Today’s post is a guest blog by Gillian at Drop that Debt! I also wrote a post for her blog today, which you can read here.
Hey all! I’m Gillian and I blog about personal finance over at Drop that Debt. It seems that Caitlin and I both started blogging and reading each others blogs around the same time, and I’ve been hooked ever since! Her Not-so-Minimalist Bathroom post was so eerily similar to my own experiences I just had to read more. I graduated school with a college diploma and a university degree like most young people do these days– in loads of debt. After a bit over 6 years in school, I was over $60,000 in debt with no real job prospects immediately leaving school. I was lucky enough to get a job serving a month after leaving school, which is not in my field but it is enough to pay the bills and it will do for now.
I got smacked by the reality train pretty hard after graduation. I realized that no, it is not as easy to pay off student loans as I thought it would be and yes, it will take me years to pay off my loans, even if I put over $1,000 per month towards them. I had been overspending during school, coupled with not earning enough to pay my tuition and living expenses and I decided I needed to finally get real about my finances so that I could throw any and all extra money at my student loans. Over the past 6 months, I have learned a lot about personal finance, what works, and what doesn’t work so well. Here are some things you can do if you find yourself not knowing where to start with getting your finances in order:
Create a budget. This is hands down the most important thing that got me on track when I started. You need to figure out approximately how much income you earn each month. Once you figure out how much you are bringing in, you can figure out how much you can afford to spend in each area. I had a set amount for rent, car insurance, car payments, and student loan payments (minimum monthly payments the institutions require) and everything else was under my control. I started by deciding how much money I wanted to dedicate for repayment of my loans. I decided on about $1,000 / month as an ultimate goal; and it’s slowly been climbing to reach that number.
Pay off your highest interest loans first. Both of my loans have fairly small interest rates. One is about 4% and the other is 4.5%. However, if you have a big credit card debt (18% +) or something else with higher interest rates, pay that off first. Make the minimum payments (or a bit above) and throw the rest of your extra money at the highest interest loan first. Once you pay the first loan off, you can add that payment onto any other loans you have.
Don’t discount anything. Even “fixed” costs can be cut back. It can be tough but often people end up living far outside of their means. If your rent is taking too large of a chunk of your budget, you should find a new place as soon as you can that is cheaper. If your mortgage payment is too big, it’s time to seriously consider selling your house and buying one that is worth less. The same thing goes for cars. It kills me that some people are making car payments that are $600 or more per month! I didn’t have too many high fixed costs but I still cut back where I could. I got my cell phone bill down from $73/month to about $33/month. Every $40 counts and can be used towards loan repayment, savings, or somewhere else.
Think before you buy. There can be many temptations when you are cutting back on spending, especially if you aren’t used to being careful with your money. Cute clothes, new gadgets and the like can be hard to ignore. I don’t deprive myself of anything (within reason), I just make sure it’s really worth the chunk of my budget before I buy it. Many times I’ve tried on clothes, left, then decided I didn’t need them after thinking on it for a day. Occasionally, the item really was worth it and I would go back the next day and make a purchase. Taking that extra time away from the store and the immediate gratification of the purchase often gives you the clarity to see that you don’t really need the item.
Since making these changes, I have consistently brought in far more money than I have paid out. My student loan payments are always high, generally in the $700 range each month and with some work I plan on increasing that number in 2013. These methods are surefire ways to get your finances in order.
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