How to Organize Your Finances and get out of debt
Welcome to the Working World
Congratulations! You’ve scored your first job out of college. You are starting to bring in cash to pay for your life experiences and other exciting adventures. Or so you think. I was in that position almost a decade ago, and while I’m happy those experiences have landed me where I am today, I would perhaps be in a better financial situation now, if I had known then what I know now, and thus more at peace with my financial security.
College debt has been steadily increasing during the 20th and 21st centuries with the average college student feeling the weight of around $55,000 of student loan debt from private colleges and around $27,000 according to Nerdwallet. Personally, I had around $35,000 in debt of which I was responsible, but I had known people with whom I had gone to school that were in almost $200,000 in student loan debt. Aside from budgeting, the best thing you can do right now is start managing your debt.
You Are Responsible
The first major point that needs to be clear before I go more in depth on what to do with the money you are now raking in, is that you have chosen to take this debt plunge. You may not have been best informed about the decision, I know I wasn’t, but regardless, a decision was made to go to college by you and only you. The benefits of college are countless, from higher average earnings to more opportunities; however, this comes at the massive monetary expense from colleges. I’ve heard the analogy that paying for an expensive college is like paying for an expensive car. I’m not a fan of this analogy since it assumes that the value of college is a depreciating value, which I don’t believe. A more appropriate version is buying a home. I just bought my first home and holy paperwork.
A home is an expensive choice that you make. Through all of that paperwork, you are clearly made aware that you alone are signing a contract with a bank to borrow money to buy this home. Make no mistake, you are borrowing that money for a cost. The same goes for student loans. Yes, you are paying the college to go to college, but you are also paying the banks to go to college at a rate of around 5.8% according to Nerdwallet.
If you pay the minimum payments, there is a chance depending on the size of the loan, that you will not be able to pay off your student loan. For example, if your interest rate is 5.8% and you’re paying off a loan that is $100,000, each year you owe $5,800 in interest. If your monthly payment is only $475 per month, your loan is actually growing by around 0.1% each year.
So How do I Fix This?
Percentages are your friend when it comes to budgeting, but I first want to briefly mention priorities. Out of college, I had the experience of going on a Fulbright scholarship. I had a fixed income of around $15,000 which was more than I had ever made before that. Nearly every penny of that went to travel and living expenses, and to be fair, that was about a break even salary for me, though I was still able to save a few thousand dollars. When I returned I was hired at NBCUniversal and started to see my first real income hitting my bank account each week.
I made around $28,000 at the time which is not a ton of money and made a lot of bad decisions with that $28,000. Most of my time and money were spent eating out, going to bars, buying nice things, and traveling. While all of these were nice experiences and things, my loans still sat there increasing since I was paying the absolute minimum. Honestly, I barely remember half of those experiences and could have done without a couple per month.
Enjoying the Fruits of your labor
To be clear, I am not one of those financial advisors on the internet who will claim to make you rich. But what I will do is attempt to show you that you can still give and enjoy yourself while making room for your financial goals.
The first lesson is to take two of your average experiences per month and dump them into your student loans. I usually spent around $70 on a night out from drinks for myself and drinks for my friends. If I just forwent two of those nights, I could have put an extra $140 per month into my loans or an extra $1,680 per year into my loans. While that doesn’t seem like a lot, every extra penny that is put into your loans helps whittle down the total cost of the loan. By the time the loan is nearly paid off, that $140 per month snowballs into colossal damage to the loan, all from just not going out for two weekends.
Percentages
To help put this in perspective, below are some percentages that took me a long time to learn. Getting married and buying a home have helped me put this into better perspective. (I’ll now need to make some adjustments with a baby on the way, but this is a rough estimate).
10% Giving
- The first fruits of each paycheck should always go to helping the needy
- This can be in the form of charity, local church, or taking out cash to give to the homeless
30% Vital Expenses
- Electricity
- Gas
- Heat/AC
- Internet
25% Housing
- Apartment (try to avoid buying a home until you are debt free)
15% Ethical Investments
- If you have no paid off debt, 10% should go to debt pay-off, 5% should go to ethical investments
10% Savings
- This is strictly for surprises that you anticipate and should only be tapped into for such
- Surprises include your car breaking down or losing your job, not buying a new car. The prerequisite is that by owning a particular thing, you assume financial responsibility.
10% Fun
- This is what you get to spend each month on going out or saving for fun purchases
These percentages, while rough estimations, have made my life much less stressful and much more fulfilling. If you follow these numbers your life will be easier and you’ll be in good financial shape. I promise you aren’t missing much by missing two drunken nights at Johnny Utah’s.
Two Different Categories
It’s important to elaborate on the point of investments. The money used for investments can be broken into two different categories: debt pay-off and ethical investing. If you live with your parents, you can take the entire 25% for housing and put it toward your debt.
Investments should be safe and ethical. I have all of my money in stocks that meet three criteria.
- The investment must be in line with Catholic teaching as much as humanly possible. For this I look to Christ Centered Capital.
- The stock must have been profitable within the last five years by over 10% per annum
- All stocks in the portfolio must have a beta of 1.3 or lower (more on this in another post)
Spending Habits
One thing that derailed me early on from these percentages when I started to make more money was definitely what I like to call “Nice Stuff Syndrome”. It usually starts off with, “this is something that will last me a long time.” That is not true for 90% of things. There are a few places where this holds true. Charity, food, and hobbies are the three things I recommend spending the most money on.
All of that money to buy food and stuff for hobbies comes from the 10% of the fun budget. I ran into problems early on in my own early life. I was buying new shoes every six months. Buying home goods such as expensive decorations and furniture, and buying random new tech gadgets isn’t great either. I found that doing that destroyed my fun account and then started to dip into my other expenses. Not to mention, that stuff did not last as long as I thought it would last.
A perfect example of this was the decorations from my new apartment. I spent around $1200 furnishing my new posh apartment. I had some hand-me-down furniture, so most of that was spent on decorative furniture and artwork. While I believe that artwork and decorations are important, a $5 trinket or $10 painting is usually just as good as a piece that is $100. And I can tell you that 90% of the stuff that I bought for that apartment is at the dump at the request of my wife. In my mind now, that was a loss of $1,080 which I could have put towards savings or my loans.
The Benefits of Being Debt Free and Being at Peace Financially
I’d like to close with a quote that I heard in a podcast the other day. “The rich invest their money and spend what is left; the poor spend their money and invest what is left”. The quote is attributed to Jim Rohn and sums up my shifted mentality over the past few years well. My ultimate goal is to make as much money as I can to support my family, and give to the community. The path there is made of choices; specifically choices that you make to either advance that goal or put it on hold. Sometimes, emergencies happen, but it’s important to invest in yourself.
Every moment is precious, and assuming that you spend your time at work, you need to make sure the time spent not at work is doing things that are fulfilling. For me, those hobbies are backpacking, reading, playing music, and golfing among others. All of which have low barriers to entry and all of which are low cost if you know the tricks. I don’t do any of those things until I know that I’ve invested my 15% that month.
For me, it’s easy since I have my 401k auto-draw set up, so I never even see that money. There are a variety of techniques, but it ultimately comes down to self control. If you have the self control to follow those percentages, and you abstain from buying unnecessary items and experiences, you will be on your way to being more organized and more at peace. This is a blog focused on providing as many techniques to getting to personal and financial peace as possible. I sincerely hope this helps and look forward to the next one.