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Don’t Put Out the F.I.R.E with a Lifestyle Creep

February 7, 2019

Unless you’re on a desert island somewhere, it’s likely you’ve heard of the F.I.R.E movement. If you haven’t Gilligan, the F.I.R.E movement stands for “Financial Independence, Retire Early.” Basically, it’s a movement started in which many finance savvy people increase their savings in hopes of retiring early and living their best life. Sounds great right? It may sound great but there are really only two ways to participate in F.I.R.E and that is increasing your income level or increasing your savings. So, how does the Financial Independence Retire Early movement relate to lifestyle creep?

What is Lifestyle Creep?

Lifestyle creep might be a term you haven’t heard before, but you’ve probably experienced it or witnessed it. As your discretionary income goes up, your lifestyle becomes more expensive. It’s that train of thought that can really get you in trouble with your bank account. You know the thought, the good ole “I worked really hard this week I deserve a new purse.” That is where lifestyle creep really starts.

 

If you suffer from lifestyle creep you’ve probably also thought of things like. If you can afford a better car, why not drive a better car? If you can afford an apartment without roommates, why have roommates? So, what’s wrong with these thoughts, because if you can afford it, then you should do it, right?

 

Lifestyle Creep and Financial Independence Retire Early Movement

It’s a really delicate balance when income goes up and you feel entitled to nicer things. Suddenly the ability to afford something makes your current situation or current belongings seem like they are not enough, whereas they were just fine yesterday. This is a nightmare for most people involved in the F.I.R.E Movement. So when does it make sense to increase your budget based on higher income and when should you hold off? Here are some things to keep in mind that will keep you away from lifestyle creep and keeping you in the race of Financially Independent Retire Early movement.

 

Always “pay yourself” first.

To pay yourself means to invest in yourself—specifically, your future self (oh hey, F.I.R.E). Increase your contributions to your retirement when your income increases. If you get a raise every year, set a reminder or put your retirement contribution on autopilot to also increase by 1% (or whatever amount works for you). If aiming to be in the F.I.R.E movement you may want to contribute over 1%. This is how people end up “maxing out” retirement contributions, without ever feeling like they are taking a hit in the present to save up for the future. Just ask anyone who’s ever done so. They’ll tell you it may have been the hardest thing they have ever done at the time, but their future self was really grateful!

 

Look at the big picture.

If you get a job offer and will suddenly make 40% more, but your commute will be long, does it make sense to move closer to work if your residence will also cost more? That depends on the big picture. Maybe the amount of time you’ll lose to commuting is worth more than the higher rent or mortgage? Maybe, you will be able to get a house in a better school district, which fits with your long-term plans?  If the commute is farther with a lower mortgage, and you can pay down debt or increase your savings. You need to run the numbers. Check out our below examples of two different scenarios that we estimated. Please note that these are estimated costs.

 

Scenario #1

For example, let’s say that you work in Manhattan, New York…

You currently live in Blairstown, NJ and live rent-free thanks to Mom and Dad.

Your commute to NY takes 4 hours by bus and costs about $400 a month.

If you pay $400 x 12 months = $4,800 a year spent on commuting

In 2019 there are about 250 Business days (excluding public holidays and weekends)

250 business days x 4 hours = 1,000 hours a year you spend commuting.

 

Scenario #2

Let’s say that you move to Hoboken and have a roommate.

You pay $1,000 a month on rent.

Your commute is about 1 hour a day.

Let’s say it costs about $150 a month to commute.

$1,000 a month x 12 months = $12,000 a year on rent

$150 x 12months = $1,800 a year on commuting costs

$12,000 year rent + $1,800 year commuting = $13,800 a year on commuting and housing

1 hour x 250 business days = 250 hours a year spent commuting

 

Now, this example really gives insight into that big picture. Yes, it costs more to live in Hoboken and you have a roommate, but look at that time saved! If your time is of high value to you, Scenario #2 is likely the best choice for you. If you are participating in F.I.R.E and want to save money or pay down debt as much as possible, Scenario #1 is likely the right choice for you. Regardless, which option is personally best for you, understand these are the types of numbers to run when looking to make big decisions.

 

Do I need this or do I just want it? The treat yo’ self trap.

