Our preschooler is learning how to do all sorts of daily tasks these days. Many times, his methods take three times longer than it would take you or me. For example, he’s learning how to get dressed on his own. When he puts on his own shirt, it bunches up under his armpits, exposing his belly. You or I would just grab the bottom of the shirt and pull it down. Mini Stapler, on the other hand, insists that the only way to get his shirt unbunched is to run up and down the hallway until all the running loosens it enough for the shirt to fall into place. This is a battle we choose not to fight, partly because it’s freakin adorable to see him run around so determinedly. We know he will figure it out someday.
We approached our debt payoff in a similarly inefficient fashion. Our plan at the beginning of the year was to pay $200 a month towards the principal if there was enough left in our bank account at the end of the month. That was a big mistake. Sure, it would get the job done, eventually, but it would take a lot more time and energy than just tackling it head-on. The first month, we made the $200 payment. The second month, there wasn’t “enough” to pay it. I worried about parting with our money, and promised myself that the next month would be better. The third month, we still skipped a payment. The fourth month, we received a tax refund and I felt better about making a payment. I thought I was being such a trooper by paying $400, to make up for one missed payment. I was so naive!
Problem #1: We paid the student loans at the end of the month. We needed to put our money where our priorities were, and we needed to do it at the beginning of the month. When we slashed our budget, the helpful folks in the Mr. Money Mustache forum suggested that we move the student loan payments to the beginning of the month. We had to put the money where our priorities are.
Problem #2: We budgeted the payment amount. Earmarking a particular amount to pay towards loans limited my emotional investment in paying off the loans as quickly as possible. I realized this when I asked myself: “How do I translate my savings into our loan payoff?” I wondered what to do when I saved $2 on parking — put it in a separate checking account? Make a $2 payment right away? We decided to calculate how much money we would need to meet our expenses that month. Then, we emptied our checking account. Every dollar we wouldn’t need to meet expenses went into a student loan payment.
Emptying our checking account was a bit scary. I worried about a sudden unexpected expense or loss of income. But I reassured myself that we had enough in our “emergency fund” for any truly expensive emergency. Not owning a home is a weight off of our shoulders, because we couldn’t be crippled by a catastrophic home event. Car accidents, uncovered medical expenses, and layoffs, however, were still possibilities. But our emergency fund could back us up in a pinch.
Unexpectedly, I found myself looking forward to each credit card statement with Christmas morning anticipation. Once that statement rolled out, I figured out how to pay everything due that month while freeing up the most money for a student loan payment. I thought that slashing our budget would mean $400 per month in extra payments, plus any extra income we could generate. What it really meant was this:
|Loan Payments||Extra Income||Difference|
That first month, instead of paying $400 towards a loan, we paid $1200. Somehow, over and above the extra we were bringing in by freelancing and selling off our stuff, we managed to save over $4,800 in four months.
What happened? First, and easiest: I received three bi-weekly paychecks in one month, but our budget is calculated on two paychecks per month. Second, and most crucial: We didn’t spend the maximum amount budgeted in each budget category. Before, I if I only spent $20 of our $100 “home supplies” budget, I would buy $80 worth of things for the home from my wishlist. No more. When we empty our checking account every month, I don’t try to spend everything I have budgeted. Instead, we try to save as much as possible so we can dump as much as possible into those loans.
Voila! Because we paid our student loan at the beginning of the month, and let our expenses for the month determine how much we contributed, we paid off a student loan paid in just four months, when I initially thought it would take us two years.
PS: The Consumer Financial Protection Bureau’s annual report on the state of student loans noted that one of the most frequent borrower complaints is the lender’s mis-allocation of extra payments. When making a principle payment to your student loan, be sure to explicitly designate it towards one loan (if that is your goal), according to the lender’s instructions.