Category Archives: Debt

Financial Planning for New College Graduates

You did it.  You earned your college degree.  Congratulations on this major life accomplishment.

Hopefully, you have a job lined-up in your field of study.  If not, don’t get overwhelmed.  Start applying and interviewing.   Before you know it, you will be working, growing your career, and earning a paycheck.

The good times are not over, but it is time to enter the real world.  By starting this next chapter of your life on the right track, you will be able to better ensure a sound financial future.  Right now, time is on your side.

As a new college graduate, I am sure the last thing on your mind is retirement.  Retirement might be many decades away, but the actions you take in the coming years will shape your financial future.  Below are the key steps that will help you to establish a plan that will guild you on your journey toward financial independence.

Step 1 – Save 15% of your salary.  Start this process of saving with your first paycheck.  It might sound like a high percentage, but this is just the first step.

Step 2 – Sign up for your employer’s retirement savings plan.  If you work in the for-profit universe, it is called know as a 401K.  If you work at a not-for-profit organization, it is called a 403B.  If you work for the Federal Government, it is a Thrift Savings Plan (TSP).  On your first day of work, go to the Human Resources office and sign up to contribute 15% of your salary to their retirement savings plan.  Increase the amount that you contribute to your retirement plan by 1% every year.

Step 3 – If possible, only Invest using low-cost mutual funds and index funds.  Avoid trying to pick individual stocks or trying to time the market.  Identify an asset allocation that best matches your age and risk tolerance.  Historically stocks have produced higher returns than bonds. Stocks, however, are more volatile.  On the other hand, bonds are less volatile but do not keep up well with inflation.  Establish a plan that uses both stocks for growing your wealth and bonds to retain your wealth during bad economic times.

Step 4 – Establish a plan to pay off your student loan debt.  Don’t fall victim to the mindset of the masses when it comes to student loans.  You attended college and earned a degree.  Hopefully, you paid attention in class and are ready to put your degree to work for you as an employee.  You attended class, possibly lived in a dorm, and most likely ate your meals in the cafeteria.  It is time to pay back what you owe.  Avoid self-pity and feelings of entitlement.  Those ill feelings will just hold you back on many levels.

Step 5 – Get a part-time job.  For those who have the entrepreneurial spirit, start a side business.  You are young and full of energy.  Now is the time for you to be working and building a solid financial foundation.  Getting a part-time job will allow you to earn extra money.  Working a couple of evenings during the week and picking up some hours on the weekend will greatly help to increase your earnings. That extra money can be used to pay off your student loans, establish an emergency fund, or open a Roth IRA.

Step 6 – Put off attending graduate school.  Unless you work in an industry that requires a graduate degree to obtain entry-level employment, put off attending for a couple of years.  Find an employer who offers tuition assistance as part of their compensation package.  That will allow you to work in the day and take graduate classes in the evening or on the weekend.

Step 7 – Write a financial plan.  A financial plan is a map.  It allows you to identify where you are at from a financial standpoint.  A financial plan is also a map that can be used as a guide to where you want to be in the future.  It helps to have a guide than to go it alone.  Financial planning is too important of a topic to not have a plan and just fly by the seat of your pants.  A financial plan is a living document that needs to be reviewed annually.  The great feature of a financial plan is that it can be amended as your plans and goals change.

Step 8 – Establish a budget.  Calculate how much you will earn every month from your job.  Write out your budget based on percentages.  Know how much of your salary will go towards housing, food, entertainment, and every other expense.  Be sure to write a budget that is practical in terms of expenses and prudent in terms of savings. In other words, always try to reduce expenses and to increase savings.

Step 9 – Keep your transportation costs low.  Transportation costs are simply an expense in your budget.  Use your budget as a guide to determine how much you can afford to spend on a car.  Keep your transportation costs at 11% of your budget.  Your budget will determine if you can afford a fancy new car or a used economy model.  Try to keep in mind that a car does not determine your identity.  It is just what enables you to travel from Point A to Point B in a timely manner.

Step 10 – Keep your housing costs as low as possible.  If you are renting, try to find a roommate or two.  Having a few roommates greatly reduces the amount you will have to pay for rent every month.  As you advance in your career and if you have a family, you might consider buying a house.  Use your budget as a guide to determine how much house you can afford.