Let’s say your discretionary income goes up, should you get that household repair or a non-urgent medical procedure? By all means, this is not an example of lifestyle creep and you should use your higher income to make it happen. Now, if you find yourself flush with cash and jealous of your neighbor’s new car, you should pause.  If you believe that you have worked hard enough to deserve a big trip. Planning a vacation just because you can, is an example of lifestyle creep. We aren’t saying you don’t deserve a vacation, but that vacation should be planned on a responsible budget.

 

When making any purchasing decisions ask yourself, “Are these wants more important than other needs?” We’d recommend thinking long-term when it comes to making purchasing decisions. What’s more responsible, paying off debt and continue reaping the reward of not having high payments or added interest or making a purchase like a car that you don’t “need”? Maybe there is a compromise like paying off your current car and setting a goal to upgrade next year, or maybe you can plan a trip for next year and save for it while you are concurrently paying down debt.

 

It’s dangerous to deserve better. We are constantly bombarded with flashy advertising, slick marketing, and more choices than ever before. It can be really easy to think that you deserve something better, but in reality, is that new item really going to bring you long term happiness and security? Many participating in the F.I.R.E movement will say items are just items and that real happiness comes from relationships and memories.

 

The F.I.R.E mindset can get even tougher when many of us have had parents who treated us like the most special people ever who gave us what we wanted. That’s not a bad thing until you start making decisions based on what you think you deserve, instead of what you can practically achieve. Thanks, Mom and Dad, but I don’t mind having roommates for another year, or it’s not a big deal to keep driving a car that’s older but works fine.

 

Check those budget boxes.

If your discretionary income has gone up either because you got a raise or other costs went down, you need to do some budgeting. Typical steps that personal finance experts advise working on include getting up-to-date on all of your bills if you aren’t already. Second, have a $1,000 emergency fund. Lastly, experts advise people to focus on high-interest debts before building a savings account with 3–6 months of expenses in it. Then look into things like investing, saving for your children’s college or paying off your house!

 

Achieving a higher income is great! It’s a wonderful feeling when you see your hard work paying off and making life easier. Don’t end up being someone who makes more than enough to live comfortably but you’re still living paycheck to paycheck. Lifestyle creep is so important to recognize and avoid. Keep your financial goals in order and continue to work towards them. Whether your goal is to be Financially Independent and Retire Early or to pay off your debt, you got this!

 

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2019-12-11
Holiday Budgeting: Gift Ideas That Last Into the New Year

Unless you’re one of those people who had their holiday shopping done by December 1, you’re like the rest of us who spend 25 days scrambling around, balancing holiday parties, school finals, baking cookies, traveling, and shopping for gifts. Gift-giving is one of most festive-feeling and most stressful of holiday traditions. It’s also likely what brought you to this blog. As a recent college graduate, with an entry-level paycheck and mountain of student loan debt, it’s difficult to gift well without destroying your monthly budget. Check out our list of possible presents that are money-conscious and aren’t likely to get returned (or thrown out with the wrapping paper).

 

Give Experiences

It’s no secret the U.S. is a country of “stuff.” We fill our homes, garages, and eventually, storage units with items that we just know we’ll use again someday. While the newest iPhone® or New York Times® Bestseller might make your family and friend’s faces light up this December, once the next model comes out or the last page is read, those gifts become obsolete. 

 

 So instead of blowing your hard-earned income and monthly budget on more “stuff,” consider giving experiences: concert tickets, zoo memberships, or woodworking classes that your recipient will remember longer than they will the plot of that over-rated biopic. What’s even better: you can experience these things together. If you’re looking for more experiences to gift this holiday season, check out Huffington Post’s article, 21 Gift Ideas For People Who Value Experiences More Than Things. You can find a more holistic approach to experiential gift-giving for the mind, body, and soul in this ELFI blog.

 

Give Savings 

While not the most glamorous gift, receiving a contribution towards your student loan debt really is the gift that keeps on giving. Helping put a dent in student loan debt is more thoughtful than cash or a gift card snagged while checking out at the grocery store, and it can help you pay off those student loans faster. 

 

If your parents, grandparents or significant other made a student loan payment in your honor for the next two-three years for the holidays and your birthday, thousands of dollars could be shaved off of your student loans. Getting out from under student loan debt faster also means more fun money in your checking account to boost that monthly budget and buy the gifts you really want to give. 

