This is a multi-part post series called My Story, where I talk about how I got to where I am today through the lens of finances. Make sure you get the full story by starting from the beginning.
Last time, I talked about how I calculated my net worth for the first time in The Great Audit. And I was not happy to figure out I had a -$82,006.23 net worth. In this installment of the My Story series, I will go through the steps I took to get to positive net worth in less than two years.
Just before I started my full time job, I had completed an audit of all my finances. My college education had left me with $103,528.00 in student loans. I had also purchased a new car, and was paying off a $10,708.15 loan. I used my credit card for monthly expenses, but I managed it well and did not have any credit card debt.
The assets I had built over my short career were split among several categories. I had a RothIRA and 401k which were my retirement funds ($8,775.42). A brokerage account was my introduction into investing outside of retirement ($1,134.63). I had a high yield savings account that housed my emergency fund, which I cut dramatically in preparation to paying off some of my student loans ($1,371.15). The rest of my emergency fund had been transferred to my main checking account in preparation of the payment ($13,149.39).
Overall, I had $32,843.25 in assets and $114,849.48 in liabilities.
LONG ROAD TO POSITIVE NET WORTH
I wanted to learn how to pay off my debt as quickly as possible. I knew my net worth was the direct result of my decisions, but I hated feeling so trapped. In my quest to eliminate my debt, I found the financial independence and personal finance community. Finally, I had found a community that shared my ideals: Debt isn’t normal. There are ways to pay off loans that don’t involve being in debt for decades.
I took the advice of every blogger I could find, and combined it with my previous knowledge of personal finance. I optimized the advice and developed a plan. The plan was to reach positive net worth in two years. Instead, I reached it in 21 months.
The bar chart below illustrates my journey so far. Liabilities are accumulated below the $0 mark on the vertical axis. Assets are above the $0 mark on the vertical axis. Each time interval records my net worth based on an end of month convention.
So, how did I go from -$82,006.23 to positive net worth in less than two years? Here is exactly how I did it…
1. I MADE A PLAN
From the moment I saw where my financial decisions had brought me, I was determined to change my outlook. I decided that I had to get out of debt. And once I was out of debt, I would stay out of it. I knew no one was going to magically save me or pay the debt for me. The only way out was my own hard work.
I had originally planned to pay everything off in two years, but I had forgotten about two very important financial concepts: interest and taxes. In addition to paying off the principle of my loans, I had to battle daily accumulating interest. The salary I was promised wasn’t going to be what hit my checking account. I had to consider the tax withholding taken from each and every paycheck I earned. With these two factors taken into account, I modified my plan to reach positive net worth in two years and debt freedom in three.
I also fully committed to the plan. All spending was made with the goal in mind. My loans came first, and all other spending second. I decided becoming debt free was worth three years of my discretionary spending budget.
2. I PUT MY EXISTING ASSETS TO WORK
Besides my emergency fund, any assets earning less than the interest rate on my loans were used to pay off the loans.
I had a one semester emergency fund during college. If the financial aid and scholarships that allowed me to attend college were no longer available to me, I could tap into the emergency fund to pay for the current semester while I planned for the next. I no longer needed the fund as I had graduated. It was also in a high yield savings account that was earning only 1%. So, instead of keeping it, I put over $10,000 towards paying off the student loans.
As a child, my family had given me bonds as birthday and Christmas gifts when they could. I had thought these added up to maybe $2,000 at most. My mother kept and managed them since I started receiving them as a toddler. (Apparently bonds should not be used as coloring paper.) During The Great Audit, I had discovered I actually had over $8,000 in bonds. Not all of the bonds had matured and their rates varied. So, my uncle and I analyzed each one to see which ones should be kept and which should go to the loans. I eventually put about $5,000 of the bonds directly to the loans.
3. I CONSOLIDATED AND REFINANCED MY STUDENT LOANS
I knew as soon as I graduated that I wanted to consolidate and refinance the student loans. Now that I was going to be earning a salary of my own and I had an excellent credit history, I wanted to take my mother’s name off of all the Parent Plus loans. I had calculated how much of a monthly payment I could afford after receiving a few paychecks and crafting my budget. I got quotes from multiple servicers with two goals in mind: put all the loans under my name only, and decrease my interest.
My original servicer had estimated it would take me 25 years to pay off all the loans. There was no way I was going to wait that long and pay that much interest. I completed a break even analysis to compute what interest rate I would need to match or beat my current plan, considering the amount I wanted to pay towards the loans each month. I ended up finding a plan with my current servicer that reduced my interest rate, and dramatically reduced my payoff period to just five years.