Step 11 – Be sure that you are properly insured.  If you are under the age of 26, you should be able to remain on your parent’s health insurance.  If not, ask your employer about when you are eligible for coverage under their plan.  You are young and most likely healthy, but one trip to the emergency room could ruin you financially if you do not have proper health insurance.  Also, be sure that you have the proper amount of insurance for your car, home or apartment, and life insurance if you have a spouse or children.

Step 12 – Avoid Debt. Keep your debt to a minimum.  Avoid payday loans and credit card debt at all costs.  Having a high credit score is important because it will allow you to get the most favorable interest rates if you do have to borrow money.  To ensure you do not take on too much debt, monitor your debt with the Debt-To-Income Ratio.  Always try to keep your DTI under 16% and never exceed 36%.  In life, sometimes debt is unavoidable.  Most people will have to take out a mortgage to purchase a house.  Some people will have to take out a car loan in order to have a means of transportation.  When doing so, use both your budget and DTI to determine how much you can safely afford.

Conclusion

There you have it.  You are finished with college and ready to take on the world.  Don’t put off applying these steps.  You can start implementing some of these steps on your first day of employment.  If you start out with a well-established plan, you will be well ahead of your peers.  Use these steps as a guide and you will surely become a financial success story.

Do you agree with these suggestions?  Do you think that anything is missing from this plan?  What would you add or do differently?

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Debt: Reaching Step Zero

The first step in correcting a problem is to admit that there is a problem.  Prior to admitting that there is a problem, there is another step.  That is when a person reaches their breaking point and cannot go on living the way that they are living.  That is often referred to as step zero.  Step zero is when a person says to themselves “this crap has to stop”.  It is the breaking point.  It is the point where a person becomes willing to take corrective action.  They become willing to try a different approach of living because of a psychic change.

Have you reached the point where you realized that your way of managing money is not working?  Are you spending more than you earn?  Does all of your earnings go towards paying bills?  Do you have creditors calling you who want to be paid?  Do you have to borrow money when an emergency occurs?  Do you find yourself spending money that you do not have in order to keep up with your friends, neighbors, or relatives?  Do you feel broke even though you work hard and earn a good income?  Do you contribute any money to your retirement savings accounts?

Have you reached step zero? Do you want to change how you manage your finances?  Do you want to take control of your life?  Do you want to break away from the bondage of debt?  Are you at a point where you are totally dissatisfied with how you are living because of debt?

The good news is that there is hope.  It can get better.  It is all up to you.  It is based on your willingness to change.

Now that you have admitted that your way of managing your finances does not work, how should you start the mending process?

Measuring the Damage

Start by measuring the damage that you created.  Before you can move forward, do an analysis of what you owe.  My favorite tool to assess debt is the debt-to-income ratio.

To calculate your Debt-to-Income Ratio, see the formula below:

Debt-to-Income Ratio = Monthly Debt Payments/Monthly Income x 100

Example: $1000 in Monthly Debt Payments/$3000 in Monthly Income x 100 = DTI of 33%

What is considered a bad DTI Ratio?

If your DTI Ratio is higher than 36%, you are in the danger zone.  The higher your DTI Ratio is, the less money you have to cover your living expenses.  A healthy DTI Ratio is less than 16%.

Where to Start

After you know your DTI Ratio, it is time to start paying down that debt.  Start with paying off all of your bad debt.  Pay off all of your payday loans, credit cards, and auto loans.  Next, start to pay down your student loans, mortgage, and business loans if they exist.

Stop the Bleeding

Stop buying stuff you do not need on credit.  Identify what you need and only pay cash for those needs.  A few examples of needs are food, clothing, medical supplies, transportation costs, and housing expenses. Wants are fancy cell phones, cable TV, designer clothes, eating at restaurants, or any other expense that is not required to live.

Income

If you are part of a dual-income household, learn to live off of one salary.  Use the higher of the two salaries to pay for all of the household living expenses.  Use the lower of the two salaries to pay down debt.  After your debt is paid off, you can start to focus on saving money.

Get a second job.  Find a side gig to earn money to pay down debt.  If you spend your free time working, you will be less likely to spend money on stuff you do not need.

Create a budget.  A budget is a plan that allows you to break down where your earnings will be allocated based on a percentage.  For example, 25% for housing, 11% for transportation, 20% to pay off bad debts.  Once you have a budget established, all you need to do is follow it.