 

If you’re like the many students who took out multiple federal and private student loans over the course of college, it may be a good time to consolidate and refinance student loans into one singular loan. Besides possibly scoring a better repayment term and interest rate, seeing the family contributions to paying off the debt could really jumpstart your 2020 goal of getting more financially fit. 

 

REgive Gifts

Re-gifting gets a bad wrap for being the lazy person’s way of shedding the unwanted junk in their house. However, with a little extra thought, re-gifting can be a fulfilling experience. Look past the junky toaster on your kitchen counter or clothes you hate and consider items that are in good condition, but no longer bring you joy or serve a purpose in your home. Maybe it’s an old CD that you and your dad listened to before you left for college. Maybe it’s an Instant Pot® that you really thought you’d use more of in 2017. Or maybe it’s a necklace your friend always compliments. Whatever it is, clean them up, wrap them nicely, and—whatever you do—be sure your friend or family member didn’t give you the item first. The secret to successfully re-gifting is to be upfront and honest about the gift being from your own personal department store and share why you did it.

 

Give Time

The holiday spirit is all about being with the ones you love and being generous to those in need. If you or your family are feeling stressed to maintain monthly budgets this year, consider scrapping gifting (in the traditional sense) altogether. There are countless organizations that take volunteers throughout the holiday season to distribute presents in hospitals, cook meals for the homeless, and even shovel snow or hang Christmas lights for the elderly. By giving time, you make connections in your community, spread cheer, and build karma for the new year. 

 

If you’re still feeling stressed about ruining your perfectly planned monthly budget this holiday season, consider student loan refinancing. Recent graduates have reported saving an average of $309 every month after their student loan refinance with ELFI*, which averages out to $20,936 in total savings.¹ And because this is the busy time of year, you can see your potential savings and see if you are prequalified for a student loan refinance in minutes. Happiest of holidays to you and yours!

 
 

*Subject to credit approval. Terms and conditions apply.

 

¹Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2019-12-10
Student Loan Repayment: Debt Snowball vs. Debt Avalanche

By Kat Tretina

Kat Tretina is a freelance writer based in Orlando, Florida. Her work has been featured in publications like The Huffington Post, Entrepreneur, and more. She is focused on helping people pay down their debt and boost their income.

 

To cope with the high cost of college, you likely took out several different student loans. According to Saving For College, the average 2019 graduate left school with eight to 12 different student loans.

 

With so much debt and so many different individual loans, you may be overwhelmed and can’t decide where to start with your repayment. If you want to pay off your loans ahead of schedule, there are two main strategies that financial experts recommend: the debt avalanche and the debt snowball.

 

Here’s how each of these strategies work and how to decide which approach is right for you.

 

The difference between the debt snowball and debt avalanche strategies

Both the debt avalanche and debt snowball methods are strategies for paying off your debt early. However, how they work is quite different.

 

Debt avalanche

With the debt avalanche method, you list all of your student loans from the one with the highest interest rate to the one with the lowest interest rate. You continue making the minimum payments on all of your loans. However, you put any extra money you have toward the loan with the highest interest rate.

 

Under the debt avalanche, you keep making extra payments toward the debt with the highest interest rate. Once that loan is paid off, you roll over that loan’s monthly payment and pay it toward the loan with the next highest interest rate.

 

For example, let’s say you had the following loans:

  • $10,000 Private student loan at 7% interest
  • $15,000 Private student loan at 6.5% interest
  • $5,000 Direct Loan at 4.45% interest
 

In this scenario, you would make extra payments toward the private student loan at 7% interest first with the debt avalanche method. Once that loan was paid off, you’d make extra payments toward the private student loan at 6.5% interest, and then finally you’d tackle the Unsubsidized Direct Loan.

 

Debt snowball

The debt snowball method is more focused on quick wins. With this approach, you list all of your student loans according to their balance, rather than their interest rate. You continue making the minimum payments on all of them, but you put extra money toward the loan with the smallest balance first.

 

Once the smallest loan is paid off, you roll your payment toward the loan with the next lowest balance. You continue this process until all of your debt is paid off.

 

If you had the same loans as in the above example and followed the debt snowball method, you’d pay off the Direct Loan with the $5,000 balance first since it’s the smallest loan. Once that loan was paid off, you’d make extra payments toward the $10,000 private loan, and then you’d pay off the $15,000 private loan.