My plan is still to pay it all off in three. But loan terms are usually in five year increments. The longer term also gives me added flexibility in the event anything unexpected happens during my three year payoff plan.
4. I PAID OFF DEBT EFFICIENTLY
In addition to using assets to bring down my student loan principle, I am paying off my debt efficiently. I am paying the student loans down first. The student loans have the highest interest rate, and therefore are earning the most daily interest. I am also paying much more than the minimum payment towards the loans, even with the reduced payoff period. Finally, I am making payments on on my debt as soon as I receive the money. I have established an automatic withdrawal from my checking account. Money is applied towards the loans as soon as payday hits.
Each of these actions reduces the daily interest accumulation, the overall interest I will pay on the loan, and the overall payoff period. I could have used my initial semester emergency fund to pay off my car right away, but I save more interest in the long run by paying off the student loans first.
5. ALL MY CASH WINDFALLS WENT TOWARDS PAYING OFF DEBT
I decided at the beginning of this journey that getting out of debt was more important than anything else. Paying off debt efficiently means putting your assets where they will work best. Whenever I received a “windfall” of cash, I immediately put the funds towards paying off the debt. Any bonus, tax refund, or overtime I earned brought me closer to my goal. For example, some overtime I recently worked helped me reach my goal early.
I will also mention that lifestyle inflation is not an option under my plan. Any raises I earn at work are put towards my loans. I am considering them another form of a cash windfall while I pay off the loans.
6. I KEPT MY COST OF LIVING LOW
As you have probably noted throughout the My Story series, my mother has made my journey much easier. She was the one to manage important financial milestones. And she helped me make decisions that fostered my financial future. I am also very well aware that her decision to allow me to live at home rent free is part of the reason I am where I am today financially.
Our “deal” started in college when I asked to live at home while pursuing my degree. She agreed to let me live at home rent free as long as I kept my grades up. The deal was renewed for graduate school under the same conditions. When I told her my debt payoff plan, she offered to extend our agreement.
I have told her I will pay for rent after my debts are paid, and while I save for a down-payment on a house. My mother has often told me that she loves that I still live at home. (We get along famously and often tell each other that we are each other’s clone. We share many of the same likes and dislikes.) Still, I often feel like I am taking advantage of her, despite her always being the one to initiate the extension of the deal.
I don’t plan to live at home forever. Having a home of my own and my own space is something I have wanted for a (very) long time. However, keeping my cost of living low is essential to meeting my goals. Paying off debt is more important to me than having an independent space right now.
7. I CONTROLLED MY DISCRETIONARY SPENDING
This aggressive of a payment schedule involves sacrifice. Every dollar I spend is with the loans in mind…and it is exhausting at times.
I have read multiple posts in the financial community that say occasional spending on yourself is okay…but I still feel like I shouldn’t be spending a cent on myself while in this much debt. I have occasionally felt physically sick when I see a purchase hit my credit card. There was one time I actually took part of a purchase back because of the buyer’s remorse.
I have gotten more used to the feeling, especially since I set up my budget to include a discretionary spending category. I pay for everything else, including the extra loan payments, first. Anything left in my checking account is free for me to spend without guilt. This is usually $50 every paycheck.
8. I SAVED & INVESTED IN MY RETIREMENT
I practically liquidated my emergency fund at the beginning of my journey. Looking back, I should have kept at least a three month buffer, or at least taken advantage of my grace period before refinancing my loans. I have slowly been re-filling the fund. Luckily I have never had to use it.
And the most controversial aspect of my plan: I am saving for retirement while paying off debt. This must be the most debated question I have encountered in the financial community. Personally, I think your future is just as important as your present. Compounding interest is incredible, and you need to take advantage of it as soon as possible.
I max out my RothIRA contribution and contribute to my 401k. My employer makes a company match on the 401k, and automatically increases your contribution by 1% every year until you reach a 10% contribution. I started out at 6%, the minimum to reach the company match. This year I am contributing 8%.
I will admit that part of the reason I reached my goal early is because of the recent bump in the market. If a major recession does hit in the near future, I could dip back into negative net worth. For now, I am just going to continue to make my regular contributions. You can’t time the market.
PURSUING THE NEXT FINANCIAL GOAL
It felt like a weight was lifted off me when I figured out I had positive net worth. Knowing that I could liquidate everything I have and pay off all my debts is so freeing. Not that I would ever want to do that, but it is an option.
My next goal is to finish paying off my debt, and I am extremely confident I will be able to do this. After feeling what it was like to reach positive net worth, I cannot wait to feel what it is like to be debt free.
What is a financial goal you are working towards? How are you doing it? If you have already reached your goal, tell me how you felt when you met that milestone in the comments!