Recreation

Even though you have debt, you still have to live your life and have fun.  Find ways to enjoy what your local community has to offer.  Instead of going to high priced movies or amusement parks, go to local parks or free museums.  Instead of going to a high priced gym, exercise outside by walking.  Instead of going on a luxurious vacation, take a staycation.

Guilt & Shame

There is no use in feeling bad about having debt.  You have identified the problem.  Now is the time to move ahead and to make positive changes.  Having ill feelings is not a solution.

Focus on the positive and on everything that is possible once your debt is under control.  Try to take small steps and to monitor your progress.  Don’t strive for perfection.  If you have a slip, don’t beat yourself up.  Pick yourself back up and keep striving for progress.

Conclusion

Debt is similar to hiking.  Once you walk 5 miles into the woods, you have to walk 5 miles to get out.  Now that you have decided that a change is needed, it is up to you.  At this point, there is no use in looking for someone or something to blame for your debt.  You cannot change the past.  You can just pick up what is left and apply a solution.  If you learn from the situation, it was not a waste.  As you move forward, you can also use it to help other people who are struggling with their own financial issues.

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Financial Unmanageability Transcends Money

When it comes to finding ways to better manage your finances, there are unlimited resources.  There are many great books, blogs, forums, websites, and apps.  There is not a shortage of information, tools, or even professional services.  If a person wants to make improvements when it comes to spending less, paying down debt, saving more of their earnings, or learning to invest, they could find out how to do it in a matter of minutes by doing a few simple online searches.

If the solution to finding ways to improve your financial situation is so readily available, why are so many people struggling?  Yes, we can blame the marketers for always trying to sell the newest gadget.  That excuse, however, only carries so much weight.  Consumers are more educated than ever and many tune ads out.

What if the problem is more pervasive?  What if the problem is beyond simple behavior modification? What if the problem is based on unmanageability?  Yes, the inability to have mastery over your life.

If the problem is based in unmanageability, there is not a blog or app to solve the problem.  If your life is truly unmanageable, trying to get a better handle on your financial shortcomings is just treating a symptom.  To gain control of your life, it will take a little more than spending less and saving more.

Denial

Nobody truly wants to admit their life is unmanageable.  Just like nobody wants to admit they drink, spend, eat, or gamble too much.  It is natural for many people to think, I don’t have an issue with my finances and then go spend more money.  It is common behavior for people who have addiction problems or a spiritual malady to deny what the problem is.  The thought process is like a broken record that skips the same verse over and over.  I do not have a problem with my finances – go spend more money.

Resentment

To resent is to keep going back to a negative feeling.  Instead of feeling and processing those bad or negative feelings, you spend money.  Resentment is not always based on harboring ill feeling towards someone who you believe wronged you in some way.  Resentment can also be rooted in harboring ill feelings towards someone who did exactly what you expected them to do.  The problem was that you were still not satisfied.  They were unable to fill that void that exists within you.  To find temporary relief, you continue to spend and try to fill that void with an external fix.  Unfortunately, it does not last.  After you exhale out and feel relief, you almost immediately inhale the resentment back in.

It is All About You

When you live an unmanageable life, there will always be a conflict with self.  It is all about you.  You cannot be of real use to others.  Sure, you might be physically present in their life, but are you truly living in the moment?  Or are you just physically there, but mentally bound to your troubles?  When your self-centered thoughts and feelings are the focus of your existence, it is difficult to make meaningful connections with others.

Anxiety 

You are not a bad person.  You might even do nice things for others.  You believe that you are thoughtful and caring.  You spend money on the people you care about and on those who you want to care about you. Externally that all might be true, but aren’t you just doing all those things to find more relief and to feel better about your current state of unmanageability?

Do you live in fear?  Do you spend more than you earn and panic when the bills arrive?  Do you lay awake at night and worry that you will never be able to get out from under all the debt you are in?  Do you see retirement as a possible option for others, but something that you would never be able to afford?  Do you obsess over your finances in one thought, but follow it up with more spending that pushes you further away from having healthy finances?  Do you feel hopeless?

Is this fear leading to other health concerns?  Is it leading to weight gain or panic attacks?  Have you gone to see your doctor because you feel overwhelmed?  Did your doctor put you on meds to take the edge off and to help you cope?

