By Butler Stoudenmire
Millennials have been put in a rotten financial situation. The job market is more competitive than ever, requiring everyone to obtain increasingly expensive college degrees, which are being financed increasingly through student loans. At the other end of the life spectrum, conventional forms of employer sponsored retirement plans are disappearing and Social Security cannot be trusted. I don’t say all of that to play the victim, but to set the stage as to why it’s so important that we millennials gain control of our finances ASAP.
When I did my loan exit counseling the month before graduating with my Masters degree, I was shocked. I was just shy of being six-figures in debt. After I collected myself off of the floor, I decided that I must focus and create a plan if I ever hoped to attack and kill the debt. Now, a year and a half later, I have managed to pay off 45% of my loan. I have learned a lot about myself- what I need, what I want, what I’m made of- and have had the opportunity to coach others who are on the journey of paying off debt. Below are some of the tips and tricks that I have learned and shared with others for taking control of personal finances, whether in debt or not in debt.
1. Calculate Your Interest
If you have no debt, skip this one (or read it anyway and be grateful you don’t have to worry about it).
Do you want to find motivation for paying off your loans as quickly as possible? Calculate how much interest you are paying on your loan each day. This was the first thing I did once I saw my balance, and let’s just say it didn’t make me feel any better.
To make the math simple, let’s say you owe $100,000 on a loan with a 6% interest rate. That means that across a year, you will accrue a total of $6,000 of interest that has to be paid off (100,000*.06). As the interest accrues, you must pay it off before you are able to pay off your principal balance. Now, let’s divide that $6,000 by 365 days in the year, which equals $16.44 per day ($495 per month- yikes!). In my mind, I couldn’t justify stressing over a $2 pack of gum that will last me for two weeks, but not stress out about $16 per day that I was paying for literally no benefit whatsoever. That was when I realized I had to pay this loan off as quickly as I possibly could. It should also be noted that a required minimum payment may be around $500 per month (or less), meaning that only $5 of principal is paid off (or none of it at all). Pay as much as possible on your loans each month!
Budget, budget, budget! The importance of budgeting cannot be emphasized enough. Budget! Personal finance guru Dave Ramsey and company like to say, “Instead of ending the month wondering where your money went, begin your month telling your money where to go.” Whether you are in debt and trying to get out, or you have never been in debt in your life, the foundation to building wealth is developing and adhering to a budget.
One of the most effective ways to budget is to use zero-based budgeting. Every month, sit down with your anticipated income and your anticipated expense categories and assign every single dollar from your income to an expense category. You start with $0 in every expense category and you end with $0 in your income category. Start with Giving and Saving. Then budget for your Housing, Utilities, Transportation, Food, and Debts. Then you can put a reasonable amount in your other categories such as Entertainment, Shopping, etc. Based on your priorities, your budget may look different from someone else’s with the same income. For instance, while I am getting out of debt, my Restaurant category is less than $75 per month, and my Student Debt category is over $1,000 per month. Once my loan is paid off, that $1,000 will be allocated to other categories (Praise the Lord).
Sitting down to do your budget each month is eye opening. I never realized how much I was spending in the cafeteria at the hospital where I work. Little meals and snacks add up across a month. Needless to say, I have been bringing my lunch to work much more often now (Yay rice and beans…). If you are married, sitting down with your spouse each month to review your expenses from last month and to discuss your upcoming expenses and financial goals is a great thing. Financial distress and lack of communication account for the vast majority of divorces in America. Having these discussions regularly with your spouse will ensure that the two of you are on the same page with your finances.
Quick Tip: Don’t bother with Excel or pen and paper. I did this at first and it was too much work. Download an app on your phone. I use EveryDollar; it’s free, user-friendly, and I can input my expenses immediately after I buy something.
3. No-Expense Weeks
This is my favorite. No-expense weeks make me feel like a financial Olympian. Setting a difficult goal, sacrificing, emerging on the other side in glory—it’s a beautiful thing. No-expense weeks are exactly what they sound. During a no-expense week, you are not allowed to spend any money (unless your rent is due, bills are due, etc.). Here’s what it looks like:
Sunday afternoon I go to the grocery store and get all of the food that I’ll need for the week. I also make sure that my car is full of gas. And then I delight in the fact that I won’t be spending ANY money until the next Sunday. “Oh man, a Starbucks sure would be good right now.” Nope. “Oh my gosh, look at those shoes that are on sale.” Nah. “Honey, I really think we should go try that new restaurant tonight.” Nuh uh.
No-expense weeks are a powerful tool for immediately putting money in your pocket. I try to do at least two each month. And I won’t lie; it can be difficult (Olympians must have discipline). One time during a no-expense week, I went to a happy hour with some co-workers, and I took a Ziploc bag of tortilla chips in my pocket. Everyone called me Napoleon Dynamite (think tater tots). True. Story.
4. SINK Your DINK
Here’s one for the married folk that we singles can only dream about. Harnessing the power of your DINK (Dual Income No Kids). DINK is a wonderful place to find yourself; however, it can also be the beginning of unsustainable financial habits. Often, new couples will use one of the incomes to pay the essentials and then use the other income as fun money. Three trips across the country, five trips to Pottery Barn, and fifteen nice dinners out later and you have made no financial progress. Once the kids come a few years later and you’re accustomed to your lifestyle, it can be really hard to cut the lifestyle to afford all of the expenses associated with the kids.
What if instead of living a lifestyle equal to your dual income you decided that you were going to live on only one income and put the entire other income to your goals: paying off debt, saving for a house, investing, or whatever you may want to do? What a way to get a headstart! You would be living the SINK lifestyle with DINK security. This also allows you to easily transition to one parent working and the other staying home if you do have children later down the road. The great news about SINKing your DINK is that you can stop at anytime and enjoy your DINK. If I end up getting married, I am going to try to convince my wife that we should SINK our DINK for our whole working life so that we can retire early (check back in a few years to see how that’s working for me).
5. Don’t Mortgage Your Life Away
There are many criticisms of millennials that I disagree with; there are some that I do agree with. One such criticism is that we expect the same lifestyle that our parents currently have. I am guilty of this. I want a nice car and a house with hardwood floors, granite countertops, and a master bed and bath suite. The problem is that when most of our parents were in their 20s/30s, they were living in a duplex with shag carpet and linoleum countertops, and were driving beaters. Therefore, the temptation is great to buy a great big nice house when you’re living that DINK life (and maybe SINK life, if the income is large).
Let’s say you give in to this temptation and buy a nice $350,000 house on a 30-year fixed-rate mortgage.
You have just locked yourself in to sending the bank a check for $1,600 every single month for the next 30 years. Then the kids come and you go from DINK to SIK (Single Income Kids). Things can get tight.
Now let’s imagine you don’t give into temptation. You decide that with just you and your spouse, you don’t really need a 4,000 square foot house. You decide that for the next 5 years you are going to enjoy living in a reasonable, yet comfortably sized and quality house, townhouse, or condo. You pay $120,000 for it and decide to make the smart decision of a doing a 15-year mortgage. That’s around $900 per month for half of the amount of time. If you SINK your DINK, you can pay your house off in three years. How quickly could you build wealth with no mortgage or rent payments? Then once the kids come, you can sell, take your equity and all of that cash you’ve accumulated while having no payments, and buy a bigger, more comfortable place (either in cash or with a small mortgage).
Putting it Together
Making smart financial decisions now is the key to financial success and stability later in life. Get out of debt, live beneath your means, give generously, and watch your investments compound across a long, happy life.