In May of 2008, I graduated from journalism school with a master of arts, new friends from around the world... and a decade's worth of student loan debt.
I was lucky that my student loan was, due to a hefty scholarship, "just" $20,500. I was lucky that my parents paid for my much more expensive undergraduate education and that they paid my living expenses while I was in grad school. I was lucky in many ways, but in one way I was deeply unlucky: I had somehow managed to reach my mid-30's without having a clue as to how to manage my finances.
My journey to the final loan payment I made in February was filled with so much fear, shame and, above all, anxiety, that when my colleagues at LearnVest suggested I write this piece, I didn't want to.
I didn't want the world to know that I'd spent the first two years of the loan payments in a fog of confusion about how to get rid of this debt, or that I'd racked up almost $8,000 in credit card debt and I had to pay that off, too, or that the way I got rid of the debt was by freakishly and obsessively tracking how I spent every dollar. I didn't want to reveal these things to future editors or to people in the well-to-do, achievement-oriented communities in which I grew up.
But given how many ways I went wrong on my way to becoming debt-free, I thought my own tale of "how I did it" -- that is, paid off more than $20,000 in student loan debt within three-and-a-half years -- could help LearnVesters and the 37 million Americans with student loan debt get there too.
How I Made a Mess of My Finances
My predicament had nothing to do with bad parenting: My sister, who was raised by the same people, has always handled money well. Purely because of my here-and-now personality, until about two years ago, my basic philosophy toward money was, "Have it, spend it." I also had no concept of a separation between "I want that" and "I'll get that."
As recently as April 2010, I didn't have a savings account. When I was in college, I remember that my bank told me to get a savings and a checking account, but I never fully understood why savings even existed since, if you actually wanted to use the money, you needed to take it from checking. So when I got my first job in New York, I opened only a checking account and put "all" my money in there. I put "all" in quotes because I lived paycheck to paycheck, not thinking there might be a time when money wouldn't come every two weeks.
So in spring 2010, two years after graduating, I had a good job and made good money for a writer, but I was digging myself a credit card hole that would, by September, reach $7,500. (The culprits: Gilt Groupe and New York City boutique shopping, a three-week trip to India, constant dinners and drinks out with friends, my book addiction and God knows what else.)
See why I hesitated to tell you -- and the world -- what a money mess I was? But if someone as far gone as I was can pull her finances together, then so can you.
When Things Started to Turn Around
In April 2010, when I was $6,500 in credit card debt and $18,432 in student loan debt, I read an article in The New York Times about female-focused personal finance sites. (That was how I got hooked on LearnVest, long before I worked here.) In September, after my trip to India, I took a personal finance workshop, where I learned about this fabulous tool. It was called a budget.
It worked just like the LearnVest Budgeting Tool. You take your monthly income, subtract your monthly expenses such as rent, utilities, etc. Then you do this magical thing: You put some money in savings and keep it there to watch it grow. Next, you make a payment toward your debt or, in my case, payments since I had the student loan and credit cards. As for the rest? That's what you live on.
I figured out that, depending on how fast I wanted to pay my loan and amass savings, I had to live on between $190 and $240 per week. In cash.
Planning My Spending
I immediately stopped all credit card spending except for items I could only buy online. I unsubscribed from Gilt. I stopped getting drinks almost every night. I stopped buying every single thing that looked good at the grocery and the farmers' market (I love to cook) and instead started planning out my meals so I only bought what I needed for that week. I even started looking up restaurant menus online and choosing my meal before going out so I knew how much I would spend.
In essence, I started "planning" all my spending.
This is how it worked: I took out the amount I had to spend that week from the ATM, and if I had to buy something with my credit card online, I immediately returned that same amount in cash back to my checking account. I started a Google spreadsheet that tracked every single dollar I spent so if I spent over my limit one week, I knew how much less to spend the next. Similarly, if I underspent one week, then the following week, I knew my how much bigger my budget was.
The sheet also tracked money I hadn't even spent yet: As soon as I made plans for the next week or the next month, I would mark on that future day a dollar estimate of how much that activity might cost, i.e. "Birthday dinner, $50," so that when I got to that week, I already knew I had that much less for other spending. It also kept me, when the night finally arrived, from being tempted to have another drink I hadn't planned on.
How My Financial Picture -- and Life -- Started to Change
Not everyone in debt may need to be as obsessive as I was, but since I was trying to undo more than a decade-long habit of buying myself whatever I wanted whenever I wanted, I needed to be hyper-vigilant.
I am not going to lie: Living on this budget had an impact on my social life. But I had fallen in with an international crowd at grad school, so coincidentally, at the same time I was trying to go out less, the last of my grad school friends moved back to their home countries, so my social life naturally became less active.
I had already made some balance transfers so my credit card debt was no longer accruing interest, but for one card, the 0% period was going to end in January 2011, and I didn't think I would be able to pay it off by then. I was getting heart palpitations just thinking about interest growing on my already sizable debt.
That Christmas, I got a gift from my parents -- several thousand dollars they said I should put toward my student loan debt. I'm sorry, Mom and Dad, but the truth is, I used it to help pay off that credit card. (As I type this, tears actually spring up because it really hurts me to tell the world that I lied to them.)
But thanks to that gift and the five months I had spent being really diligent about my budget, by February 2011, I was free of my credit card debt. I had even saved enough money to take a trip to Mexico with 15 of my grad school friends.