There is a Solution

Yes, getting your finances in order is great, but you first need to get your mind right.  I am not a therapist.  I am just a guy with a personal finance blog.  If you are honesty suffering from the symptoms that I listed above, you should seek outside help.  Find out if your health insurance covers visits to a psychologist without a referral from your primary care doctor.  If not, ask your doctor for a referral to one that they recommend.  You might have to pay a low co-pay, but it will be worth it.

There are also 12-step programs.  As I stated earlier, your spending might be just a symptom of a larger issue.  There are 12-step programs for spending, gambling, drinking, and just about any other type of obsessive disease.  It is up to you to dig deeper and decide if you think a 12-step solution would be a good fit for you.

Conclusion

Don’t beat yourself up.  Don’t wallow in guilt, shame, remorse, or any other negative feeling.  The past is the past.  It is time to move on.  Pick up the pieces.  You are not a bad person.  You might have made poor decisions and you might suffer from the disease of addiction.  After you put your own house back in order, you can make amends to those you feel you might have harmed including yourself.

There is hope.  There is also help available.  It is now up to you to find the right help that will be a catalyst for positive change.

Once you get your mind right, great things will start to happen in your life.  Not only will your financial situation improve, but every area of your life will get better.  How could it not, you will be moving away from the problem and in the solution.

You will be able to better accept people and situations as they are.  You will be able to let go of the past. You will better assimilate into the mainstream of life.  You will become more useful to the people around you.  You will finally find the peace that you have been searching for all along.

As a bonus, you should be able to better budget and save money.  Your whole life will become more manageable.  Having a few more bucks in the bank will just make life more enjoyable.

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Saving: The Foundation for Financial Success

Is your goal to reach financial independence?  Do you want to retire early?  If you have an ambitious financial goal, there are many things that you must do correctly.  For example, you need to always be working on improving your ability to earn more money.  You must live below your means.  You must invest wisely in stocks and bonds.  It is also important to take advantage of tax-deferred accounts like a 401K or IRA.  Yes, all those steps are important, but in my experience, having a high savings rate is the most important step to becoming financially successful.

I see savings as the foundation for being financially successful.  Without savings, there is no money to invest.  It is the foundation for one’s financial house to be built upon.  For a house to last, it needs a solid foundation.  If you skimp on the sand or mortar, the foundation will not be suitable to support the structure that you are dreaming about constructing.  If you are not saving enough money, you will not have enough to support a high quality of life when you retire and draw from your savings to pay your expenses.

Savings Rate

This will probably not come as a big surprise, but American’s are not saving enough.  The current national savings rate is just over 5%.  As recent as the 1980’s, the saving rate in the United States was over 10%.  If your goal is reaching financial independence and ultimately early retirement, a savings rate of 5% is not enough.  Even with compound interest, it would simply take too long to grow into a substantial enough nest egg to cover your living expenses.

How Much is Enough

In the classic personal finance book The Richest Man in Babylon, a savings rate of 10% is suggested.  I feel 10% is the bare minimum that the average American should be saving.  I do not think that is nearly enough if your goal is early retirement.  It might be suitable if your goal is to reach financial independence by age 65, but not if you want to retire at age 50.

If you are just entering the workforce, start by saving 15% of your salary.  Work on increasing that rate every year.  Try to increase it by at least 1% annually.  Increase it with every annual raise or bonus.

Spending

Spending is the opposite of savings.  Spending is the enemy of wealth creation.  Spending leads to lifestyle creep.  The more stuff you buy, the more stuff you will want.  There is always something new or better than what you own.

Marketers earn a living by trying to convince you to buy what they are selling.  When you see that your friends or neighbors have the newest products, you will want to upgrade your stuff too.  This is a vicious cycle without an end.

The secret to winning this game is to not play.  Every dollar that you spend puts you one dollar further away from financial independence.  On the other hand, every dollar you save goes towards buying your freedom.

Debt

Debt is created when you spend more than you earn.  Some debt is not as bad as other debt.  Student loans provide you with the funds to get an education to obtain the skills to earn a higher salary.  Taking out a mortgage enables most Americans to be homeowners.  You still must use extreme caution before you incur any type of debt.

Bad debt comes in the form of credit cards, auto loans, and payday loans.  All debt, however, prevents you from saving as much as you could be saving.  When you take on excessive debt, you become a slave to your creditor.  It is possible, but difficult to escape from the bondage of debt once you start to slide down that slippery slope.