 

Pros and cons of the debt avalanche method

The debt avalanche strategy has several benefits and drawbacks:

 

Pros

  • You save more in interest: By tackling the highest-interest debt first, you’ll save more money in interest charges over the length of your loan. Compared to the debt snowball method, using the debt avalanche method can help you save hundreds or even thousands of dollars.
  • You’ll pay off the loans faster: Because you’re addressing the highest-interest debt first, there’s less time for interest to accrue on the loan. With less interest building, you can pay off your loans much earlier.
 

Cons

  • You don’t see results as quickly: Because you’re tackling the debt with the highest interest rate rather than the smallest balance, it can take longer before you can pay off a loan.
  • You may lose focus: It takes longer to pay off each loan, so it’s easier to lose motivation.
 

Pros and cons of the debt snowball method

The debt snowball method has the following pros and cons:

 

Pros

  • You get results quickly: Since you’re targeting the loan with the lowest balance first, you’ll pay off individual loans quicker than you would with the debt avalanche method.
  • Frees up money to pay down the next loan: You’ll be able to pay off loans quickly and roll the payments toward the next loan, helping you stay focused on your goals.
 

Cons

  • You’ll pay more in interest fees: By paying extra toward the loan with the smallest balance rather than the highest interest rate, you’ll pay more in interest fees than you would if you followed the debt avalanche method.
  • It could take longer to pay off your debt: Because you aren’t targeting the loans with the highest interest rate first, more interest can accrue over the length of the loan. The added interest means it will take longer to pay off your loans.
 

Which strategy is best for paying off student loans?

So which strategy is best for paying off student loans: the debt avalanche or the debt snowball? If your goal is to save as much money as possible and pay off your loans as quickly as you can, the debt avalanche method makes the most financial sense.

 

Psychologically, the debt snowball may have the advantage. According to a study from the Harvard Business Review, the debt snowball method is the most effective approach over the long-term, as borrowers are more likely to stick to their repayment strategy. However, which strategy is best for you is dependent on your mindset, motivation level, and your determination to pay off your debt.

 

Managing your student loan debt

Regardless of which repayment strategy you choose, you could save even more money or pay off your loans earlier by refinancing your student loans. When you refinance student loans, you apply for a loan from a private lender for the amount of your current student loans, including both private and federal loans.

 

The new loan has completely different repayment terms than your old ones, including interest rate, repayment term, and monthly payment. Even better, you’ll only have one student loan with one monthly payment to remember.

 

Use ELFI’s Find My Rate tool to get a rate quote without affecting your credit score.*

 
 

*Subject to credit approval. Terms and conditions apply.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2019-12-04
Tips for Starting Your Student Loan Repayment Journey

Once you graduate from college, leave college, or drop below half-time enrollment, it’s time to start thinking about when your student loan repayment period kicks in. Understanding the repayment process for your student loans is very important for a number of reasons – for one, if you don’t pay, your interest will accrue. Second, if you don’t pay, it will affect your credit score, which can hinder your ability to buy a home, buy a car, qualify for credit cards, take out a personal loan, or refinance your student loans.   If you graduated this past spring, your student loan repayment period will likely start around this time of year (if they haven’t kicked in already). Follow these tips to master student loan repayment and get yourself to a strong financial start after college.  

Know How to Access Your Loan Information

A good first step is to acquire your loan information. This can typically be accessed via an online login. Monitoring your loan information will be essential during the course of repayment. If you took out Federal Student Loans, you can likely access your info at https://myfedloan.org/. If you took out private student loans, check with your lender for how to access your information. Tracking your loans will give you a gage on the status of each loan, the balance you owe, as well as interest rates for each loan. By understanding the status of your loans, you can make more informed decisions about how you want to prioritize repayment, what type of repayment plan you want to choose, or even whether you want to consolidate or refinance your student loans.   

Know When Your Payments Start

Immediately following graduation, you’ll likely have a grace period, or a period of time before your first payment is due. This can vary depending on the type of loan you have, and they can be different for each loan. Subsidized and Unsubsidized Federal loans have a six-month grace period. Perkins loans have a nine-month grace period. There is no grace period for PLUS loans; however, if you are a graduate or professional student PLUS borrower, you do not have to make any payments while you are enrolled at least half time and (for Direct PLUS loans first disbursed on or after July 1, 2008) for an additional 6 months after you graduate or drop below half-time enrollment. Private student loans will have differing grace periods so contact your loan servicer for more details. Knowing when your loan will be due is imperative to starting off on the right foot when it comes to your student loans.  

