Author: Money Maroon

Student Loans: Debt Avalanche Method And Debt Snowball Method

Student Loans: Debt Avalanche Method And Debt Snowball Method

Money Maroon

Student Loan Reality

In 2018, about 69% of college students took out student loans and graduated with an average debt of $29,800. These students are a small part of the 45 million Americans who owe over $1.56 trillion in student loan debt.  Yes, that is not an error, $1.56 trillion and growing. Based on the numbers, it is safe to assume that graduating students are leaving undergrad with multiple loans.

In view of the above, for many Americans, the journey to financial independence goes through paying off student loans. No matter if you have federal student loans or private student loans, to get out of debt, you must attack these loans.

Paying Off Your Student Loans

While some students may qualify for student loan forgiveness (if you are using this path, please review the requirements), many others do not.  For those who do not qualify for student loan forgiveness, I recommend the use of one of the below two methods (Debt Avalanche and Debt Snowball). 

But before we discuss Debt Avalanche and Debt Snowball, your first step on this journey is to obtain the facts. How much do you owe? What interest rates are you dealing with?

Debt Avalanche

Debt Avalanche – the idea here is to focus on the debt with the highest interest rate first. Use this method in a stepwise fashion:

  • Organize your student loans in a document with the interest rates from highest to lowest on the left and the related loan total on the right
  • Begin paying off your student loans by paying the minimum + extra on the account with the highest interest rate first, while paying the minimum payment on the other loans
  • Once your first targeted account is paid off, roll the payment amount you were making to your next target account (the account having the highest interest rate – the second loan on your list). This payment is in addition to the minimum payment you were paying for this account
  • After the second account is paid off, if you have a third account, then you apply the payments from the first and second accounts to the third one. Again, this is in addition to the third account’s minimum payment
  • Rinse and repeat

The benefit of the Debt Avalanche method of debt repayment is that it minimizes the amount of interest you pay and therefore minimizes the amount you will pay over the lifetime of your loan. However, this method takes discipline, commitment and an appreciation for delayed gratification. If these characteristics do not describe you, the Debt Snowball method may be for you.

Debt Snowball

Debt Snowball – the idea here is to focus on the debt with the lowest balance first. Use this method in a stepwise fashion:

  • Organize your student loans from lowest amount to highest amount
  • Begin paying off the student loans by paying the minimum + extra on the account with the smallest balance first, while paying the minimum payment on larger balances
  • As you pay off one account, the amount that was formally directed to the first account is now added to the payment of the new lowest total. This payment is in addition to the minimum payment you were previously paying on this account
  • After the second account is paid off, if you have a third account, apply the payments from the first and second accounts to the third account. Again, this is in addition to the third account’s minimum payment
  • Rinse and repeat

The benefit of this method is that paying off the smaller student loan and making progress provides momentum and motivation that you can carry through the rest of the process. However, because this process is not focused on the interest rate, you will pay more with this method as compared to the Debt Avalanche method over the lifetime of your student loans.

Consistency And Perseverance

These two methods will aid in your journey to financial independence. Select the method that works best for you and stick to it. The journey to financial independence like all difficult journeys in life requires consistency and perseverance. Get out of student loan debt one payment at a time.

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Video Summary

Saving To Financial Independence Today

Saving To Financial Independence Today

Money Maroon

For many, the path to financial independence begins with saving. No matter if you are a high earner or earning minimum wage, saving is a primary driver of financial independence.  The earlier you begin to save, the better your financial outlook.

Start Now

When should you start saving? The answer is an obvious one, NOW! The earlier you start saving, the more time you will have for your savings to compound. If you have not heard the gospel of compounding interest, I will give you an introduction.

Compound interest is interest calculated on the initial principal and the accumulated interest of previous periods. As such, this is a cycle of earning “interest on interest.” Compound interest will make a deposit grow at a faster rate than simple interest, which is interest calculated only on the principal amount. As such, the earlier you begin, the longer your savings + interest compounds, the harder your money works for you.

Automate

This easiest way to ensure a consistent savings rate is to automate your savings. The typical employee receives a paycheck twice per month. Start saving slowly at a rate that is acceptable for you, and increase the amount over time. Further, have a portion of one or both of your paycheck automatically deposited to a savings account. By automating your savings, you never see the money. Additionally, to save takes no action on your part once automation is in place. But where should you save your money?