Why Save So Much

Once you take on the mindset of a saver, you will never be a spender.  Personal Capital is a free online platform that is great for tracking savings.  That feeling of accomplishment of watching your savings grow is far greater than any new product that you can buy.

After you become a saver, you might notice a mental twist occur.  Once you reach a point in life when you could afford luxury cars and upgrade to a larger house, you will realize that you do not want to waste your money on any of that stuff.  Buying new stuff will become unimportant.  You will see it as being wasteful.

At that point, spending is viewed as an opportunity cost.  You will want your money to keep growing.  Financial independence will become the most import thing that your money can buy.  There is no product or service that is more appealing than having mastery over your own life.

As a saver, you will always be trying to optimize your spending and to live on less.  It is fun to try to stretch a dollar as far as it can be stretched. This mindset will greatly help you on your journey toward financial independence because you will need less money to live on.

For example, if you can live on $40,000 per year, you only need to have $1,000,000 saved based on a 4% withdrawal rate.  What about if you want to live on $100,000 per year?  You would have to have $2,500,000 in savings at a 4% withdrawal rate.  The more money you require, the further away you are from freedom.

Compound Interest

Compound interest works no matter what your saving rate is.  It is just math.  It just works better if you have a high savings rate.  For example, Joe saves $800 per month and Bill saves $2,000 per month.  Their savings both grew by 8%.

How much will Joe have in savings after ten years?  He will have over $147,000 saved.  That is a nice sized nest egg.  It is a solid foundation to build upon.  However, he is still a long way from financial independence.

How much will Bill have saved?  Bill will have over $368,000 in savings.  Bill is well on his way to reaching financial independence.  He is starting to see the light at the end of the tunnel.

As you can see, compound interest worked out well for both Joe and Bill.  Joe has a nice financial foundation.  Bill, on the other hand, has almost 10 years of living expenses stashed away assuming he can live on $40,000 per year.

Conclusion

Start saving early.  Save as much as you can.  Always try to save more.  Don’t be fooled into thinking that you are missing out on anything because you are saving too much.  Once you become a saver, you will have established the required foundation that is needed to fuel the wealth building process.

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You Can Live Debt Free

Do you dream of being debt free?  As long as a person has debt, they are working for someone else.  Unfortunately that someone else is a bank.  The ticket to be debt free is to change how you are managing your finances.

Today, debt is as American as apple pie with trillions owed in mortgages, auto loans, and credit cards. Household debt in 2017 stands at $12.35 trillion.  It is only slightly lower than the 2008 figure of $12.68 trillion. The average American household owes a little above $28,535 in auto loan debts, $172,086 in mortgage debt, and $16,000 in credit card debts.

Considering those statistics,  Americans have too much debt.  To improve their financial future, debt needs to be managed more prudently.  To become debt free, people need to be educated that debt makes them a slave to creditors.  The answer is based on becoming willing to change, finding a solution, and following it up with action. 

How to be Debt Free

Most people have similar financial goals.  Most of these goals are about achieving a better quality of life.  More specific goals include becoming debt-free, savings more money, improving personal relationships, and building a secure financial future for their family. 

Of course, everybody who is in debt wants to be out of debt.  They also want to break the cycle that keeps them going back into debt.  The majority of people never learned how to be debt- free.  In high school, students learn how to cook in Home Economics, but are not taught how to balance checkbooks, save money, and invest for their future.

High-interest credit cards are one of the key factors driving people to excessive debt levels.  Wouldn’t you rather pay yourself instead of paying creditors high-interest rates?  It is possible when you implement a couple of simple practices.  By learning a new way to manage money, you will have a brighter financial future.

Steps to Reducing Debt

One option is to consider debt consolidation if you owe money to many different creditors.  This approach allows you to combined many different credit cards or loans into one simple payment.  It also helps to reduce the pressure from collection agencies if you have delinquent debts.   

While it may seem complicated now, reducing debt is quite easy and is the first step in achieving financial freedom. All you need to do is make a few small adjustments to what you are currently doing. Doing this will help shed off the debt holding you hostage to these creditors.  It might also let you pay off your debt much quicker than you thought and prevent you from going back into debt.  Just imagine how much control you will have in your life when you stop paying creditors high-interest rates just to use their money.