Weigh Repayment Options

When you take out federal student loans and your grace period is complete, you will automatically enter the Standard Repayment Plan. This plan allows you to pay off your debt within 10 years, with the monthly payment remaining the same over the life of the loan. If standard repayment doesn’t work for your budget, you may want to consider some other options, or perhaps even refinance your student loans. The federal student loan program offers the following Income-Based Repayment plans: 
  • Graduated Repayment Plan – Gives you a smaller payment amount in the beginning and gradually increases the payment amount every two years.
  • Extended Repayment Plan – Allows you to pay the least possible amount per month for 10 to 25 years.
  • Revised Pay As You Earn Repayment Plan or REPAYE Plan – Bases the monthly payment on you (and spouse’s) adjusted gross income, family size, and state of residence.
  • Pay As You Earn or PAYE – Monthly payments are based on your adjusted gross income and family size. You must be experiencing a financial hardship to qualify. You must also be considered a “new borrower” as of 10/1/2007 or after, or be someone who received an eligible Direct Loan disbursement on 10/1/2011 or after.
  • Income-Based Repayment or IBR – Monthly payments based on your adjusted gross income and family size. Must be experiencing a financial hardship to qualify.
  • Income-Contingent Repayment or ICR – Based on your monthly adjusted gross income and family size. Typically chosen if an individual can’t qualify for the Pay As You Earn Plan or Income-Based Repayment.Any changes to your income or your spouse’s income will affect your student loan payment. For example, if your salary increases, your student loan payment will as well. If you are married, both your income and your partner’s income are combined. Two combined incomes will increase your total income, likely increasing your monthly payment. 
  Keep in mind that each repayment option will have positives, negatives, as well as eligibility requirements. Research each option before making a decision, and consider contacting your loan servicer if you have questions or need more information.   

Automate Your Payments (If you can)

Setting up automatic payments will make student loan repayment less of a hassle, will avoid late payments, and may even score you an interest rate reduction. Just be sure you have enough money in your account month-to-month to endure the payments without overdrawing.   

Make Extra Payments

When you make your monthly payment, it will first apply to any late fees you have, then it will apply to interest. After these items are covered, the remaining payment will go toward your principal loan balance (the amount you actually borrowed). By paying down the principal, you reduce the amount of interest that you pay over the life of the loan. Applying extra income by making larger payments or double payments will reduce the total amount you’ll end up paying.   

Reach Out for Help if Necessary

If you’re having trouble making your monthly payments, particularly on your federal student loans, contact your loan servicer. They will work with you to find a repayment plan you can manage or help determine your eligibility for deferment or forbearance. If you stop making payments without getting a deferment or forbearance, you risk your loan going into default, which can have serious consequences to your credit.   

Weigh Refinancing & Consolidation Options

If you have multiple student loans that are all accruing interest at different rates, you may want to consider student loan refinancing or consolidation to make repayment more manageable. The federal student loan program offers student loan consolidation, in which they combine your loans into one loan with a weighted average interest rate, rounded up to the nearest 1/8th percent. You can also consolidate your federal and/or private student loan with a private lender through the process of refinancing. Refinancing your student loans is much like consolidation, however it offers the opportunity to start new repayment terms and possibly lower your interest rate. Keep in mind that refinancing with a private lender may cause you to lose access to certain federal student loan repayment options that are listed above.   

Look Into Loan Forgiveness

If you work in a public service position or for a non-profit, you may want to consider the Public Service Loan Forgiveness program or another loan forgiveness program offered by the federal government. Other options exist for volunteers, military recruits, medical personnel, etc. Some state, school, and private programs also offer loan forgiveness. Check with your school or loan servicer to see if you may qualify for student loan forgiveness.  

Earn Your Tax Benefits

If you are paying your student loans, you may be able to deduct the interest you pay on your student loans when filing your taxes. Deductions reduce your tax liability, saving you money and serving as a nice tradeoff for having to pay interest on your student loans.    Repayment of student loans can be a long, difficult journey – but by taking advantage of your resources and staying determined to pay off your debt, it is manageable. If you need more information on paying back your student loans or the options that are available to you, contact your loan servicer.  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.