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Planning

The 12 Steps to Fixing Your Financial Life

Mr. Money Mustache says:

Your attitude determines your lifetime wealth much more than your knowledge of financial nuts and bolts.

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I’m blatantly stealing part of this post title from Mr. Money Mustache, my unofficial personal finance/badassity mentor. In a recent post he writes what is probably one of the best paragraphs on the interwebs relating to personal finance. He says:

Here’s how to cut your life costs in half. Start by getting rid of your Debt Emergency if you have one. Live close to work. Move to another city if you enjoy adventure. Don’t borrow money for cars, and don’t buy stupid ones. Ride a bike wherever you can. Cancel your TV service. Stop wasting money on groceries. Give your kids the opportunity to achieve greatness without being pampered. Lose the overpriced cell phones. Learn to appreciate the life-boosting joy of using your own body to get things done. Learn to mock convenience. Practice optimism.

13 sentences, one overarching message: take control of your own financial well-being. This little paragraph is the best road map to getting on the path to financial freedom. It eschews the bullshit and minutiae to get straight to the point. Don’t let your debt control you. Don’t let keeping up with the Joneses control you. Don’t let your paycheck or your bills control you. You should be the one in control.

I have either directly been following this advice or found it on my own through common sense. I love that it is now all put together into one concise paragraph with links to further details. If you really want to find out how to improve your finances then take each sentence, put it into a list and work towards achieving each step.

Thanks to MMM we now have this 12 step process that will tell you how to cut the frivolous spending in your life and get on the path to financial freedom. And guess what? It actually works. I am living proof.

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A Special Trick to Increase Cash Flow

Mr. Money Mustache says:

There really is no suffering here, in this highly frugal life. Just a lot of rewarding work and effort and accomplishment.

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I am one of the lucky American’s that gets free money from my employer just for saving money for retirement! Whoever invented this system is a genius. Additionally the Company I work for gives me the option of paying taxes on those retirement savings now or in the future. I have the choice between a traditional 401(k) and a Roth 401(k).

For those of you who are unaware a Roth 401(k) allows me to save money into a 401(k) account after I pay my taxes. Traditionally people are able to save into a 401(k) before paying taxes. Under the traditional plan you are forced to pay taxes when you withdraw that money in retirement. For me that is over 30 years away. Under the Roth plan any qualified distributions in retirement are made tax free because you paid taxes on that money before you put it into the account.

I decided to go with the Roth option when I started my 401(k) because I am currently in the 25% federal tax bracket. While it is impossible to guess what the tax rates will be in 30 years I am absolutely convinced that taxes will never be as low as they are right now. Tax rates are generally at the lowest level they have been in the past few decades. However, the United States has a massive debt that sooner or later is going to have to be paid back and in the coming years millions of baby boomers will be retiring with little to no savings and ever rising health care costs. The burden will fall to the people still working to pick up this tab, that includes me. I am happy to pay the 25% now and avoid the coming higher rates. [1]

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The Hard Numbers on How to Punch-Out $70k in Debt

Early Retirement Extreme says:

This is what being heavily in debt must feel like. Paying and paying and never really getting anywhere. Fortunately, there is a way out: An extreme increase in payments.

Goal Posts

Last time I talked about my outrageous goal of taking out my Wells Fargo student debt in just three years! I went into some detail about how much I owe, my new and improved budget, and the steps I need to take in order to funnel as much money as possible into my goal.

Today I am going to focus even more on the numbers. Specifically I am going to break down my Wells Fargo loans and really evaluate the steps to obliterating these debts in three years. The simple math says I need to make an extreme increase in payments.  Let’s begin.

Outstanding Debt

From here on out I am only going to be focusing on my Wells Fargo debt. I will worry about my federal loans once I am free from my private student loans.