Imagine enjoying life instead of joining the more than 70 percent of Americans that are unhappy with their jobs because they feel disengaged, unappreciated, and overworked.  It is time you learn how to manage your finances.  Do you want long-term financial stability?  Today is a great day to change.

The Debt Snowball Strategy

The debt snowball strategy is perhaps the oldest practice for getting yourself out of debt.  It is a simple plan and it works. This popular strategy is based on ranking your current debts based on interest rates.  Focus on paying off your high-interest debts like credit cards or payday loans.  Next, pay down auto loans and student debt.  Last focus on mortgage debt.  As soon as you pay off a high-interest debt, add the same payment amount to the next loan, and continue the process until you are finally out of debt.

To find extra money to pay down debt, you have to drastically cut expenses.  This includes cutting off excessive spending on items like coffee, dining out, and vacations.  All of the money you save must be applied to deb.

This approach also requires you to stop funding retirement accounts.  Only contribute enough to capture the match that your employer contributes.  You do not want to miss out on free money.  Once your Debt-to-Income Ratio is brought down to 25%, you should start ramping up the amount that you contribute to retirement accounts.  

To calculate your Debt-to-Income Ratio, see the formula below:

Debt-to-Income Ratio = Monthly Debt Payments/Monthly Income x 100

Example: $1000 in Monthly Debt Payments/$4000 in Monthly Income x 100 = DTI Ratio of 25%

When you combine the money that you have from reducing expenses with what you were contributing to retirement accounts, you will soon realize that you can make double monthly payments high-interestst debt as you make minimum payments to other loans. 

Advantages: The snowball debt strategy works as people can free up money and pay off their debts once they follow the plan. It is also a good way of strategically reaching your desired debt-free lifestyle.

Disadvantages: The strategy requires that you reduce your contributions to your retirement accounts and sacrifice the quality of life to pay off debt. It also has a very low success rate because most people are unwilling to give up the small pleasures of life for years.

Create an Emergency Plan

When you take all that money every month and sink it into paying debts, you will be making a noticeable step towards achieving a debt-free life. However, when you run into a financial emergency or hardship, the first place you will want to turn to is to use credit cards and loans. 

Rather than using all your available money for paying debts, work on saving up three months of living expenses in an emergency fund.  Start by putting $25-$50 per week to the side.  keep this money in a checking or savings account.  By having an emergency fund, it will prevent you from using credit cards and going into debt.  Whenever you require money for an unforeseen expense, you just withdraw the funds from your bank.

Write and Follow a Plan

Write a financial plan.  Stick to your plan and use it as a guide.  Let it guide you to escape debt. It might be hard at first.  You are modifying your lifestyle.  Change is not easy, but it is necessary to make progress in your financial life.  Your written plan should spell out the steps above and include additional layers including investments, insurance, and education to make the most of the opportunities that you will be able to take advantage of after you pay off your debt.

Conclusion

While this sounds simple, it is not easy.  This is common sense information that you might have heard before.  Your debt reduction plan is your ticket to becoming debt free and it will also increase your retirement dollars. The best time to get started on this life-changing financial adventure is now.

Why I Paid Down My Auto Loan on a Used Car as Fast as Possible

Cars are a necessary expense for most Americans.

Unless you are lucky enough to live near a good public transportation system or in a major urban area, you will likely need a vehicle to accomplish tasks of daily living, such as getting to work, buying groceries, or going out to dinner. Buying a car can be expensive, and having a car loan can be a pretty steep financial burden, particularly on top of student loans, a mortgage or rent and other obligations.

That is why it makes sense to buy a quality used car whenever possible — and to pay off your car loan as soon as you can.

My Story

For me, buying a used car just made good financial sense. As a father of three young kids who is still working on paying off my student loans while saving for their college, I don’t have a lot of extra cash to put towards the latest and greatest vehicle. And while having a new car can be great, it’s no secret that a car is a terrible investment, as a new car starts to lose value the minute you drive it off the lot.

So when it was time for me to purchase a vehicle, I looked for a solid used car that was safe, reliable and a good deal. Then I got to work paying off my car loan as quickly as possible.

Why I Chose to Pay Off My Auto Loan Faster Than Required

Many people accept car payments as a fact of life. For me, not having a car payment represents financial freedom. Car loans can often have high-interest rates, particularly if you arrange to finance through the dealership. Loan rates may be as high as eight or ten percent.