Finally Paying It Off
I began to use plastic again, but I stuck to my weekly budget -- and I ramped up the student loan payments. By this point, my student loan debt was just over $15,000.
Around the same time, I got a new job -- at LearnVest -- and increased my freelance income with a new regular writing gig. (Increasing your income, whether through a raise or side income, is an under-sung way of helping pay down debt.)
I also started learning more about personal finance, and realizing that not only did I need to pay off my debt, I needed to build an emergency fund. A CFP I worked with counseled me not to worry about my student loan since the interest rate was a "low" 6.8%. She suggested I stop the loan payments, build my emergency cushion, then pay the loan off.
I tried and watched with pride as my emergency fund grew. But I felt dismay every time I looked at the student loan balance. Before meeting with her, the debt had fallen below $10,000, but by the time winter arrived, the interest, which accrued every day, pushed it above $10,000. Again.
Over Christmas, I made a decision: When I got my bonus in late January, I immediately sent a payment in the same amount to the lender. Then I took a massive amount out of my savings account, essentially decimating my emergency fund. The February day it hit my checking account, I quietly logged onto the student loan website while at work and made my final payment.
But I'd been so traumatized by the experience of seeing the interest increase my debt on a daily basis, I still didn't quite believe my saga was over. It wasn't until a full month passed and I received a paper letter from the lender showing that I owed nothing, that I finally -- finally -- breathed a full sigh of relief.
Why are experts calling the current student loan situation an "Impending economic crisis"? In our infographic, we take a closer look at the numbers. See where you fit in.
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This story originally appeared on LearnVest.com.
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Smart budgeting and a maintaining a keen awareness on your money is something that many people could learn from this article. Unfortunately, for hundreds of thousands of people, their student loan debt is commensurate to a mortgage, which means that they will have to apply this discipline over the same amount of time it takes many people to pay off a home, or even longer, in some cases. Which doesn't mean it can't be done, by any means, but it robs many of the opportunity to get that American "dream" when they've already bought it (voluntarily, yes) through an education and it puts them in a position of living under debt in perpetuity because of a degree.
Regardless, great piece. Good to see some positive work being done out there on the student loan front! Now, if we could only address the skyrocketing cost of higher education in the first place! Hmmm...
So in addition to watching what I spend, I work THREE (yes, THREE) extra jobs to throw more money at Sallie Mae. I'm hoping to be out from under this horrible debt by this time next year. Yep, that's how much more money I'm bringing in with three extra jobs. It's so hard, but I'm a Dave Ramsey fan, and when I listen to his Friday podcast about people who have paid their debts, I want to be them - I want that feeling of freedom. Though I'll still have a relatively small car loan and an underwater mortgage to pay off after the student loan debt, I'm glad to be making a dent in this, finally.
Kudos to the writer for paying off her debt, though I won't be checking out LearnVest. I can make my own budget, thankyouverymuch. However, if they want to hire me, I'm sure I can find room for one more job!
as i was growing up, my father's motto was "pay yourself first". if only i had listened! i wound up having my bank close my savings account when i was in my late teens, as i had gotten into the bad habit of withdrawing my savings for things i didn't need. i'm trying to re-teach myself to save.
um, when I do that I have -14 dollars a month to live on. Suggestions?
For those of you giving her a hard time about having a job that pays bonuses - it sounds like you all need to find new jobs :)
2. Your techniques are not novel or unique they are the "beans and rice" method taught by Dave Ramsey for decades.
Basically you spend nothing but your base needs, work every day of the week, eat beans and rice/ramen every day and give up your social life.
Not much different then doing time in prison accept you will be working your rear off instead of sitting in a cell.
The best advice you can give people who want to get out of debt is to chop up all current credit cards and close the accounts and then never use credit again. Or at the least end credit slavery after you buy the home you want to live in for the next twenty years.
Next, you had tremendous help from your family. Something that a lot of upper middle class people don't seem to realize is such an advantage in the world. I bet you also had family members giving you money and lots of gifts throughout your childhood and life, perhaps cash/gift cards when you hit your teens.
Your parents prevented your college loans from being sky high, and they might have even paid off the interest as you went to school to keep your rates low on whatever you did owe. Then they gave you a lump sum of several thousand dollars for Christmas? Good grief, that is in no way realistic for the majority of us.
So while I commend you on fixing your ridiculous spending habits, your attempt at making your experiences relevant to the rest us is lukewarm at best. It just makes me shake my head at how much you don't know what it's like to be buried under debt, with literally no way out. You had options, you had a job that gives bonuses, you had parents with money. Most people don't.
Fresh start and while not as luxurious as the corporate BAILOUT which is tax payer funded it is there and is legal.
Zero shame in it as well. Just remember you cannot write off school debt, taxes owed or court ordered payments.
I'm in my mid-20s and I've had a savings account since I was in elementary school. Granted, it never had a lot in it, but I learned from a young age to budget myself. I suppose it helped that my parents never carried credit card debt (they still don't) and only bought things when they knew they had the disposable income.
I learned from their example. They're not going to be giving me thousand dollar gifts to take care of my college loans. And I wouldn't expect them to. I keep track of all of my money, but it's something that I've simply learned over the years and through personal experience.
I find it shocking that she managed to make it to her mid-30s with ONLY the amount of debt posted. With her out of control spending habits, if her parents hadn't obviously stepped in, she'd have been in actual deep trouble.