My total Wells Fargo debt stands at $70,500. This is made up by two loans, one with a 6.25% fixed interest rate and one with a 9.49% variable interest rate. I made a total of $8,700 dollars in loan payments in 2012, that amount almost entirely went towards paying off interest. The outstanding balances on the two loans are:

  1. $36,000 @ 9.49%
  2. $34,500 @ 6.25%

The payment that is applied to loan 1 each month amounts to $403 and $326 goes towards the second loan. I will continue to make the regular payments on both of these loans. I am also going to be making large extra payments starting with the principle of the high interest loan first and moving on to the second loan. To begin, this month I will distribute my entire savings into that loan ($6,500).

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My Plan To Get Out Of Debt In 3 Years

No More Harvard Debt says:

Debt Pay-down Is a Marathon, not a Sprint … This is 26.2 miles up the side of an extremely steep mountain.

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Obliterating my Student Loan debt has become my top priority. This is my battle plan.

I am embarking on the challenge of rapid debt repayment. The next few years will challenge my former relationship with money and my former lifestyle. I am doing this by choice. I am choosing to take the more difficult route, the route that will lead to financial freedom. I am choosing this because it is hard and things that are hard tend to reap the best rewards. Today I will lay my debts out on the table, acknowledge them, and form my plan.

The Back Story

After four years of college I have accumulated quite the portfolio of student loans. Unfortunately this is not a good portfolio, this portfolio pretty much represents my entire net worth (in a monetary sense) and it is a very large, negative number.

To pay for my first two years of college I took out substantial private loans through my bank, Wells Fargo. I needed the loans to cover my tuition expenses but I also used them to cover housing costs, textbooks, and food. I was also able to take out a few small Federal Loans that helped to cover a small portion of my annual university costs. However, I did not qualify for subsidized interest rates on my Federal Loans nor did I qualify for financial assistance from my university. So, Wells Fargo was there to pick up the slack and fund the rest of my education / college experience.

In 2008 the US financial markets crashed and lending from private banks dried up. I was only half way through my four years of education yet Wells Fargo informed me that I no longer qualified for a private student loan. I was stuck; I needed to graduate in order to get a job to pay off my debt that I needed to incur in order to get an education so that I would qualify for a job (follow that?).

My university told me that I did not qualify for need based aid, apparently my parents made too much money. My parents told me that they couldn’t afford the high cost of my private university education. For a few months the situation became desperate, I was on the verge of being forced to drop out of school. Eventually I was able to find a solution. My parents were willing to take out a parent loan to cover the cost of my education on the condition that I pay them pack. I jumped at the offer.

So I was able to fund my education. I borrowed the money, I went to school, I graduated, I got a job, and I started paying it all back.

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How I Got Where I Am Today

Mr. Money Mustache says:

Your Debt is not something you “work on”. It is a HUGE, FLAMING EMERGENCY!!!

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“What you don’t know can’t hurt you!” they say, but it’s not true. What they really should tell you is: What you don’t know will DESTROY your future! Whoa, did that get your attention? because it finally got mine.

I thought I had a pretty good life, I thought I had my finances under control, I thought I had a great retirement to look forward to! As it turns out, I was just lying to myself through the egregious sin of ignorance. In reality I am in the middle of a DEBT EMERGENCY!!! And not just that, but I have been in a debt emergency for 5 years!! 5 YEARS! And I didn’t even know it.

How did I get here? How could I be so stupid? Why did I do it?

To answer these questions I went back to the beginning in an effort to illuminate the decisions that have lead me here.

I come from a comfortable life. My father was always able to put food on the table, sent me to the best private high school in town, and even bought me a car when I turned 16. He did this all with a high school degree having never set foot on a university campus, a model of the America Dream if I have ever seen one. Yes, life was good. However, despite this cushy existence, by the time I turned 18 and graduated from high school I was eager to leave it all behind and go do my own thing. I wanted freedom! and independence! and College was the way I was going to get it.

About that time every college in the country was sending me nifty little postcards and full color brochures that all said the same thing: We have the most beautiful campus! Our classes are the best and our professors the brightest! Your future will be better if you get your degree here! And you know what dear readers? I bought it. Hook, line, and sinker.

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