Car loans may also be sold by a lender to a different bank, and if it has a variable interest rate, it may become more expensive over time as rates change. For these reasons, it makes a lot of sense to pay off your car loan as quickly as fast as you can — and avoid car payments entirely.

Saving Money

Of course, there are other benefits to paying off the debt on your car. When you pay off your car loans ahead of schedule, you will save significant money on interest. Interest on your loan — even if it is at a relatively low rate — can add thousands of dollars to the total amount of your loan.

By adding even a small amount of money each month onto your car payment, such as $50 or $100, you can shorten your loan term considerably and pay hundreds or even thousands of dollars less on your car loan. A number of online calculators are available to help you determine how much you can save by paying off your loan early.

Freeing Up Money to Use Elsewhere

The money you save by paying off your car can then be used to start saving for your next car. Unfortunately, unlike a house or a college education, a car will not last a lifetime. By buying a less expensive car and paying off your loan early, you can set aside money for a down payment on your next vehicle. That will help you get ahead of the game for your next car purchase — and perhaps even avoid the need for a loan at all.

Reduce Insurance Costs

Paying off your loan may also reduce your car insurance costs. When you have a car loan, the lender will require a certain level of coverage. Once you have paid off your loan, you can reevaluate your coverage. You may not want to dip below a certain level of coverage, but you might be able to save some money by lowering the amount of collision or comprehensive coverage for your policy.

Boost Your Credit Score

Finally, paying off your car loan will boost your credit score. Without a car loan on your credit report, your debt to income ratio will improve (in other words, you will have less debt in relation to your income). This will make it easier for you to be approved for major purchases and to get lower interest rates on mortgages or refinancing your student loans — which can save you even more money and help you reduce your overall debt.

Closing Thoughts

While it may be more fun to drive a flashy new car or to always have the latest car, it makes good financial sense to pay off an auto loan on a used car instead. By making that choice for myself, I am helping my family reach our financial independence — and achieving more security for our future.

Josh runs a parenting, faith, and personal finance blog over at Family Faith Finance. As the father of 3 children, he is always looking for ways to save a few extra bucks for his family.

Next Steps to Take After Paying Down Student Debt

When you have finished paying off student loans, it is time to start building your wealth. It’s also time to achieve some of life’s most important milestones.

But first, I want to talk about the negative effects that student loans can have on your future.

There are many people that go to the bank to buy a home with tens of thousands of dollars of student debt on their shoulders. The loan officer looks at the debt and you can almost see the look of disappointment in their eyes because they are going to have to tell you that the student loans are driving up your debt-to-income ratio.

If you say, “but my loans are deferred” or “my loans are in forbearance,” the loan officer is going to look at you and tell you that it doesn’t matter because the debt has to be paid back eventually. At some point, while owning a home or car, the repayments may begin on your loans. That consumes part of your income. The bank doesn’t want to take the risk of you not having enough income to make your payments to them.

It is devastating, and it happens every day.

To keep this from happening to you, it is best to pay down your student loans as fast as you can so you can enjoy buying a home or new car without receiving bad news while sitting at the loan officer’s desk.

Think About Retirement

Another milestone that student loans can interfere with is investing. When you’re dealing with student loan payments, it’s difficult to put money into anything else. Of course, you can increase your income with a second job or find side gigs like I did. However, I still didn’t have a lot of room for investing until the student debt was gone.

Investing can take many forms. You can invest in stocks, bonds, or mutual funds. You can even invest in real estate crowdfunding, P2P lending, or business ventures. There are many things that you can do with your money when you have the funds to do it. Think about being able to retire early or just retirement in general.

The last thing you want to do is retire and find that you don’t have enough income. There are many senior citizens filing bankruptcy because of pensions that fall short, social security that isn’t enough, and medical benefits that are still too expensive.

Think About Your Family 

With student debt gone, it is also easier to expand your family on the financial end of things. When you don’t bring children into debt, you’re able to focus more on the financial needs of your child.

It is difficult to bring a child into a debt situation because so much of your income has to be put into debt while meeting the needs of your family. Of course, it can be done. But do you want to go through that struggle if you don’t have to?

Of course not!

Regardless of what phase of your life you are in, it is important to pay off your student loans quickly. Those high balances are holding you back in more ways than one. Many good people who went to college to do something meaningful and make a good income are plagued with debt for a while after graduation. They make their minimum payments but still pay the collateral consequences of having the debt.

