(Guest Post by Stephanie Halligan while J$ cuddles his new baby :))
When I graduated from college with $30,000 in student loans, I didn’t feel very confident about my financial future. I was confident about one thing, however: I wanted to get out of debt and fast.
I started reading everything I could about getting rid of debt. I researched debt snowballs, APR, ROI, debt consolidation, income-based repayment plans – you name it.
Then one day, I stopped reading and started repaying my loans with my own plan. I paid off $16,000 in debt in a year and a half by ignoring conventional advice and listening to my gut.
How I Got Here – My Debt Story
Like a lot of my peers, I graduated from school with a mountain of student loans. And sadly, like many of my friends, I was in shock when I saw my total debt for the first time: $30,000. I’d never come across that much money in my life, and there was a big minus (-) in front of it.
After the initial shock wore off, I began to panic. When I graduated, I was only making $1,000 a month and living in Boston (read: expensive city). I could barely pay for my prescription medicine, let alone even think about how I was going to pay back my loans. I was freaking out, and with good reason.
“Okay,” I told myself. “I got myself into this mess. Now how the hell am I going to get out of it?”
Given my financial situation at the time, the only realistic answer was “little by little.” I buckled down, faced reality and started paying the minimum.
Calculating My Debt ROI
That same year, I was persistent enough (and darn lucky) to land an entry-level job in Washington, DC. When I started earning a real income, my life instantly felt more secure. I paid off my credit cards, started an emergency fund, and even opened a retirement account. I felt like I finally had a say in my financial destiny.
But there was still the $30K gorilla in the room. It didn’t matter that I was making quadruple my previous salary – my entire paycheck would barely make a dent in my debt. My student loans made me feel anxious and helpless. It was such an intimidating amount that I didn’t even know where to start. So, like anyone else with a question, I turned to Google :)
In my search, I stumbled upon a few personal finance blogs and began reading advice about the best way to start paying off my student loans. One theme came up over and over again in my reading: ROI and interest rates.
The finance experts suggested knowing the APR on each loan. My debts were neatly divided into a federal loan and a private student loan:
- $16,000 federal, 6.8% APR
- $14,000 private, 3.5% APR
You then compare your loan interest rates with other investment opportunities, like investing in the stock market. Let’s say that the stock market has a 5% return, conservatively. This means I would have a better return on investment (ROI) on the market than it would paying down a loan with 3.5% interest.
I had a plan to maximize my ROI: I would pay as much as I could afford on my federal loan and start investing in my 401(k) before putting any extra money toward my private loan.
On paper, this plan worked. In my head, this plan made me incredibly nervous.
Why Psychology Matters More than Interest Rates
The logical half of me said, “This makes sense!” The overly-cautious, panicky half of me had a different reaction:
- “What if the market crashes again?”
- “What if I get a pay cut or lose my job?”
- “What if the interest rates on my private loans go up?”
Everything about my debt made me nervous, even my plan to eliminate it. I realized there was only one strategy that made me comfortable: Get rid of my debt, as much as possible, as quickly as possible.
The interest rates on my loans didn’t matter. The possible returns on the market didn’t matter either. The only thing that mattered was that my debt made me feel uncomfortable and insecure.
I realized that how I felt about my debt mattered more to me than choosing the “right” strategy for eliminating it.
I started saving less for retirement and paying back both of my loans with the full force of my disposable income. Both of my loan balances were shrinking quickly.
And I felt great.
Do What Makes You Feel Good and You’ll Get Results
Some people cringe when I tell them I cut back on my retirement savings and focused on paying down a loan with a 3.5% APR instead. I knew the ROI strategy was not going to work for me and my personality, but it might make others feel great knowing they’re maximizing the return on their dollar.
The bottom line is: do what works from you.
Since I made the decision to go with my gut, I’ve paid off almost half of my debt. I still have $15,000 left, but the amount doesn’t make me nervous anymore. I know I’m doing everything I can to get rid of it, and I’ll be able to relax once it’s all gone.
[EDITOR’S NOTE: YES! Very very important – you have to do what works for YOU even if it technically doesn’t make sense. The experts out there aren’t living your life, you are – so thanks for the great reminder :) It’s exactly why I’m paying down our smaller, but lowest interest, mortgage of the two too – I’ll accomplish it faster and with more vigor!]