, is an under-sung way of helping pay down debt.)
I also started learning more about personal finance, and realizing, not only did I need to pay off my debt, I needed to build an emergency fund. A CFP I worked with counseled me not to worry about my student loan since the interest rate was a “low” 6.8%. She suggested I stop the loan payments, build my emergency cushion, then pay the loan off.
I tried and watched with pride as my emergency fund grew. But I felt dismay every time I looked at the student loan balance. Before meeting with her, the debt had fallen below $10,000, but by the time winter arrived, the interest, which accrued every day, pushed it above $10,000. Again.
Over Christmas, I made a decision: When I got my bonus in late January, I immediately sent a payment in the same amount to the lender. Then I took a massive amount out of my savings account, essentially decimating my emergency fund. The February day it hit my checking account, I quietly logged onto the student loan website while at work and made my final payment.
But I'd been so traumatized by the experience of seeing the interest increase my debt on a daily basis, I still didn't quite believe my saga was over. It wasn't until a full month passed and I received a paper letter from the lender showing that I owed nothing, that I finally—finally—breathed a full sigh of relief.
Why are experts calling the current student loan situation an "Impending economic crisis"? In our infographic, we take a closer look at the numbers. See where you fit in.
Editor's Note, April 17, 2012: Since publishing this story, a number of you have commented on the gift my parents gave me, and many of you implied that they paid off my debt. While I appreciate everything my parents have ever given me, from that gift all the way down to love, I would like to emphasize that their gift was a small fraction of my debt. If I hadn't received that gift, I still would have paid off the debt, just a few months later.
What really enabled me to pay my loans off was 1. learning to live beneath my means, 2. getting a budget, 3. sticking to that budget day in and day out, and 4. earning more. But even without earning more, I still would have paid off the loans, just a bit later than I did. If I hadn't started living below my means, my parents' gift would have done nothing to get me out of debt and I would still be in it today. If you're in debt and are looking at how you can get out of it, the key for you, as it was for me, will be to live below your means, get a budget and stick to your budget--and if you can find extra work, to earn more.
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