It can be heart-wrenching to struggle or be told “no” by a bank when all you’re doing is what you’re supposed to do.

The fact is that you need to go above and beyond what you’re supposed to do to get ahead as soon as you possibly can.

Even if you already have a family, a strict budget and some discipline can help you pay down the student debt so you can start working on other milestones in life. It’s best to pay off debt as soon as you can, but don’t ever think you are too late. People thinking that they are too late causes them to not be aggressive with their debt when being aggressive can be one of the best things they ever do for themselves and their family.

Jacob runs Dollar Diligence where he blogs about debt repayment, saving money and side hustles.

 

I Bought a Lemon

 

The first time I took on debt was the spring when I graduated from high school.  When I was a senior in high school, I was not 100% sure what I wanted to do with my life.  I knew that I would ultimately attend college, but I was not mature enough yet at the age of 18.

After talking about it with my parents, we decided that I was going to work for a year or two before I went to school.  They were not thrilled with the plan, but also did not want me to just go to college without a solid direction.  Looking back, I still think that was a good idea.

Since I was going to get a job, I needed a means of transportation.  I grew up in a part of Pennsylvania where public transportation was limited.  To get to work, I needed a car.

It was 1995, so all the online car buying resources were not available.  At that point, there was Consumer Reports and Edmunds.  As you will find out, I did not read those magazines.

I decided that I wanted a Jeep Wrangler.  I started shopping by looking at the classified ads in the newspaper.  After looking for about one week, I spotted a 1991 Jeep Wrangler with a hard top.  My dad and I took a ride down to this local used car lot to test drive it.

The Jeep was nice, but when we were at the lot, a different car caught my eye.  The other car was a 1986 Audi 5000 CS Turbo.  The salesman called it a 4-door Porsche.  We test drove the car and we really liked it.  It was a solid driving car.

At the time, I had zero credit.  My dad agreed to co-sign for the loan.  He had one condition, he said if I missed a payment, he would sell the car.  I agreed to his terms and bought the car.

The car had less than 60K miles and only cost $6,500.  The loan payments were around $165 per month.  Because that it was a turbo, the insurance was higher than the car payment.

 

I had the car for about 2 months before the trouble began.  There were many issues, but the major issue was that if I was not driving with my foot on the throttle it would stall and not start back up.  When I was at a red light, I had to slip the car into neutral, put my left foot on the brake, and keep my right foot on the gas pedal.  Yes, very dangerous.

I took the car to a few different local mechanics and they did not know how to fix it.  I took it to a mechanic that specialized in European auto repairs.  He was not able to pinpoint the issue.

After I owned the car for about 4 months, I had to sell it.  My Mother was driving it on a major interstate highway when it stalled and would not start back up.  She was lucky to not have been injured or even killed.  The state police came and they called a flatbed to tow it away.  The car was simply not safe and had to be sold.

I took it to a dealer to find out what it was worth on a trade-in.  The dealer offered me $2,500.  I owed over $6000.  I did not want to lose $3,500.  At that time, $3,500 was a fortune because I was broke.

On my way home from the dealer, the car stalled at a major intersection.  I tried to start it for 15 minutes, but it would not restart.  This time the state police were not needed, but a flatbed was.

The car had to go.  I spoke to the owner of the car lot who offered me $2,500.  We worked out a trade for a 1986 Honda Accord with a bent frame and 115,000 miles.  The salesman told me to be careful with the car because it had a bent frame that causes it to drift to the right.

This whole situation truly had me upset.  I was not upset about losing the Audi.  What had me worried was the amount of Debt that I now had.  Plus, I felt that I had very little to show for it.

For the next four years, I had to make monthly payments on a $6,500 loan, but drive a $2,500 car.  This experience left a bad taste in my mouth when it came to debt.  I never missed a payment and paid the loan off.  I told myself that I would never get another car loan again.

The Honda lasted about 8 years.  My next few cars were hand-me-downs with well over 100K miles on them.  I received one from my parents and one from my wife.

I did not buy another car until I was 35 years old.  This time I did my due diligence and did some research before making the purchase.  That car was certified used Subaru with a 100K mile warranty.  I also paid cash.

Have you ever had a negative experience with debt?  If you have, please share your experience and what you learned from it.