High Yield Saving

All saving accounts are not created equal. The average interest rate is 0.09% APY. Banks such as Bank of America has an interest rate of 0.03%. On the other hand, online banks pay a significantly higher interest rate. For example, online banks Marcus and Ally offers 2.0% APY and 1.90% APY, respectively. As you can see, having a high yield online bank account is the way to go when saving for financial independence. The higher the interest rate, the faster your savings will grow.

While saving is an important part of the journey to financial independence, unless you are a very high earner, saving alone will not get you to financial independence. Saving is a tool to be used in combination with other methods discussed here. Save, invest and grow.

Conclusion

For many, the path to financial independence begins with saving. No matter if you are a high earner or earning minimum wage, the earlier you begin to save, the better your financial outlook. Journey to financial independence today.

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Video Summary

Income and expenses

Understanding Income and Expenses

Money Maroon

On a basic level, financial independence requires an understanding of your income and expenses. Without a full understanding of what you are taking home and what you are spending, you will remain financially lost.

Asking The Questions

If you are thinking about financial independence, you have asked certain questions and have come to certain realizations. When did you realize that you may have to work the rest of your life? When did you realize that there are families who could relax and not lift a finger and their wealth would continue to grow? Upon the realization of the first thought, you will almost certainly think of the second.

Was it in school? Were you visiting a friend? Did you overhear a conversation? Were you on vacation? Was it after viewing a facebook picture? Was it following the purchase of a big-ticket item (home or vehicle)?  Were you checking your account balance, reviewing a bank statement, or looking at your paycheck? Were you paying a bill or a portion thereof? Was a purchase declined?

The Calculation

At one point or another, we all do the calculation. If my salary/yearly income after taxes is $X, and my expenses are $Y, $X-$Y = working forever.

At this point, one has a choice: (1) continue down the same path or (2) make a change. You are reading this because you want to/have made a change.

On a basic level, to change the above in your favor requires an increase in $X and/or a decrease in $Y. While this is a basic concept understood by all, the above is easier said than done.

Increasing Income

With regard to increasing $X, you may:

  • Save
  • Request a raise at work, 
  • Start your own business, 
  • Invest,
  • Begin one or more side hustles, 
  • Go back to school, or
  • Change jobs. 

Decreasing Expenses

With regard to decreasing $Y, you may:

  • Give up coffee and avocados (or whatever your daily morning pleasure may be),
  • Downsize your life (reduce the size of your home, or vehicle)
  • Bring your lunch to work, 
  • Cut back on purchases (shoe, clothing), 
  • Move closer to work, 
  • Change modes of transportation (buy a bicycle, take public transportation), 
  • Change living conditions (get a roommate, move in with mom), 
  • Paying down debt, or
  • Decrease the number of vacations/ stay at an air bnb rather than at a five star hotel.

Taking action to improve your financial situation is harder said than done, especially if your financials are impacted by your education level, children, health or student loans. The combination of any two of these will significantly impact your saving rate, and thus your retirement plans. However, the fact that you are thinking about your financial future means that you are ahead of the crowd. Continue on your journey to financial independence by understanding and tracking your income and expenses.

Conclusion

Financial independence requires an understanding of your income and expenses. Without a full understanding of what you are taking home and what you are spending, you will remain financially lost. We will tackle paths to financial independence here at JoToFI.com. Journey to early retirement and financial independence.

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Video Summary

Financial Independence: Income and Expenses
Financial Independence

Your Financial Independence

Money Maroon

Welcome to JoToFI.com. May our insight and opinions on the financial world aid your journey to financial independence. Break free from the 9-5 and journey to a life well live. Ask yourself this simple question, do you want to retire when you are in your 60s or are you willing to put in the work to retire early? By retiring early, we are not talking about siting at home and doing nothing as the world passes you by. Intsead, we are talking about taking your life back and living as you choose because you can financially afford to do so.

Start Living Your Life Today

According to Wikipedia, financial independence is the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others. In other words, financial independence is the freedom to live without the need to earn an income. Because you do not need to earn an income does not mean that you will not. If you look around the internet or here at JoToFI.com, you will find many examples of people who have retired and are earning more than they did while working a stereotypical job. Are you ready to take the next step?

Financial Independence Can Be A Reality

While financial freedom may seem impossible, it is not. Financial independence can be achieved by modifying your attitude toward money and implementing your financial plan consistently over time. Save, invest, pay down debt, live below your means and repeat. The journey may be long, and the pace of financial growth will begin slow, however, the destination is worth it.

All journeys begin with a first step. Take your first step to financial freedom today and reap the rewards tomorrow. The journey to financial independence begins now.

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